Report No. 25162-ME Mexico State-Level Public Expenditure Review The Case of Veracruz-Llave October 8, 2003 Poverty Reduction and Economic Management Sector Colombia and Mexico Country Management Unit Latin America and the Caribbean Region Document of the World Bank CURRENCY EQUIVALENTS CurrencyUnit:Pesos EXCHANGERATE ExchangeRate Effectiveas of October8,2003 MxP$l1.3=US$l FISCAL YEAR January 1 -December 31 ABBREVIATIONSAND ACRONYMS Vice President: David de Ferranti CountryDirector: Isabel Guerrero SectorDirector: Ernest0May SectorManager: MauricioCarrizosa Lead Economist: Joaquin Cottani TaskManagers: GladysLopez-Acevedoand StevenB. Webb PREFACE Putting efsective public expenditure management systems in place is a major objective to ensure that domestic resources and external assistance are used eflectively for poverty-reduction purposes. We support the ongoing efsorts by the Bank, the IMF and donors to help countries strengthen these systems.... Development Committee, April 2001 States and their municipalities now manage close to half of Mexico's public spending for programs, and the great majority of it in education. The states vary considerably in the way they manage their spending, in terms of fiscal balances, quality of results, and institutional arrangements. The national government does not monitor closely the performance of most subnational spending programs, nor does it impose strong standards, even though i t has some ultimate responsibility for assuring that the programs deliver adequate services (Note: monitoring and evaluation i s done at the federal level, in addition Presidencia de la Repziblica has just implemented the DSG system to monitor expenditure a very detailed level). Therefore, a better understanding of state-level spending i s required in order to design reforms not only to the federal system o f intergovernmental relations but also to the key sectors where responsibilities have been decentralized to the state and local levels. Veracruz-Llave was chosen for this review because it expressed interest in getting such analytical support and because preliminary evidence showed that it might have the potential to participate in a program of World Bank financing for subnational infrastructure investment. The criteria for the latter are that the state has adequate management capacity and no excess fiscal deficits or outstanding debt. The investigations for this study large verified, with much more detail, this preliminary assessment. The Veracruz study has seven components: an economic and social overview of the state, analysis of fiscal performance, analysis of the sectoral distribution o f state spending, four components on specific sectors-education, health, water, and transport -and a review of the institutional arrangements for developing and executing the budget. Except for the first section with background, each will contain recommendations for reforms to address some of the problems identified. A companion unpublished paper with the diagnostic of poverty in Veracruz, on the basis of the detailed ENIGHhousehold surveys for Veracruz and other data sources, provides key criteria for evaluating the targeting and effect of expenditure. For that reason the executive summary presents some of the results of the Veracruz Poverty Diagnostic (VPD). The report covers the three standard dimensions of public spending analysis- macroeconomic stability, distribution of resources across sectors and programs, and efficiency and effectiveness of spendingprograms: 0 Macroeconomic sustainability concerns the evolution o f the fiscal balance-not just the total revenues and expenditures but also their principal economic components. For income, this would mean especially the breakdown-between own revenues and transfers, but also some differentiation between type o f transfer and type of own revenue. For expenditure, this means looking at interest payments (for various types o f debt), transfers to municipalities (distinguishing automatic pass through of federal money and transfers of money from state sources), other transfers, investment (implying future spending needs), and salaries. Since salaries are the largest part, it i s useful to examine at least 3 categories - federal teacher salaries that are still automatically funded b y the states, state teacher salaries that are funded b y the state but where raises are effectively determined by the federal level, and other salaries over which the state has control. Sectoral distribution of spending concerns whether adequate resources are going to poverty reduction, through social programs, and growth-enhancing social and infrastructure programs. We look at the balance across sectors and level in sectors, in comparison with other states. Obviously, a key issue in Mexico i s how much control the individual states have and how much i s determined at the federal level. The efficiency and effectiveness of the spending focus on the output indicators and the mix of inputs within each sector. The special considerations o f each sector come into play here. The budgeting-institutions component concerns how the government manages the integration of the three previous concerns. The team producing the report consisted of Oscar Alvarado, Luis Chalico, Mauricio Cuellar, Eduardo Fernandez, Michael Geller, Albert0 Gonima, Christian Y. Gonzilez, Gladys Lopez-Acevedo (co-task manager), Erica Soler, Elizabeth Toxtle, and Steven B. Webb (co-task manager). At the time of the mission and report preparation, Marcel0 Giugale was the Sector Leader and Olivier Lafourcade was the Country Department Director. Many people in the Government of Veracruz, especially Dr. Juan Amieva (Secretary of Finance), C.P. Juan Felipe Aguilar and Lic. Bernard0 Urriza provided excellent guidance and collaboration in the preparation of this report. A very special thanks to the Governor of Veracruz-Llave, Lic. Miguel Aleman Velazco, for his collaboration and interest in the publication and dissemination of this report through the web page of SEFIPLAN (www.sefiplan.gob.mx). The main mission was inMarch 2002. Table of Contents EXECUTIVE SUMMARY ........................................................................... i RESUMENEJECUTIVO .......................................................................... xv 1. MACROECONOMIC AND SOCIAL OVERVIEW ....................... 1 BACKGROUND ISSVES............................................................... AND 1 STRUCTURE OF THELABOR MARKET ............................................... 3 STRUCTURE OFTHE STATES' ECONOMY .......................................... 4 2. CONCLUSIONS AND RECOMMENDATIONS ......................................... 6 PUBLICFINANCES .................................................................. 9 REVENUE AND EXPENDUURE TRENDSAND FISCAL BALANCES. 1998-2002............................................................. 10 FISCALSUSTAINABILITY. POLICYAND GOVERNMENT ACTIONS.... 17 CONCLUSIONS ANDRECOMMENDATIONS ....................................... 19 3. THEALLOCATION OFRESPONSIBILITY. AUTHORITY. AND RESOURCES FORSPENDING .................................. 21 PROGRAMMABLE SPENDING ........................................................... 24 NON-PROGRAMMABLE SPENDING .................................................. 25 GOVERNMENT TARGETS THEMILLENNIUM AND DEVELOPMENT GOALS............................................................. 25 CONCLUSIONS AND RECOMMENDATIONS 4. ....................................... 28 EDUCATION ........................................................................... 29 OVERVIEW OF THE EDUCATIONAL SYSTEM .................................... 30 FINANCEAND EXPENDITURES ......................................................... 38 EDUCATIONALOUTCOMES ............................................................. 40 FEDERAL.STATE AND SCHOOL PROGRAMS ................................... 49 CONCLUSIONS ANDRECOMMENDATION 54 5. ......................................... HEALTH SECTOR: STRATEGIES, PERFORMANCE, AND OPTIONS ................................................................. 59 BACKGROUND 59 SYSTEM..................................................................... ................................................................................ THEHEALTH 61 HEALTH STATUS............................................................................. 62 RESOURCE ALLOCATIONANDSPENDING ....................................... 66 PUBLIC HEALTH SECTORPERFORMANCE ....................................... 67 EFFICIENCY.FINANCE.ANDMANAGEMENT OPEN OF THE POPULATION HEALTH SYSTEM.................................................. 69 HEALTH CARECOVERAGEAND RESOURCES-SPECIAL CHALLENGESAND PROGRAMS ................................................... 71 HEALTH INVESTMENTAND THEGOVERNMENT PLAN2000.2004 ..73 ................................................ 74 6 . OPTIONSANDRECOMMENDATIONS WATER SECTOR ................................................................... 77 COVERAGE ..................................................................................... 77 FINANCIALANDOPERATIONALEFFICIENCY.................................. 78 INSTITUTIONAL ARRANGEMENTS .................................................... 79 STATE SPENDINGONWATER AND SANITATION ............................. 80 WATERSECTOR MAINCHALLENGESANDSTRATEGIC OPTIONS....82 CONCLUSIONS AND RECOMMENDATIONS 7 . ....................................... 83 TRANSPORT ........................................................................... 85 PORTS ............................................................................................. 85 ROADS ............................................................................................ 86 RAILROADS ..................................................................................... 87 AIRPORTS....................................................................................... 87 STATE SPENDING ............................................................................ 87 INSTITUTIONSAND AGENCIES ........................................................ 89 RECOMMENDATIONS ....................................................................... 90 8. BUDGETING INSTITUTIONSAND FISCALOUTCOMES: STABILITY, EFFICACY, ANDEFFICIENCY ...................93 FISCALSTABILITY .......................................................................... 94 COST-EFFICIENCYOF SPENDING................................................... SECTORAL ALLOCATION AND EFFICACY SPENDING...................98OF STATE RELATIONSWITHOTHER LEVELSGOVERNMENT OF ........102 104 SUMMARY RECOMMENDATIONS ................................................... 104 BIBLIOGRAPHY ............................................................................ 107 APPENDIX TO CHAPTER 2 ............................................................. 109 APPENDIX TO CHAPTER4 ............................................................. 113 APPENDIX ToCHAPTER5............................................................. 125 APPENDIX TO CHAPTER6 ............................................................. 137 APPENDIX TO CHAPTER7 ............................................................. 139 i Mexico: Veracruz-Llave Public Expenditure Review Executive Summary 1. The state of Veracruz-Llave (henceforth Veracruz) runs its public finances and expenditures well compared to most other Mexican states, and has improved its practices from the past. Its recent fiscal imbalances have been modest, mostly financed from past savings; it has implemented significant reforms to its tax and pension systems; a new integrated financial management system i s improving the information and accountability of its spending; and the substance of its programs show many valuable innovations. It has good credit ratings and could borrow to finance infrastructure investments, should it decide to do so. Veracruz is one of the two states that has successfully absorbed the transferred educational system, and it i s also one of the few states that has been able to coordinate successfully the different health systems operating in the state. There remain, nonetheless, areas where the state could improve its policies and practices, as elaborated in this document. Toward the goals of reducing poverty and accelerating economic growth, the highest priority public services at the state level are education and road transport. In particular, education reforms need to continue improving supervision, evaluation, and teacher's incentives (better and relevant training; link performance to rewards), so that more children will want to complete secondary school, and places will have to be created for them. Greater efficiency in allocating educational personnel could raise some of the necessary resources, but eventually more revenue will be needed. In road transport, private-sector participation could bring in part of the resources needed for investment and maintenance in inter-city highways and for public transportation; still more public resources will be needed to supplement the private participation and to cover costs of improved roads to rural areas. For these increases in state spending to be sustainable, the state will need to strengthen its finances further, for example, by eliminating floating debt. POVERTY AND ECONOMIC DEVELOPMENT 2. Public spending must be evaluated in the context of poverty reduction and economic development, both of which are the goals of state programs. As will be seen below, state and federal programs such as Oportunidudes have helped to improve the well-being of the extreme poor in rural areas although more can still be done at the state level, such as complementing the actions from Oportunidudes to expand the coverage of the program. Veracruz has made these achievements despite poverty levels above the national average, which result largely from policies inthe past. Even though the income and GDP in Veracruz are not yet converging with the rest of the nation, the state i s making important progress in closing the gap in non-monetary measures of well being, such as education, health, and housing. Primary school enrollment and access to basic .. 11 infrastructure services are getting closer to the national average, and the state has achieved universal coverage in first-level health care. 3. Since pre-Colombian times, Veracruz has been a center of economic activity, with the largest port in the country. Despite its recent boom in some export industries, the population of Veracruz-Llave has low average incomes by Mexican standards. GDP per capita in the state i s less than three-fifths of the national average and ranked as one of the poorest in the country. As in all of Mexico, poverty i s high in rural areas of Veracruz, with an incidence only slightly above the national average, but the state i s distinctive in that the rate of poverty i s also high in urban areas, where most of the population lives. This accounts for the overall poverty rate in Veracruz being so much higher than the national average. 4. Growth has been the best way to reduce poverty in Veracruz, because its income distribution i s already more equal than in the rest of the country. If the past relationship between growth and poverty persists, an average growth rate of 5 percent per year in state GDP from now until 2009 would enable Veracruz to reduce extreme poverty by half. The reduction in extreme poverty could be even faster if growth were higher or if the level of income inequality were reduced further. The challenge will be to attain such a growth rate, and to do so in a way that includes the poor among its beneficiaries, such as with better logistical connections for poor households to bring their labor and products to the market.' 5. The central problems of economic and social development are the low productivity of the labor force and the structure of the state's economy. Traditional agriculture still employs a lot of people, but produces a much smaller share of state GDP. Service sectors account for most of employment and value added; tourism and transport are the largest and most promising parts for the future. Although both sectors are growing, neither can accelerate readily. Convergence in GDP growth requires a strategy to diversify the state's economy. Also, the poorer regions that are further away from the industrial corridor lack the education and transport connections that could provide the population with steady employment while permitting them to remain in their home communities. Maloney et al. (2000) have shown that in Mexico proximity to United States, higher education, and more urbanized areas (capturing perhaps the effects of agglomeration or infrastructure) are positively correlated with foreign direct investment. Areas with indigenous populations receive less foreign direct investment, but this appears to be only because they also tend to have lower education, are more rural, and are located farther from United States. In the case of Veracruz, the solutions seem to be to improve education, build better roads, and obtain buses or trucks to transport people to jobs in towns and to move products from rural areas to urban markets. Improvingthe roads gives the rural poor people at least somewhat better access to better marketsfor their goods and to labor markets in more efficient production centers. 111 FISCAL MANAGEMENT 6. Veracruz has strong fiscal institutions and has carried out a strong investment program, but has experienced unexpected fiscal shocks from a reduction in federal transfers2, plus some emergency spending in 1999 for flood relief and control. The shocks left the state with short-term fiscal trouble. During the last four years it has run overall deficits in fiscal flows, reaching 7.1 percent of total revenues for 2002. Until 2001 the state was able to avoid issuing debt by using previously accumulated assets and some advances from the federal government. In 2002 Standard & Poors raised its credit rating for Veracruz to MX A+, as well as other agencies such as Fitch and Moody's, reflecting improved fiscal management. 7. Revenues. In 2000 the state revenues in Veracruz-about MxP 3,900 per capita- were below the national average of M x P 4,300 per capita, placing it 26fhout of 31 states. This ranking is mainly due to the low level of federal transfers, which is the main income source in all the states. State-generated revenue raises barely 5 percent of the total, originating primarily from annual fees, capital revenue, payroll tax, and collection of federal car taxes that are 100percent h ha red."^ The current administration has expanded the state's own-revenue base by placing new taxes on payrolls, lotteries, and tourism, and by reforming tax administration. State tax revenues increased from 0.2 percent of total revenue in 1998 to 2.8 percent in 2002. Also, the collection of shared federal taxes increased significantly during this time period. This represents a meaningful fiscal and political effort, which was facilitated by the payroll tax being earmarked to infrastructure projects. Beyond these taxes, there i s not much more that Veracruz can do, because states have little legal authority to expand their tax bases. Nevertheless, the Conferencia Nacional de Gobernadores (CONAGO), of which the Veracruz governor is a member, has lobbied for reform of the fiscal pact. To allow Veracruz and the other states to obtain the revenue and autonomy they need, thefederal government should reform thefiscal pact to give the states more tax authority such as with non-transitory laws devolving the sales tax. It should also change the transfer formulas to be more equal per capita and to favor to some extent the states with below average GDP per capita, since they have less potential to raise own revenues. The state could enhance its revenues by continuing tax administration refom and by supporting such reforms of the fiscal pact at the federal level and by passing its own sales tax when the appropriate federal laws are in place. Aggregate Expenditures. About 88 percent of state outlays are actual expenditures on goods and services. Mandatory pass-through o f transfers from the federal government to The Law of Fiscal Coordination regulates the federal transfers, and therefore the state government has no control over these. In2000, the state made a fiscal reform which eliminated several taxes. In 2001, a payroll tax was put in place, which increased own revenues. iv municipalities account for about 12 percent of total outlays; transfers and subsidies chosen by the state account for almost 1 percent. Interest payments are less than one percent of the total and do not indicate a problem. Approximately 48 percent of the state's outlays are for payroll, and keeping this ratio low i s a key objective and achievement of the Secretary of Finance. 4 Much of the state's wage bill depends on union negotiations at the federal level, especially in education, and automatic adjustment of federal transfers pays for only about two thirds o f the effect. The state has few options with which to deal with this source of uncertainty, except to limit its hiring to positions that are automatically paid for by the federal government. As in other states, a large share of the expenditures in Veracruz are financed by earmarked transfers, making it difficult for the state to reallocate resources. 8. Capital expenditure accounts for almost 10 percent of total expenditure, which was the highest of all the states in 2001 (INEGI2001). In contrast to other states, where investment has contracted as the adjustment variable to achieve fiscal targets, Veracruz has increased capital outlays during the present administration. From the perspective of short-term fiscal management, the emphasis on investment provides the advantage of flexibility, since this type of spendingi s easier to reduce than personnel. And, of course, the investment i s aimed to enhance growth and reduce poverty. 9. On the spending side, the overall challenge for Veracruz, and the other states i s to establish clearer accountability for its spending, and to strive for and obtain the authority to manage this spending more effectively and efficiently. This will require not only control over hiring and the wage bill, but also control over the assignment and management of personnel, including teachers and health sector workers. Some of this accountability and control could be decentralized to municipalities or service-provider units-schools, clinics, and hospitals-which experience elsewhere has been shown to improve quality and accountability of service delivery. 10. Pensions. The pension system for state workers, although partly reformed in 1996, has several important problems. It is a relatively generous system relative to contributions-giving 100 percent of final salary to those retiring after 30 years ( 130 percent of final salary if we include the bonus that the pensioners received but did not made a contribution on) and at least age 53, and collecting under 25 percent of salaries in contributions. Pensioners already equal 20 percent of active employees, with the ratio rising, and the state has to put in an additional 2 percent of its revenues to the pension fund to allow it to pay the legally committed pensions (MxP 1,150 million during the 1999-2002 period). A recent study projected that the necessary transfers would rise to 3 percent of state revenues by 2020 in the absence of further reform. The contingent liabilities are MxP 35,000 million, which calls for a reform o f the pension system. The reform in 1996 thus made substantial improvements, but more could be done. The Veracruz pensions are not transferable, so that someone moving to another job before serving 15 years or reaching the age of 53 receives nothing, not even an eventual pro- rated based on years served. ~~ In200164 percent of current expenditures are for payroll, of which 87.8 percent are for the education sector. V The Veracruz pension system needs further reform immediately-to make it fiscally self-sustaining, and to make the pensions compatible with and transferable to the rest of the public and private sectors. The actual deficit is around MxP 500 million, which is relatively large, and it has a fast projected growth; therefore, the government should make the next reform a priority. 11. Borrowing and Debt. Veracruz has run fiscal deficits in recent years, and by the end of 2002, the state's debt stock was about M x P 2,000 million. This debt stock was recently contracted and i s low by Mexican or international standards-roughly 6 percent of the state's current revenue and less than 13 percent of the state's participaciones, which are used to guarantee the debt service. During 2002 the state refinanced debt on favorable terms.' Thus, there i s not an issue of the sustainability of the existing debt stock. The question i s at what pace and with what sort of financing it could safely increase its debt; the state would have to work this out in the context of a long term financing plan, which i s beyond the scope of the present study. Besides using credit and federal advances of participaciones to finance its fiscal imbalances, the government has been delaying and rolling over treasury payments. Since 1998 floating debt (ADEFAS) has increased, reaching over MxP 3,693 million at the end of 2002.6 These represented about 11 percent of total annual revenue and over three months of capital-investment outlays-almost twice as much as could be justified by the normal pace of payment for contractors (payment within an average o f 60 days). The age of these arrears and the order of paying them are not transparent. 12. The current state government has committed to have Veracruz's fiscal stance on a sustainable path at the end of its mandate. The government should follow through on this intention by financing public expenditures with its current resources, thereby avoiding any further increase in the stock of debt, unless in the context of a long-term investment and financing plan. Four actions being considered or implemented by the state will help achieve this goal: 1. Define explicit fiscal and debt targetsfor the medium term as well as eachyear; 2. Stop using arrears (ADEFAS) as afinancing mechanism and define a mid-to-long-term debtpolicy; 3. Review and update government programs according to a new fiscal scenario, optimizing capital outlays according to government goals; 4. Develop nontraditional sources for financing public activities, bonds on revenue-earning assets. including joint ventures with the7private sector, for example, issuing By refinancingits debt the state saved MxP 180 million. 'ADEFASsoughtto are not financed by advances ofparticipaciones. Also, ADEFAS are not in the budget. The state increase state investment inroads by restructuringits debt at a lower interest rate and by issuingbonds on the Veracruz-Cardelhighway. v i SECTORALALLOCATION OFSPENDING 13. As in other states, over three fourths of the state's outlay (egresos) comes from the earmarked pass-through of federal funds (for federal teachers, health workers, and municipalparticipaciones). This lack of control by the state government on the spending side, and on the revenue side, i s contrary to the growing political prominence and sectoral responsibility of the states and calls for some reform by the federal level. The state i s also putting some of its own disposable or discretionary resources into education, health, and municipal transfers, in addition to federal monies. This indicates that the earmarking of funds by the federal government i s not necessary in order to motivate the state to allocate resources to these sectors, although the state might allocate them differently within the sector if it exercised more effective control. The sectoral composition of spending in Veracruz i s similar to other Mexican states. Education i s by far the largest spending function, comprising over half of total spending and over half of the federally mandated and funded spending. 14. For addressing the needs of the poor in Veracruz, eventually more resources will be needed in the education sector, to finance the expansion of coverage of secondary school, and in the roads sector. However, most of the necessary adjustments could be achieved with more efficient and effective use of the present level of resources. EDUCATION 15. Veracruz has made important achievements in the education sector. The most noteworthy accomplishments have occurred at the primary level, where the coverage in public schools has increased in the past decade to almost 100 percent, slightly above the national average. Veracruz's post-elementary net enrollment rates, on the other hand, are low by Mexican and Latin American standards, particularly for the extreme poor in urban areas and for women. The state does poorly at keeping the older students in school and getting them to graduate. At the university level, the percentage of the population enrolled i s much lower than at the secondary level, but it i s comparable to the national average. University students mostly come from families in the upper half of the income distribution, yet there i s essentially no cost recovery from them. To improve educational attainment, the state needs to take actions in the fivefollowing areas that are in its sphere of authority: 1. Improve the composition of basic education expenditures to assure adequate resourcesfor teaching materials and other non-salary inputs and to improve the coordination of basic education programs; 2. Identify and remedy thefactors causing dropouts and gradefailures; 3. Expand the supply of secondary education, to meet the increases in demand that the above measures should generate; 4. Strengthen supervision and evaluation of teaching and school management, such as by implementing the sistema escolarizado de control escolar; 5. Reduce the state subsidy to the university, implement some cost- recovery, and provide targeted tuition subsidiesfor studentsfrom low- income households. 6. Improve the quality of education in rural areas, where the dropout indexes are the highest. 16. While the state has nominally met its commitment to provide secondary education places to all who want to attend, it remains far from providing the nearly universal secondary education that its young people will need to succeed in the 21Stcentury economy. This goal will require three things: (i) children completing primary all educations successfully, (ii)improved teachers' incentives,' and (iii) expansion of secondary-school places to meet the increased demand (for example, by reallocation of educational personnel and resources, and construction of new schools). The fiscal impact of increasing secondary enrollment would be the largest, although it will come gradually as success i s realized on the other fronts. If the government were to close the gap between Veracruz and the national average (optimistic scenario), it would cost around US$16 million extra per year. 17. While education comprises the largest share of the state's spending, the majority of the funds are not fully under control of the state. The federal transfers (Ramo 33) cover teachers' salaries. Teachers in the formerly federal schools, with over half of the students and almost half of the teachers have a different pension scheme from the state teachers. The state has the legal authority to take more control over those funds, and developments at the national level and in other states, like Chiapas, show that it i s a political decision of the state how far to go. To increase the state's accountability for education outcomes, thefederal government should continue to reduce its involvement in the direct management of the sector, and tofocus on setting peijformance standards and supplementing state resources for assuring access to students from low-income households. HEALTH 18. Veracruz has good health outcomes, especially considering that its GDP per capita i s more than 40 percent below the national average and that medical resources per capita in Veracruz (doctors, nurses, hospital beds, and clinics) are 10 to 30 percent below the national average. As in all of Mexico, several systems operate in parallel (IMSS, ISSSTE, SEWER, and others), each serving a separate population as determined by employment situation. With few options for clients to choose between systems, there i s * The teachers salaries maybe highon average, but their structure should reward performance. ... V l l l little scope for them to press for improved service standards. The expenditure and resources per client differ widely across systems, with the resources and spending per capita being much lower in the Servicios de Salud de Veracruz (SESVER). This i s the only system run by the state itself, and along with IMSS-Solidaridad, it has the main responsibility for the "open" population-over 60 percent of the total, most of whom work in the informal sector and thus not are covered b y any of the social security programs. The open population includes most of the poor and marginalized population. 19. Despite having fewer resources per client than the other systems, SESVER has made important advances-achieving universal coverage with the basic package of health services, running a good public health program, starting some programs for cost recovery, and implementing an impressive investment program. The investment program was mostly funded by the state's disposable resources (not Ram0 33), including the new payroll tax. In 2001, Veracruz achieved universal coverage in health services and the state was recognized by the Pan-AmericanHealth Organization. Four further steps by the state are appropriate to improve the health care for the poor in Veracruz: 1. Maintain the state's contributionfor the health sector in real value at present levels, shifting priority from new investment to recurrent costs for operation and maintenance of the expanded SESVER health network. 2. Improve cost-recovery mechanisms by improving pricing, billing, and collection systems and SESVERfacilities and targeting subsidies more to clients with low income. 3, Increase SESVER's income generation by expanding agreements to sell services, such as use of private rooms, imaging, and lab equipment to the other healthcare networks-IMSS, PEMEX, and ISSSTE, and private sector providers. This will require market-demand analysis and a legal and normative framework in order to establish management agreements, standard tarifS structures, and cost-recovery quotas based on the cost of services. Standard billing and collection applications will need to be integrated with electronic clinical records and with SEFIPLAN. 4. Introduce incentives at all managerial levels, based on productivity and quality indicators. The incentives should combine new cost- recovery quotas with incremental reduction in historically assigned budgets and should include better physician-remuneration mechanisms. WATER 20. With the highest annual rainfall of any state in Mexico, Veracruz has abundant water resources, but they are not evenly distributed in the state. A few areas have drought seasons, and many areas have recurrent floods from periodically intense rainfall ix and have increasing pollution, due mainly to industrial production. Also, the state has one third of the national rainfall and very little of it i s utilized. 21. Veracruz i s one of the two worst states in terms o f access to piped water, lagging well below the national average despite the natural abundance of water. The share of households without access to sewerage i s closer to the national average. This situation results from historical neglect of the sector and from pervasive political interference in pricing and tariffs. Water and sanitation services traditionally have been perceived only as social goods, not economic necessities. Consequently, the local water authorities depend almost completely on subsidies to develop new infrastructure, and in some cases even to operate the systems. The local water authorities typically do little on their own since they lack the technical capacity, and the state subsides are declining and insufficient to finance needed investments. 22. In the past the state government contributed to the problems because it lacked a clear vision, good planning, and the political will to develop the sector by makingit more self-sufficient. Recently, however, a new vision has begun emerging from the state government that could turn this situation around. 1. The State recognizes its need to update the water sector strategy and follow up in several areas: a new regulatory framework, incentives to raise tariffs, a plan for rural areas, and institutional support for the water utilities and municipalities. 2. Creation of a better regulatory framework is a crucial element in the modernization process, especially to attract private sector operators and investors. 3. The Water Consultative Council should become the instrument to improve water-sector planning, coordinating with municipal and federal level agencies to promote the state-level perspective of needs and strategy. 4. Additional funds are needed to speed investment. Private sectorfunds will probably come, but it is unrealistic to expect them to be large in the immediatefuture. Municipalities and users will need to do more. The state should make its subsidiesfor investmentand loan guarantees contingent on local action to raise tarif collection enough to cover operations and maintenance. 5. The state's plan should take into account both public and private options for delivery of services. Municipalities that cannot obtain a private operator, due to lack of financial or even political viability, should consider the option of corporatization, with full commercial autonomy and orientation. 6. Rural areas represent the majority of the state's gap in coverage. The strategy there should give special attention to the high cost of delivery to dispersed clients, and thus should consider nontraditional alternatives based on local capture and storage of rainwater. X 23. The state has been allocating a significant amount of resources to improve access to water and to decontaminate water of the rivers. However, there i s still a lot to do in order to achieve full coverage of this service. COMMUNICATIONS AND TRANSPORT 24. Transport i s central to any strategy for economic development and poverty reduction in Veracruz because of the importance of the location of the ports. Businesses come to the state because of them, and people in some parts of the state stay poor because they lack good transport to the new growth poles. Railways, formerly federal and now private, carry the bulk of goods between the ports and the rest of Mexico, including the rest of Veracruz, but most other transport, especially of people, i s by an extensive road system. The state now has effective responsibility for most roads, because many of the federal roads have been transferred to subnational governments, which must now care for their maintenance, rehabilitation, and expansion. Larger and wealthier municipalities generally have taken on responsibility for their local roads, but most other municipalities lack the managerial and financial capacity for the job. Maintenance i s a problem throughout the system, with over half o f non-toll roads being in substandard condition.' Roads with clear state responsibility are typically in less bad condition than federal, or especially, municipal roads. Many roads have no clear affiliation and suffer consequent neglect. However, resources employed by the Junta Estatal de Cuminos are not spent efficiently even on the state roads that get attention, because too much goes to the payroll of a large state workforce and to the upkeep of a large stock of machinery, both partly inherited from the federal government a decade ago when it transferred many road responsibilities to the state. The Secretaria de Comunicaciones, which i s in charge of buildingnew roads, has been investing a significant amount of resources. For state spending, improving rural roads has highest priority, because it will do the most to reduce poverty by improving the access of presently marginal communities to the growth poles of the state." Then, rather than emigrate, workers could commutefrom their traditional communities, and productsfrom the communities could be sold more effectively to the rest of the world." Maintenance of all roads needs to be done more efficiently. Outsourcing, such as to micro-enterprises created by former public sector workers, often shows good results, and the state should consider that option. 25. The state recently made some institutional improvements in the communications and transport sector. For instance, for the new Veracruz-Xalapa-Mexico City toll road the state obtained a concession from the federal government and i s now constructing the road as ajoint venture with the private sector. It established a procedure for prioritizing Most of the toll roads are managed by the federal government. loSome resources from the collection of the payroll tax are used to finance rural sector projects. l1The state has spent significant resources on building new roads in the Sierra de la Zongolica, which i s one of the poorest areas of the country, but still more remains to be done. x i road investments according to the share of population benefiting, the contribution to the reduction o f marginality, the per capita distribution of other public investment, the degree of contribution to the Veracruz Development Plan, and other socioeconomic benefits. Establishing objective criteriafor investment decisions will help greatly to especially if the information in the selection process is published, such as increase transparency, if the procedure is followed objectively, and in a report to Congress. Thestate still needs to establish an action-oriented transport development strategy, linked to the Development Plan, which will establish the framework for choices about investment and maintenance. The state should study the experience with the joint venture toll road (Veracruz-Cardel) and disseminate the lessons within the state and elsewhere. For expanding its system of toll roads, the state should explore further the optionsfor getting private sectorfinancing based on theflow of toll revenues in excess of maintenance costs. 26. The state government i s involved in the port o f Veracruz through its 42 percent ownership,12 and in the road transport system. Thus it must decide in which area to put its limited public investment funds. Many private investors would like to invest in the port, and the value of state involvement i s its contribution to regulation and planning, not as a source of finance. The port authority could raise capital by selling shares to private investors, without requiring the state to contribute its scarce financial resources or weakening its ability to provide regulatory and planning inputs. State funding in communications and transport should focus on roads, particularly those that cannot be supported by tolls. PLANNINGAND BUDGETINGINSTITUTIONS 27. Veracruz's institutions for budgeting and fiscal management have the potential to allow good outcomes in terms of stability, spending effectiveness, and cost-efficiency. The rules have a lot o f flexibility and leeway for discretion, however, so actual achievements depend on the attitudes and ability of those in power, especially the Governor and Secretary o f Finance and Planning. 28. For fiscal stability, the state constitution requires a balanced budget, but with authorized borrowing counted as revenue, the requirement provides no safeguard against deficits. Debt issues have to be pre-approved by Congress and can only be incurred to '* The federalgovernment has a 51percent ownership. xii finance investment, which should ensure that the state at eastruns a current surplus- current revenues in excess of current expenses. The state can, and until 2001 did, frequently incur substantial floating debt, sometimes by getting advances on participaciones from the federal government. Other states with good political relations with the federal level also didthis, but now the practice has ended and the states have had to adjust quickly. The most important macro-fiscal institutional constraint seems to be the unwritten expectation that a governor will balance the budget over his sexenio and pay off by the end of his administration any debt incurred in the early years. This i s better than no debt strategy, but it cannot guarantee that some future governor would not break the tradition and run up unsustainable debt. Furthermore, if the state has some investments with a long economic life, it could be optimal and not imprudent to finance these with longer-term debt, which might continue to the next sexenio. To rule out unsustainable deficits, the state does not need toforbid deficits entirely, but it does need to establish stiffer rules without discretion by the executive or the legislature alone. For instance, a debt limit as a share of revenue should include floating debt, arrears, and federal advances. A super-majority of Congress could be required to make any emergency exceptions. The debt policy should establish a debt ceiling, including all government operations and closely related to budget targets, with a sub-ceiling on short-term debt. While the public accounts are accurate and timely as far as they go, increased transparency requires that they should be broadened to include thefloating debt and at least a summary of payment arrears (and transfer advances),organized by the length of time 0verd~e.l~ 29. Financial Management. Veracruz has an integrated financial management system (SIAFEV), making it the first state to do so in Mexico. Although final judgment will need to await more experience, the new system has already helped to improve fiscal control over public spending and to provide timely information to sectoral managers so that they can take measures to improve the quality of the spending. It also helps reduce corruption on the payments of ADEFAS, because they are made electronically. Building on this important success, the state should continue implementation of SIAFEV and encourage the use of its information throughout thepublic sector. 30. The Secretariat of Finance and Planning-SEFIPLAN-has both functions in its mandate, but has concentrated on the former. It prepares a multiyear financing plan for the state, which emphasizes the fiscal concerns. The inter-sectoral planning committee, COPLADEVER, which receives technical support from SEFIPLAN and includes other secretariats, has made strong efforts to improve the state capacity to respond to social ~~ ~ l3For 2002, the Cuenta Pdblica includes the amount of money that the federation owes to the states for the Fondo de Aportaciones para la Educacidn Bhsica. This practice should be continued systematically and should also include the length of time that the money is overdue. ... Xlll demands, based on the Plan Veracruzano de Desarrollo. Inter-sectoral analysis has encountered difficulties, due to the restraints imposed by the large portion of earmarked revenues and due to the committee's lack of the operative capacity and technical autonomy. SEFIPLAN should strengthen the planning function, through COPLADEVER. It should provide the Committee with enough operative capacity and technical autonomy to coordinate and integrate inter- sectoral activities within the state's Development Plan. Intemational experience indicates the benefits of having the investment planning functions somewhat separate from, although coordinated with, the fiscal control function. The state should take advantage of the ongoing review of the Plan by COPLADEVER, to develop a multiyear investmentplanfor the period 2002-2004. This investment budget should be closely linked with the medium-term financing and debt plan, based on conservative estimates of the revenue growth that would occur with the planned investmentprogram. COPLADEVER should be considered an initial step toward theformation of a more developed and independent organization that would take full charge of the coordination of planning, budgeting, monitoring, and evaluation. 31. The state i s making quarterly reports that disclose the pace of achieving the budgetary goals and present evaluations o f the effectiveness and efficiency of all major spending programs. This is helping to improve transparency and intra-government coordination. AREGIONAL in a study title "Indice de Transparencia 2003" ranks Veracruz in the third place inMexico on transparency inpublic finance management. xv M6xico Revisi6n de Gastos Publicos: Elcas0 de Veracruz-Llave Resumen Ejecutivo 1. El estado de Veracruz-Llave maneja bien sus finanzas pdblicas en comparacidn con otras entidades federativas de Me'xico, ademis su manejo ha mejorado a traves del tiempo. Los dkficits fiscales en 10s que ha incurrido el estado recientemente han sido modestos, y en su mayoria han sido financiados por ahorros; ha implementado reformas significativas en materia de impuestos y a su sistema estatal de pensiones; su nuevo sistema para integrar el manejo financier0 ha mejorado la informacicin y el manejo del gasto pdblico estatal; y tienen una serie de programas substanciales que muestran innovaciones valiosas. Ademis, cuenta con una buena calificacih crediticia, lo cual le permitiria obtener pre'stamos para financiar proyectos de inversi6n s i asi lo decidiera. Es uno de 10s dos estados que exitosamente han absorbido el sistema educativo transferido y tambikn uno de 10s pocos estados que ha sido capaz de coordinar exitosamente 10s diferentes sistemas de salud que operan en el estado. Sin embargo, hay algunas 6reas en las que el estado pudiera mejorar adn, las cuales serin descritas en este documento. Para alcanzar las metas de reducir el nivel de pobreza y de acelerar el crecimiento econ6mic0, 10s servicios con mayor prioridad son la educacidn y las carreteras. En particular, las reformas del sector educativo deberin de continuar con mejorar la supervisih, la evaluacih y 10s incentivos a 10s maestros (mejor y mis relevante capacitacih; vincular desempefio a recompensas), de tal manera que 10s estudiantes tengan el deseo de terminar la secundaria y mis espacios educativos tendrin que ser creados. Mayor eficiencia en la distribuci6n del personal docente podria incrementar 10s recursos necesarios del sector, per0 eventualmente mayores ingresos serin necesarios. En el sector transporte, la participacih del sector privado pudiera incrementar 10s recursos para nuevas inversiones y para el mantenimiento de autopistas y transporte pdblico. Sin embargo, es necesario una mayor cantidad de recursos pdblicos para poder complementar la participacih del sector privado y para cubrir 10s costos de mejoramiento de caminos en las zonas rurales. Para que estos incrementos en el gasto pdblico Sean sostenibles, es necesario que el estado fortalezca mis sus finanzas, como por ejemplo, eliminando la deuda flotante. POBREZADESARROLLO Y ECONOMICO 2. Elgasto pdblico debe de ser evaluado en el context0 del combate a la pobreza y el desarrollo econ6mic0, ambas metas de 10s programas del gobierno del estado. Tal y como se menciona mas adelante, programas estatales y federales tales como Oportunidudeshan ayudado a mejorar el bienestar de 10s veracruzanos en condiciones de pobreza extrema que habitan en las zonas rurales, aunque todavia se puede hacer mis a nivel estatal, tal como complementar las acciones de Oportunidudes para expandir la cobertura. Veracruz ha alcanzado estos logros a pesar de 10s niveles de pobreza superiores al promedio nacional, resultado de politicas pdblicas de gobiernos anteriores. A pesar que la brecha entre el product0 interno bruto del estado y el promedio nacional adn no converge, el estado est6 logrando un gran progeso en cerrar la brecha en medidas no monetarias de bienestar tales como educacih, salud y vivienda. L a matricula en el xvi nivel de primaria y el acceso a servicios de infraestructura bBsicos se estBn acercando a1 promedio nacional, y Veracruz ha alcanzado cobertura universal en salud a nivel primario. 3. Desde la Cpoca Precolombina, Veracruz ha sido un centro importante de la actividad econ6mica en MCxico, ya que cuenta con el puerto mBs grande de todo el pais. A pesar del auge de algunas industrias exportadoras en el estado, la poblacidn de Veracruz tiene bajo nivel de ingresos promedio segdn 10s estindares mexicanos. El producto intemo bruto per cBpita es menos de tres quintas partes del promedio nacional y es uno de 10s mBs pobres del pais. Como en el resto del pais, la pobreza es alta en las zonas rurales de Veracruz, donde su incidencia se encuentra un poco por encima del promedio nacional, per0 el estado se distingue del resto de MCxico ya que tambiCn tiene una alta tasa de pobreza en la zona urbana, donde vive la mayor parte de la poblacidn. Este hecho provoca que la tasa de pobreza global en el estado de Veracruz-Llave este por encima del promedio nacional. 4. El crecimiento econdmico es la mejor manera para combatir la pobreza en Veracruz, porque su distribucidn del ingreso es mBs equitativa que en el resto del pais. Si la relaci6n histdrica entre el crecimiento econ6mico y la pobreza persiste, con una tasa de crecimiento anual del producto interno bruto estatal de un 5 por ciento desde ahora a1afio 2009 permitiria que la pobreza extrema en Veracruz se redujera a la mitad. L a reduccidn en pobreza extrema serfa mayor si la tasa de crecimiento fuera mayor o si el nivel de inequidad se redujera mBs. El reto sera obtener tal crecimiento, y hacerlo de una forma que se incluya a 10s mBs pobres como beneficiarios, como podria ser con mejores vias de comunicacidn para 10s hogares pobres para introducir su trabajo y productos a1 mercado.l4 5. Los problemas centrales del desarrollo econ6mico y social son el bajo nivel de productividad de la fuerza laboral y la estructura de la economia local. L a agricultura tradicional emplea a una gran cantidad de gente per0 produce solo una pequefia parte del producto intemo bruto estatal. El sector servicios emplea a la mayor cantidad de la fuerza laboral y produce el mayor valor agregado; dentro de este sector el turismo y el transporte son 10s mayores y son 10s mBs prometedores para el futuro. A pesar que estos sectores estBn creciendo, ninguno puede crecer mBs rBpido. Para que el crecimiento del producto interno bruto de Veracruz converja con el promedio nacional es necesaria una estrategia enfocada a diversificar la economia local. AdemBs, las zonas con un mayor indice de marginacidn que se encuentran muy alejadas del corredor industrial del estado no tienen buenos medios de comunicacidn y tampoco unbuen acceso a la educaci6n que le permitiera a la poblacidn permanecer en sus comunidades. Maloney y otros (2000) han demostrado que la cercania a 10s Estados Unidos, educacidn superior, y una mayor cantidad de Breas urbanas (variable que refleja 10s efectos de aglomeraci6n e infraestructura) estBn correlacionados de una manera positiva con la inversidn extranjera directa. Las Breas con poblacidn indigena tienden a recibir menor inversidn extranjera l4 Est0permitiria que la poblaci6n pobre de las zonas rurales tenga un mejor acceso a1mercado laboral en otros centros de produccih con sistemas m6s eficientes y tambi6n para que sus productos tengan mejor acceso a otros mercados mejores. xvii directa, per0 est0 parece ser porque tienden a ser 6reas con bajos niveles de educacibn, rurales, y se encuentran alejadas de 10s Estados Unidos. En el cas0 de Veracruz, las soluciones parecen ser mejorar el nivel educativo de la poblaci6n, construir accesos a estas comunidades, y obtener camiones para trasportar a la gente de sus comunidades a 10s empleos y tambie'n para transportar 10s productos de las zonas rurales a las zonas urbanas. MANEJOLASFINANZAS WBLICAS DE 6. Veracruz tiene instituciones fiscales fuertes, y ha llevado a cab0 un fuerte programa de inversi6n pdblica, per0 ha recibido fuertes impactos en las finanzas pdblicas a causa de la reducci6n de las transferencias federale~,'~ y tambie'n por que en 1999 el gobiemo del estado tuvo que gastar una gran cantidad de recursos a consecuencia de las inundaciones. Estos impactos han causado problemas fiscales de corto plazo. Durante 10s dltimos cuatro aiios el estado ha tenido de'ficits en el balance general de las finanzas pdblicas, aunque el deficit ha alcanzado un nivel de 7.1 por ciento de 10s ingresos totales en el aiio 2002. Hasta el aiio 2001 el estado se mantuvo sin endeudarse, ya que utiliz6 ahorros y anticipos que recibi6 del gobiemo federal para financiar su gasto. En 2002, Standard & Poors mejor6 la calificaci6n crediticia de Veracruz a MX A+, asi como otras agencias calificadoras tales como Fitch y Moody's, reflejando su mejora en el manejo fiscal. 7. Zngresos. En el aiio 2000 10s ingresos estatales eran cerca de 3,900 pesos per cipita, mientras el promedio nacional era de 4,300 pesos per cipita, l o cual coloca a1 estado en el lugar ndmero 26 de 31. Este lugar se debe principalmente a la baja cantidad de transferencias federales, ya que estas constituyen la principal fuente de ingresos de 10s estados. Los ingresos propios del estado constituyen apenas el 5 por ciento de 10s ingresos totales, 10s cuales se originan primordialmente de derechos, aprovechamientos, impuesto sobre la nbmina, ingresos de capital y del pago de tenencia que actualmente comparte la federaci6n con 10s estados en un cien por ciento.16 L a presente administracibn ha expandido la base de 10s ingresos propios por medio de la imposici6n de nuevos impuestos sobre la nbmina, sobre loterias y sorteos, sobre hospedaje, y por reformas a la administracibn tributaria. Los ingresos tributarios estatales incrementaron del 0.2 por ciento de 10s ingresos totales en 1998 a1 2.8 por ciento en 2002. Tambie'n cabe mencionar que la recaudaci6n de 10s impuestos que actualmente la federaci6n comparte con 10s estados incremento substancialmente. Est0 representa un gran esfuerzo fiscal y politico, que se ha facilitado por el hecho de que 10s ingresos por el impuesto a la n6mina son completamente destinados a proyectos de infraestructura. AdemBs de estos impuestos, Veracruz no puede hacer mucho mBs de lo que ha hecho en materia de impuestos ya que 10s estados estin muy limitados por el marco legal para expandir la base fiscal. Cabe mencionar que la Conferencia Nacional de Gobernadores (CONAGO), l5La Ley de Coordinacih Fiscal regula las transferencias federales, y por ello el gobierno estatal no tiene control sobre ellas. l6 La reforma tributaria llevada a cab0 en el 2000 derog6 algunos impuestos y dio la facultad para gravar el impuesto sobre la n6mina a partir del 2001, lo cual ha hecho que 10s ingresos tributarios hallan incrementado. xviii agrupacidn a la cual pertenece el gobernador de la entidad, ha hecho gestiones para llevar a cab0 una reforma a1pacto fiscal. Para que Veracruz y otras entidades federativas obtengan mayor autonomia e ingresos, el gobiernofederal deberia reformar el pacto fiscal de tal manera que le conceda a 10s estados una mayor autoridad para gravar impuestos, como por ejemplo, con leyes no transitorias en las que les de' lafacultad a 10s estados de gravar el impuesto sobre ventasfinales. Tambie'ndeberia cambiar la fo'rmula de redistribucio'n de transferencias federales de tal manera que Sean mds equitativas per cdpita, ya que estos estados tienen una base de'bilpara gravar impuestos. El estadopuede mejorar sus ingresos si continua con las reformas en la administracio'n tributaria y apoyando tales reformas del pacto fiscal a nivel federal y aprobando el impuesto sobre las ventasfinales cuando el gobiernofederal haga 10s cambios correspondientes. Egresos. Cerca del 88 por ciento de 10s egresos estatales son gastos en productos y servicios. Las transferencias federales a 10s municipios constituyen el 12 por ciento de 10s egresos, y las transferencias y subsidios a 10s municipios que son a discreci6n del gobierno estatal constituyen cerca del uno por ciento del total de egresos. Los pagos de intereses son menos del uno por ciento del total y no indican ningdn problema. Cerca del 48 por ciento del total de egresos lo constituye el pago de la nbmina, y el mantener este porcentaje relativamente bajo constituye uno de 10s objetivos clave de la Secretaria de Finanzas y Planeaci6n.l' Una gran parte de la n6mina estatal depende de las negociaciones a1 nivel federal, especialmente en educacibn, y el ajuste automitico de las transferencias federales paga solo dos terceras partes de este rubro. El estado tiene pocas opciones con las que puede controlar esta fuente de incertidumbre, except0 el limitar sus contrataciones a las posiciones que son pagadas automiticamente por las transferencias federales. Asi como en otras entidades federativas, una gran parte del gasto es financiado por transferencias federales etiquetadas. Por l o que se limita el margen de maniobra con el que cuenta el estado para cambiar la distribuci6n sectorial del gasto. 8. El gasto de capital representa cerca del 10 por ciento de 10s egresos, que fue el mayor de todos 10s estados en el 2001 (INEGI 2001). En contraste con otros estados, en donde la inversi6n pdblica se ha dejado como una variable de ajuste para alcanzar las metas fiscales, Veracruz ha incrementado su gasto de capital durante la presente administraci6n. Desde la perspectiva del manejo de las finanzas pdblicas en el corto plazo, el e'nfasis en la inversi6n tiene una ventaja de flexibilidad, ya que es m6s sencillo reducir la inversi6n que el personal. Y, desde luego, la inversi6n est6 dirigida a aumentar el crecimiento y reducir la pobreza. 9. En materia de egresos, el reto principal para Veracruz, asi como del resto de las entidades federativas, es el de establecer una responsabilidad y transparencia m6s claras sobre el gasto pdblico, y adem6s el de luchar y obtener la autoridad para manejar su gasto l7Enel 2001 el 64 por ciento del gasto corriente se destin6 a servicios personales,de 10s cuales el 87.8 por ciento de estos gastos correspondi6 a1sector educativo. xix de una manera mis efectiva y eficiente. Esto no solo requiere de tener el control sobre el reclutamiento y la nbmina, sino tambiCn del control sobre la asignaci6n y el manejo del personal, incluyendo a 10s maestros y a 10s trabajadores del sector salud. Parte de esta responsabilidad y control pueden ser descentralizados a1 nivel municipal o a1 nivel de las unidades de servicio - escuelas, clinicas y hospitales, que la experiencia en otros lados ha demostrado que esto mejora la calidad y la responsabilidad de provisi6n del servicio. 10. Pensiones. El sistema de pensiones para 10s bur6cratas estatales, parcialmente reformado en 1996, adn presenta algunos problemas importantes. El sistema es muy generoso en relaci6n con 10s beneficios que otorga - dando el cien por ciento del salario final a aquellos trabajadores que se jubilan por l o menos a 10s 53 aiios de edad (si se consideran 10s 60 dias de aguinaldo por el cual no pagaron contribuciones 10s trabajadores, entonces 10s pensionados reciben un 130 por ciento del salario) y despuCs de 30 aiios de servicio, y a su vez con contribuciones menores del 25 por ciento de 10s salarios. Los pensionados son actualmente el 20 por ciento de 10s trabajadores activos, con este porcentaje creciente, y el gobierno del estado se ha visto en la necesidad de transferir un 2 por ciento adicional de sus ingresos a1 fondo de pensiones para que se pueda cubrir las obligaciones con 10s pensionados (aproximadamente $1,150 millones de pesos durante el periodo 1999-2002). Un estudio reciente muestra que las transferencias del estado a1 fondo de pensiones tendrian que ser de un 3 por ciento de 10s ingresos estatales en el 2020 en la ausencia de una reforma. Los pasivos contingentes ascienden a $35,000 millones de pesos lo que refleja la necesidad de reforma. L a reforma de 1996 fue efectiva, sin embargo adn se pude hacer miis. Las pensiones no son transferibles, lo que significa a que un trabajador que se cambia de trabajo antes de servir por 15 aiios o de tener 53 aiios de edad no recibe nada, ni siquiera alguna suma prorrateada basada en 10s aiios de servicio. El sistema de pensiones de Veracruz necesita de una reforma adicional inmediata para que sea fiscalmente autosuficiente y para que las pensiones Sean compatibles y transferibles con 10s otros sistemas de pensiones, tanto del sector pziblico como del sector privado. El gobierno del estado tiene ya que realizar la siguiente reforma, ya que el dkficit actual de caja es ya de $500 millones de pesos y su tasa proyectada de crecimiento es elevada. 11. Deuda Pziblica y Endeudamiento. Veracruz ha tenido dCficits fiscales en 10s dltimos aiios y para fines del 2002, el monto total de la deuda ptiblica ascendi6 a 2,000 millones de pesos. Esta deuda ha sido contraida recientemente y no es muy alta bajo 10s estiindares internacionales y de Mkxico (la deuda representa cerca del 6 por ciento del gasto corriente y menos del 13 por ciento de las participaciones, las cuales son utilizadas para garantizar el servicio de la deuda). Durante el 2002 el estado empez6 a refinanciar la deuda en tkrminos favorables.'* De esta manera, el estado no tiene problemas de la sostenibilidad de su deuda. L a pregunta es cual es el ritmo y con que tipo de financiamiento pudiera incrementar su deuda de una manera sostenible. Para responder a esta pregunta, el estado tiene que estudiar el context0 de un plan de financianiento de '*Medianteel refinanciamiento de la deuda, el Estado ahorro alrededor de $180 millones de pesos. xx largo plazo, el c u d esta fuera del alcance de este estudio. El gobierno del estado, a parte de utilizar 10s anticipos de las transferencias del gobierno federal y el credit0 para mantener un balance fiscal, ha retrasado el pago a sus proveedores. Desde 1998, 10s adeudos de ejercicios fiscales anteriores (ADEFAS) han crecido substancialmente, hasta alcanzar 3,693 millones de pesos a fines del 2002.19 Esta cifra representa cerca del 5 por ciento del total de ingresos, y mis de tres meses consecutivos de gastos de capital, casi el doble del tiempo que normalmente se podria justificar para pagarle a un proveedor (es decir, el pagarle en un promedio de 60 dias). El tiempo de estos atrasos y el orden de c6mo se pagan estas deudas no es muy transparente. 12. L a presente administracidn se ha comprometido a que a1 fin de su mandato, Veracruz vuelva a tener unas finanzas p6blicas sanas y con un crecimiento sustentable. El gobierno del estado podria lograr este compromiso financiando el gasto pdblico con sus ingresos corrientes, de tal manera que no haya un crecimiento en el monto total de la deuda pdblica, a menos que esta se realice en el context0 de inversi6n p6blica de largo plazo y de unplan de financiamiento. Cuatro acciones consideradas o implementadas por e l estado ayudarin a cumplir con este objetivo: 1. Definir metasfiscales y de deudapara el medianoplazo asi comopara cada aiio; 2. Eliminar el us0 de las ADEFAS como mecanismo definanciamiento, y definir un mecanismo de financiamiento para el mediano y largo plazo; 3. Revisar y actualizar 10s programas de gobierno de acuerdo a un nuevo escenariofiscal, en el cual 10s gastos de capital cumplan con las metas de gobierno; 4. Desarrollar fuentes no tradicionales para financiar las actividades pu'blicas, incluyendo la participacidn del sector privado. Por ejemplo, a travks de la bursatilizacio'n de activos en la Bolsa Mexicana de valores. 2o ASIGNACION SECTORIAL DEL GASTO 13. Asi como en otros estados, mis de tres cuartas partes de 10s egresos son traspasos de transferencias federales a maestros federales, a trabajadores del sector salud, y participaciones y aportaciones a 10s municipios. Esta falta de control por parte del gobierno del estado sobre 10s egresos e ingresos va en contra de la prominencia politica y de la responsabilidad sectorial de 10s estados, lo cual hace un llamado para hacer una reforma a1 nivel federal. El estado ha utilizado parte de sus recursos disponibles para financiar el sector educativo y de salud, asi como para otorgar algunas transferencias a 10s municipios, ademas del traspaso de las transferencias federales. Esto indica que no es Las ADEFAS no han sido financiadas con 10s anticipos de las participaciones. Ademis, estas no se *'reconocenen el presupuesto. Elestado ha hecho unesfuerzo parapoder incrementar el gasto de inversi6n en carreteras atrave'sde la reestructuraci6n de su deuda con mejores condiciones de tasa de intere's y por medio de la bursatilizaci6n de 10s ingresos de peaje de la carretera Veracruz-Cardel. xxi necesario que 10s fondos federales esten etiquetados para gastos especificos para motivar a1 estado a que asigne recursos en estas keas, aunque el estado pudiera distribuir estos recursos de una manera distinta dentro del sector s i tuviese un control mis efectivo sobre ellos. L a asignaci6n sectorial del gasto en Veracruz es similar a la de otros estados. El sector educativo es el rubro mis grande del presupuesto, constituyendo m i s de la mitad del gasto total y ademis, constituyen m8s de la mitad de las aportaciones federales recibidas por el estado. 14. Para satisfacer las necesidades de 10s pobres en Veracruz, eventualmente se requeririn mayores recursos en el sector educativo para financiar la expansi6n en la cobertura a1 nivel de secundaria y en el sector de carreteras. Sin embargo, la mayoi-fa de 10s ajustes necesarios se podrian lograr con una utilizaci6n de 10s recursos actuales en el sector educativo y en el sector de comunicaciones de una manera mis eficiente y efectiva. EDUCACION 15. Veracruz ha tenido importantes logros en el sector educativo. El mis notable de estos logros ha ocurrido a1nivel de primaria, donde la cobertura de las escuelas pfiblicas ha incrementado a casi un cien por ciento durante la filtima dCcada, una cifra que esta ligeramente por encima del promedio nacional. Por otro lado, la matricula a nivel de post-primaria en Veracruz es sumamente bajo comparado con 10s estindares de Mexico y AmCrica Latina, en particular en las keas de pobreza extrema de las zonas urbanas y para las mujeres. El estado no ha logrado que 10s estudiantes mayores permanezcan en las escuelas y se gradfien. A1 nivel universitario, el porcentaje de la poblaci6n que se encuentra matriculada es mucho menor que a1 nivel de secundaria, per0 esta cifra es comparable con el promedio nacional. Los universitarios provienen de familias que tienen ingresos en 10s tiltimos cinco deciles de la distribucibn, aunque esencialmente no hay uncosto de recuperaci6n por ellos. Para mejorar el sector educativo, el estado necesita tomar medidas en las siguientes cinco dreas, las cuales estdn dentro de su a'mbito: 1. Mejorar la composicidn del gasto a1 nivel de educacidn bdsica de tal manera que se aseguren 10s recursos necesarios para la compra de material docente y otros costos no-salariales, y mejorar la coordinacidn de 10sprogramas bdsicos de educacidn; 2. Identificar causas y solucionar 10s problemas de desercidn y reprobacidn; 3. Expandir la oferta a1 nivel de secundaria de tal manera que se satisfaga la demanda generadapor 10spuntos anteriores; 4. Fortalecer la supewisidn y la evaluacidn de la enseiianza y la administracidn escolar, a travis de la implementacidn, por ejemplo, del sistema escolarizado de control escolar; xxii 5. Reducir el subsidio que. el estado otorga a la universidad e implementar algin mecanismo de recuperacidn de costos, y otorgar subsidios (0 becas)dirigidos a 10s estudiantes con bajos recursos. 6. Mejorar la calidad de la educacidn rural donde predominan 10s indices de desercidn ma's altos. 16. Mientras que el estado ha cumplido su compromiso de proveer educaci6n secundaria a todos 10s que quieran obtenerla, todavia esta lejos de la provisi6n universal de educaci6n secundaria que 10s j6venes necesitan para triunfar en el siglo XXI. Para alcanzar este objetivo se necesitan tres cosas: (i) que todos 10s nifios terminen el nivel primario exitosamente, (ii)que se mejoren 10s incentivos de 10s maestros:' y (iii) expandir 10s espacios educativos a1nivel de secundaria para satisfacer la demanda (como por ejemplo, la reasignaci6n de personal educativo y recursos, y la construccibn de nuevas escuelas). El impacto fiscal del incremento en la matricula a1nivel de secundaria sera bastante alto, sin embargo este se manifestaria de manera gradual y mientras se obtienen Cxitos en otros frentes. S i el gobiemo de Veracruz quiere cerrar la brecha con el promedio nacional (escenario bptimo), es necesario incrementar el gasto anual por $16 millones de d6lares adicionales. 17. L a mayor parte del presupuesto se destina al sector educativo, sin embargo la mayor parte de 10s fondos no esta bajo el control del estado. Las aportaciones del Ram0 33 son destinadas para cubrir 10s salarios del personal docente. Los maestros que pertenecian a1 sistema federal, 10s cuales representan a mas de la mitad de 10s maestros del estado y son 10s que dan servicio a mas de la mitad de 10s estudiantes del estado, tienen un sistema de pensiones distinto a1 de 10s maestros estatales. El estado tiene la autoridad legal para tener un mayor control sobre 10s fondos que recibe de la Federacibn, y debido a 10s acontecimientos a1 nivel federal y en otros estados, como Chiapas, muestran que es una decisi6n politica de que tan lejos se quiera llegar. Para que el estadopueda mejorar su responsabilidad sobre 10s resultados del sector educativo, es necesario que la participacidn del gobierno federal en el manejo del sector se reduzca, y deberia de enfocarse en la imposicio'n de esta'ndares de desempeiio asi como en complementar 10s recursos estatales para garantizar y motivar el acceso a la educacidn a 10s estudiantes de escasos recursos. SALUD 18. Veracruz tiene buenos resultados en el sector salud, considerando que tiene un product0 interno bruto per capita que esta 40 por ciento por debajo del promedio nacional y que 10s recursos per capita del sector(doctores, camas de hospitales, enfermeras y clinicas) son entre un 10 a un 30 por ciento menores que el promedio nacional. Como en todo MCxico, existen varios sistemas que trabajan paralelamente (IMSS, ISSSTE, SESVER, y otros), cada uno atendiendo a diferentes sectores de la poblacibn, *' Lossalariosde 10s maestrospudieran ser altos en promedio, sin embargo, su estructura deberia de reflejarsu desempefio. xxiii determinados por la situaci6n del empleo. Debido a que 10s clientes tienen pocas opciones para elegir entre 10s sistemas, hay un margen muy reducido para que presionen para que se mejore el servicio. El gasto y 10s recursos por cliente difieren ampliamente en 10s diferentes sistemas, con el gasto per cipita de Servicios de Salud de Veracruz (SESVER) siendo uno de 10s mis bajos. Este es el dnico sistema en el cual el estado tiene una responsabilidad directa y completa. SESVER en conjunto con IMSS- Solidaridad tienen la responsabilidad de atender a la poblaci6n no asegurada (poblaci6n abierta) - mis del 60 por ciento del total, donde la mayoria trabaja en el sector informal y por lo tanto no est6 cubierta por ningdn sistema de seguridad ptiblica. L a poblaci6n abierta incluye en su mayoria a la gente pobre y marginada. 19. A pesar de que tiene menos recursos por cliente que otros sistemas, SESVER ha hecho avances importantes - como el alcanzar cobertura universal con un paquete bisico de servicios, manejar un buen programa de salud pdblica, empezar con programas para recuperaci6n de costos, e implementar un programa de inversi6n impresionante. Este programa de inversi6n ha sido financiado principalmente por 10s recursos disponibles del estado, 10s cuales incluyen la recaudaci6n por concept0 del nuevo impuesto sobre la n6mina. En el afio 2001, Veracruz alcanz6 cobertura universal en servicios de salud, siendo reconocido por la Organizaci6nPanamericana de la Salud. Cuatropasos por el gobierno del estado son apropiados para mejorar el sistema de salud pdblica estatal en Veracruz: 1. Mantener la contribucidn del estado a1 sector salud a1 mismo nivel que el actual per0 en te'rminos reales, cambiar la prioridad de inversidn a cubrir 10s costos recurrentes de operacidn y mantenimiento de la red estatal expandida. 2. Mejorar 10s mecanismos de recuperacidn de costos, utilizando subsidios dirigidos hacia 10s pacientes con escasos recursos y mejorando 10s precios, la facturacidn, y 10s sistemas de cobranza y las clinicas de SESVER. 3. Mejorar la generacidn de ingresos de SESVER a trave's de la expansidn de acuerdospara la venta de servicios, tales como el us0 de cuartos privados, y el us0 de 10s laboratorios, a otos sistemas de salud como el IMSS, ISSSTE, PEMEX y las clinicas del sector privado. Para llevar a cab0 esto, es necesario realizar un estudio de mercado asi como un marco juridic0 que le permita a SESVER a realizar dichos acuerdos, asi como a imponer una estructura tarifaria, y cuotas basadas en recuperacidn de costos de 10s sewicios. Lafacturacidn y la cobranza deberdn ser integradas con 10s registros electrdnicos de la clinica y con 10s ingresos de SEFIPLAN. 4. Introducir incentivos basados en indicadores de productividad y calidad a nivel gerencial. Estos incentivos deberdn de combinar las nuevas cuotas basadas en costos de recuperacidn y la reduccidn histdrica de 10s presupuestos asignados asi como mejorar 10s mecanismos de remuneracidn de 10s mkdicos. xxiv AGUA 20. Veracruz tiene una precipitacidn superior que en cualquier otra entidad federativa, lo cual permite a1 estado en contar con una gran cantidad de recursos acuiferos, sin embargo estos no se distribuyen de una manera equitativa. Unas keas tienen temporadas de sequia, y otras tienen inundaciones de manera peri6dica y tienen un alto grado de contaminaci6nproveniente principalmente de las industrias. Ademis, el estado tiene una tercera parte del escurrimiento nacional y el cual casi no se aprovecha. 21. Veracruz es uno de 10s dos estados con el peor acceso a1 agua entubada, a pesar de ser un estado con una gran abundancia de agua. El porcentaje de la poblaci6n sin acceso a1 drenaje es muy similar a1 promedio nacional. Esta situaci6n es el resultado de una negligencia hist6rica del sector y tambiCn debido a la interferencia politica en la fijaci6n de precios y tarifas. El agua y 10s servicios de sanidad han sido percibidos como bienes sociales y no como necesidades econ6micas. De manera consecuente, 10s organismos municipales de agua dependen completamente de 10s subsidios para poder desanollar nueva infraestructura, y en algunos casos para operar sus sistemas. Los organismos municipales de agua hacen muy poco por su propia cuenta, ya que no tienen la suficiente capacidad te'cnica y porque 10s subsidios otorgados por el gobierno del estado han sido reducidos y son insuficientespara financiar sus necesidades de inversi6n. 22. Enel pasado, el gobierno del estado contribuia a estos problemas ya que no tenia una visi6n muy Clara, una buena planeacibn, y la voluntad politica para desarrollar un sector que sea autosuficiente. Sin embargo, recientemente una nueva visi6n del gobierno del estado ha emergido, la cual pudiera mejorar la situacidn actual del sector. 1. El estado reconoce sus necesidades de actualizar la estrategia del sector y darle seguimiento a distintas dreas: a un nuevo marco regulatorio, a 10s incentivos para incrementar las tarifas, un plan para las dreas rurales, y en el apoyo institucional a 10s organismos municipales de agua. 2. La creacidn de un mejor marco regulatorio es un elemento crucial en el proceso de modernizacidn, especialmente para poder atraer la inversidn y operacidn del sector privado. 3. El Consejo Consultivo del Agua debe ser el instrumento para mejorar la planeacidn del sector, ya que puede ser el puente de comunicacidn con 10s organismos municipales de agua y la Comisidn Nacional de Agua para promover la perspectiva estatal sobre las necesidades y estrategiasdel sector. 4. Se necesitanfondos adicionales para acelerar la inversidn. Fondos del sector privado probablemente lleguen a ser invertidos, per0 no seria realista pensar que fueran grandes cantidades, por lo menos en el futuro inmediato. Los municipios y 10s usuarios deberian de hacer mds. El estado deberia destinar subsidios a la inversidn asi como el otorgar garantias que fueran contingentes a que 10s organismos xxv municipales de agua incrementen la recaudacidn por concept0 de tarifas de tal manera que se puedan cubrir 10s costos de operacidn y mantenimiento. 5. El plan estatal debe de considerar la opcidn de que Sean el sector pu'blico y el privado 10s que provean el sewicio. Los municipios que no tengan la opcidn de que el operador del organismo de agua pertenezca a1 sector privado debido a que no es rentable o porque no esfactible politicamente, deberia de ver la opcidn de hacer phblica la empresa, es decir, que se permitan socios del sector privado, y que el organismo tenga su propia autonomia y orientacidn comercial. 6. En las zonas rurales es donde hacefalta una mayor cobertura de este servicio. La estrategia que se disefie tiene que considerar 10s altos costos en la provisidn del servicio a 10s clientes dispersos, y por lo tanto seria mejor considerar otras alternativas no tradicionales basados en extraccidn local y almacenamiento de agua de lluvia. 23. El estado ha asignado una cantidad muy importante de recursos para mejorar 10s servicios de agua potable y saneamiento de 10s rios. Sin embargo, hay mucho por hacer para alcanzar la cobertura total del servicio. COMUNICACIONESY TRANSPORTES 24. El transporte es un elemento central en cualquier estrategia para el desarrollo econ6mico y el combate a la pobreza en Veracruz debido a la importancia en la localizaci6n de sus puertos. Los negocios se localizan en el estado debido a ellos, y algunos veracruzanos permanecen en condiciones de pobreza ya que carecen de buenos transportes a 10s nuevos polos de desarrollo. Los ferrocan-iles, 10s cuales eran propiedad del gobierno federal y que actualmente son propiedad del sector privado, transportan una gran cantidad de productos entre 10s puertos y el resto del pais, incluyendo tambiin por supuesto a1resto del estado. Sin embargo, la mayor parte del resto del transporte se lleva a cab0 a travks del sistema de carreteras, especialmente el transporte de las personas. El estado actualmente tiene responsabilidad efectiva sobre la mayoria de las carreteras, ya que varias carreteras han sido transferidas a 10s gobiernos estatales y ahora el estado tiene bajo su responsabilidad su mantenimiento, rehabilitacidn y expansi6n. Los municipios m6s grandes y m6s ricos han tomado la responsabilidad de sus propios caminos y carreteras, per0 la mayor parte de 10s municipios carece de la capacidad administrativa y financiera para llevar a cab0 esta funci6n. L a falta de mantenimiento es el principal problema a trave's de toda la red carretera, ya que mis de la mitad de las carreteras que no son de cuota est6n en muy malas condiciones de acuerdo a 10s estindares. Las carreteras que claramente son responsabilidad del estado se encuentran en mejores condiciones que las carreteras federales, especialmente que las carreteras municipales. TambiCn hay muchas carreteras en las que realmente no se sabe a que nivel de gobierno competen, y por consecuencia sufren de negligencia. Sin embargo, 10s recursos pdblicos ejecutados por la Junta Estatal de Caminos no son utilizados de una manera eficiente adn en las carreteras que reciben atencibn, ya que muchos de 10s recursos se utilizan para pagar la n6mina de un alto ndmero de trabajadores y para mantener una gran cantidad de xxvi maquinaria que fueron parcialmente heredados del gobierno federal hace una dCcada cuando se transfirieron muchas de las responsabilidades a1nivel estatal. L a Secretaria de Comunicaciones, quien es la encargada de la construccidn de las carreteras, ha invertido una gran cantidad de recursos en nueva infraestructura. Con respecto a1 gasto phblico estatal de este sector, la mejora de 10s caminos rurales es la mayor prioridad, porque esto tendria el mayor impacto para el combate a la pobreza ya que mejoraria el acceso de las comunidades con mayor grado de marginacidn a 10s nuevos polos de desarrollo.22 De esta manera 10s veracruzanospodrdn comunicarse desde sus comunidades en vez de emigrar a otros lugares, y adema's 10s productos de estas comunidades podrian ser vendidos a1 rest0 del El mantenimiento de las carreteras debe de llevarse a cab0 de una manera mds efciente. La subcontratacidn, como la que se llevo a cab0 por las microempresas creadas por 10s antiguos trabajadores del sector phblico, presenta buenos resultadosfrecuentemente, y el estado pudiera considerar esta opcidn. 25. El estado ha hecho algunas mejoras institucionales en el sector de comunicaciones. Por ejemplo, la nueva carretera de cuota de Veracruz-Xalapa-Ciudad de MCxico obtuvo una concesi6n por parte del gobierno federal y ya se est6 construyendo con la participaci6n del sector privado. El desarrollo de este proyecto estableci6 un procedimiento para priorizar las inversiones que toma en consideracibn el porcentaje de la poblaci6n que se beneficia por dicho proyecto, el impacto que el proyecto tiene en la reducci6n de la marginacicjn, la distribuci6n per &pita de otro tipo de inversi6n p6blica, su contribucidn a1Plan de Desarrollo de Veracruz, y otros factores socioecon6micos. El establecimiento de criterios objetivos para la toma de decisiones sobre proyectos de inversidn ayudarh de manera significativa a incrementar la transparencia, per0 siempre y cuando se cumplan de manera objetiva, y especialmente si la informacidn en el proceso de seleccidn es publicada, por ejemplo, en el reporte a1 Congreso. El estado necesita ann de un plan de accidn para el desarrollo de transporte vinculado con el Plan de Desarrollo de Veracruz, en el cual se establezca el marco contextual sobre las opciones para la inversidn y el mantenimiento. El estado deberia analizar la experiencia que tuvo con la carretera de cuota (Veracruz-Cardel) que se hizo con la participacidn del sector 22Algunos de 10s recursos del impuesto a la n6mina se est6n canalizando a 10s sectores rurales. 23ElEstado hainvertido una gran cantidad de recursos en la construccihde carreteras en laSierra de la Zongolica, la cual es una de las zonas m8s pobres de todo el pais; sin embargo, es necesario hacer afin m8s en este sector. xxvii privado, y diseminar sus lecciones. Para expandir las autopistas de cuota, el estado deberia explorar mds las opciones definanciamiento del sector privado de tal manera que 10s ingresos de las cuotas sean superiores a 10s costos de mantenimiento. 26. El gobierno del estado esta involucrado en el Puerto de Veracruz a trave's de la participacibn de un 42 por ciento de las a c ~ i o n e sy, ~a~travks del sistema carretero. De tal manera que el gobierno del estado debe decidir en que keas debe utilizar sus fondos escasospara la inversi6n pdblica. Enla regulaci6n y en la planeaci6n del puerto es donde tiene valor la participaci6n del gobierno del estado y no en el financiamiento, ya que existen muchos inversionistas del sector privado con deseos de invertir en el puerto. La autoridad portuaria podria incrementar su capital a travks de la venta de acciones a1 sector privado, y de esta manera no habria la necesidad de que el estado utilizard sus escasos recursos para su financiamiento y adema's esto no debilitaria la habilidad del gobierno en la regulacidn y en laplaneacidn. Los fondos del gobiemo del estado correspondientes a1 sector de comunicaciones deberian de canalizarse a1 sistema carretero, en particular aquellas que no puedan ser de cuota. PLANEACION Y LAS INSTITUCIONES F'RESUPUESTARIAS 27. Las instituciones dedicadas a1 manejo fiscal y del presupuesto en Veracruz, tienen el potencial de permitir buenos resultados, en tkrminos de estabilidad, de utilizaci6n del gasto en una manera efectiva, y de costos. Las reglas tienen mucha flexibilidad y margen para la discrecibn, sin embargo, sus logros actuales dependen de la actitud y de la habilidad de 10s que sustentan el poder, especialmente del Gobernador y su Secretario de Finanzas y Planeaci6n. 28. Con respecto a la estabilidad fiscal, la constituci6n del estado requiere de un presupuesto balanceado, per0 el endeudamiento autorizado se considera como ingresos, por lo que la ley no tiene una salvaguarda para 10s dkficits. L a deuda tiene que ser preaprobada por el Congreso y solo se puede incurrir en ella para financiar inversiones, l o cual garantiza a que haya un superiivit en el balance corriente, es decir que el ingreso corriente sea superior a1 gasto corriente. El estado puede, y hasta fines del 2001 lo ha hecho, incurrir frecuentemente en deuda flotante significativa, obteniendo en ocasiones anticipos sobre las participaciones del gobierno federal. Otros estados que tenian buenas relaciones politicas con el gobierno federal tambih hacian l o mismo, sin embargo, hoy en dia han tenido que terminar esta priictica y se han tenido que ajustar riipidamente a1 nuevo sistema. L a restricci6n institucional macro-fiscal miis importante que se tiene es la expectativa no escrita de que el gobernador va a balancear el presupuesto durante su sexenio, y que paguarii en su totalidad cualquier deuda contraida con anterioridad. Est6 priictica es mejor que tener una estrategia de no-endeudamiento, per0 est0 no garantiza 24 Mientras que el Gobierno Federal tiene un 5 1 por ciento de las acciones. xxviii que un futuro gobemador rompa con la tradici6n e incurra en deuda insostenible. Mis adn, si el estado tiene alguna inversi6n con una vida econ6mica de largo plazo, seria 6ptimo y no imprudente que se llevari a cab0 la inversi6n con financiamiento de largo plazo, que pudiera continuar a1siguiente sexenio. Para evitar 10s de'ficits insostenibles, el estado no necesita prohibir 10s de'ficitspor completo,pero si necesita establecer reglas mcis rigurosas que no este'n a la discrecidn del ejecutivo o del poder legislativo solamente. Comopor ejemplo, un cierto limite de deuda como porcentaje del total de ingresos debe incluir deuda pu'blica, ADEFAS y anticipos de la federacidn. Se deberia requerir una gran mayoria en el Congreso para poder realizar excepcionesemergentes. La politica de endeudamiento deberia establecer 10s limites de endeudamiento en donde se incluyan todas las operaciones del gobierno y que estas este'n relacionadas con las metas presupue'stales. Tambie'n esta politica deberia establecer un sub-limite a la deuda de cortoplazo. Mientras la cuenta pziblica es precisa y oportuna, es necesario que e'sta incluya las ADEFAS, y un resumen organizado por su fecha de vencimiento del pago de 10s atrasos y 10s anticipos de lafederacidn, para poder incrementar su transparencia.25 29. Administracidn Financiera. Veracruz ha implementado un sistema integral de administracidn financiera (SIAFEV), lo cual coloca a1 estado como un pionero en este ram0 en MCxico. A pesar de que se necesita tiempo para poder emitir unjuicio sobre el sistema, Cste ya ha mejorado el control sobre el gasto pdblico y ha provisto de informaci6n oportuna a 10s administradores sectoriales para que puedan tomar medidas para mejorar la calidad del gasto. Ademis de que permite eliminar la corrupci6n en el pago de ADEFAS, ya que 10s mismos se realizan electrbnicamente. Continuando con este gran logro, el estado debe de continuar con la implementacidn de SIAFEV y el promover el us0 de su informacidn en todo el sector pu'blico. 30. L a Secretaria de Finanzas y Planeaci6n (SEFIPLAN) tiene a su cargo ambas funciones, sin embargo se ha concentrado principalmente en el manejo de las finanzas. Elabora un plan de financiamiento multi-anual, sin embargo se enfoca en 10s aspectos fiscales. El comitC de planeaci6n para el desarrollo del Estado de Veracruz (COPLADEVER), el cual recibe apoyo tCcnico de SEFIPLAN per0 que incluye a otras secretarias, ha hecho un esfuerzo para mejorar la capacidad del estado para responder a las demandas sociales basindose en el Plan Veracruzano de Desarrollo. El analisis intersectorial ha encontrado dificultades debido principalmente a que una gran proporci6n 25 Para el2002, la Cuenta Pliblica revela el adeudo de la Federaci6n por concept0 de diferencias del Fondo de Aportaciones para la Educaci6n Bhsicapor cobrar a la Tesoreria de la Federacibn, sin embargo, es necesario a que Sean organizados por su fecha y que esto se lleve a cab0 de manera sistemhtica. xxix de 10s recursos pdblicos e s t h etiquetados y a la falta de capacidad.operativa y autonomia : tCcnica del comitC. La SEFIPLAN debe de fortalecer su funcidn de planeacidn a trave`s de COPLADEVER. La SEFIPLAN deberia de proveer a1 comite` con una suficiente capacidad operativa y darle una mayor autonomia te`cnicapara que pueda coordinar e integrar las actividades intersectoriales dentro del marco del plan estatal de desarrollo. La experiencia intemacional muestra 10s benefcios de mantener separada lafuncidn de planeacidn de la funcidn del control fiscal, sin embargo, debe de existir alguna coordinacidn de algu'n tip0 entre ellas. El estado deberia de sacar provecho de las revisiones hechas por el COPLADEVER a1 plan estatal de desarrollo para poder desarrollar un plan de inversidn multi-anual para el period0 2002-2004. Este presupuesto de inversidn deberci estar vinculado a un plan definanciamiento y de deuda de mediano plazo, que se base en estimaciones consewadoras sobre el crecimiento de 10s ingresos quepudiera ocurrir con el programa de inversidn planeado. El COPLADEVER deberia de considerarse como el paso inicial hacia la formacidn de institucidn mcis organizada e independiente, quien se encargue de la coordinacidn de la planeacidn, el presupuesto, el monitoreo y la evaluacidn. 31. El estado elabora reportes trimestrales que revelan el avance que se tiene para cumplir con sus metas presupuestales y presenta sus evaluaciones de efectividad y eficiencia de todos 10s programas de mayor gasto. Est0 ha ayudado a mejorar la transparencia y la coordinaci6n intra-gubernamental. AREGIONAL en su estudio "Indice de Transparencia 2003", ubica a1 estado en el tercer lugar a nivel nacional de transparencia en el manejo de sus finanzas pdblicas. -1- 1. MACROECONOMICAND SOCIAL OVERVIEW 1.1 Duringthe 20thcentury, the state of Veracruz-Llave fell behindthe rest of Mexico in terms of GDP per capita. On one hand, the state has both public and private companies, such as PEMEX and TAMSA, that are world-renowned and use state-of-the- art technology, and the state has been able to attract tourism from all over Mexico and North America. On the other hand, many public and private companies in the state still use substandard technology. The state exports coffee and cane sugar worldwide, but those industries are now declining due to world market conditions. Oil extraction has declined dramatically from its peak inthe 1980s, as deposits are depleted. Manufacturing and agribusiness have fueled some recent growth, but less than inthe rest of Mexico. 1.2 This chapter describes and discusses the macroeconomic and social context of the state of Veracruz, and provides a general strategy to improve the economic development of the state. It describes how the economic development of the state and the federal programs such as Oportunidades have led to a distinctive pattern of poverty, and at the same time have allowed many extreme poor households in rural areas to remain in a social context that mitigates the welfare impact of poverty. To improve the economic development of the state in ways that reduce poverty, the government could take action in four areas: 0 Invest in human capital, particularly, to increase enrollment in secondary education and improve the quality of basic education. 0 Invest in physical capital, such as roads that are strategic for the economic and social development of rural regions, and inthe provision of water. 0 Conduct a study of the labor market in order to understand its relationship with economic development. 0 Implement a strategic plan for economic development that emphasizes diversifying into highvalue industries. BACKGROUND ISSUES AND Background and Social Context 1.3 The State of Veracruz-Llave, commonly known as Veracruz, is the third-largest Mexican state in terms of population, with 7 million, but growing only 1.05 percent per year, which i s below the national rate of 1.85 percent. The population o f the state is predominantly urban (59 percent) and young (44 percent i s 19 years old and younger). Veracruz's indigenous population i s the third largest of any Mexican state, and represents close to 10percent o f the state 26 Results obtained with the 1997 Encuesta Nacional de Caracteristicas Socioecon6micas de 10s Hogares (ENCASEH) indicate that at the national level being indigenous reduces per capita income by 11percent in rural areas and has no significant impact in urban areas. -2- 1.4 The population of the state i s very dispersed geographically, with 210 municipalities and around 21,500 localities, close to 99 percent of which have less than 2,500 people. Over 40 percent of the population lives incommunities of less than 2,500 people. According to the Veracruz Poverty Diagnostic (VPD) document, almost of one- third of the per capita difference between Veracruz and the rest of the country is due to the unobservable effects that stem from the geographical differences between Veracruz and the country. The terrain and population dispersion make it difficult for the government to provide basic public services in some rural areas. 1.5 Veracruz i s one of the poorest states in Mexico. It still i s the fifth-largest state in terms of GDP, but 24thinterms of GDP per capita. It has a GDP per capita of about M x P 28,500 in 2000, compared to MxP 51,280 nationally and accounts for approximately 4.8 percent of the national GDP. During the last five years, Veracruz's GDP per capita has grown under 1 percent per year on average, a rate slower than the national average; indeed, the state's total GDP as a share of the national total has been declining for the last two decades. On both CONAPO's index of marginality (based on access to basic infrastructure services, housing conditions, education attainment, and wage earnings) and the UNDP's Human Development Index (based on per capita GDP, educational achievement and enrollment, and life expectancy), Veracruz i s the four poorest state in the country. 1.6 The distribution of income in Veracruz i s more equal than the national average, particularly in rural areas (see the VPD and Table 1.1) inequality in Veracruz went down from 1994 to 2000 because the total current income share accruing to the 20% poorest increased slightly (it went from 3.8 to 4.5 percent), whereas the richest 10%experienced losses (from 42 to 37 percent). The average national per capita income2' grew by 10 percent in real terms, but inVeracruz it decreased by 8 percent. The majority of this loss stemmed from the state's urban areas. Although there were gains in real per capita income inrural areas (7 percent), they were enough to offset the losses inurban areas. Table 1.1. Indicators of Income Inequality Year National Gini Veracruz-Llave'sGini (householdper capitaincome) (household per capita income) ALL Urban Rural ALL Urban Rural 2000 0.53 0.5 0.47 0.5 0.45 0.4 Sources: Bank staff calculations. 1.7 The population in rural areas often lacks adequate access to education, health, water, employment, housing, and other public services. Providing these services represents a challenge to the state government because o f the dispersion of the settlements, and insome cases, the diversity of cultures.28 ''Realexample, mean per capita income is a measure of growth. For in one settlement, the state government provided water to this community, however, the population still went to the river to wash their clothes. -3- STRUCTURE OF THE LABOR MARKET 1.8 Although Veracruz has one of the lowest unemployment rates in the country (see Table 1.2), it i s also one of the poorest states of Mexico and has a relatively high rate of part-time employment, with 41 percent of the labor force working less than 40 hours per week compared with the national average of 35 percent. Only one-fourth of the labor force i s in the formal sector, compared with 40 percent nationally. According to the VPD, demographic and labor force participation characteristics explain nearly 40 percent o f the difference in per capita income between Veracruz and the rest of the country. The negative impact of underemployment for the spouse in Veracruz may have policy implications, as other countries have been able to implement job training and employment programs targeted to women, such as in Colombia under the fumilias en uccio'n program. Still, more work i s needed in Veracruz in this area in order to reach a better understanding of the issues and their relationship to the characteristics of the labor market. Table 1.2. Percentageof Employed Population by Activity, Veracruz 1996(%) 1998(%) 2000 (%) Agriculture, farming, hunting, and fishing 33.0 35.8 35.1 Extractiveindustries and electricity 0.6 0.7 1.9 Transformation industries (manufacturing) 11.3 11.3 10.0 Construction 4.6 4.9 6.8 Commerce 17.7 17.3 14.9 Services 25.2 24.1 24.3 Communications and transports 3.7 3.2 3.9 Public administrationand defense 3.8 2.6 3.1 Sources: ENEVeracruz 1986, 1998, and2000 STPS-INEGI. 1.9 The redirection of internal migration flows has contributed to halting the unprecedented growth of older urban centers, most importantly in Mexico City and the port of Veracruz, but the rapid growth of new cities causes problems for administrations unprepared to deal with urban infrastructure, ecological damage, and service provision. The port of Veracruz i s offering entry-level jobs into the more modern parts of the economy, which i s a good development but not a cause for complacency. The next challenge i s to improve the performance o f the quality of jobs in cities. Veracruz seems to have the location and institutional foundations to achieve this goal. 1.10 Veracruz's labor force represents almost 40 percent of the total population in the state and around 7 percent of the labor force in the country. Almost 38 percent of the state's labor force has no schooling at all or did not finish elementary school, and only 19 -4- percent of the labor force has more than a high school education-both figu.res worse than the national average. See Table 1.4. Underemployment and a low level of education of the labor force explain part of the low labor productivity in the state. The more important part, however, i s the below-average productivity and earnings o f workers with the same education level, as shown in the poverty diagnostic. Thus a program to improve labor income needs to provide logistical and other support for labor productivity, as well as better education. Table 1.3. OpenUnemploymentRate 1996 1998 2000 Veracruz-Llave Total 3.1 1.9 1.3 Male 3.0 1.6 1.2 Female 3.2 2.7 1.4 National Total 3.7 2.3 1.6 Male 3.5 2 1.5 Female 4.1 2.8 1.8 Sources: ENEVeracruz 1986,1998, and 2000 STPS-INEGI. 1.11 The education level i s low inVeracruz. Heads of households, for example, either have no education or an incomplete primary education, and this group of people accounts for three fourths of the extreme poor inVeracruz versus the 57 percent national average. Table 1.4. Labor Force Participationby Levelof Educationin2000 (percent) Veracruz-Llave National Average D.F. Illiterate 10.8 8.3 2.4 Didnot finishelementary school 27.2 17.3 6.8 Finishedelementary school 19.4 20.5 15.6 Lower secondary 22.7 29.0 33.5 High school 10.0 11.4 15.9 College 9.9 13.3 25.7 Sources: INEGI, Encuesta Nacionalde Empleo, ENE. STRUCTURE OF THE STATE'S ECONOMY 1.12 The largest sector of Veracruz's economy i s commerce and services, representing almost 60 percent o f the state GDP and employing 39 percent of the labor force (see Table 1.2). The second-largest sector of Veracruz in terms of employment i s agriculture, which employs around 36 percent o f the labor force but produces less than one tenth of the state GDP, making it the main locus o f poverty. The main crops are coffee, -5- sugarcane, and citrus fruits, all of which have limited opportunities for growth. Improving labor productivity and incomes in these areas will require shedding a lot of labor from agriculture. To avoid high unemployment and emigration, the state economy will need to create morejobs. 1.13 The manufacturing sector employs only around 10percent of the labor market and also produces under one eighth of the state GDP. Within this sector, the most important industries are chemicals, steel fabrication, food processing, and hydrocarbon transformation. Oil extraction was one tenth of the state GDP in the 1980s, but now it accounts for only 1.5 percent o f state GDP, although its links to manufacturing and transport services make it more important than that. Construction had the fastest growth in employment in the late 1990s. Food processing, construction, and services, like tourism and the ports, seem to hold the greatest possibility for employment growth. 1.14 The second-largest contributor to the difference in expected income statewide and nationally stems from the sector of activity in which the head and the spouse are working. Households with heads working in the agricultural sector tend to have lower levels of per capita income than other households. This i s true nationally and in Veracruz (with the exception of the utilities sector). For example, a household with a head employed in manufacturing has an expected level of per capita income 30 percentage points higher than an otherwise similar household with a head working in agriculture. The impact of the spouse's sector of activity tends to be smaller than that of the household head. Overall, the dependence of the Veracruz population on sectors of less favorable activities accounts for a large share of the income differential between Veracruz and the country as a whole. 1.15 The export sector of Veracruz i s relatively small. During recent years foreign exports have decreased dramatically, from US$1,250 million in 1995 to US$ 798 million in 2001. Exports represent almost 7 percent of the state's economy, and almost 26 percent of these exports come from TAMSA, a firm that produces oil pipelines. Most of Veracruz's exports-59 percent-go to the United States, with much smaller amounts going to Europe and the Middle East. Imports were US$ 648 million in 2001, so the trade balance of the state inthat year had a surplus of US$ 150 million. Table 1.5. Veracruz-Llave's Foreign Trade (millions of U.S. dollars) Concept 1998 1999 2000 2001 Exports 1,247.6 858.5 1,141.3 798 Imports 850.9 753.5 886.9 648 Source: Secretm'a de Econom'a. 1.16 Foreign investment to Veracruz increased dramatically, from US$10.2 million in 1994 to US$163 million in 1999 and by the end of 2003 i s expected to increase to US$350 million. Although foreign investment has increased, it i s still very low --less than one percent of state GDP. Around 44 percent of foreign investment comes from the United States, 29 percent from Spain, and the rest comes mainly from Germany, Italy, the Netherlands, and Switzerland. The largest share goes to manufacturing industries, with 44 percent. I t has been shown by Aroca and Maloney (2001) that the most important -6- determinants of Foreign Direct Investment (FDI) in Mexico are proximity to the United States, higher education, and more urbanized areas (capturing agglomeration effects or infrastructure), but not low wages. 1.17 GDP growth within the state is geographically unequal. Inthe central part of the state the economy i s more diversified and growing faster than in the northern and southern regions. Central Veracruz now i s doing much better than other regions, mainly because of the interconnections between the port of Veracruz, the most important seaport of the country, with the port of Tuxpan, and Mexico City. The northern region of the state i s predominantly rural, while the southern region i s more specialized in livestock and oil. The state's strategy for economic development should be to link the southern and northern regions better with the center and help them to diversify into new industries. For the mountain areas, the best option may be to improve transport links that will allow people from there to work in the centers of growth without losing contact with their home communities. CONCLUSIONS AND RECOMMENDATIONS 1.18 This chapter identifies four problems from an economic and social development point of view: (a) inadequate access to communications and public services in rural areas, (b)low productivity of the labor force, (c) low diversification of industries inthe northern and southern regions of the state, and (d) lack of a coordinated strategy among government agencies. The following policies address these problems: 1. Develop a coordinated strategy, under the umbrella of the state's six-year development plan, which would support economic growth while improving the ability of the poor to participate in it. 2. Invest in physical capital such as roads and water. Roads are strategic for economic and social development of rural regions. Nevertheless, the authorities need to find a balance between providing overly costly infrastructure to villages, and providing too little, so that the residents have no access to the transport system. Shortage of water in rural areas seriously harms the well being of the population, but traditional provision of this service i s difficult given the dispersion of the settlements and the topography of the state. The authorities should find a balance between providing an overly costly infrastructure and finding alternate methods to assure access to safe drinking water (Davila and Levy 1999; World Bank 1999). 3. Invest in human capital, in particular, improve the provision of technical training to rural areas, and improve the quality and relevance of basic and secondary education. In the global economy, workers need the capacity to learn quickly and take advantage of current information and emerging technologies. Education i s critical to enhance the productivity of declining industrial sectors and to develop new competitive industrial clusters inthe state. -7- 4. Analyze the labor market in Veracruz, with a study of its relationship with economic development. 5. Create a strategic plan for economic development that emphasizes diversifying into high-value industries, including in the northern and southern regions. The state can do little for the oil sector except to lobby for the energy reform, since it i s by constitution controlled at the federal level. World market conditions offer little hope for a major comeback in sugarcane and coffee. Good regulations can facilitate the continued expansion of the construction industry, but it will always depend on growth in other sectors to fuel growth in demand for buildings. In a global economy where the main source of economic growth comes from Veracruz needs a long-term strategic plan for developing economic clusters based on industryand services. 29 Krueger and Berg(2002), "Trade, Growth and Poverty," ABCDE conferences. -9- 2. PUBLIC FINANCES3' 2.1 The distinctive feature of public finances in Veracruz i s its cyclical pattern. Growing current and capital outlays are both responsible for the recent fiscal expansion. The present government increased public expenditures in an effort to meet the social needs of its citizens and to improve public infrastructure. Despite the successful efforts to increase revenue, however, the increased spending ledto fiscal deficits. 2.2 In the late 1990s, the government could finance those deficits without issuing debt, by using the savings it had generated in previous years. The "rainy-day fund" lasted until 2000; since then continued deficits have forced the government to draw on credit and floating debt. Although not yet critical, this trend raises questions about mid- and long-term fiscal sustainability. Veracruz has been making efforts to return to a sustainable path with moderate fiscal adjustment in the short term; the structure and management of its debt are the main concerns-not its size, which i s modest. 2.3 Since taking office, the present government has had to deal with revenue and expenditure rigidities, and therefore it decided to generate greater revenues to pay for capital outlays. The state made a comprehensive fiscal reform in which it introduced three new taxes (on payroll, hotels, and lottery) as well as eliminated two taxes (public events and transport tax) as the core o f its tax restructuring. As a result, tax revenues increased from M x P 42 million in 1998 to almost M x P 850 million in 2002. Complementing these actions on the revenue side, the government has announced a significant cut in current expenditures. These and other measures demonstrate the present government's commitment to achieve at least modest fiscal surpluses by the end o f its term. Accordingly, Veracruz has maintained sound fiscal policies during the present administration. The state's fiscal strategy would thus help avoid serious problems for Mexico's macroeconomic stability and its financial system, such as in Argentina, Brazil, and Colombia. 2.4 When development requires strategic public investment, as in Veracruz, deficits are not necessarily bad. Access to public services such as education, water provision, and sewage disposal in the state i s below national standards. Not surprisingly, the state has a number of projects with high positive rates of return, which deserve to be carried out even if partially financed by debt. The challenge for Veracruz is to respond to rising demands while avoiding excessive growth of expenditures that create a structural imbalance. In this context, three questions arise about Veracruz's public finances: (a) How far can this expansive cycle go without puttingfiscal stability inperil? (b) What are the optimum sizes, sources, and conditions for financing? (c) What institutional changes are needed to ensure higher quality for public outlays? 3" All the data in this chapter were obtained from Veracruz's fiscal account. All the data in the figures and tables are expressed in real terms. Appendix 2 contains all the tables with data expressed in nominal terms. -10- 2.5 This chapter begins by examining recent fiscal outcomes and highlights the trends . in revenue, expenditure, and debt. Next it evaluates the measures taken by the government to control the magnitude and impact of the ongoing expansion. Finally, it addresses some other factors that may affect fiscal balances, like pensions, and proposes recommendations to ensure fiscal discipline. REVENUEAND EXPENDITURE TRENDS AND FISCAL BALANCES, 1998-2002 2.6 Deficits increased after the surplus year of 1998, as shown inTable 2.1 and Figure 2.1. The government's commitment to bring living conditions in Veracruz up to national averages and to improve the economic competitiveness of local producers required substantial public investment in recent years, which largely explains the recent drop in the overall fiscal balance.31 The government increased the fiscal deficit from MxP 225.5 million in 1999 to M x P 2,119.7 million in 200L3* Future reductions in the deficit are expected as a result of government actions on the expenditure side. Figure 2.1. Veracruz FiscalBalance (MxP million of 2000) -3,000 1 I ~ Source: Bank staff estimates based on Veracruz's fiscal accounts. 31The amounts in Figure 1 represent fiscal flows for the year, except for the line representing stocks "Available in Treasury" at the end of the year. A portion of the "Treasury" fund is set aside as a "rainy day fund," which comes from funds accrued for expenditures during the fiscal year (same as calendar) but which have not been disbursed yet. The bills for these expenditures are paid in the following year. I n this way it is possible for the change in "Treasury" to differ from the fiscal balance. 32All figures are expressedinreal terms. -11- Table 2.1. Veracruz FiscalBalance - (2000 MxP million) ~~ ~ 1998 1999 2000 2001 2002 Current Revenue 21,227.2 22,850.0 26,749.8 28,696.5 29,645.4 State's Own Revenue 372.7 461.0 522.7 1,157.2 1,624.8 FederalTransfers 20,854.4 22,388.9 26,227.1 27,539.3 28,020.6 Participaciones 8,437.2 8,853.1 10,074.6 10,278.4 10,095.7 I Aportaciones 11,972.8 13,061.8 15,639.0 16,671.6 17,349.2 Current Expenditure 18,624.3 21,665.1 25,606.2 28,166.2 28,639.1 Current Expenditure 18,624.3 21,665.1 25,606.2 28,088.0 28,466.2 Public Debt Service 0.0 0.0 0.0 78.2 172.9 Current Balance 2,602.8 1,184.9 1,143.6 530.2 1,006.3 Capital Revenue 718.3 758.7 368.1 116.1 110.5 Capital Expenditure 2,196.9 2,169.0 2,482.0 2,556.3 3,236.5 Capital Balance (1,478.6) (1,410.4) (2,113.9) (2,440.2) (3,126.0) Fiscal Balance 1,124.2 (225.5) (970.3) (1,910.0) (2,119.7) Source: Bank staff estimations based on Veracruz's fiscal accounts. 2.7 Though fiscal balances depend on the government's own decisions, intergovernmental relations also play an important role explaining those outcomes at the state level. As in the other states, federal transfers largely determine the state's total revenue, and thus affect current and capital expenditures. Although Veracruz shows an impressive record of reforms to tax policy and administration within the limits of federal law, the relatively small amount collected by the state government demonstrates the continued dependency on federal transfers and the limits on its own efforts. Revenues 2.8 From 1998 to 2002 the state's total real revenues grew by 35 percent, on average 8 percent per year. 2.9 Federal transfers. Revenues in Veracruz, like in the other Mexican states, depend on federal transfers. The federal transfers-participaciones (38 percent)-and federally earmarked transfers-aportaciones (57 percent)-add up to 95 percent of total state revenues. See Table 2.2. These two sources of revenue suffice to pay for all current expenditures plus three-fourths of public investment in Veracruz. From 1998 to 2002, participaciones grew by almost 20 percent in real terms, and aportaciones grew by about 44 percent. -12- Table2.2. Veracruz Revenue - (2000 M x P million) 1998 1999 2000 2001 2002 State's Own Revenue Taxes 42.4 45.7 70.6 490.1 844.2 Payroll 0.0 0.0 0.0 416.4 772.8 Other 42.4 45.7 70.6 73.7 71.3 Fees 200.7 299.3 287.6 388.0 501.0 Aprovechamientos 129.7 116.1 164.5 279.1 279.6 Financial Products 718.3 758.7 368.1 116.1 110.5 Federal Transfers 0.0 0.0 0.0 0.0 0.0 Participaciones 8,437.2 8,853.1 10,074.6 10,278.4 10,095.7 Aportaciones 11,972.8 13,061.8 15,639.0 16,671.6 17,349.2 Ram0 33 11,538.3 13,018.5 14,286.0 14,859.7 15,440.2 Others 434.5 43.2 1,353.0 1,811.9 1,909.0 Incentives 444.4 474.1 513.5 589.3 575.7 Total Revenue 21,945.4 23,608.6 27,117.9 28.812.6 29.756.0 Source: Bank staff estimations based on Veracruz's fiscal accounts 2.10 The state's dependency on federal transfers goes beyond a pure income relationship. Besides transmitting the federal revenue's volatility to the state's fiscal accounts, intergovernmental relations also introduce earmarked rigidities that complicate short-term decision-making and management issues.33 There i s an inherent stop-and-go tendency that despite its efforts, the state i s not able to break away from. 2.11 State's own revenues. In Veracruz, the state's own revenues account for barely 5 percent of its total income, which i s typical for Mexican states. Nonetheless, the present state government has made good efforts to modernize the tax structure and management, which increased own tax revenues from M x P 42.4 million to M x P 844.2 million between 1998 and 2002. 2.12 Though small in absolute terms, the increase of own revenues represents 25 percent of investment expenditures. In recent years the present government has introduced three new taxes on payrolls, tourism, and lottery. The state has also taken the opportunity to adjust the state-local tax structure, leaving the responsibility for taxing urban transportation and public performances to the municipalities. Furthermore, substantial technical or financial resources have been allocated to reform tax procedures and the management of collection inthe state. 2.13 While the state i s using all the tax bases now at its disposal under the National System of Fiscal Coordination, the federal government is considering legislation to expand the authority of the'states. The transitory measures for the 2002 Revenue Law gave the states the opportunity for one year to collect a sales tax and a tax on small business revenue. While such a transitory measure was not adequate for states to take the 33David Colmenares P. gives an excellent visual presentation of this phenomenon. See "El Sistema Mexicano de Coordinacih Fiscal," in Experiencias de Reformas Fiscales en el Mundo y el Cas0 Mexicano. Colmenares P. D. Coordinador. Colegio Nacional de Economistas A.C. El Economista Mexicano, N ~ m e r o2. -13- political risk and cost of passing new taxes, the states would find it more attractive to use these taxes if authorized by a regular law. In2003, Congress amended the Income Tax Law to allow the states to collect revenues from the income tax on small businesses. In May 2003, Veracruz signed an agreement with the Federal government so that the revenue o f this tax i s collected by the state government. 2.14 The treatment given by the state authorities to the cadastre and to the local property tax deserves special mention as well. The new cadastre law, enacted in 1999, allows the government to adjust assessed property values upward at a rate of up to 14 percent per year. As a result of this law, assessed property values are expected to match market values in 2002. These and other collateral reforms have permittedproperty taxes to recover to revenue levels formerly present in 1993, when Veracruz occupied a prominent position on a national scale in the distribution of the Fondo de Foment0 Municipal, which partially depended upon local tax collection. Although the property tax i s a local tax, the increased revenues (over M x P 260 million expected for 2002) indirectly benefit the state's own finances by reducing the demand on the state to provide local infrastructure and maintenance, which should be the responsibility of the municipalities. Though small in absolute terms, these results reflect achievements not seen in most other states. Expenditures 2.15 From 1998 to 2001, expenditures increased by 37 percent, which was slightly faster than revenue growth. Current expenditures have grown the fastest, leaving public investment more dependent on deficit finance. See Table 2.3. Table 2.3. Veracruz -Expenditure (2000 MxP million) 1998 1999 2000 2001 2002 ProgrammableExpenditure 17,109.1 19,176.4 22,839.2 25,051.6 25,974.0 Current Expenditure 14,511.4 16,595.6 19,640.8 21,799.7 22,072.9 olw Personnel 9,951.7 10,797.0 12,089.3 13,944.8 14,903.0 CapitalExpenditure 2,196.9 2,169.0 2,482.0 2,556.3 3,236.5 o/w Infrastructure for Development 1,731.0 1,825.2 2,159.8 2,388.7 2,993.1 Transfers to Autonomous Organizations 400.8 411.7 716.4 695.6 664.5 Non-programmableExpenditure 3,712.1 4,657.8 5,249.0 5,671.0 5,901.7 Participaciones and Subsidies to Municipalities 3,712.1 4,657.8 5,249.0 5,592.8 5,728.8 Public Debt Service 0.0 0.0 0.0 78.2 172.9 Total Expenditure 20,821.2 23,834.1 28,088.2 30,722.6 31,875.7 Source: Bank staff estimates based on Veracruz's fiscal accounts. -14- Currentexpenses 2.16 Current expenses account for almost 70 percent of total expenses in 2002. The share of personnel expenditures has remained almost constant as a share o f the total, but i s still less than half of total outlays and less than 70 percent of current spending. Education and health received the largest increases of spending since 1998, mostly from the state's disposable resources (including participaciones), not the federally earmarked transfers. See Table 2.4. Table2.4. Veracruz EducationandHealthExpenditure,by source offunds - (2000 M x P million) 1998 1999 2000 2001 2002 Education EarmarkedFederal Transfers 8,759.7 8,827.6 10,384.7 10,605.8 11,117.6 State DisposableFunds 3,068.0 3,775.9 4,099.7 4,949.3 5,588.7 Health EarmarkedFederal Transfers 794.0 1,002.9 1,132.2 1,217.2 1,317.2 State DisposableFunds 499.8 526.7 597.8 989.4 1,041.4 Source: Bank staff estimations based on Veracruz's fiscal accounts. 2.17 Transfers to municipalities (Ramo 33, participaciones, and subsidies), which pass through the state's accounts, have also grown in size and relative importance, rising in real terms from MxP 3,712.1 million in 1998 to M x P 5,728.8 million in 2002. Currently municipalities are in position to surpass the state's capital outlay. The Veracruz state government has recognized this possibility, and thus has strengthened municipal tax institutions. 2.18 Capital Outlays. During 1998-2002, Veracruz invested 9 percent of its budget (MxP 2,500 million) on average. According to INEGI, in 2001 Veracruz ranked as the state that had the largest expenditure on public works and social services in Mexico. This i s an outstanding record inboth absolute and relative values. Guanajuato and the State of Mexico recently invested 5 percent and 6 percent of their budgets, respectively. In per capita terms, this means that while Veracruz invests MxP 360, Guanajuato and the State of Mexico dedicate MxP 140 and M x P 190, respectively. Moreover, Veracruz has been increasing capital outlays, contrary to most other states where investment i s the adjustment variable. 2.19 Comparing the Plan de Desarrollo with the actual results shows the government's commitment to address pressing social and developmental requirements, as stated in the Plan. However, unpredictable factors and the wage-bill increase have absorbed part of the income that could have otherwise helped finance capital outlays. The resulting expansive drive eventually exceeded disposable resources and necessitated deficits. -15- Pensions 2.20 Recent experiences in Argentina and Brazil show that subnational civil service pension funds are important, and potentially dangerous, for state-level finances and even national macroeconomic stability. In Latin America, many countries like Argentina, Bolivia, Chile, Colombia, Peru and Mexico have moved towards at least partial privatization of national pension schemes, and most have integrated their civil servants into the national system. A few like Mexico, have not yet done so at the federal level, and Mexico i s one of three countries in Latin America with substantial separate subnational pension systems as well. Each of the 31 states has its own civil service pensions scheme for state and municipal workers. Also, public universities have their own pension plans as well. 2.21 State employees in Veracruz have received social security benefits through the Znstituto de Pensiones del Estudo de Verucruz (IPE) since 1952. Apart from the provision of old age pensions, IPE also provides support for funeral expenditures and short-term loans as well as pensions for workers who become disable. In 2001, there were 69,258 active workers and 13,657 pensioners. Before 1996, the employer and employees each contributed 7 percent of wages to IPE. But the law did not specify any retirement age. Employees had all the benefits if they retired after 30 years of service, 50 percent of the benefits if they retired after 15 years of service, and for each additional year of service an additional 2.5 percent was added. In 1996, a reform to the pension system increased the contributions of the employee and employers, and set a minimum age for retirement. With the reform, the employer contributes 13.5 percent of the wage while the employee contributes 11percent, thus 24.5 percent in total. The new pension system has defined benefits-individuals can retire at the age of 53 if they had at least 30 years of service, or at the age of 55 if they had at least 15 years o f service. These minimum ages for retirement only apply to those workers that enter the system after 1997. As of December 2001, there were about 70,000 contributors and about 14,000 pensioners-a 5:1ratio. 2.22 Like other state pension plans inMexico, IPEprovides generous benefits -based on earnings in only the final month. The pension system has started to create a fiscal burden to the state. In 2001, the state government transferred MxP 453 million, or the equivalent of 1.5 percent of the state's total revenue. According to an IMF study (1999), the deficit inthe pension system i s projected to reach 3 percent of the state's total revenue in 2020, which indicates a problem. The contingent liabilities are MxP 35,000 million, which calls for a reform of the pension system. The reform in 1996 thus made substantial improvements, but more should be done, because the IPE has been runningcash deficits each year. 2.23 The pension reform strategy should have two main objectives. First, whatever reform i s proposed should lead to long-run fiscal sustainability and self-sufficiency. Within the current pay-as-you-go system, raising the retirement age, reducing the benefits, or raising contribution rates can accomplish this. Reducing benefits can be accomplished by changing the benefit rate or changing the base on which the pension i s -16- based, toward the lifetime average wage instead of the final wage rate. Raising contribution rates i s politically often easier, but not recommended in the case of civil servants since the higher contribution rates often result in higher fiscal costs, resulting in no gains from a fiscal perspective. Second, the reform should establish portability with other systems, which the current system lacks. Workers with less than 15 years of service lose all pension rights if they move to another state civil service system or the federal civil service, or to the private sector. This separation serves as a major impediment to labor market mobility and prevents the rationalization of health and education resources, which are often provided at both the federal and state levels. The optimal strategy would be a full integration between all the civil service systems, federal and subnational, with the national (private-sector) system. The federal government i s proposing such integration for the federal system. Another state, Estado de Mexico, has partially integrated its system for new entrants with the national system. It would be beneficial for Veracruz to look carefully at the issue of integration and portability of rights, and to consider at least providing new regulations so that workers leaving the public sector before retirement would have a proratedpension when they reach retirement age. This would enhance flexibility in the state's labor market. A more complete integration would be recommended particularly if that were accomplished at the federal level. FiscalBalances, FinancialRequirementsand State Debt 2.24 From 1998 to 2002, Veracruz ran current balance surpluses, but increased capital outlays led to growing overall deficits. See Figure 2.1. However, a positive overall balance i s expected by 2004. 2.25 Since 1998 current saving has been decreasing from MxP 2,600 million to MxP 1,000 in 2002 (Figure 2.1). Current savings used to finance nearly 70 percent of capital expenses in 1998, but in 2002 they only financed one third of investment. In the face of pressing demands for current expenditures, the states of Mexico and Guanajuato, where the Bank already reviewed public expenditures, have also reduced current saving and investment outlays. Veracruz has given more priority to development-oriented investment approach. Between 2003 and 2004 they plan to improve the current balance enough to reach a positive overall balance, while not significantly cutting back investment. 2.26 Since 1999 the state o f Veracruz has run fiscal deficits requiring financing (Figure 2.1, Table 2.5); prior to then it could cover its deficit by drawing on funds that had accrued in the Treasury from previous years. Other than fiscal year 1999, the average annual deficit has been around MxP 1,667 million, which i s manageable. As will be shown, public indebtedness i s not a critical problem in Veracruz; on the other hand, the debt structure and its management may conflict with other government proposals. -17- 2.27 Initially, the state financed its deficit with its own savings; after 2001 it has borrowed from the financial markets and used floating debt in the form of delayed Treasury payments and advances of federal participaciones. In 1998 and 1999, the current government used its Treasury's surplus of over MxP 2,200 million (disponibilidad en tesoreria) to finance expenses mostly related to natural disaster relief. For a couple of years, the state obtained advances on portions of its participaciones to cover payment requirements, especially at the end of the year. However, these sources o f financing have now been exhausted, forcing the state to contract financial debt if it runs fiscal deficits. 2.28 Veracruz began to contract financial debt again just recently. There i s now a debt stock of around M x P 2,000 million, mostly contracted in 2001-02 (Table 2.5). This i s a relatively low level of public debt by national and international standards, as it remains under 6 percent of total revenue and under 18 percent of the state's disposable income. The latter includes the states' own revenue plus participaciones (the part not transferred to municipalities), which are the collateral for the loans.34 There i s not an issue of the sustainability of the existing debt stock, because it i s so low. The question i s at what pace and with what sort of financing it could safely increase its debt, if the state were to decide to start borrowing again to finance some of its investment. The state would have to calculate a financially and politically acceptable pace of borrowing in the context of a long-term financing plan, which should have the approval of Congress. Although such a plan i s beyond the scope of the present study, doing the plan i s one o f the recommendations. Table 2.5. Veracruz -Debt Stocks (2000 MxP million) 2000 2001 2002 DocumentedPublic Debt 0.0 965.8 1,790.2 Floating Debt (Adefas) 2,209.2 2,182.1 3,306.4 Total Debt 2,209.2 3,147.9 5.096.6 Source: Bank staff estimationsbasedon the Cuenra Pliblica. 2.29 Besides using credit and federal advances o f participaciones to finance its fiscal imbalances, the govern-ment has been delaying and rolling over treasury payments. In 2000-02, arrears (ADEFAS) grew, and reached worrisome levels. For 2003 it should publishits plan to reduce the ADEFAS further. FISCAL SUSTAINABILITY, POLICY, AND GOVERNMENT ACTIONS 2.30 The government of Veracruz stated its objectives for fiscal and debt policies in the Programa Veracruzano de Finanzas Pciblicas 1999-2004: "The government will relentlessly strive for long-run equilibrium budgets where tax and non-tax revenues 34 The state's uportuciones are not disposable for service debt, since they are nearly all earmarked for social sector current expenses, mostly wages. -18- slightly exceed total public expenses."35 This goal was included in a recent state-level constitutional reform. Although positive balances have not yet been realized, many examples show the government's commitment to fiscal stability. Nonetheless, financial credit i s considered a valid developmental instrument, and the law explicitly defines its purposes, contracting conditions, and mechanisms. In accordance with the State's Financing Code, Congress must approve credit sought to finance investment expenditures, and the Secretary of Finances i s the only agency legally able to contract and manage credit 2.31 In spite of the fiscal adjustment effort, participaciones dropped by 10.8 percent with respect to its target, leading the government to to reduce expenditures through Programa de Contenci6n del Gasto 2002. Table 2.6. Veracruz RevenueAnnual Growth Rates - 1998-99 1999-00 2000-01 2001-02 State's Own Revenue Taxes 7.7 54.6 594.2 72.2 Fees 49.1 -3.9 34.9 29.1 Aprovechamientos -10.5 41.7 69.7 0.2 Financial Products 5.6 -5 1.5 -68.5 -4.8 Federal Transfers Participaciones 4.9 13.8 2.0 -1.8 Aportuciones 9.1 19.7 6.6 4.1 Incentives 6.7 8.3 14.8 -2.3 Total Revenue 7.6 14.9 6.2 3.3 Source: World Bank staff estimatesbasedon Veracruz's fiscal accounts. Table 2.7. Veracruz ExpenditureAnnual Growth Rates - 1998-99 1999-00 2000-01 2001-02 Programmable Expenditure Current Expenditure 14.4 18.3 11.0 1.3 olw PersonalServices 8.5 12.0 15.3 6.9 Capital Expenditure -1.3 14.4 3.0 26.6 o/w Infrastructure for Development 5.4 18.3 10.6 25.3 Transfersto Autonomous Organizations 2.7 74.0 -2.9 -4.5 Non-programmable Expenditure 25.5 12.7 8.0 4.1 Purticipuciones and Subsidiesto Municipalities 25.5 12.7 6.5 2.4 Public Debt Service 121.1 Total Expenditure 14.5 17.8 9.4 3.8 Source:World Bank staff estimates based on Veracruz's fiscal accounts. 35 Programu Verucruzanode Finanzas Pliblicas, pp. 79, 82, and 83. 36 Cddigo Financier0 para el Estudo de Veracruz-Llave. Titulo V. De la DeudaPiiblica, pp. 147-58. -19- CONCLUSIONSAND RECOMMENDATIONS 2.32 Presently the fiscal scenario i s tighter than expected at the beginning of the administration, because unforeseen political and economic factors have reduced revenues. The state's fiscal deficit i s moderate by comparative standards. The government has been acting on both the spending and revenue sides of the fiscal equation, and further actions could enhance fiscal stability and financial soundness. 2.33 The government has a clear commitment to have its fiscal stance on a sustainable path at the end of its mandate. To this end, they intend to finance public expenditures with their current resources, thereby avoiding any further increase in the debt stock. In order to achieve this goal, the government should focus future actions on four fronts: (a) define explicit, though flexible, fiscal and debt targets; (b) review and update government programs according to a new fiscal scenario, optimizing capital outlays according to updated government priorities; (c) utilize new tax bases when federal legislation makes them available andsearch for nontraditional sources of financing, includingjoint ventures with the private sector; and (d) discontinue using arrears (ADEFAS) as a financing mechanism and define a mid-to-long term debt policy for public activities. As a first step, the government should consider publishing explicit fiscal and debt targets for the rest of its term. The adjusted financial plan will be used later to review programs and projects, and to frame further government intervention. Fiscal and Debt Policy 2.34 From the beginning of its term, the present government has aimed its fiscal policy toward achieving slightly positive fiscal balances. Its Plan considers the use of financial resources, restricting them for funding exceptional projects with a high social rate of return or adequate income flows. It i s a clear pro-stability stance that constrains expenditures to resource availability. It seems to echo Arnold Harberger's advice: "Keep budgets under control. It does not mean to have balanced budgets all the time since it will not happen anyway, but keep budgets tight so that they will not result in an increasing public debt [as share of the tax base] over time. Debt should be maintained within affordable and manageable limits."37 2.35 The government should start disclosing ADEFAS clearly, including their total amount and composition. The magnitude of ADEFAS makes it unlikely that the government could reduce them all the way to an appropriate level during fiscal year 2003, but it should specify and publish annual targets leading to the goal of low ADEFAS, say 20 percent of the annual investment budget, by the end of the government's term in 2004. 37Harberger,A., "Finanzas pliblicasy crecimiento econbmico," inExperiencias de Reformas Fiscales en el Mundo y el cas0 de Mhico, David ColmenaresP., Coordinador. Colegio de EconomistasMexicanos. A.C. El Economista Mexicano, Nlimero 2, 2001, p. 81. Author's translation. -20- PrioritizingCapital Outlays 2.36 It is clear that disposable resources inVeracruz will decline in the next couple of years, but the administration has not yet specified how this shortage will affect programs and projects. Now it should do an overall review of the main programs and projects in light of the new economic and fiscal scenario. That review, to which the following chapters could contribute, should lead to the development of specific goals, programs, and actions for the rest of the administration. 2.37 At a time of expenditure reduction, all government expenses are claimed to be essential. To address this perception problem, government officials must share a common understanding of the present fiscal conditions, including their short- and mid- term implications for government sectoral plans. The revised fiscal and financial plans will provide a framework to prioritize programs and projects to be carried out during the remaining term. Besides a technically supported evaluation for each of these activities, the process will require strong authority to carry out the updated program (see chapter 8). Augmenting State Resourcesby matching with Municipal, Federal and Private Resources 2.38 Although direct resources of the state government are going to be less than initially planned, at least until the state i s able to utilize new tax bases, other sources could fill part of the gap. For example, greater emphasis should be given to those projects that co-finance activities with local governments. Earmarked federal transfers could be blended into broader programs without abandoning their goals. Currently, the government i s considering organizing joint activities with the private sector. It has already provided a general framework, and many opportunities are waiting to be explored, especially inroad construction, water provision, and health services. DeepeningInstitutional and Organizational Reform 2.39 Fiscal structural factors and government decisions combine with institutional factors to explain fiscal outcomes, as elaborated in Chapter 8. To cope with the present fiscal conditions, the state i s considering a variety of institutional and organizational reforms: 0 to plan and manage public resources effectively and efficiently 0 to create incentives for a more productive relationship with local governments 0 to create incentives to induce cost-efficient micromanagement 0 to join efforts with the private sector in order to improve the provision of public goods. -21- 3. THEALLOCATION OFRESPONSIBILITY,AUTHORITY AND RESOURCESFOR SPENDING 3.1 This chapter considers the allocation of responsibility, authority and resources for public spending in Veracruz among the different levels of government. We chose four sectors to analyze: education, health, water and communications and transport. These sectors were chosen because they are primarily the ones under the responsibility of the state, although other levels of government also play important roles inthe supply of these services. Table 3.1 shows the responsibilities of the different levels of government. In a few areas, like primary school curriculum and seaports, there seems to be a reasonable division of responsibility; in most areas, however, the allocation i s unclear between the state and federal governments, especially in health and education personnel. In a few areas like roads maintenance of roads and schools the confusion includes all three levels of government. The responsibility for the problem lies mainly with the federal government, where the laws define the competencies in theory and whose actions and earmarking of transfers define them inpractice. 3.2 The sector allocation of public spending has to be examinedboth in relation to the state development strategy and in the context of overall spendingby the public sector for services in Veracruz. The latter i s important because state government spending goes to only certain sectors or parts of sectors, with others being assigned to the federal and municipal levels. 3.3 The comparisons with other states focus on Guanajuato and Estado de Mexico, because these are the only two other states from which we have detailed data. One must bear in mindthat the differences in the allocation of resources of these states might arise inpartfrom their basic social and economic characteristics, rather than from the nature of the government process for spending decisions. Also, governments in these three states have fewer resources per capita than the average for Mexico, because they receive less per capita intransfers. 3.4 Spending allocation can be analyzed in several ways. This chapter looks at programmable spending and discretionary spending. Programmable spending goes for the programs of the state, and is thus net of interest payments and transfers to municipalities. The allocation of programmable spending indicates the areas o f most importance in the state budget, but does not necessarily directly reflect the priorities of the state government. Discretionary spending may reflect more the priorities o f the state, because they are programmable expenditures and transfers to municipalities that are not made with earmarked resources from the federal government. Table 3.1 identifies programmable and non-programmable spending, discretionary spending, and spending done with earmarked federal resources. -22- Table 3.1. Allocation of responsibility and authority for spending Service/ Expenditure Federal Government State Government Municipal Responsibilities Government EDUCATION Maintenance and Equip. Negotiates salariesfor federal resources financial teachers, which sets the resourcesfor standard. infrastructure and equip. Teacher Training and allocation Normative and policymaking Provides teacher training None and Evaluation functions and allocates them; designs a state evaluation system Curriculum Contents Normative and policymaking Proposesregional None functions content the federal government B) Upper Secondary Education Teachers Salaries Provides financial resources. Provides supplemental None financial resources Curriculum Contents Normative and policymaking Normative and None functions policymaking functions C)Tertiary Education Teachers Salaries, Infrastructure Provide financial resources Provide financial None Maintenance and Equip. resources. Negotiates salaries Evaluation and Curriculum Normative and policymaking Normative and None content functions policymaking functions HEALTH A) Service to Insured Population (outside thepublic sector) Wages, Infrastructure, Provides financial resources None None Maintenance, Equipment, and and is in charge of Providing Regulation the service. Norms and policies for regulation Wages, Infrastructure, Provides financial resources Provides financial None Maintenance, Equipment, and and Some services. Norms resources and most Regulation and policies for regulation service delivery. Norms and policies for regulation C) Service to Government Employees Wages, Infrastructure, Provides financial resources Provides supplemental Provides Maintenance, Equipment, and and service delivery to federal financial resources and financial Regulation employees, and in some cases service delivery to state resourcesto state and municipal and municipal pay for its employees. employees. employees. Regulation The government has Normative and None normative and policymaking policymaking for its own health network. -23- Service/ Expenditure Federal Government State Government Municipal Remonsibilities Government WATER Sets framework regulation and Regulates water for Runwater regulates the details of water household and small companies, for industrial and agricultural commercial users. Sets which provide users. minimumfees for service to urban municipal water. areas. Promotes water conservation and water quality standards. iegulation Normative and policymaking Normative and Some functions. policymaking functions. policymaking Maintenance of network None Provides financial Provides resources and service in . . service delivery marginal. and I supplemental financial resources. rnfrastructure Provides resources and large-scale financial investments. resources and local I investments. 3) Service in Rural Areas Regulation The government has The government has None normative and policymaking normative and functions. Dolicvmaking Infrastructure Provide financial resources. Provide financial None resources. TRANSPORT A ) Roads Interstate highways (building Intercity roads (building Urban roads and maintenance) and some and maintenance) and (building and rural roads. Provides financial some rural roads. maintenance). resources to state and municipalities through various programs. B) Seaports Regulates seaports, but To promote the activities Municipal decentralized organisms called of the port and make government APIs handle the management. recommendations to the representatives API, the state can create could be part of a commission, with the the president of API and commission. representatives from state and municipal governments, the chamber of commerce and others. -24- PROGRAMMABLE SPENDING 3.5 In Veracmz the state puts a considerable amount of its discretionary resources into each of the two areas with federally earmarked transfers-education and health. From this one may conclude that, to a first approximation, the federal earmarking does not constrain or alter very much the way the state allocates spending. Thus the total allocations may be taken to reflect the priorities of the state. Table 3.2. Overview of PublicSpendingwithin Veracruz (2000, MxPper capita) Guanaiuato I Estado de Mbxico Veracruz State Federal Total State- Federal Total Federal Total Spending Spending3 Spending Spending Dire? Direct endin 3 Spending Spending Spending3 'pending State Direct 1zl 1 Programmable 2,549 2,679.5 5,228.5 2,381 1,817.5 4,198.5 { 3,309.5 4,567.2 7,876.7 Education Ramo 33 1,000.1 847.1 1,505 Other Funding . 611.9 594.2 Health n.a. n.a. 245.1 n.a. n.a. 258.4 n.a. n.a. Ramo 33 169.6 194.4 161.7 Other Funding 78.5 50.7 Transport 83.6 45.9 129.5 Water' 30 n.a. n.a. 26.7 n.a. n.a. 37.3 n.a. n.a. Housing2 7.2 n.a. n.a. 2.2 n.a. n.a. n.a. n.a. n.a. Security 49.8 n.a. n.a. 42.7 n.a. n.a. 44.3 n.a. n.a. 1II Auditing 8.7 n.a. n.a. 7.9 n.a. n.a. 19.1 n.a. n.a. Other 553.5 555.2 774.9 Non programmable 700.1 n.a. n.a. 706.3 n.a. n.a. 7600.6 n.a. n.a. Debt Service 5 n.a. n.a. 163.4 n.a. n.a. n.a. n.a. Transfers to municipalities 695.1 n.a. n.a. 542.9 n.a. n.a. 760.6 n.a. n.a. States govt.funds n.a. 39.6 n.a. n.a. :. n.a. n.a. Federal govt.funds n.a. n.a. r~a. 1. Comisi6nEstatalde Agua. This figureincludesonly the transfers from StateGovemmentto the Water Commission. 2. Institutode Vivienda. 4. Includesthe Aportaciones t(Iuv. 3. Statistical Annex to Preside]ntial Report(2000). Sources: State budgets of Veracmz -Llave, Guanajuato,andEstadode MBxico, except as noted 3.6 Education i s by far the largest area of state spending-63 percent of programmable spending. The state government spends more on education per capita than the federal government in Veracmz, and also more than Guanajuato. Veracruz has been investing at an increasing rate. The population o f Veracmz has an average of 6.8 years of schooling, while Guanajuato has 6.7 years and Estado de Mkxico 8 years, although some of this difference may derive from the education sector's performance in the more distant past. -25- 3.7 The second-largest share of state spending i s for health-7.8 percent of programmable spending. The state government provides coverage to almost 68 percent of the total population, while Guanajuato provides almost 40 percent, and Estado de MCxico almost 62 percent. The percentage of open population has been increasing during the last decade. Although the three states have similar health indicators, the state of Veracruz has a particular problem in providing the service to the population in dispersed settlements. 3.8 The state's expenditure on transport i s small relative to the overall budget-only 2.8 percent. As explained in chapter 6, the state should spend more on road maintenance to improve the quality of the service. 3.9 Water i s a critical sector in Veracruz because its coverage i s well below the national average. One of the main problems in the provision of this service i s the dispersion and location of settlements. The State Water Commission regulates the prices of water as in Guanajuato and Estado de Me'xico; however, the water tariff rates in Veracruz are well below those of Guanajuato. 3.10 Although the amount spent on security represents a small share of the government budget, Veracruz has maintained good provision of this public good. 3.11 Auditing represents a small budget item in the three states. To improve the accountability inthe state, it i s necessary to increase expenditure on this activity. NON PROGRAMMABLESPENDING - 3.12 In 2000, the state had zero debt. Veracruz borrowing 2001, and its debt service during that year were relatively low. 3.13 Transfers to municipalities are the second-largest category of outlays-20 percent of participaciones and the aportaciones in two funds of Ramo 33 go automatically to the municipalities after the state receives them from the federal government. The state transfers some of its disposable funds to its municipalities, although this amount i s much smaller per capita than in Guanajuato and Estado de Mkxico. GOVERNMENT TARGETS THEMILLENNIUM AND DEVELOPMENT GOALS 3.14 In the previous sections we compared the sectoral allocation of public expenditures in Veracruz, Guanajuato and Estado de Mexico. However, that analysis does not provide how the state government should allocate resources among sectors. Although there i s no specific theory that will give some guidance on this issue, the government target as well as the targets specified by the Millennium Declaration adopted by the member States of the United Nations can provide us with some guidance.38Table 38 At the Millennium Submit in September 2000 the states of the UnitedNationsreaffirmedtheir commitment to working toward a world in which sustainingdevelopment and eliminating poverty would havethe highestpriority. The Millennium DevelopmentGoalsgrew out of the agreementsand resolutions -26- 3.3 shows the MillenniumDevelopment Goals (MDGs) and how i s Veracruz and Mexico doing with respect to these goals. 3.15 According to Table 3.3 there are some indicators in which Veracruz i s moving in the right direction, but for some goals the state lags behind Mexico and many targets are not yet specified. Inthe first MDG, which i s to eradicate extreme poverty and hunger, the state government does not have a specific target. However, it lags behind on all of the indicators with respect to Mexico. The Veracruz Poverty Diagnostic found that the best way to eradicate poverty i s by improving economic growth which depends heavily on education in the long run. Relative to the second MDG, to achieve universal primary education, we can see that the net enrollment in lower secondary is very low in Veracruz. In order to promote economic growth and thus eradicate poverty, the state government should make a specific plan to raise the lower secondary enrollment rate. With respect of promoting gender equality, Veracruz i s performing well and in some indicators they are doing better than the national average. of world conferences organized by the United Nations in the past decade. The goals have been commonly accepted as a framework for measuring development progress. -27- Table 3.3. Overview of MillenniumDevelopment Goals within Veracruz VERACRUZ MEXICO Millennium Development Goals 2000* 2000 Millennium Development Goals, 2015 1Eradicateextreme povertyand hunger Population below $1 a day (%) 14 13.2 8.4 Poverty gap at $1 a day (%) 27.5 18.2 Share of income or consumption heldby poorest 20% 6.3 5.3 Populationbelow minimumlevel of dietaryenergy consumption 62.9 45.7 7 (%I 2 Achieve universal primary education Net primaryenrollment ratio (% of relevant of populationbet. 6- 99.8 98.2 100 11) Urban Net primary enrollment ratio (% of relevant of populationbet. 6- 100 98.6 100 11) Rural Net lower secondary enrollment ratio (% of relevant of population 58.7 74 100 bet. 12-14)Urban Net lower secondary enrollment ratio (% of relevant of population 51.4 52.1 100 bet. 12-14)Rural 3 Promote gender equality Ratioof girls to boys inprimary and secondary education 97.8 98 100 Ratioof young literate females to males (% ages 15-24) 108 106 100 Share of women employedin the nonagriculturalsector (%) 37.5 35.8 4 Reduce child mortality Under 5 mortalityrate (per 1,000) 0.8 (0.6) 36 15 Infant mortalityrate (per 1,000 live births) 11(9) 24.9 12 Immunization,measles(% of childrenunder 12 months) 98.2 92 100 5 Improve maternal health Maternalmortalityratio (modeled estimate,per 10,000 live births) 5.8 (2.4) 5.1 1.4 6 Combat HIV/AIDS, malaria and other diseases Prevalenceof HIV, female (% ages 15-24) 0.05 0.05-0.08 0 Contraceptiveprevalencerate (% of women ages 15-49) 73 70.8 Incidenceof tuberculosis (per 100,000people) 27 15.7 Halt the spread 7 Ensure environmental sustainability Access to an improved water source (% of population) 70.2 88.5 92 Access to improved sanitation (% of population) 64.6 73 85 8 Develop a Global Partnership for Development Fixedtelephone lines (per 100people) 7 12.4 StateGovernmenttargets for 2004 in parenthesis. Source: Government of Veracruz-Llave and World Bank. 3.16 On the fourth MDG, which i s to reduce child mortality, Veracruz i s moving in the right direction, reducing childunder 5 mortality rate. The state's target is more ambitious than the MDG. The infant mortality rate it lags behind the national average however and i s very distant from the MDG. On maternal health, the maternal mortality ratio in Veracruz i s higher than the national average. On the sixth MDG, to combat HIV/Aids and others, the prevalence of HIV among women between 15-24 years old i s almost zero; that is, it i s relatively close to the MDG. In terms of health, the state i s moving in the right direction. -28- 3.17 On the seventh MDG, which i s to ensure environmental sustainability, the state lags behindthe national average inevery indicator. The state should make a specific plan to increase the access to an improved water source. On the eighth MDG, the state lags behind the national average interms of number of fixed telephone lines. Although that i s not the role of the state government to supply this service, it could lobby to the corresponding entity. CONCLUSIONSANDRECOMMENDATIONS 3.18 The sectoral allocation of public spending in Veracruz i s similar to other states. The state puts a considerable amount of its discretionary resources into each of the two areas with federally earmarked transfers-education and health. From this one may conclude that, to a first approximation, the federal earmarking does not constrain or alter very much the way the state allocates spending. Thus the total allocations may be taken to reflect the priorities of the state. 3.19 Although there i s no theory that will tell us how to allocate resources between sectors, by comparing some statistics with the Millennium Development Goals, it was found that the state should emphasize: a) improving economic growth to eradicate poverty through improving lower secondary enrollment, and b) improving the access to an improved water source. -29- 4. EDUCATION 4.1 As the financially largest part of the state public sector and as the strategically most important part o f the state plan for poverty reduction and growth, reforms to the education sector deserve the highest priority. Some will cost more money, such as the expansion of secondary school coverage, but others can be largely achieved with better accountability and efficiency inthe use of existing resources. 4.2 Duringthe last decade, Mexico has become more open to global competition and technological change. It has begun to move toward a more pluralistic political democracy, and it has taken notable steps toward decentralizing administrative and spending authority to the states in education, and in other sectors. As part o f this decentralization effort, in May 1992, the federal government, state governments, and the National Union of Workers in Education (SNTE) signed the National Agreement for the Modernization of Basic Education (Acuerdo NacionaZ para Za Modernizacidn de la Educacidn Ba'sica, ANMEB). This agreement was created in response to demand for a decentralized educational system. In principle, the agreement should allow states to control their own educational systems. Inpractice, not all states were able to adjust to the decentralization process well, but the state of Veracruz, through the Ministry of Education and Culture (SEC), i s one of two states that have successfully absorbed the transferred educational system. 4.3 Section 2 of this chapter discusses the main characteristics of the educational system; Section 3 analyzes educational finance and expenditure; Section 4 examines educational outcomes in terms of coverage, equity, and quality; Section 5 discusses the federal and state school programs and initiatives; and Section 6 offers conclusions and recommendations. 4.4 The overall conclusion i s that the educational system in Veracruz has some exemplary features of financing and, spending programs, and has achieved some good educational outcomes, but weaknesses still exist. Eight types of action would help improve the system: e Improve the composition of basic education expenditures; e Address the factors causing low net enrollment rates, particularly among the poor; Address the factors causing school dropout and failure; Implement the sistema escolarizado de control escolar (SECE); Improve supervision and evaluation; Improve the quality and occupational relevance o f education; Improve the coordination of basic education programs; Improve the quality of education inrural areas; -30- 0 Reduce the state subsidy to the university, implement some cost- recovery, and provide targeted tuition subsidies for students from low-income households. 4.5 This chapter does not prescribe how each action should be implemented; rather, it lays out a framework for evaluating strategic educational options inVeracruz. OVERVIEW OF THE EDUCATIONAL SYSTEM 4.6 The education system inVeracruz has five main parts: i)Earlychildhoodeducation(orpreschool), whichisoptionalforchildrenfrom3 to 5 years old. ii)Mandatoryprimaryeducation,ideallyforchildrenage6to12,butduetolate enrollment and grade repetition it i s targeted at children age 6 to 14. iii)Mandatorybasicsecondaryschooleducation,consistingofathree-yearcycle and intended for children age 12 to 16. iv) Upper-secondary education, which inMexico is a three-year cycle. This level i s divided into (a) bachillerato general (general baccalaureate), (b) bachillerato te'cnico (technical baccalaureate), and (c) bachillerato bivalente (bivalent baccalaureate). v) Tertiary education, which i s a four-year cycle. This level comprises a system of federal technology institutes, state universities, autonomous universities, and teacher-training institutes. 4.7 Basic education services-parts 2 and 3-are the highest priority for both the federal and Veracruz governments, and the state i s the predominant provider. It owns about 91 percent of primary and secondary schools, accommodating 90 percent of the e n r ~ l l m e n t .At~higher levels of education, however, the private sector plays a bigger ~ role, accounting for nearly half o f the enrollment. 4.8 The federal government increasingly centralized Mexican basic and secondary educational system up to 1990, although universities remained mostly at the state level. Total enrollment in federal schools rose from 64 percent in 1970 to 72 percent in 1990. InMay 1992, however, the states, federal government structures, andthe SNTE signed an agreement to decentralize the basic and secondary educational system. This agreement, called the National Agreement for the Modernization of Basic Education (Acuerdo Nacional para la Modernizacidn de la Educacidn Bbsica, ANMEB), gave states primary responsibility for the public education system. Previous attempts to decentralize this system had failed due to constraints on the state and federal government structures and because of opposition from the SNTE. 39 The share of public school enrollment is about 94 percent (primary), 93 percent (lower-secondary), and 78 percent (upper-secondary). -31- 4.9 The ANMEB had three main objectives: 0 The first was the reorganization of the educational system, which consisted of the transfer of the education sector, formerly administered by the federal government, to the states. The transfer included 513,974 teachers; 116,054 administrative posts; 3,954,000 hourly salaries; and 1.8 million preschool, 9.2 million elementary, and 2.4 million lower-secondary students. The second objective was the reformulation of educational content, in which states received the authority and the right to propose changes. Proposals would then be evaluated by the Secretaria de Educacidn Pdblica (SEP), and, if accepted, would be included in the Free Textbook System (Sistema Nacional de Libro de Text0 Gratuito). In this respect, the role of the states was to propose content, while the federal government retained the right to decide which proposals it would put into practice. 0 The third objective was the reevaluation of teaching activities. The Carrera Magisterial was developed as a program for teachers of basic education and members of the SNTE with the objective o f improving teacher well being and productivity through better salaries and housing poli~ies.~'To this end, the federal government modified its educational discourse, placing greater emphasis on the quality of educative content than on educational coverage, as it had inthe past. 4.10 The creation of the CarreraMagisterial in 1992, as part of the ANMEB, aimed to raise the quality o f basic education through teachers' professional training, a new learningpresence in schools, and improved working condition^.^' One component of this program i s the training of teachers; another is a merit payment system in which professional staff are voluntarily evaluated and rewarded with salary increases for their performance as classroom teachers, school directors-supervisors, and administrators (apoyoste'cnico-pedagdgicos). 4.1 1 This evaluation i s based on experience (10 points), professional skills (28 points), educational school level (15 points), and completion of accredited courses (17 points). Finally, up to 30 combined points are given for student performance (20 points) and teacher professional performance (10 points). 40 Still, the federal government remains responsible for general policies and standards (normative and policymaking functions), teacher training and allocation, textbook production, evaluation and monitoring, and the provision of financial resources needed to ensure proper coverage and quality of the educational system. Moreover, federal education transfers to the states remain earmarked for specific purposes. In 1998, the government passedthe 1998 Law on Fiscal Coordination, which gave the states greater discretion inthe use of federal education and other transfers. 41Decentralization that simply transfers authority and money from the federal government to the states would have a very limited impact, as has been the case in Argentina. I t i s notable that much of Chile's remarkable achievements in improving learning outcomes came after its decentralization policy was complemented with implementation of well-designed public school improvement programs that increased material support for disadvantaged schools and strengthened support for professional development of teachers (focus on quality). -32- 4.12 For principals and supervisors, 30 points are given to school performance and professional achievement. Master teachers (in the third level, tercera vertiente) earn 30 points for educational support. All the teachers at the basic levels (initialeducation, basic education, indigenous schools, and lower-secondary education via television, telesecundaria) are considered candidates for the program. 4.13 The promotion ladder in Carrera Magisterial places considerable importance on seniority within the program, posts, and teaching jobs taken in underdeveloped areas. Once teachers acquire benefits of the Carrera Magisterial, they rarely lose them. There are five levels of promotion ("A," "B," "C," "D," "E'). The salary rewards allocated to each represent a salary increase but do not represent a change inthe type of post assigned to the teacher. The amount assigned to each of these levels increases considerably according to the number of hours worked inthe initial post. 4.14 According to the federal General Direction of Evaluation in SEP, 21 percent of a teacher's total salary at Level "A" comes from the Carrera Magisterial program. The Carrera Magisterial contributes 38, 51, 61, and 68 percent to a teacher's salary at levels "B," "C," "D," or "E," respectively. Currently, close to 80 percent of basic education teachers are enrolled in Carrera Magisterial in Veracruz, which i s almost at high as the national average. 4.15 In previous attempts to decentralize the educational system, the federal government, through the SEP, established state delegations that were responsible for some administrative functions. Gradually, the delegations gained new responsibilities and administrative power that facilitated the negotiation of the ANMEB with the states and the SNTE. These delegations created a new political setting where state union leaders and teachers started to gain power, but internal struggles in the SNTE weakened the rigid structure that had opposed previous decentralizationprograms. 4.16 After the ANMEB, the federal government i s still responsible for the following actions:42 0 Normative and policymaking functions 0 Teacher training and allocation 0 Textbook production 0 Evaluation 0 Monitoring 0 Providing financial resources needed to ensure proper coverage and quality of the 42 According to comments from the Ministry of Education (SEC): "I.- Determinar para toda la Repdblica 10s planes y programas de estudio para la educacidn primaria, la secundaria, la normal y demhs para la formacidn de maestros de educacidn basica, a cuyo efecto se considerarh la opinidn de las autoridades educativas locales y de 10s diversos sectores sociales involucrados en la educacidn; 11.- Establecer el calendario escolar aplicable en toda la Repfiblica para cada ciclo lectivo de la educacidn primaria, la secundaria, la normal y demas para la formacidn de maestros de educacidn bhsica; 111.- Regular un sistema nacional de formacidn, actualizacidn, capacitacidn y superacidn profesional para maestros de educaci6n basics; ademas de regular 10s servicios educativos que ofrecen 10s particulares en todos 10s tipos y modalidades." -33- educational system (the federal government negotiates teachers' wages with the national union). 4.17 The state governments are responsible for the following actions:43 e Providing the educational service guarantee e Assuring labor rights to the transferred workers e Creating public organizations to receive the transferred system e Integrating both systems into a single agency e Establishingeducational agreements e Designinga state evaluation system e Proposingregional contents for the programs inbasic education. 4.18 The municipalities are responsible for providing resources for school maintenance 1 . and equipment.44 4.19 Table 4.1 shows the different ways in which states responded to the decentralization process. Depending on their abilities to absorb their new functions and responsibilities, some states had an easier time than others transitioning to the new system. 43 According to comments from the Ministry of Education (SEC): "Prestar 10s servicios de formacibn, actualizacibn, capacitaci6n y superaci6n profesional para 10s maestros de educaci6n bAsica, de conformidad con las disposiciones generales que la Secretaria de Educacibn Pdblica determine." 44According to comments from the Ministry of Education (SEC), "Se crea el Fondo para la Infraestructura Social Municipal (FISM) y Fondo de Aportaciones para el Fortalecimiento de 10s Municipios (FAFM) dentro del Ram0 033, que permite y obliga a la vez a 10s H. Ayuntamientos a aplicar con m8s responsabilidad 10s recursos de esos fondos. Por lo que de acuerdo a sus proyectos y con base en el Manual de Fiscalizaci6n, deben destinar parte de 10s mismos para la construcci6n, mantenimiento y equipamiento de 10s centros educativos de sus municipios." -34- Table 4.1 BEFORE THE NATIONAL AGREEMENT AFTER THE NATIONAL AGREEMENT CAMPECHE CAMPECHE GUERRERO GUERRERO HIDALGO HIDALGO MORELOS MORELOS OAXACA OAXACA QUERETARO QUERETARO QUINTANA ROO QUINTANA ROO TAMAULIPAS BAJA CALIFORNIA SUR MICHOACAN MICHOACAN OF EDUCATION COLIMA COLIMA CHIAPAS CHIAPAS CHIHUAHUA CHIHUAHUA DURANGO DURANGO COEXISTENCE OFTHE GUANAJUATO GUANAJUATO MINISTRY AND THE NAYARIT NAYARIT DECENTRALIZED ORGANISM PUEBLA PUEBLA (With dominance of the SAN LUIS POTOSI SAN LUIS POTOSI ministry over the institute) SONORA SONORA TLAXCALA TLAXCALA ZACATECAS YUCATAN Fusion BAJA CALIFORNIA BAJA CALIFORNIA JALISCO COEXISTENCE WITH JALISCO MINISTRY AND A MEXICO AN EQUALIZED STATUS 1 MEXICO DECENTRALIZED ORGANISM NUEVO LEON NUEVO LEON (With dominance of the SINALOA SINALOA Institute over the Ministry) VERACRUZ I Fusion Source: Informe de Labores, SEP, 1996. 4.20 The state of Veracruz, through the Ministry of Education and Culture (SEC), successfully in absorbed the transferred educational system. Furthermore, in 1996, the federal government and the state of Veracruz signed an agreement to devolve the construction and maintenance of the schools to the state of Veracruz. This task i s now under the supervision of the Comite' Constructor de Espacios Educativos of Veracruz. 4.21 Since the ANMEB was signed, important administrative discrepancies remain between the transferred and the state educational system in Veracruz. First, the federal and the state branch of SNTE still seek to control the process of creating and allocating teaching posts. Second, two different pension systems coexist-one i s for teachers affiliated with the federal SNTE, and the other for state teachers. Third, salary increases for federalized teachers and state teachers are budgeted in Ram0 25, but are made effective through Ram033.~~ 45 According to the Ministry of Finance (SEFIPLAN), the federal government has an outstanding debt of about MxP 1,350 million to the state to cover federally determined salary increases. -35- Box 4.1. Teacher Hiring Processinthe state of Veracruz Por otra parte, las necesidades de personal docente en el Sistema Educativo, se valoran por medio de la Programacih Detallada de Servicios Educativos, proceso que identifica la situaci6n de 10s centros escolares instalados, asi como las ubicaciones geogrhficas sin estos servicios, para integrar la propuesta de requerimientos y someterla a las instancias conespondientes de 10s Gobiemos Federal y Estatal para su autorizacih En el Subsistema Federal, el presupuesto autorizado no satisface en su totalidad esta Propuesta y la asignaci6n de plazas docentes derivadas de este proceso en cada ciclo escolar, se realiza en funci6n de la demanda educativa, de tal forma que resulten favorecidos 10s planteles con necesidades mhs apremiantes. Enel Subsistema Estatal, este procedimiento difiere, a1considerar como base de la autorizacidn de recursos, la egresi6n de las Normales Oficiales existentes en el Estado y su asignacih se efectha de manera similar a1 Subsistema Federal. Asimismo, en ambos casos el establecimiento de un registro escalafonario, ofrece al personal docente la oportunidad de buscar mejores ubicaciones. En la contratach de docentes en el sistema federalizado de la Secretm'a de Educacidn Phblica, el Gobiemo Federal aporta el recurso a travCs de la demanda justificada por medio de las acciones de planeacidn y la programacih detallada, autorizando por medio de la validacih especifica, el porcentaje correspondiente a cada nivel educativo de 10s recursos docentes sujetos a contratacidn. Acciones administrativas llevadas a cab0 por el hrea de Recursos Humanos de la propia Secretan'a de Educaci6n y Cultura, conjuntamente con 10s niveles de Educacih Bhsica. L a contratacih del sistema estatal a travCs de la Secretan'a de Educacidn y Cultura (SEC), se realiza tradicionalmente, a travCs del procedimiento de asignacidn automhtica a 10s egresados de las escuelas normales oficiales en la Entidad, proceso en donde el Estado garantiza la contrataci6n a 10s egresados de las escuelas normales oficiales CREN de Tuxpan, Normal Veracruzana y Normal de Tlacotalpan. Cabe mencionar que la Secretm'a de Educacidn y Cultura, a travCs de la Direcci6n General de Planeacibn, Programacih y Presupuestacih, realiza las acciones de planeacidn conespondientes y determina la Programacih Detallada, mediante la cual se realizarh la contratacih de docentes en Educaci6n BBsica, toda vez que Csta sea autorizada por la Secretan'ade Finanzas y Planeacidn del Gobiemo del Estado. En el sistema federal, la contratacidn se realiza conforme a la demanda del servicio educativo, previamentc establecida con base en la estadi`stica educativa que aporta las inscripciones anticipadas, sistema de diagndstico que permite establecer 10s pardmetros de oferta y demanda educativa, dando como resultado 10s criterios de contratacidn de docentes para 10s distintos niveles de educacidn bdsica. En el sistema estatal la contratacidn es realizada conforme a1 criteno de asignacidn automdtica, absorbiendo 16 Secretaria la totalidad de 10s normalistas egresados de 10s planteles: CREN "Dr. Gonzalo Aguirre Be1trdn"dt Tuxpan, "de la "Beneme`rita Escuela normal Veracruzana Enrique C. Rebsamen" y la Normal "Juan Enriquez" dt Tlacotalpan, Ver. Por tal motivo, la asignacih de maestros en la Entidad, indistintamente del sistema federal o estatal, requiere de ur sistema de contratacidn que homogenice la asignaci6n de recursos docentes que permita unificar 10s dos sistemas acciones de modemizaci6n educativa propuestas por el Gobiemo de la Entidad, siendo congruentes a las politicas er materia educativa y a 10s objetivos que corresponden a la modemizacidn de la educacih, implementados por 1: Secretm'a de Educacidn y Cultura. Source: Veracruz Secretariat of Education. 4.22 Thefederalized system receives funds earmarked from the federal government on the basis of the cost of pre-1993 system, with adjustments negotiated on the basis of inflation, state population, and implicit political influence. 46 The federal SEP negotiates teacher wages with the national union. The allocation of teachers within the former federal system is supposedly based on demand factors, such as the number of students, even though union rules limit the impact of such factors. The state subsystem is even more explicitly driven by the supply of teachers, who have untilrecently, effectively been 46 The World Bank has proposed and discussed with the Federal Ministry o f Education a set of formulas to improve the allocation of Federal Transfers (see which states are discussed in the report, "Advancing Educational Equity and Efficiency in the Context o f Decentralization" and Box 4.2). -36- guaranteed a job if they graduate from the teacher training schools (escuelas normales). In addition, as a result of an agreement reached with the union, teachers are allowed to choose their location after earning a few years of ~eniority.~' 4.23 Figure 4.1 presents data showing the broad dimensions of the educational sector in Veracruz. For the academic year 2001/02, there were 21,341 schools, consisting of 6,990 preschools, 9,821 elementary schools, 2,278 lower-secondary (secundaria) schools, 1,071upper-secondary (media superior) schools, 97 higher education schools, and 1,084 institutions for other types of education (training centers for work, adult education, and for disabled people). 4.24 In 2000, 13 percent of the total schools in Veracruz are presently federal (such as for military personnel), 54 percent were federalized (federal schools transferred to the state), 26 percent have been state from the beginning, and 7 percent were private. See Figure 4.1. The distribution of the number of students follows more or less the same pattern. 4.25 The primary educational system in Veracruz serves approximately 1,066,500 primary school students in 9,821 schools. Almost 97 percent of the children in the state are educated in public schools. The majority of the schools in Veracruz, about three- fourths, are general primary schools, and around one third are run by the state. Federally run schools comprise 40 percent. A small fraction is indigenous schools (9 percent), and the Consejo Nacional de Fomento Educativo (CONAFE) schools are 13 percent. Inthe 1999/2000 school year, 73 percent of the lower-secondary schools were telesecundaria schools; 44 percent of the students attended these schools, most of which are located in relatively isolated areas. 47 En el sistema estatal la contratacih es realizada conforme a1 criterio de asignacih automitica, absorbiendo la Secretaria la totalidad de 10s normalistas egresados de 10s planteles: CREN "Dr. Gonzalo Aguirre Beltr6n"de Tuxpan, "de la ``Benemerita Escuela normal Veracruzana Enrique C. Rebsamen" y la Normal "Juan Enriquez" de Tlacotalpan, Ver. -37- Box 4.2. Opportunities for Using Federal Education Transfers as a Tool for Positive Change ~~~ Federaleducation transferscanbe used more effectively inpromotingequity, efficiency and resourcemobilization. Prior to the 1998 budgetarychanges, the interstateallocationof Federaltransfers for basic education (i) past distribution pattems persist and, hence, inequities remain as the current formula depends almost totally on past year's allocation (ii) States' accountability and incentives for performance and local contribution to education finance remain weak, if not absent. /I Three formulae appear promisingfor improvingthe interstate andintrastate allocation: (9 uniform per student formula: simplest and most transparent; rewards enrollment, but does not explicitly address differentialneeds of states; (ii) productivity adjusted per student formula: maximizes enrollment impact by giving more to states with high enrollment elasticity to subsidy; no equity assurance but at this stage of Mexico's development, it can be favorable to disadvantaged states since they now tend to have highel enrollmentelasticities; and (iii) multi-component formula: divides total transfers into (a) core fund to be distributed on a pel studentbasis; and (b) supplementary fund for extra cost of improving education of selected groups of disadvantagedchildren (poor, indigenous, rural). The formula requires more information and ir more complex; but it has the flexibility for ensuringa balancebetweenefficiency and equity. I Simulations show that adoptionof any of the above formulae would tend to improve the distribution in favor of lon income andeducationally lagging states. Further reformof transfers methodology would be agood entry point for: (9 instituting a more effective accountability framework based on outputs or performance anc developinga cultureof evaluationandopennessto public scrutiny; (ii) experimentationwith state performance incentives based not only on enrollment (implicit in the formula above) but also on student learning achievement; and strengthening Federal support foi intrastate development. Source: World Bank "Advancing EducationalEquity and Productivity in the Context of Decentralization"PhaseIReport, November 1998. -38- Figure 4.1. The Distributionof Students, Teachers and Schools by type of school (2000) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0Yo Students Teachers Schools laFederal HFederalized 0State 0Private Autonomous Source: SEC. FINANCE EXPENDITURE AND 4.26 Five observations deserve highlighting: 0 From 1995 to 2000, the share of total expenditure spent on education increased from 52 percent to 63 percent. 0 The composition of educational expenditures is distorted, with nearly 96 percent being allocated to wages and salaries (sewiciospersonah). 0 From 1998 to 2001, real expenditure in education increased by 22 percent and the state increased its allocation to education by 42 percent; as previously mentioned, the federal government has an outstanding debt with the state's Ministry of Education. Relative to the number of students and school-age population, Veracruz receives lower federal education transfers than the national average. 0 Basic education spending i s progressive, while higher education spending i s regressive. Basic education spending primarily benefits the poor, whereas expenditure on higher education benefits those with more income. 4.27 In 2000 total expenditure on education in Veracruz was 63 percent of state total expenditures. Two thirds of the budget was financed through earmarked federal transfers in Ram0 33, and the state financed the remaining third. From 1998 to 2001, total real education expenditures increased by 22 percent (Figure 4.2). Since 1998, education spendingper school-age citizen has increased annually by 4.2 percent. In 2001 about 96 percent of the Ministry of Education and Culture's (SEC) total expenditure was allocated to wages and salaries. -39- Figure4.2. EducationExpenditureby itsSourceof Financing, Veracruz (millionsof 2000MxP) 1998 1999 2000 2031 IUFederal .State I Source: SEC 4.28 In2000 Veracruz received only MxP 2,752 per school-age person for all levels of education, which i s well below the national average of M x P 4,250 and slightly more than the MxP 2,509 of Guanajuato. Federal education expenditure per student in basic education for the state (MxP 4,620) i s 10percent lower than the national average of M x P 5,172. Including the state-financed education expenditure on basic education, spending per student i s higher than the average federal educational transfers for the country as a whole.48 4.29 Unitary cost per student shows varies by level. The total education expenditure per student in Veracruz in 2000 was as follows: elementary M x P 6,700; lower-secondary MxP 8,200; and upper-secondary M x P 5,400. For higher education (Zicenciatura) expenditure was MxP 17,200, and M x P 19,900 per student for higher education for teacher training (nomal). Education expenditure per student at the elementary school level in Veracruz i s 42 percent higher than in Guanajuato. Because of the distribution of students,mostly at the basic level, the bulk of education spending goes to preschool (10 percent), elementary (45 percent), and lower-secondary (19 percent) education. Education expenditure for post basic education and for research and training accounts for a little over 20 percent, and the remaining portion for general administration not assignable to any level. 48 Total educationspending by states, including with their own resources, is not readily available for most states. -40- 4.30 As shown in Figure4.3, education expenditure in Veracruz i s highly progressive in basic education; meaning that public spending on education in Veracruz clearly benefits the poorest at the basic education level; but public spendin on upper-secondary and higher education clearly benefits mostly higher-income groups.45 Figure 4.3. Cumulative Distribution of Total Education Expenditures by income decile, - .- 2000Veracruz 100.0 90.0 3 70.0 2 m 80.0 s e, % 60.0 $ 50.0 % 40.0 2 -c 30.0 w 20.0 10.0 0.0 ----primary ......Lower Sec ---.-Upper I -.._.Tertiary -Totalexpend ~ Sec -Equality EDUCATIONAL OUTCOMES 4.31 In 2000, the average education level of the labor force in Veracruz was only 6.9 years, lower than the national average of 7.7 years, but the situation has been improving. The proportion of people age 15 and older with post-elementary education rose from 33 percent in 1990 to 42 percent in 2000, and their literacy rate rose from 82 percent to 85 percent during the same period (see Table 4.2). Nonetheless, illiteracy rate of Veracruz remains the highest in the nation and i s three times that of the Federal District and Nuevo Le6n. The illiteracy rate i s particularly high for women at 18.2 percent compared to 11.5 percent nationally. 4.32 Reflecting past disadvantages, the proportion of people age 15 and older who have not completed their primary education i s about 24 percent, and 22 percent have not completed the lower-secondary level. Over one fourth of the economically active population has not completed elementary school, but now the coverage in elementary 49However, a World Bank study (2000) shows that the number of teachers increases the probability of enrollment in upper secondary, especially for the poorer households and the rural areas. -41- schools i s much improved. The number o f enrolled children age 6 to 14 rose from 82 percent in 1990 to 90 percent in 2000, increasing faster than the national average. Table 4.2. EducationAchievementStatistics 1990 2000 Percentage of thepopulation between age 6 and 14 that attends school National 85.8 91.3 Distrito Federal 95.1 96.0 Guanajuato 81.6 89.3 Veracruz 82.3 89.7 Proportion of thepopulation age 15and older with post primary education National 42.5 51.7 Distrito Federal 64.5 71.7 Guanajuato 30.3 40.4 Veracruz 33.4 41.8 Percentage of thepopulation age 15 and older that are illiterate National 12.4 9.5 Distrito Federal 4 2.9 Guanajuato 16.5 11.9 Veracruz 18.2 14.9 Source: Census 1990 and 2000. 4.33 Veracmz's post-elementary net enrollment rates lag behind the national average and are particularly low for women and for the poorest people inurban areas. (Tables 4.3 and 4.4). The state's lower-secondary net enrollment rate i s 56 percent, which i s also lower than the national rate of 68 percent. For the poorest in urban areas, the rate i s an even lower 46 percent compared to the national rate of 53 percent. The state's upper- secondary net enrollment rate i s also low at 31 percent compared to the national rate of 38 percent. Again, for the poorest in urban areas, the rate drops dramatically to 8 percent compared to the national rate of 26 percent. 4.34 The retention rates for the school system are low. Inthe 2000/01 school year, the terminal efficiency rate inVeracruz at the elementary school level was almost 80 percent, which was below the national average of 86.5 percent. Dropout at the primary level i s above Tabasco, Nuevo L e h , Mexico City, Guanajuato, and the national average. The failure rate i s 8.5 percent, which i s higher than the national average of 7.3 percent. The comparable numbers for the lower-secondary level are much better. Terminal efficiency was 76 percent, which i s about the same as the national average. The dropout rate was very close to the national rate o f 8 percent. The failure rate i s about the same as the national average. Table A.4.2 shows these educational indicators b y school level and compared to other states. -42- Table 4.3. Public School Net Enrollment Rates by Poverty Status, 2000 National Veracruz Poverty Status Urban Rural Urban Rural Primary (age 6-11) Extreme 99.5 99.3 99.8 100 Moderate 97.9 97.7 100 100 Total 98.2 98.6 99.8 100 Lower Secondary (age 12-14) Extreme 53.2 43.1 45.5 47.1 Moderate 70.4 59.8 48.8 55.7 Total 74.0 52.1 58.7 51.4 Upper Secondary (age 15-17) Extreme 25.8 4.4 7.8 10.7 Moderate 37.0 22.0 22.0 27.4 Total 43.1 15.1 34.0 17.2 University (age 18-24) Extreme 5.8 0 0.9 0 Moderate 7.5 1.2 13.5 1.7 Total 16.2 2.2 19.7 0.5 Source: Bank staffestimates usingENIGH2000 data. Table 4.4. Public School Net Enrollment Rates by Poverty Status and by Gender, 2000 _______ ~ ~~ National Veracruz Male Female Male Female Poverty Status Urban Rural Urban Rural Urban Rural Urban Rural Primary (age 6-11) Extreme 99.7 99.3 99.2 99.2 99.6 100 100 100 Moderate 99.6 97.5 96.4 98.0 100 100 100 100 Total 98.6 98.6 97.8 98.7 99.7 100 100 100 Lower Secondary (age 12-14) Extreme 59.5 41.4 46.5 45.0 72.6 60.0 31.2 29.7 Moderate 68.1 55.3 72.3 64.7 36.0 36.5 62.1 75.6 Total 73.7 49.5 74.2 55.1 65.7 52.3 51.9 50.2 Upper Secondary (age 15-17) Extreme 20.4 5.5 30.7 3.4 16.9 18.6 1.6 3.5 Moderate 39.2 20.5 34.6 23.7 11.4 23.4 31.0 34.1 Total 42.7 15.9 43.5 14.3 29.9 20.7 37.5 13.4 University (age 18-24) Extreme 5.7 0 5.9 0 2.7 0 0 0 Moderate 10.3 1.5 5.3 0.9 20.8 3.1 5.7 0 Total 16.9 2.8 15.6 1.7 27.9 1.1 13.2 0 Source: Bank staff estimatesusingENIGH2000 data. 4.35 Leaving school before completion is a problem in Veracruz. According to the Programa Veracruzano de Educacio'n y Cultura (1999-2004), only 47 out of 100 -43- students completed lower-secondary education on the age and time that they were supposed to, while the national average i s 60 students per 100. The document "Evaluaci6n de la Pobreza y Programas de Desarrollo Social en Veracruz" indicates that leaving school in rural areas before completing basic education i s primarily due to the poor quality of basic education. Anecdotal evidence seems to support this assertion. However, additional research i s needed to determine what factors contribute to students leaving school.50 4.36 A survey of sixth graders in Guanajuato who did not enroll in lower-secondary schools the following year revealed that two-thirds of them mentioned demandmotivational reasons for their absence. O f these two-thirds, about half left because o f the lack o f interest in continuing school, but the survey did not ask the reasons behind the lack of interest. About on fifth of total school leavers indicated economic problems as reasons; another one-seventh mentioned parent's disapproval of the school system as their reason. Only one in seven mentioned distance or availability of local schools as causes. The Ministry of Education (SEC) plans to undertake a similar survey inVeracruz to identify the factors associated with dropping out of school. 4.37 Educational indicators clearly show that Veracruz has reached a point where the secondary level of education must be expanded, which i s what the government already has been trying to do. Indicators also show that the quality of primary education needs further improvement. Quality and universal primary education should be a primary concern that goes beyond measured (internalized) monetary costs, especially considering the positive social externalities that such an education lends to society. 4.38 Standardized student achievement test scores in Veracruz (Esta`ndaresNucionales 1998-2000, SEP) that measure ability instead of knowledge are low, and they are not improving significantly (see Figures 4.4 and 4.5).51 This is particularly true of indigenous and rural schools. That students cannot answer even half of the test questions correctly, which places the test scores in Veracruz below Guanajuato, Tabasco, Mexico D.F., and the national average. 4.39 Lopez-Acevedo (2002) shows that controlling for other variables, the teacher's wage has no effect on students' learning achievements. These findings indicate that increases in education spending through teachers' recurrent salaries might not contribute to learning achievement. According to the Ministry of Education (SEC), "En lo que se refiere a 10s factores asociados a la desercidn escolar, a partir de la base de datos del SECE, como marco muestral, sera posible conducir estudios estadisticos que permitan identificar 10s factores mencionados." However, SEC must also gather valid contextual variables to assess the factors that influence school dropout and repetition. " AlsoreferenceFiguresA.4.1-A.4.9. -44- Table 4.5 Determinants of Mathematics Achievement Scores in Fifth Grade at National Public and Private Schools Public Schools Coeff. Level of Elasticity Sig. Coeff. Sig.Of Elasticity Student Socioeconomic Variables 0.485 0.000 0.485 0.000 Teacher's gender (male) -0.675 0.023 -0.0072 -0.916 0.015 -0.0103 Teacher's age 0.190 0.095 0.0183 0.280 0.070 0.0270 Attendance to updating courses (yes) -0.931 0.074 -0.0171 0.416 0.476 0.0077 Teacher's residence within the community (yes) -0.052 0.890 -0.0004 -0.102 0.801 -0.0008 Teacher's years of residence in the community 0.240 0.027 0.0261 0.135 0.261 0.0148 Teacher's schooling level 0.139 0.294 0.0103 0.219 0.183 0.0163 Teacher's pedagogical behavior 0.053 0.034 0.0052 0.194 0.015 0.0041 Teacher's interest in students' leaming 0.288 0.023 0.0098 0.092 0.003 0.0031 Number of updating courses 0.028 0.584 0.0030 0.021 0.709 0.0023 Type of post. Short term (yes) -1.210 0.030 -0.0013 -1.177 0.014 -0.0013 More than one post (yes) -0.004 0.990 0.0000 0.304 0.395 0.0014 Teacher's income 0.135 0.225 0.0097 0.094 0.475 0.0069 Didactic material available to the teacher 0.011 0.608 0.0033 -0.004 0.878 -0.0011 Number of supervisor visits 5.523 0.000 0.0754 5.484 0.000 0.0780 Teacher's enrollment in Carrera Magisterial (yes) 1.436 0.003 0.0187 Carrera Magisterial level -0.413 0.056 -0.0072 Correction for possible self-selection bias in Carrera 1.674 0.182 Magisterial Constant 45.854 0.000 44.873 0.000 R"2 0.388 0.377 Number of Students 14847 13,767 Number of Schools 1718 1602 Source: Lopez-Acevedo (2002). 4.40 Student-teacher ratios are 24 for elementary education and 19 for lower secondary. However, the ratios are somewhat lower on average for the upper-secondary and higher levels of schools, where teaching capacity seems underutilized. For basic education, the studenvteacher and studentklassroom ratios are below the levels of Guanajuato (see Table 4.5). Despite substantial investment in their training, the quality of teachers remains low, especially considering the number of teachers enrolled in PRONAPand Curreru Magisterial. -45- Figure 4.4. "Esthndares Nacionales,"MeasuringAbility, Veracrud2 50 40 30 20 10 n 1998 I 1999 I 2000 SCommunity courses __ 40 92692 40 86491- 43 04254 38 6302 41 30939 0 Publicrural 42 52076 42 43408 46 3494 Communitycourses Indigenouseducation Public rural CI Public urban PrivateurbanI Source: Direcci6n General de Evaluaci6n, SEP. Figure 4.5. "EsthndaresNacionales," MeasuringAbility53 52 - 50 46 44 ---A I1 42 0 1 ~ 40 ! 1998 1999 2000 +National 43.09922 45.90533 49.25525 -c 1 50.83674 ~ .EdO.M~x. - -~ 44.10725 46.76306 Guanajuato __ 44.17591 -___. ______ ~ 41.57428 +veracruz j 42.40767 45.83384 48.024292 52 In this exercise the population considered were children that in 1998 studied Znd grade of primary; in 1999, 31dgrade; and in 2000, 4`h grade. The test measures ability, not knowledge. Standardized grades range from 0 to 100. 53 In this exercise the population considered were children that in 1998 studied 4`h grade of primary; in 1999, 5Ih grade; and in 2000, 6`h grade. The test measures ability, not knowledge. Standardized grades range from 0 to 100. -46- Table 4.6. SchoolInput-Output Indicators,Comparison2000-01 Student/Teacher Student/Classroom 2000-01 2000-01 Preschool education Guanajuato 33.4 26.2 Veracruz 16.6 12.58 National Primary Guanajuato 31.9 29.7 Veracruz 23.89 16.47 National 27.1 Lower Secondary Guanajuato 28.4 32.9 Veracruz 19.44 27.68 National 17.4 Upper Secondary (Prof Medio) Guanajuato 14.2 28.4 Veracruz 11.68 34.31 National 11.3 Upper Secondary (Bachillerato) Guanajuato 14.4 28.2 Veracruz 15.81 30.84 National 14.7 Teacher Training Guanajuato 7.6 22.2 Veracruz 8.21 27.71 National Source: StatisticalAnnex of the President's Report, 2001. 4.41 Inorder to understandhow the education systemfunctions atthe schoollevel, we interviewed teachers, principals, parents, and municipal-local authorities in several schools in Veracruz. The majority of them were sincere and eager to make a positive contribution to improving the coverage and quality o f the school. This same commitment to improving the educational outcomes has been observed by the SEC. Overall the interviews revealed six main areas of concern: management, unions, teaching practices, parents, infrastructure, and lack of evaluation of programs. Management 4.42 The effectiveness of supervisors i s constrained by the large number of schools assigned to them.54 Inaddition to general support, the supervisor has traditionally been j4 This number varies by educational level. According to some who were interviewed, the average in upper secondary is 67 schools. -47- expected to monitor the school and implement a wide range of non-educational programs. Many other agencies, such as the health, environment, agriculture, and social development bodies, take advantage of this educational infrastructure to disseminate their information, which places a significant burden on the supervisors. This is all made more difficult since the government has not delineated clear priorities for the supervisors. 4.43 The numerous bureaucratic requirements increase the time it takes for supervisors to solve problems. Especially since the educational system was decentralized, the bureaucracy i s further complicated by lack of clarity on how the state and federal levels will coordinate to resolve certain issues. Many feel that due to the reorganization of the system, work i s being duplicated and the delegation of responsibility and the transferring of the decision-making authority to different levels have been problematic. Supervisors are also supposed to evaluate the performance of students, directors, and schools, but there i s little standardized and consistent evaluation of students, and no structure exists to evaluate the director's perf~rmance.~~ Unions 4.44 Although teachers can join the well-known union SNTE, they also have the option of joining other unions such as those coordinated on the state level; however, as in the past, SNTE has commonly exerted the most influence over both the state and national Ministries of Education. The union exerts a great deal of control over the allocation of teaching posts and on the supervision and evaluation of schools. This effectively prevents the Ministry of Education in Veracruz from receiving dependable and timely information concerning the status of its schools. The teachers' union plays a complex and non-transparent role in the school's management and leadership. For instance, individuals may be promoted to the position of principal based on a preference of the union rather than because of leadership or management skills. 4.45 In addition, teachers are not held accountable for the educational outcomes, and they are often not even held accountable for their own attendance. The federal supervisors themselves are union representatives as well. The state's own Secretary of Education lacks real responsibility because others handle so many critical decisions, such as state teachers' unions, federal teachers' unions, and the federal Secretary of Education. Teaching Practices 4.46 Some teachers, although not all, resist change and new techniques and continue using traditional teaching practices and methodologies. Improvising in the classroom 55According to the Ministry of Education (SEC): "En relaci6n a la supervisidn tinicamente es cierto para el subsistema originalmente estatal, ya que la proporcidn de escuelas asignadas para un supervisor en el subsistema transferido es mucho menor. De la misma manera, 10s supervisores estatales son personal de confianza sin derechos sindicales vigentes." -48- rather than working from a lesson plan and relying on lectures that merely follow each page of the book characterize these traditional practices. 4.47 The school principals should support the improvement of teaching skills, but many principals are unable to help because they themselves are unfamiliar with the more active learning methodologies. Many directors lack leadership skills and problem- solving skills. Even if they had these valuable skills, however, they would have little opportunity to apply them since people inthese positions have little real authority; nor are they accustomed to makingdecisions. 4.48 The effectiveness of the teacher training programs was a concern, since the training programs have a broad, theoretical focus and are not tightly linked to the immediate job requirements. Moreover, the methodology taught i s not considered to be effective in promoting significant and lasting learning. Also, the teachers are selected to participate in training based on the content of their teaching programs rather than selecting those who have a genuine commitment to education. The state projects for in- service training are believed to be inadequate to meet the demand. Parents 4.49 The participation of parents and the community i s an important element in improving the quality of education. Particularly in rural areas, parents and the general community are often actively involved in the schools and in educational issues, which demonstrates the positive potential of this resource. It i s the perception of the local government authorities, on the other hand, that urban parents are often more concerned with grades than with education. The issue of family participation i s complicated by a lack of clarity about what the parents' role can or should be. While the school authorities agree that financial contributions are appropriate, other important forms of participation are not always welcomed. A federal regulation prohibits parental involvement in technical, academic, and administrative matters, a restriction that the Veracruz educational officials noted was inconsistent with the parents' real concerns.56 4.50 At higher levels of education, parents and students complain about cost barriers.57 Furthermore, students themselves face difficulties in adapting their educational strategies to their abilities and interests as they become aware of them with age. They are required to do this at the same age that they usually acquire a more realistic appreciation for the labor market. Parents also complained about the lack of an adequate school infrastructure for conducting classes, the late arrival of teaching materials, and a shortage of school supplies. 56According to the Ministry of Education (SEC): "Asociaciones de Padres de Familia en todas las escuelas de educaci6n basica como un mecanismo de participacih de 10s padres, igualmente existen 10s Consejos de Participacih Social en la Educacibn, en algunas escuelasy municipios." 57Monetary and non-monetary barriers, such as the time needed to execute all the necessary procedures to change a student from one program to another. -49- FEDERAL, STATE, AND SCHOOL PROGRAMS 4.5 1 The Programa Veracruzano de Educacidn y Cultura, 1999-2004, identifies three key objectives for improving the education system: 1. Ensure that students complete their education on time. The Plan seeks to reduce the school dropout and failure rates for all levels of schooling. Measures to increase the terminal efficiency rate include promoting reading, programs such as "Reading Corners"; training teachers on issues concerning grade repetition; establishing vocation-oriented schools; broadening the state's student loan program; emphasizing and recognizing the value of teacher's work; increasing social participation in education; and establishing educational programs for parents. 2. Provide educational services to adults. The intention here i s to strengthen the Pro Alfabeto program, a program that aims to increase the literacy rate for people over age 15. 3. Increase educational coverage, particularly for ethnic minorities and women. The document indicates that coverage of indigenous children age 6 to 14 should increase to 80 percent by 2004.58 4.52 There are three important areas that can be improved in a program called La Reforma Educativa, which i s part of the Program of Education and Culture of Veracruz, 1999-2004: 1. Set specific educational objectives. As currently formulated, the Plan does not set quantitative targets for the number of children who should be enrolled in schools and finish basic education, nor does the plan set objectives for increased enrollment rates. 2. Budget constraints. The Plan needs to assess the financial requirements and budgetary implications of reaching its goal; it also needs to develop a resource mobilization strategy. Box 4.3 illustrates the resources needed to increase coverage. 3. Coordination and evaluation of programs. There i s a lack of evaluation and coordination between federal and state school programs, specifically with respect to the objectives and contents of each program. 58 According to the Ministry of Education (SEC): "La educaci6n primaria indigena bicultural, seglin el Programa Veracruzano de Educacih y Cultura 1999-2004, establece como meta para el 2004, elevar la cobertura de 60% a1 80%, de 10s niiios en el rango de edad de 6 a 14 aiios, esta meta ya fue rebasada, ya que con el apoyo de las escuelas primarias indigenas, primarias indigenas del CONAFE y escuelas primarias generales, la cobertura es arriba del 95% actualmente." -50- Box 4.3. Simulation on the cost of increasing basic education enrollment in Veracruz The table shows a rough calculation of the budgetary implications of various scenarios for increasing basic education enrollment, depending on the assumption made regarding enrollment demand, and the proposedexpenditures for basic education. The simulated enrollment increases would be mainly for lower secondary, since primary enrollment is alreadyclose to the maximum. In a steady-stateenrollment rate scenario, which means that demand grows at same rate as school- age population, there could be budget saving of around USS 40 million compared to spendingnow (plus 3 percent annual real growth), since school-age population is projected to decline. However, if the government were to close the gap in enrollment rates between Veracruz and the national average (optimistic scenario), paying for the extra students would cost US$ 1 1 million in 2003 and USS 16 million in 2005'. Without reducingcost per student, this would be an underestimatesince there probably would be a needto spend some resourcesto stimulate the demand side. This resultpoints to the importance of developing and implementing a strategy that makes greater use of existing resources and cost-effective combinations of methods for increasing coverage in Veracruz, as discussedearlier. SimulationBasicEducation Steady State Scenario (1.14% populationdecrease 6-16; 1.14% expected enrollment decrease) 2000 2003 2004 2005 EnrollmentrateVeracruz 81% 81% 81% 81% Nationalnetenrollment rate 92% 95% 96% 96% AdditionalResourcesNeeded(USD million) -39.2 -39.9 -40.7 Unit Cost (UC)=659 Optimistic Scenario (1.14% populationdecrease 6-16; 4.5% expectedenrollment growth) 2000 2003 2004 2005 Enrollmentrate Veracruz 81% 86% 91% 96% Nationalnetenrollment rate 92% 95% 96% 96% Additional Resources Needed(USDmillion) 14.2 15.3 16.4 Unit Cost (UC)=659 Note: All costs are in 2000 USDper student per year Unit cost is calculated with total (state andfederal) expenditure in basic education Source: Bank staff calculations based on CONAPO and Government of Veracruz data. 4.53 Numerous programs and projects have been implemented in Veracruz to increase coverage and reduce school dropout rates. The programs highlighted in this report illustrate types of programs that are embedded within the overall goals of the education system but have not yet been formally evaluated. A number of innovative schools programs aim to help indigenous children and children at risk of dropping out or failing. The main problem now i s the lack of a systematic evaluation of these programs, in order to know which to extend, how to improve them, and if any should be discontinued. -51- FederalPrograms 4.54 Programa de Distribucio'n de Libros de Texto Gratuitos. This program distributes educational material to support teaching and education in order to reduce the financial burden on the family budget. During the 2000/01 school year, the program distributed over 12 million free textbooks to students in basic education and upper-secondary school levels.59 4.55 Programa Escuelas de Calidad (PEC). The objective of this program i s to transform the central educational system into one in which the planning comes from the school itself. The underlyinghypothesis of the PEC i s that principals, teachers, students, and parentsform a real school community, which has the capacity to identify the schools' needs, problems, and goals better than a centralized authority. 4.56 Programa de Becas Oficiales. Federal educational policy supports the provision of scholarships as an initiative to provide equal opportunities to children and youth at all levels of education. These scholarships often bridge the gap between a student who will drop out and one who will graduate. Table 4.6 shows the scholarships provided by level. The amount of the scholarships i s MxP 194.6 for basic education and MxP 389.2 for Escuelas Normales (teacher training schools). Even though education and books are provided by the state, the households face many costs by sending their children to school, like the materials for class, uniform, and transportation. Table 4.7. Numberof ScholarshipsProvided,Veracruz Level 2000-01 Primary 500 Secondary 18 Technical 573 Normal 460 Total 13.51 Note: Data do not include scholarships given to the Oporfunidades program. Source: SEC. 4.57 Programa Nacional de Actualizacidn Permanente para 10s maestros de Educacio'n Bdsica en Servicio (PRONAP). This in-service teacher-training program has served 51,600 basic education teachers and principals. The program provides trainingto teaching in various practices and methodologies, in the theory of education, and in practical tools to strengthen their teaching practices in the classroom. This in-service training program serves 78,000 basic education teachers, principals, and teachers working in administrative tasks. The Training Centers offer 16 courses and a licenciatura in education. The National Pedagogical University in Veracruz offers a specialization in 59 According to the Ministry of Education (SEC), the exact figures are: "12 millones 311 mil 654 ejemplares, que incluyen: 141 mil 610 librosparaEducacidnPreescolar, 9 millones250 mil 350 libros para alumnosde Primaria, 122textos en lengua Indigena, 1milldn 179mil 314 libros de SecundariasTCcnicas y Federales, 1milldn 618 mil 380 de Telesecundaria." -52- educational administration and a licenciatura in indigenous education, preschool, and primary education. The Teacher Centers offer 11 training courses and four diploma courses. 4.58 Programa para Abatir en Rezago Educativo (PARE). The PARE i s a compensatory program that aims to improve the quality of primary education in the poorest states of Mexico. It works by decentralizing practices, providing teacher incentives and instructional materials, and by developing and producing textbooks for indigenous schools. 4.59 Programa para Abatir el Rezago en Educacidn Ba'sica (PAREB). The PAREB program operates in the smallest and most isolated communities in the state to provide primary schools with basic equipment. To date, the total investment in school infrastructure has been over M x P 10 million and i s projected to benefit 18,000 students. The program also encourages teachers to live in the community where they teach and to stay after school to help students with their studies. In 2001 the program benefited 3,400 teachers with an investment of over M x P 60 million. The amount delivered to the Parents Association was over MxP 19 million for school maintenance. The cost for school supplieswas over M x P 18 million. 4.60 Programa para Abatir el Rezago en Educacidn Ba'sica e Inicial (PAREIB). This program i s intended to stimulate early child development through parents' support. It has benefited over 30,000 children who are under age 4 in over 1,000 localities. The investment in infrastructure and teaching materials has surpassed M x P 60 million. In 2001 the total investment allocated to the PAREB and PAREIB programs combined was over M x P 120million. 4.61 Programa de Carrera Magisterial. The career-teaching program i s designed to increase the professionalism of the teaching corps by providing direct incentives for teachers to continue their education and professional development. The program recognizes that the teacher i s the determining influence on the quality of education. Nearly 80 percent of teachers in basic education in Veracruz are enrolled in the Carrera Magisterial program, meaning that they have been rewarded with salary increases and promotions. While this type of incentive has great potential, it depends on objective and thorough supervision, and freedom from politicized union influence, which i s a problem as noted above. 4.62 Programa de Educacidn a Distancia. The distance education program enables the state to provide increased services to isolated communities by using modern telecommunication technologies. In 2001new schools were brought into the educational satellite network (EDUSAT), raising the total number of schools served by the program to 600. The program also seeks to connect teachers and students using the Internet, a project that began in 1997 in two primary schools, two secondary schools, and a teacher center. This Internet program has grown to include 521 primary schools with a total installation of 2,000 computers. -53- 4.63 Programa Estatal de Foment0 a la Lectura. The reading program focuses on books, libraries, andreading through the combined efforts of federal, state, and municipal governments and the private sector and families. The program sponsors numerous events designed to encourage reading, in addition to distributingover 526,000 books through the Rincones de Lectura program. In addition, a teacher-training program was held for 35 preschool educators who, in turn, were able to train the other preschool teachers. State Programs 4.64 Proyecto: Sistema Automatizado de Control Escolar. The SEC i s planning to modernize the educational management information system using an integrated network and database with data generated at the state level. The purpose i s to improve the security and reliability of the information collected (Sistema Integral de Planeacidn, Programacidn y Presupuestacidn). This should be coordinated and crosschecked with the newly createdZnstituto de Evaluacidn Nacional. 4.65 Misiones Culturales Rurales. This program provides specialized work-training support to various communities. During2000-01,4,225 adults over age 15 enrolled in a variety of courses. 4.66 Programa de Apoyo Editorial a1 Magisterio. This program provides publication support to in-service teachers by distributinginternal reviews, documents, and briefs with information that helps teachers to manage their classes more effectively. In 2001 this program distributed 41,000 bulletins and briefs. 4.67 Programa de Znfraestructura. The infrastructure development program supports the physical infrastructure of education. Table A.4.160 illustrates the construction and maintenance schedule in Veracruz. Resources from the federal government are earmarked for use in educational infrastructure; however, educational infrastructure resources are very limited (less than 3 percent of total educational expenditures). A significant portion of state educational resources i s allocated to higher educational infrastructure under the program Obra Estatal Directa. 4.68 Programa de Alfabetizacidn (Adult Education). This program aims to reduce the illiteracy rate and encourages the completion of basic education for those above age 15. It i s delivered through the Cruzada Pemanente Pro Alfabeto to 12 Misiones Culturales, 54 Centers of Adult Basic Education (CEBAS), and 145 elementary schools. In 1998 there were over 4,200 adults enrolled inthese centers. 4.69 Programa Estatal de Apoyo a Estudiantes en Riesgo. This program identifies students that have learning difficulties and recommends policies to help them improve their performance. 6o I t i simportant to note that the figures in Table A.4.1 show only the number of spaces allocated by the Programa de Infraestructura, without taking demand into account. -54- 4.70 The state has developed many respectable goals in order to provide a better education system for its citizens; but beyond merely stating its goals, the state government must present a coherent plan of action with a feasible budget, which will help them achieve these goals. Furthermore, they must develop a system of evaluation in order to determine which of their existing programs should be maintained and replicated in other areas of the state, and they should modify or eliminate those programs that are not helping students improve significantly over time. CONCLUSIONS AND RECOMMENDATIONS 4.71 The government of Veracruz i s already working toward initiating vital institutional reforms to improve the effectiveness of their educational system by taking the following steps: 1. Complete the unification of educational services, between the transferred federal system and the traditional state system; 2. Rationalize school information systems, and computerizing and streamlining data inputs and management; 3. Implement the innovative compensatory educational programs (PARE, PAREB, and PAREIB); 4. Give individual schools the authority to plan improvements for themselves. 4.72 Along with the federal initiatives to improve education and other human development activities (for example, Carrera Magisterial, Oportunidades, Becas Escolares, Escuelas de Calidad, Gestidn Escolar, and the textbook programs), these achievements provide a strong foundation for even greater improvements to the education system in Veracruz. Seven steps,wouldmake progress toward this goal: 1. Improve the composition of basic education expenditures. Expenditure on salaries for basic education should range between 80 and 90 percent. Otherwise too little i s left for investment, instructional materials, and strategic projects. Veracruz needs to better allocate its expenditure to lower-secondary and upper-secondary education in order to close the enrollment rate gap between the state and the national average. Educational indicators clearly show that Veracruz has reached a point where it needs to expand the coverage and quality of secondary education. 2. Address thefactors causing low net enrollment rates, particularly for thepoorest in urban areas. Improving the quality of primary education would allow more students to complete the primary grades while being prepared for and interested in continuing their education. Incentive schemes, like the Oportunidades program (formerly PROGRESA) extended to urban areas, should be maintained and expanded to motivate parents to keep their children in school. Improve the quality and relevance of secondary education. Implement a basic education scholarship program or develop the educational component of Oportunidades to the benefit of children who are extremely poor. Rigorous evaluation of Oportunidades has shown that it has significantly impacted the schooling of poor children, and its economic benefits outweigh its costs. The concern i s that the -55- educational grants provided by the program could create a dependency on government assistance and thus reduce incentives to work. However, the previously mentioned study of the program reveals that thus far Oportunidudes has not produced these detrimental effects. The cost of increasing enrollment of basic education to national level by 2005 i s USD$14-16 million annually. Another option i s to implement a well-targeted state loan program for upper and higher education. The government of Veracruz could profit from examining the EDUCAFIN program inGuanajuato and the national SOFES program.61 3. Reduce school dropout and absentee rates. First, identify the causes of the high school dropout rate through a survey, then promote and evaluate programs such as PAER, followed by addressing the determinants of dropout rates. Base school fundingon student attendance to help assure more equitable funding and greater incentives for efficiency and quality. Enhanced supervision would need to check on reported attendance of students, and of teachers. 4. Initiate pilot programs for demand-side grants. In urban areas where students could potentially attend different schools and parents want to exercise choice, including between public and private schools, grants could enable them to do so. This would allow students to get the best education for their needs and would provide schools with more incentive to improve, since their funding would depend in part on the ability to attract students with grants.62 Box 4.4. Demand-SideFinancingInitiativesinEducation Demand-side financing, the principle of channeling resources to education through students and their parents or basing school funding on enrollments, has been proposed for a number of reasons indifferent countries. Since the demand for schooling i s often influenced by economic, political, social and cultural factors, in many cases it i s not sufficient merely for a school to exist. Evenfree education may not entice poor families. Demand-side financing includes a range of interventions. The focus i s on putting the resources in the hands o f those who demand education and not those who supply it. The aim i s to counter the constraints that prevent children from either attending school for from continuing their education. Demand-side financing programs have improved educational indicators and outcomes. In most cases, they led to higher school attendance rates and lower school dropout rates. Evaluation results indicate that these programs have led to significant reduction in both school dropout and repetition rates. The most comprehensive programs, such as Mexico's Progresa (currently Oportunidades), have contributed to the reduction of child labor, increased educational attainment, and improved health and nutrition for the poor. Progresa increased transitions to secondary school by nearly 20 percent. Educational attainment i s estimated to increase eventually by two-thirds of a year because o f Progresa. Larger effects would probably arise if benefits were extended beyond the ninth grade. The phased implementation of Progresa made it easier to evaluate its impact. The rigorous evaluation that followed makes the evaluation results so persuasive, providing powerful arguments for advocates of the program to press for its adoption in other countries. Family income i s the main determinant of whether children work or attend school. Most families in poor countries would prefer to send children to school instead o f work, but they cannot afford to forgo the income their children bring home. Demand-side financing programs raise family income and reduce the cost of attending school. Demand-side financing programs are also very cost-effective. For example, Progresa's grants to families are a much more cost- effective instrument for increasing school enrollments in Mexico than are alternative supply-side interventions such as building more schools. Such programs benefit most the poorest, with uneducatedparents, and those living further away from a school. Incentive schemes are proving especially effective in increasing access to secondary education. This i s true in high enrollment countries such as Mexico as well as countries where enrollment rates. ~articularlvfor girls. have 61 See World Bank document, "Mexico: Higher Education Financing Project," 1998, PAD#17174-ME. 62 Schools inBogotB, Colombia have successfully implemented such programs -56- historicallybeenvery low, as in Bangladesh. Demand-sidefinancing promotes access for underserved populations when private schools are allowed to take in the excess demand, as was the case in Colombia's targeted secondary school voucher program. If these outcomes continue, then demand-side financing schemes could be a very powerful way of achieving an important part of the Millennium DevelopmentGoals, especially the achievementof universalprimary education. Source: Patrinos, HarryA. "A Review of Demand-SideFinancingInitiatives on Education",August 2001. Mimeo. 5. Implement the sistema escolarizado de control escolar (SECE). This action will allow the Ministry of Education and Culture to make timely educational decisions.63 6. Improve supervision and evaluation. The incentive structure and institutional capacity should enhance educational quality by creating greater social accountability for school performance. This can be achieved by making school performance more transparent and by improving parental, social, and business participation. Specifically, the SEC should continue supporting the programs Escuelas de Calidad and Gestidn Escolar. In addition, the state should develop an annual report card for each school, making public quantitative measures of each school and its students' achievements. Establish benchmarks so that the public and the SEC can have a measure by which to compare these achievements or lack thereof. Assure dissemination of this information to parentsand encourage their input to the evaluation process. Finally, the state government should establish performance agreements between the SEC and the schools. The federal administration could strengthen the sector by consolidating the Sistema Nacional de Evaluacio'n Educativa (SNEE), thus providing timely and accurate public information to enhance accountability and transparency of the education system. This i s of particular importance to Veracruz since the public traditionally seems to have little interest inthe education sector. 7. Improve quality and relevance of education. Educational quality improvements should complement the push for enrollment; in turn, students and parents will recognize the greater relevance of their education, which would enhance returns to schooling and increase enrollment. By improving the teaching-learning process, making it more active, students would become more motivated while simultaneously increasing their ability to think, imagine, and construct knowledge. For example, the PAREprogramhas improved achievements in the learning process of Mexican students. Suitably adapted and strengthened, the PARE approach would enhance student interest in learning and help them develop creative and logical thinkingtechniques. Veracruz can also learn from the experiences of Colombia's highly successful Escuela Nueva, Japan's school-based system of improving teaching practices, New York's District 2 reform program, Guatemala's Nueva Escuela Unitaria, and the Escola Ativa in several Brazilian states, which are described in the appendices. These programs require ~~ 63 According to the Ministry of Education (SEC), "actualmente la Secretaria de Educacih y Cultura, cuenta ya con una base de datos que contiene mas de 900 mil registros de alumnos de educacih basica, del presente ciclo escolar, dicha base sera actualizada con las calificaciones a fin de ciclo y se elaboraran reportes de desempefio con indicadores estadisticos, a nivel individual, por escuela y estatal." -57- the professional development of teachers, principals, and supervisors and call for providing them with paid time to do this. Equally important i s the need for the SEC to evaluate and rationalize current training programs, discarding those that are found to be ineffective, and then they need to reallocate resources to training programs that support active teaching-learning. The quality of basic education in rural areas in Veracruz i s poor, and it i s not improving (see Figures 4.4 and A.4.1). Frequent absences by the teachers may be a cause of this, which may be perpetuating the high dropout rate in these rural areas. In addition to this problem, programs like the telesecundaria schools may not be producing significant improvements in rural areas. Thus, in order to improve the quality of education, the current telesecundaria system could be improved, or the telesecundarias and telebachilleruto schools could be transformed into technical secondary schools, which help to increase subsequent earnings. The state could also benefit from the Escuela Nueva approach used by Tabasco, which has successfully increased its educational indicators inrural areas. -59- 5. HEALTHSECTOR: STRATEGIES, PERFORMANCE, AND OPTIONS BACKGROUND 5.1 Despite a high poverty rate and low per capita federal funding to cover health- care expenditures, Veracruz has made noteworthy progress in improving the health status of its population over the last decade. Increased access to basic services, public health measures, and rising prosperity have increased life expectancy, by reducing both the infant and the general mortality rates. Like many middle-income countries, Veracruz and the rest Mexico are undergoing an epidemiological transition. Childhood diseases such as diarrhea, respiratory diseases, and malnutrition continue to be significant causes of illness and death, but now the growing problems are associated with the aging of the population, rapid industrialization, and urbanization. Increasing demands on the medical system come from chronic diseases such as cardiovascular diseases and cancer, and injuries from industrial accidents and urban violence. 5.2 The expansion of the state health-care delivery network has required rapidly rising funding, which seems unlikely to continue. So the immediate challenge in the sector i s to consolidate the recent achievements, making them financially as well as technically sustainable. Expansion of health services has been financed mainly by state funds and federal funds coming from the Programa de Ampliacidn de Cobertura (PAC). The expanded program has been able to reach a population that i s highly dispersed, in addition to an underserved urban-marginal population. The coverage of the uninsuredor open population from 1995 to 2001 grew from 58 to 61 percent, and since only 0.05 percent of the total population was uncovered, the World Health Organization (WHO) awarded Veracruz the certificate of universal coverage. 5.3 The state contribution to fund the Servicios de Salud de Veracruz (SEWER) grew from about 25 percent in 1996 to 34 percent in 2001, and additional funding from the new state payroll tax i s being allocated to the Secretary of Health (SSA) for investment in 2002. By measuring the amount spent on the health sector, Veracruz was among the highest-spending states, with three percent of state GDP. 5.4 The Veracruz Health Plan 1999-2004 adequately addresses the main health problems relative to (a) reducing communicable and chronic diseases; (b) providing universal access to the open population with the Basic Health Services Package (PABSS); (c) focusing on the highly dispersed communities with functional (health centers and health houses) and geographic coverage (mobile units); and (d) addressing the epidemiological transition to chronic and degenerative diseases, accidents, substance abuse, and sexually transmitted diseases, mainly concentrated in urban and peri-urban populations, including a well-designed secondary and tertiary care network supported by hospitals of varying complexity, ambulances, and a state-of-the-art reference laboratory center inVeracruz. -60- 5.5 The current investment plan o f the state takes into account the existing infrastructure and occupation levels to avoid inefficient redundancies and sub-utilization levels of the health facilities. The adopted strategy has rehabilitated the health sector by refurbishing equipment and expanding coverage in health centers and hospitals; moreover, the new strategy provides additional investments to those without an existing health infrastructure, especially those that exhibit unacceptable standards or poor functionality. However, the health plan and projects selected have not been supported and prioritized by proper financial and economic assessments. Furthermore, the plan lacks the required financial projections to measure the implications of recurrent costs and possible sources of financing, including cost recovery. 5.6 The SSA in the State's Health Plan still need to address three main challenges: Increasing recurrent costs: Efforts to improve the efficiency in delivering care, such as outsourcing general services in certain hospitals, have not been as successful as they could have been. This lag in efficiency i s attributed to two main reasons: (a) new investment in the health infrastructure along with the redesigning of the SESVER health network has added about 4,400 new employees (almost a 250 percent increase from 1997 to 2001); and (b) deficits in the timely supply o f drugs and medical supplies exceed 50 percent, which has reduced the effectiveness of the health care network. Using the observed operational expenses in 2001, preliminary projections based on expected demand in personnel, drugs, medical supplies, general services, other maintenance, and operational expenses, show that real costs could grow between 15 and 20 percent (in addition to general price inflation) by 2004. InsufSicientcost recovery: Currently, cost recovery i s low, accounting for less than 4 percent of total SESVER health expenditures. SSNSESVER plan to improve cost recovery by (a) installingprivate rooms in selected hospitals, which will be offered to employers and the insured population; and (b) by selling diagnostic imaging, laboratory services, and ancillary services to other providers. If a significant increase in recurring expenses is expected, the additional funding will require a major reorganization of the structure and management of the health network. SEFIPLAN should be involved in this reorganization, and should be in charge of the billing and the collection of fees. Lack of incentivesfor pegomance: Current budget allocation mechanisms combined with limited jurisdiction autonomy have led to the lack of productivity, efficiency incentives, and controls in hospitals and health centers. Managers lack adequate incentives to improve the pace of treating patients, which has driven down the pegomance of hospitals and clinics. This lack of incentives i s compounded because SESVER hospitals, labs, and health centers cannot retain (with the exception of CEMEV) nor reinvest recovery quotas, which are refundedto SESVER headquarters. -61- THEHEALTH SYSTEM 5.7 Public Health Network: The health sector in Veracruz has three public-provider networks: (a) federal social security under the responsibility of IMSS, which covers most workers in the formal private sector and i s contracted by the state's social security system to provide health and maternity care for state employees; (b) the Federal Workers Social Security Institute (ISSSTE), which covers federal workers in the state; and (c) the coverage provided for the open population (uninsured) b y both the IMSS-Solidaridad and the Servicios de Salud de Veracruz (SESVER) under the Secretary of Health (SSA). 5.8 Open population: In an effort to strengthen the state's capacity to regulate the health sector, in 1986 the federal government created the Secretaria de Salud (Secretary of Health, SSA); regional and municipal hospitals continued operating under existing arrangements through the Public Health Services Coordination. By the mid-l990s, the SSA began to concentrate on policymaking, stewardship, and regulatory roles at the federal level; it also began to decentralize, transferring the responsibility of service delivery to the states. As a result of these reforms, in 1996 the government of Veracruz agreed with the SSA to assume the responsibility of providing the open population with health services. In 1997 the state government of Veracruz created SESVER as an Organism0 Pu'blico Descentralizado (OPD) and integrated all of the public hospitals, some of which had been operating as autonomous entities. Through SESVER, the state covers about three-quarters of the uninsured (open population), and IMSS-Solidaridad covers the rest. 5.9 Social Health Insurance: A mandatory social insurance program i s funded by contributions from formal sector employees and employers, and the federal government. The insurance program i s comprised of various programs covering the state population: (a) IMSS funds around one-third for the private sector, (b) ISSSTE funds 8 percent for employees in the public sector, (c) PEMEX covers 5 percent for its employees, and (d) the armed forces has its own health system. With the exception of 2000, when the sugarcane industry contracted and PEMEX reduced health benefits to a large number of the unemployed, social insurance organizations have covered nearly 40 percent of the state's population throughout the years, as shown inFigure 5.1. 5.10 Private Health Sector: According to the State Health Plan study, the private sector covers only 2 percent of the population. The private sector i s composed of 108 health care centers, which provide inpatient care with close to 940 beds, accounting for 20 percent of all available beds in the state. The private sector also provides 248 outpatient clinics (7 percent of the total). The hospital centers, with a limited capacity of less than 9 beds on average, account for only 15 percent of the total state discharges, and their outpatient clinics can provide only 1.5 percent of outpatient consultations. Public sector institutions also employ most of the 780 physicians providing medical care in the private facilities. -62- Figure 5.1. Percentof Populationwith Access to Health Services C O V E R A G E O F H E A L T H SERVICES: S O C I A L S E C U R I T Y A N D O P E N P O P U L A T O N 39.26 38 94 39.53- 30.99 * .. I /r I I I I 1997 1998 1999 2000 2001 i O I N S U R E D L O P E N W I T H O U T S E R V I C E S 1 Source: Operational Regionalization Study, SESVER. 5.11 Hospital directors interviewed in the main cities of Veracruz believe that the private facilities lack the te~hnology,~~functional accommodations, and access to the infrastructure available in the public sector. The limited capacity of the private sector i s one of the major opportunities being exploited by the state's Plan, as shown by the construction of private rooms and the installation of both tomography and laboratory equipment in all regional and some sub-regional hospitals. However, the Plan lacks detailed market studies of specific inventory of privately installed capacities, quality of care, current utilization rates, and patient and consumer satisfaction. Comparisons of cost and price structures are also needed to better assess the competitive advantages and opportunities that the public sector may have over the private sector. HEALTH STATUS 5.12 Health indicators for the state of Veracruz are comparatively good by national and international standards (developing countries). Health expectations have improved steadily, particularly over the past five years. The mortality rate in children under age 5 has significantly decreased along with the infant mortality rate; this achievement has been augmented by the fact that life expectancy at birth has also increased. These improvements are consistent with the state's priority of extending coverage and basic health care programs. This shift in focus has resulted in high rates of child immunizations (above 98 percent), control o f respiratory and diarrheal diseases, and an increased emphasis on maternal and child health programs. This effort has been supported by a significant increase in state and federal funding, with state funds reaching 3.2 percent of GDP per capita in 2000. This was even above the national average by state 64This is true except in a small number of imagingcenters providing tomography and magnetic resonance services. -63- of 2.5 percent (see Table A.5.1), and it was equivalent to the average of Latin American countries. 5.13 Population Growth and Life Expectancy: The state's health plan goals of reducing the population growth rate and improving life expectancy are well under way. This i s shown in Figure 5.2, where life expectancy at birth in 2000 was 74.0 years, a figure higher than the national average. However, since the population is mainly young, a high proportion of women are still fertile, limiting the expectations o f increased reductions in the population growth rate. Life expectancy at birth for males has been improving, surpassing the national average over the past five years. Most recently in 2000, the state surpassed the national average with a life expectancy for males of 71.7 years compared to the national 71.2 years. However, at 76.2 years, the female life expectancy in Veracruz i s lower than the national average, which i s 77.5 years (Table A.5.2). Figure 5.2. Population Growth and Life Expectancy G R O W T H R A T E 1.2 1RATE z 0.4 22.- z 0.2 0 1 1 -- 1997 1998 1999 2000 2001 2002 2003 2004 -$- OBSERVED T R E N D Y E A R "r G O A L 2 0 0 4 LIVE. YEARS LIFE EXPECTANCY AT BIRTH 80 1 79 78 77 76 75 -* ---.&et -*-- 74 73 7 72 I I I I i I I I -- 1997 1998 1999 2000 2001 2002 2003 2004 -0- OBSERVED TREND YEAR GOAL 2004 Source: SESVER. -64- 5.14 Morbidity: Selected morbidity indicators duringprevious years presented in Table A.5.3, show no new cases of measles, malaria by P. Fakiparum, and oncocercosis. Although most state morbidity indicators have improved over the past five years to levels comparable to the state of Guanajuato and better than the national averages, the number of cases of arterial hypertension, diabetes mellitus, and tuberculosis are growing to levels that are threatening to exceed national averages. The availability of the Basic Health Service Package, which focuses on the prevention and management of diarrhea and acute respiratory infection, has been improved for all of the state's population; however, the rates of these types of infections in children under age 5 are still growing, as indicated in Figure 5.3. Figure 5.3. Diarrheaand Acute Respiratory Infection Rates Major InfectionsIncidencein Children Under 5 Years I .. ...-.'---....--* '"'"vu 30,000 20,000 -- _._____~~_______~_____ 0 7 1995 1996 1997 1998 1999 2000 - -- .-+.-Ac-re -- Res? ralory llfecf01s ess Iran 5 years (ARI) -YEAR -A- D Brrneas n ess lian 5 years 0 c (EDASJ ~. -og ( A c a Resp ratory rfectons ess v a n 5 tears (AROJ- LogjDarrneas n ess lnar 5 years 0 0 (EDASjj Source: SESVER 5.15 According to the epidemiological analysis by SESVER, the increased number of upper-respiratory infections and diarrhea in children under age 5 i s mainly attributed to the health professionals recently gaining the resources to merely become aware of these cases and thus report them, rather than an actual net increase in the number of cases. Although this could be one of the reasons for the increase, Veracruz i s between the two states in the Federation with the lowest water supply.65 This shortage i s also thought to be one of the major factors, suggesting the need for joint programs and well-coordinated intervention between federal, state, and municipal water agencies with SSA. 65See chapter 6 on the water sector. -65- 5.16 Mortality: In the late 1990s, Veracruz maintained an infant mortality rate lower than the national average, but the general and maternity mortality rates remained above national averages. However, the mortality rate of children under age 5 has been decreasing below the national average. Significant reductions in deaths attributed to diarrhea declined by more than 50 percent compared to the 1994 rate, and acute respiratory infections declined by about 40 percent. Figure 5.4 shows the progress made inthe past five years. The preliminary data obtained for 2001show major improvements, with results almost reaching the goals set inthe 1999-2004 healthplan (see Table 5.2). 5.17 The ratio of maternal mortality per 1,000 live births dropped below the national average in 2001. However, the rate i s still 15 to 20 times higher than the ratios reported by developed countries, and it i s about six to seven times the mortality rate in Costa Rica (0.35 per 1,000 live births.). Figure 5.4. Maternal and Infant Mortality Trends, 1997-2004 MATERNALAND INFANT MORTALITY 7 6 ----_ 5 n 4 ---_ -' \o --- ----_--- 3 2 1 0 1997 *1998 1999 2000 2001 2002 2003 2004 Infant +Maternal - - -'Linear (Infant)---Linear(Maternal) YEAR GOAL 2004 Source: SESVER. 5.18 Demographic Variances and Demand for Health Services: Whereas communicable disease mortality rates have progressed, chronic and. degenerative mortality rates are rising above national averages (see Table A.5.2) because of diabetes mellitus, cerebrovascular diseases, and cervical cancer. 5.19 However, morbidity by communicable diseases i s still prevalent in rural and indigenous communities, and in urban marginal areas. In the city of Veracruz, the top five health problems reported by the Veracruz hospital outpatient care are related to genitourinary pathologies, diabetes mellitus, inguinal hernias, hypertension, diarrhea, -66- HW/AJDS, and other sexually transmitted infections. In the northeast of Huasteca, which has a highly dispersed population with a low 10 percent urban population, most municipalities are very poor. In this region the five main pathologies are still acute respiratory infections, intestinal infections, and other communicable diseases. Therefore, the public health network should have the ability to respond to multiple pathologies that vary significantly by region, and they should have sanitary jurisdictions, which may be accomplished by providing an adequate combination of the Basic Health Package with secondary and tertiary care. RESOURCE ALLOCATIONANDSPENDING 5.20 Veracruz i s among the three states receiving the lowest federal transfers per capita for health from Ram0 33 funds (see Table A.5.4). These transfers were less than half of the national average received within the past two years and about 40 percent of national per capita transfers projected for 2002. 5.21 According to the INEGI Income and Expenditures Survey 2000 (ENIGH), the average out-of-pocket health expenditure per household in Veracruz was almost 4 percent, ranging between 3 percent in the highest-income group to a little over 5 percent inthe middle-income group. 5.22 Health Spending for Open Population: Table A.5.1 shows that while the combined per capita expenditures from IMSS, ISSSTE, and PEMEX reached an average of M x P 1,470 in 2000, the open population through SSNSESVER received only M x P 497 from federal and state funds, which i s one third of the insured per capita (excluding IMSS-Solidaridad contribution). Still, considering the low per capita expenditures, both federal and state funding has been growing significantly in the state as shown by Figure 5.5. 5.23 Federal Funding: The federal funding (Ramo 33), as indicated in Table ASS, represented 65 percent of total funding, and it had grown by 93 percent by 1999. That rate drops to 10 percent for 2000 to 2002 (in 2000 constant prices), contributing only 55 percent of the total funding. Including PAC (Ramo I2), the percentages change from 69 percent in 1996 to 71.6 percent in 1999, dropping to 64 percent in 2001, with an estimated budget contribution of only 57 percent in 2002. 5.24 State Funding: The state contribution to fund Veracruz Health Services through SESVER grew from about 25 percent in 1996 to 32 percent in 2001, and it has a budget equivalent of 43 percent for 2002 (see Table ASS). In 2000, Veracruz allocated about 3.2 percent of GDP per capita, which was well above the national state average of 2.5 percent. 5.25 Cost Recovery: Although cost recovery through cuotas de recuperacidn (collected mainly in major city hospitals) doubled during 1996-2001 in real terms, the increase did not keep pace with federal and state contributions. This percentage -67- decreased from 5.3 percent in 1996 to 3.6 percent in 2001, which i s lower than other states, such as the State of Mexico, with 5.3 percent. Figure 5.5. Veracruz Health Services (SESVER) Funding and Expenditure(1996- 2001) and Budgeted2002 (millionsof 2000 MxP(constant)) 2'5007 ----- 2,000 1,500 rmCost Recovery Mothers mState EPAC Progresa 1,000 mFederal 500 0 1996 1997 1998 1999 2000 2001 2002 Source: SESVER 5.26 Investment and Recurrent Costs: Investment inequipment and public works grew from 3.4 percent o f total expenditures in 1996 to 21.5 percent in 2002; while the operational expenses for 2002 were reduced to an estimated 78 percent (excluding SESVER expected income due to recovery quotas). Personnel payroll has been growing in SSNSESVER from 58 percent in 1996 to 70 percent in 2001, thus reducing management discretion to allocate resources. Although still at reasonable levels, payroll growth and general services are dangerously reducing available resources for drugs and medical supplies, from 23 percent in 1997 to 10percent in 2001. The reduced allocation for drug supplies (8 percent of total operational expenditures, compared to a reasonable average of 20 percent) accounts in part for the 40 to 50 percent o f prescriptions that go unfilled. Making matters worse i s that most o f these drugs are needed to combat acute respiratory infections and other needs intreating diabetes. PUBLICHEALTH SECTOR PERFORMANCE 5.27 Productivity: Despite lagging behind in health resources (see Table A.5.6), Veracruz production in consultations and surgical interventions per 1,000 o f the population grew between 1997 and 2000 to levels above 1997 national averages and to levels similar to other states like Guanajuato. However, the state i s behind in births -68- attended per 1,000 women in reproductive age, suggesting that deliveries are below national levels. This situation may explain the higher maternal mortality rates. 5.28 Outpatient Care: The state productivity average-1 3 daily consultations by physicians (2001; see Table 5.l)-is below the national average equivalent of 15 observed in 2000. The consultations by specialists show a reduction from almost 3 daily consultations per physician in 1999, to 2 in 2001. This i s very low compared to the standard 10-to-15-consultation average. This i s significant especially when considering the additional daily responsibilitiescarried out by specialty physicians, including surgical interventions, invasive diagnostic tests, and other time-consuming inpatient treatment and diagnostic tests. Consultations per physician per year among the public health institutions in the state show ISSSTE, PEMEX, IMSS, and IMSS-Solidaridad 15 to 30 percent above those of SESVER, indicating room for further improvement. Table 5.1. State Physician Productivity-Average Consultations CONCEPT 1997 1998 1999 2000 200I physician * Consultations by specialist* 2.7 2.7 2.8 2.5 2.1 Consultations by examining 4,684.8 4,859.4 4,950.5 4,940.3 5,050.0 room * * Surgical interventions by surgical 907.1 944.1 1111.5 1099.9 1175.2 suite* * * Daily. Source: SESVER 5.29 Hospital Beds, Occupation, and Length of Stay: Although the number of state beds per 1,000 lagged 25 percent behind the national average in 1997 (see Table A.5.6), this lag has been balanced by the high utilization rate of the hospitals, showing an efficient use of available resources. The average state occupation rate of 72 percent in 2000 exceeded the 70 percent national average. However, although state's length of stay has dropped from 4 days in 1994 to 3.6 days in 2000, the figure i s still about 20 percent higher than the 3-day national average. Table A.5.8 shows the SESVER 68 percent occupation rate average for 2001, and a reduced trend in length of stay up to 3.4 days in the same year. 5.30 Analyzing SESVER hospitals' performance by municipality (see Table A.5.8) shows how the utilization o f larger hospitals in the metropolitan areas are reaching or exceeding their operational capacity, with occupationrates ranging from 70 to 95 percent. This includes Coatzacoalcos, Cbrdoba, Poza Rica, Rio Blanco, Veracruz, and Xalapa. Poza Rica's occupation rates grew from 83 percent to 94 percent inthree years, justifying current investments that will expand the hospital capacity in that city. This i s particularly justifiable when considering that neighbor hospitals from IMSS and ISSSTE already exhibit 89 percent and 94 percent occupation rates, respectively. The same reasoning applies to Orizaba, Rio Blanco, Veracruz, and other major cities. -69- 5.31 Staff Utilization: Table A.5.6 shows that Veracruz uses-fewer medical (by 10 percent) and nursing staff (by 30 percent) per capita than the national averages. Differences are still larger when comparing between the SSNSESVER and those o f social security agencies in the state. IMSS and PEMEX exceed SESVER physicians per 100,000 people on the order of two to six times, and nurses three to six times, respectively (see Table A.5.7). Within open population providers, SESVER exceeds IMSS-Solidaridad in staff in all categories: physicians, nurses, dentists, and health workers. 5.32 Quality of Care and User Satisfaction: User satisfaction surveys carried out within the National Quality of Health Care Crusade show 90 percent and above are satisfied overall, according to the selected indicators of waiting time, consultation, and medicinal supply for all public networks (IMSS, ISSSTE, PEMEX, and SESVER). However, when the SESVER i s considered on its own, satisfaction rates lag behind all other providers, according to most indicators. EFFICIENCY,FINANCE, MANAGEMENTOFTHEOPENPOPULATIONHEALTH AND SYSTEM 5.33 Current Recurrent Costs and Trends: In 2001 preliminary projections show a potential growth of observed operational expenses between 15 and 20 percent b y 2004. Unless additional income is obtained from cost recovery and federal and state funding, this trend will affect the operational capacity of the network because of additional shortages in drug and other medical supplies, which are undergoing budget reductions. 5.34 Drugs and Medical Supplies: Deficits in the timely supply of drugs exceed 50 percent, reducing the effectiveness of the healthcare network. Although main hospitals like CEMEV, Rio Blanco, and Veracruz have limited authority and resources for local purchase through shopping or bidding procedures, their dependence on federal and state purchases of drugs to maintain their own supply compromises their managerial capacity to provide their own needed resources. In addition, SSNSESVER purchasingpower has been weakened by the lack of participation of national and international suppliers in the state's biddingprocesses. 5.35 Cost of Services: Major state hospitals are developing cost analysis by department, availability of unitary costs per procedure, and per diagnostic-related groups; nevertheless, discharge or consultations per hospital or health center are still limited. Coding criteria and cost methods vary in each hospital, and since these figures are calculated on a proxy base due to the lack of systematized cost accounting applications, it i s difficult to compare and assess the efficiency of the SSNSESVER network operation. 5.36 Allocation Process, Budgeting, and Execution Control: The resources currently allocated to sanitary jurisdictions, hospitals, and health centers are not directly proportional to their degree of marginality, expected demand or volume, and quality of services delivered. Furthermore, the allocated resources do not include commitments based on expected production goals and other efficiency and productivity indicators. -70- 5.37 Recovery Quotas: Recovery quotas are a significant portion of the total income in major hospitals. The best example of this i s that CEMEV achieves close to 30 percent cost recovery from total expenditures. The Rio Blanco and Veracruz Hospitals follow with roughly 15 and 10 percent, respectively. The hospitals must refund these collected funds, which are to be incorporated into the SESVER budget. However, through negotiation CEMEV was able to retain its collected funds and apply them to current expenditures. Even considering the income generated by each hospital, the reallocation of funds i s returned earmarked or undergoes considerable delays, which prevents management from effectively usingthose resources to cover immediate cash flow needs. 5.38 Billing, Collection Systems, and Price Tabulators: Hospitals like CEMEV and Rio Blanco have developed their own billing and collection systems, but each applies a different price tabulator and tariff structure, according to its own cost estimates. SESVER i s in the process of selecting a billing system among the best of those already improvised to incorporate into its new and refurbishedhospitals. Through this process, it i s advisable that they establish standard tariff and subsidy criteria for the entire network. This would allow future statewide negotiation for the sale and purchase of health services with public and private providers, thereby improving the financial autonomy of the network. 5.39 Physician Contracting and Incentives: The contracting of physicians and nursing staff follows federal policies and regulations o f Ram0 33, which do not provide mechanisms for group or individual incentives based on productivity or quality of care. However, under chapter 3000 General Services, incentives and fresh contracting mechanisms with new options are being introduced to contract personnel services. CEMEV shares the income generated by insured patients admitted in their private rooms with its treating physicians, which i s an example that the current private rooms structure in regional, sub-regional, and zone hospitals within the State's Investment Plan should follow. 5.40 Inter-institutional Agreements and Purchase of Services: The state of Veracruz was among the first states to establish agreements with reimbursement mechanisms for the provision of services with ISSSTE and IMSS; other states like Mexico are currently undergoing the same process. Current agreements with ISSSTE and IMSS include selective services provided by the Cancer and Psychiatric Centers and also specialized inpatient care in regional (Coatzacoalcos, Veracruz) and general hospitals (Cordoba, Cozamaloapan, and others) provided by ISSSTE. However, current contracted amounts are under MxP 1million per year. This number i s still well below the contracted services provided directly by CEMEV, which has more than 20 employers and insurers, including PEMEX, with a total income of MxP 58.6 million in2001. Those beneficiaries of IMSS who have not been reimbursed are seeking healthcare inthe SESVER network. The SSA and SESVER face additional challenges because of the required coordination and agreements to be reached with IMSS, since they must deal with delegations from the North and South within the state in addition to the Tamaulipas State Delegation. -71- 5.41 Competitiveness and Sale of Services: The functionality-ofthe design and quality of new and refurbished equipment implemented in hospitals, health centers, and laboratory and imaging services within the State's Investment Plan are on par with the highest standards set by other states in Mexico and the Latin America and Caribbean Region. B y including private rooms, by adding trauma and neurosurgical specialties, and by adding diagnostic equipment such as tomography to all sub-regional and selected zone hospitals, the competitiveness of the SESVER network will improve in most markets in the state, which will generate additional income resources. Additional market studies of public and private networks will be necessary to adjust each hospital's portfolio of services to the specific specialty demands in accordance with available capacity. This will be critical for the cost recovery of high investment items such as tomography, and for other diagnostic and laboratory installations. HEALTH COVERAGEANDmSOURCES--sPECIAL CHALLENGESAND PROGRAMS CARE 5.42 As observed in Table 5.2, the state's goal of reaching universal coverage for the open population has been obtained in the last three years. This was mainly accomplished by SESVER's adding access to health services to more than 100,000 people in this uninsured group. As mentioned, the access to health services for the open population during 1995-2001 grew from 58 to 61 percent, expressed as a percentage of the total population, with only 0.05 percent uncovered, an accomplishment that earned the state the WHOPAHO universal coverage certification in 2000. During 2000, unemployment increased in the state because of the sugarcane industry crisis and the temporary contraction of PEMEX operations, which reduced the insured population to 8.5 percent of the total population. The IMSS and PEMEX health care coverage regressed in 2001 to 1999 levels. Table 5.2. Population Covered with Health Care Services by Institution-Insured andODen Powlation INSTITUTION Pop. % Pop. % Pop. % IMSS 2,327,609 33 1,866,645 26.3 2,398,089 33.50 ISSSTE 220,505 3.1 176,835 2.5 227,182 3.2 NATIONALDEFENSESECRETARIAT (SDN) 14,857 0.2 11,916 0.2 15,307 0.2 MARINE SECRETARIAT(SM) 35,075 0.5 28,127 0.4 36,135 0.5 PEMEX 148,846 2.1 119,369 1.7 153,354 2.1 SUBTOTALBENEFICIARYPOPULATION 2,746,892 38.9 2,202,892 31.1 2,830,067 39.5 VERACRUZ HEALTHSERVICES - SESVER 3,136,788 44.5 3,659,769 51.4 3,229,171 45.1 IMSS SOLIDARIDAD 1,064,675 15.1 1,242,184 17.4 1,096,033 15.3 SUBTOTALOPENPOPULATION 4,201,463 59.6 4,901,953 68.8 4,325,204 60.4 WITHOUT ACCESS TO HEALTHSERVICES 105,812 1.5 3,554 0.1 3,579 0.1 5.43 Public Health Network Resources: Figure 5.6 shows how growth of the SESVER network has outpaced all other public institutions, becoming the largest network in the communities and municipalities by geographic distribution. It has also achieved figures that are higher than other health facilities in the state. SESVER i s number one in -72- outpatient centers, carrying 49 percent of the total. IMSS-Solidaridad follows with 36 percent. Furthermore, SESVER has 42 percent of the public hospitals, followed by IMSS, which has 25 percent of the hospitals. However, including IMSS-Solidaridad, the northern and southern delegations of the I M S S collectively account for nearly 46 percent of the total number of public beds, outnumbering SESVER's 39 percent (see Table A.5.8). In human resources, SESVER employs about 1 out of 4.5 public health staff, which is less than half of IMSS North and South combined (see Table A.5.9). Figure5.6. PublicHealthNetwork OutpatientandHospitalUnitsby Institution PUBLIC HEALTH SECTOR NETWORK OUTPATIENT HEALTH UNITS BY INSTITUTION 800 700 600 500 # UNITS 400 300 200 100 0 1997 1998 1999 2000 2001 YEAR I W S S A r l M S S - S O L S I M S S ORD. SISSSTEI PUBLIC HEALTH SECTOR NETWORK HOSPITAL UNITS BY INSTITUTION 30 -- 25 -- 20 -- 15 -- l o -- 5 -- 0 - 1997 1998 1999 2000 2001 Source: SESVER. 5.44 Micro-Regionalization and Coordination of Carefor Open Population: SESVER and IMSS-Solidaridad jointly coordinate care for the open population through micro- regional planning, limiting the overlap of health centers to only three local communities -73- in the state. Hospital services and referral mechanisms among the two institutions are working adequately; however, SSNSESVER has absorbed most of the growth in the open population's outpatient care and hospital discharges for the past five years, as shown in Figure 5.6. Although the 1999-2001 State Health Plan calls for the functional integration of the open population health network (SSNSESVER and IMSS- Solidaridad), no decisions have yet been made. HEALTH INVESTMENT AND THE GOVERNMENT PLAN, 2000-2004 5.45 Health Goals ofthe State: The health plan goals set by the state government for 2004 address the most serious health problems of the state's population. The plan recognizes that both disease prevention and treatment interventions for communicable diseases, chronic degenerative diseases, and other urban-type pathologies-drug addiction, HIVIAIDS, and other sexually transmitted diseases-are required. Table 5.3 presents the major goals and observed results, using the preliminary data that was available. According to current trends, most of the indicators, with the exception of school age and maternal mortality, are close to reaching their 2004 goals, if they have not already been achieved. Table 5.3. 1999-2004 Veracruz Health Plan Goalsand ObservedResultsto 2001 HEALTHINDICATOR OBSERVED GOAL 1997 1998 1999 2000 2001 * 2004 1 Growth rate 1.1 0.9 0.8 0.7 0.7 1 2 Global fecundity rate 2.5 2.5 2.4 2.3 2.2 2 3 Birthrate 22.4 21.8 21 20.2 19.6 18.5 4 Life Expectancy at birth 72.8 73.2 73.6 74 74.3 75.5 5 Standardized mortality rate 4.4 4.6 4.6 4.5 4 3.8 6 Infant mortality rate 10.2 11.5 11.9 10.9 8.4 9 7 Pre-school mortality rate 1 1.1 1 0.8 0.7 0.6 8 School age mortality rate 3.6 3.4 3.4 3.2 3 2 *Mortality ~ ~~~~~~~ rates are obtained from preliminary data, with about 95 percent death certificates collected Nore Numbers 3, 5 rate X 1,000 population 7, 8 rate X 1,000by age group 6,9 rate by X 1,000 live births 2,3 CONAPO. Source SESVER, SSA, CONAPO 5.46 SESVER Health Delivery Model and Health Care Network Structure: The state's Basic Health Service Package (PABSS) adds to existing programs, such as the Extension of Coverage Program (PAC) and the Open Population Delivery Model (MASPA), to cover additional communicable diseases and pathologies. The hospital network and the required human and technological resources are being adapted so that the portfolio of services included in Figure 5.7 can be implemented according to each hospital's complexity. -74- Figure 5.7. 1999-2004 Proposed Health Services Portfolio by Hospital Complexity Level of Care itegral Hospital ub-zone Hospital ;oneHospital ub-regional [ospital :egional Hospital ource: SESVER. 5.47 Primary Care, Hospital Infrastructure Rehabilitation, Replacement, and Investment Plan: To implement the health delivery model formulated by the SSA and the state government, the SSNSESVER i s executing an investment plan using resources of MxP 1,500 that have already been allocated. The funding includes the financial support of the Expansion of Coverage Program (PAC) from the federal resources allocated by the SSA with a loan from the World Bank through NAFINand state resources. 5.48 Information Technology Plavorm-Expanded REDSA: With the technical assistance from the state-supported National Laboratory of Advanced Informatics (LANIA), SSNSESVER is implementing a statewide area network (WAN), thereby expanding the Health Information Network that was originally implemented using REDSSA funds in coordination with PAC. The additional information technology platform i s linking REDSSA data, video, and voice with WAN, the state government's network. In the first stage, WAN will use SSA's headquarters, 11 sanitary jurisdictions, 8 hospitals, 9 storage centers, and the State Public Health Laboratory inVeracmz. OPTIONS AND RECOMMENDATIONS 5.49 Inthe next two to three years Veracruz expects to have only limited increases of resources, if any, for the health sector, and yet it expects an increase of 15 to 20 percent inrecurrent costs by 2004 compared to 2001. Inthis situation, the following options are suggested: 1. Restrain investment to obtain resourcesfor essential operating expenses. Maintain state expenditure on health at about the present level in real value, which will require prioritizing. Recurrent spending for operation and maintenance of the expanded -75- SESVER health network will need to go up. To stay in the overall budget constraint, investment in the sector out to 2004 will have to decline to the level required only to keep up with the increase indemand for the existing menu of services, not to expand the menu. 2. Improve cost recovery. Standardize and develop cost-recovery mechanisms including (a) categorization criteria to focus subsidies on the open population, (b) cost accounting, (c) pricing of services, (d) coding of procedures (ICD-9 modified, CPT-4, or Diagnostic Related Groups (GRDs)), and (e) automated billing and collection systems. This would help cover part of the coming increase of recurrent spending. 3. Sell more services. Increase further the income generation of the SESVER Health Network by expanding on the agreements to sell services to IMSS, PEMEX, and ISSSTE, and by marketing new specialized services, private rooms, imaging and lab equipment to insurers, employers, and other private sector providers. To obtain the best results ineach market, the following steps are recommended: (a) analyze the supply and demand, including public and private providers in SESVER and IMSS-Solidaridad markets; (b) define the legal and normative framework in order to establish management agreements between SESVER and IMSS for the purchase and sale of services among them and with public and private providers; (c) define standard tariff structures and cost-recovery quotas based on the cost of services, supported with financial projections by hospital and consolidated at the state level, focusing subsidies on the low-income population; (d) implement standard billing and collection applications selected among those currently in use by CEMEV and Rio Blanco hospitals, integrated with electronic clinical records; and (e) analyze the cost and benefit of leasing high-technology equipment as an alternative to purchasing. 4. Increase efliciency. Decentralize the health network and increase its efficiency and ability to focalize subsidies to help the poor and the underserved in ways that do not require large increases of spending (a) incentives to allocate resources according to productivity and quality of services (b) more effective referral arrangements through an integrated health network; (c) managerial agreements for the sale and purchase of services among primary care and specialty care facilities, which should assure the continuum of care between rural and urban ambulatory centers and sub-zone, zone, sub- regional, and regional hospitals and emergency services; and (d) strengthening the managerial capacity of sanitary jurisdictions and hospitals, including training and computerized instruments for the planning, programming, budgeting, payroll, cost accounting, financial management, procurement, procurement, and inventory control. 5. Strengthen incentives. Introduce incentives based on productivity and quality indicators at individual, departmental, and facility levels. These incentives should have new contractual mechanisms based on performance, including (a) the retention o f cost- recovery fees and only partially offsetting reductions in the historically assigned budget; (b) implementation of physician-remuneration mechanisms that share the income generated by increased public network competitiveness. Relevant alternative models would include those inplace inthe CEMEV and Rio Blanco Hospitals. -76- 6. Coordinate provider networks. The inter-institutional agreements for the purchase and sale of services will require the public (SESVER, IMSS, ISSSTE, PEMEX) and private providers to standardize several systems for the whole state: (a) unique identification numbers of patients and providers, demographic information, billing information, and beneficiary database for the coordination of care and the reimbursement of services, including encrypted technologies to protect patient confidentiality; (b) electronic medical records and clinical information systems to be available online and in real time through the WAN being implemented; and (c) per-capita-based prepayment mechanisms, Diagnostic Related Groups, or fee for services by procedures. -77- 6. WATER SECTOR 6.1 With the highest annual rainfall of any state in Mexico, Veracruz has abundant water resources. The state currently uses about 4 percent o f its available water, more than half of that for irrigation. A few areas have drought seasons, and many areas have recurrent floods from periodically intense rainfall. Since only a fraction of wastewater gets treated, pollution of surface water from industrial production has increased to alarming proportions. 6.2 The report here focuses on the water and sanitation services delivered to households and businesses, the aspect of the water sector with which the state deals, and does not consider the issues of irrigation. While such a separation would not bejustified in some states, where agriculture usage eats into water available for the other purposes, the abundance of rain in Veracruz allows farmers to take as much as they need without affecting the supply for households and business, which i s the business of the water companies. The next section of the chapter discusses the coverage of service to households, and the second section covers the operational and financial efficiency in the sector. The third section discusses the various institutions and agencies involved in the sector, and the fourth section discusses the pattern of spending on water within the state by the various levels of government involved. COVERAGE 6.3 The share of households in Veracruz with connection to the water and sanitation systems ranks as one of the lowest in the nation. This situation results from historical neglect of the sector, since water and sanitation services traditionally have been perceived as being only a social good rather than an economic one. Pervasive political interference when it comes to pricing and tariffs has not helped the situation either. These factors have led to an almost complete dependence on subsidies to develop new water infrastructure and, in some cases, to operate the systems. In the past, the situation was exacerbated by a lack of a clear vision, good planning, and the political will to develop the sector by makingit more self-sufficient. Currently, the state of Veracruz is aware of this situation and has issued various proposals under the Veracruz Development Plan, together with sector specific initiatives like the APAVER (state plan for the sector). In these, the state has established a new vision and orientation for the development of the sector that could very well turn around this situation. However, this plan was not defined at an operational level and some of its elements do not appear to be actively pursued. 6.4 While urban areas enjoy a coverage level close to the national average (86 percent for both water and sewerage), the rural areas with dispersed population lag significantly behind, with 46 and 32 percent coverage, respectively. See Table 6.1. Water and sanitation coverage in Veracruz as whole is 70 and 64 percent, respectively. Such coverage levels compare with those in Ecuador and Bolivia, but they are below the averages for Latin America and the Caribbean. On a positive note, water quality in the -78- state i s good according to C.N.A. statistics, with nearly 100 percent of the piped water being potable, which i s above the 95 percent national average. Table 6.1. Water and Sanitation Coverage (%) States Water Sewerage Urban Rural Total Urban Rural Total Veracruz 86.8 46.5 70.2 86.9 32.6 64.6 Sonora 99.3 89.4 97.6 88.1 38.3 79.8 Chiapas 87.8 64.7 75.5 87.6 35.8 60.0 Mexico 95.2 68.9 88.5 89.7 37.6 76.5 Ecuador 81.5 51.4 70.3 70.0 37.0 58.0 Total L A C 93.0 61.2 84.6 89.8 49.6 79.2 Sources: Situation of the Water and Sanitation Sector bv CNA December 2000 for Mexico, and Evaluation report on Water and Sanitation, PAHO, September 2001 for other countries. 6.5 Veracruz has made steady improvements in the water and sanitation coverage duringthe past 10 years, but many other states have improved at a faster rate, so the gap compared with the national average i s not closing. See Table 6.2. Matching the national average represents a big challenge for state authorities, and will require higher investment rates, more use of alternative technologies, and enhanced efficiency in service delivery. Table 6.2. Water and Sanitation Coverage and Trends (%) I990 1995 2000 Veracruz National Gap Veracruz National Gap Veracruz National Gap Water 60 80 20 65 86 21 72 90 18 Sewerage 53 60 7 64 72 8 68 77 9 Source: INEGI. 6.6 In addition, wastewater treatment also lags behind, with only 5 percent of urban water treated. Veracruz has 77 municipal wastewater treatment plants in addition to about 150 plants for industrial effluents. O f these municipal treatment plants, 20 (mostly larger ones) could treat twice as much as the rest, but they are out of service. Pollution from both cities and industries (sugar refining, coffee) i s worsening inthe state, and most of its main rivers, especially the Coatzacoalcos and Rio Blanco, are heavily polluted. FINANCIAL OPERATIONAL EFFICIENCY AND 6.7 For those consumers who receive it, the quality of water service i s generally good-potable and reliable in most medium-size and big cities. Nevertheless, the efficiency of water and sanitation services could be greatly enhanced. For instance, unaccounted-for water (UFW) in most cities i s high: 36 percent in Xalapa and nearly 50 percent in Tuxpan, Cordoba, and Orizaba. While the UFW problem i s systemic throughout Mexico, this index i s closer to 25 percent in well-run utilities in Latin American countries, including some inMexico (Tijuana). -79- 6.8 Tariffs in Veracruz generally do not cover operating costs, and they are low compared with those in other states. Authorities typically set tariffs by the criteria of what i s politically viable, not what i s needed to cover service costs. Table 6.3 compares tariff levels of the main Veracruz cities-Veracmz, Xalapa, and Poza Rica-with other state capitals and other Latin American cities. Xalapa exhibits the lowest tariffs, and ranks 31'` among all state capitals, (surpassing only Villahermosa and Tabasco). Annual collection per person appears to be somewhat better, although it i s below other cities such as Monterrey and Guanajuato. Table 6.3. Comparisonof Tariffsand CollectionPer Capita(US centsanddollars) Municipality Tariff/m3 Domestic (@) Collection/person/Year ($) Xalapa 8.5 14 Veracruz N.A. 16 Poza Rica N.A. 7 Monterrey 38 54 Oaxaca 15 6.2 Guanajuato 35 26 Bogota, Colombia 150 N.A. Lima, Peru 40 N.A. Sources: CNA, 2000 for Mexico. Bank staff analysis for other countries. 6.9 Veracruz lacks a reliable sector information system on financial and operational performance of water utilities. Evidence from individual utilities suggests that revenue does not usually cover even the operational costs, which helps explains their extremely low contribution to investment. The establishment of a benchmarking system, also call regulation by comparison, has proven effective in many places to motivate water utilities to perform better, as the compare themselves to peers. Veracruz would benefit from adopting such mechanisms. INSTITUTIONAL ARRANGEMENTS 6.10 The state recently passed a water law, Law 21, 2001, which aims to modernize the sector by promoting private sector (and civil society) participation, revamping tariff guidelines, and creating a management committee called the Veracruz Advisory Water Council. It also establishes the basis to transfer some services and functions from the state to the municipalities. It still lacks, however, a clear regulatory framework, which is needed to provide arbitration between providers, municipalities, and consumers, especially in terms of tariffs and quality of service. It i s especially important for private operators, who usually will only operate if there are clear rules and a well-defined contract. Also, the Law does not have the special regulations needed for rural areas. The Water Law regulations, currently under preparation, should address these concerns. 6.11 Water and sanitation services in urban areas are provided by water utilities (organismos operadores) ,in28 of the state's cities, by the municipal government in 29 cities, and by the state water company (CAEV) in other cities. Water juntas serve most rural areas, and their municipalities serve a few. Currently, all water utilities except for Xalapa are under the state's jurisdiction; but the state plans to put them under municipal -80- jurisdiction in order to meet the constitutional mandate that defines municipalities as responsible for water provision, and as an initial legal step need to carry out the state's strategy to increase private-sector participation. Box 6.1. The Regulatory Framework of Mexico's Water Sector Given that water is a natural monopoly, regulation i s needed to assure respect for the rights and obligations of the different parties involved, mainly local governments, utilities and consumers. Regulation normally deals with water tariffs and water quality but it also acts as an arbiter to settle disputes between the different parties. Sometimes, benchmarking i s used to compare performance among utilities, as part of the regulatory process. In Mexico, although the legal framework for environmental regulation is relatively advanced, no comprehensive regulation encompassesservice-quality targets or pricing for water. The CNA developed a model law to guide state water laws and to remedy some deficiencies in the regulatory framework. I t envisages the creation of state level regulatory entities and lays down the principles for tariff determination. The guidance provided by the model law has been only partially incorporated into state laws, however, and many states have not set up any regulatory entity. A sound and comprehensive regulatory framework i s especially important for attracting private-sector participation in water services, and is still need in most of Mexico. 6.12 The new Water Law creates the Sistema Veracruzano del Agua, a state water system that combines legal instruments, programs, plans, norms, and regulations into a comprehensive water management and planning system, which includes all sector participants-public and private. The law established the Veracruz Water Council to manage this system. It will be responsible for sector planning, information systems, sector research, training, and overall sector coordination. In addition, the Council will review and comment on methods for setting for water tariffs, an important regulatory function, as explained in Box 6.1. Although a public entity, the Council has been designed to have some degree of autonomy by including municipal representatives. As the Water Council may become a key player in strategic planning for the sector, the creation of this institution i s a step inthe right direction. 6.13 The state water commission (CAEV) has long been the channel for state funds to finance water and sanitation works. CAEV i s the state's specialized contractor for water and carries out most construction functions. CAEV provides operational services in small localities at no cost to them, and responds in emergency situations related to water. CAEV also provides technical assistance to water utilities to improve their efficiency, a function that it plans to expand. STATESPENDING ONWATER AND SANITATION 6.14 Total spending in the sector has declined in recent years, mainly because the sector depends almost completely on subsidies, and the federal and state government have reduced their budget allocations. The result has been declining service quality, slowed expansion of service coverage despite growing population, and quiet depreciation of the capital stock. The deterioration o f the physical plant, due to lack of maintenance expenditure, will make increased outlays more urgent inthe future. -81- 6.15 CAEV carries out a variety of federal and state programs, some of them financed by multilateral agencies. Each program has its own rules and organization; no master plan coordinates them. Spending programs financed by the state budget are chosen yearly from a list of "needs" that the municipalities present. Given a yearly fixed amount of funds, the `main selection criteria are the order in which the municipal request was submitted and the readiness for implementation (existence of technical designs). Selection criteria do not include economic and financial feasibility of the proposed investments, or considerations of service sustainability. The state i s preparing new guidelines for economic analysis o f projects, which will be used to prioritize and select investments. This should help to avoid financing projects that make no economic sense and to get a deeper understanding of how the state's subsidies are allocated. 6.16 The state has become the major source of financing; the federal level i s important but declining; and municipalities and utilities make a small contribution. See Table 6.4 for spending in the water and sanitation sector per source over the past three years. This table aggregates yearly information provided by the SEFPLAN and intends to demonstrate a sense of the spending trend. The table clearly indicates that Federal financing has decreased since 2000, an election year, and it will probably continue to decline. This follows with the general strategy of transferring funds via federal transfers to states and municipalities. Except for 2002, the state has assumed the main burden of sector financing and it has made a significant effort to maintain investments levels in the water and sanitation sector. In2001 the state contributed with 70 percent of investments inthe sector, with the remaining 30 percent coming mainlyfrom the federal level. Table 6.4. Veracruz Investment for Water and Sanitation, by source of funds Year Expenditure (Millions of MxP or percent) State Federal Municipality Other/' Total 1999, ActualTotal 147 39 12 35 234 Percent 63 17 5 15 100 2000, ActualTotal 257 131 6 6. 400 Percent 64 33 1.5 1.5 100 2001 Actual Total 217 62 2 3 284 Percent 77 22 0.5 0.5 100 2002 BudgetedTotal 85 10 N.A. N.A. 95 Percent 89 11 100 Note: Data for 2002 does not include funds from a recently established trust fund, which receives money from the new payroll tax. See Annex Table A6.1 for details 1/ Including cost recover and other intemally generatedcash. Source: SEFIPLAN. 6.17 It is surprising that municipal financing remains so low, since they receive important general transfers and could devote them to sector investments. Internal cash generation, which should be the natural source of funding, i s noticeably absent.66 The 66 Many Latin American cities like Bogota or Quito finance water investments largely through their own cash generation. Subsidies are usually requiredfor emergency cases in order to assist small-scale systems -82- reason why this happens in Veracruz i s the pervasive low tariffs, which on many occasions are not sufficient to cover operational costs. If this structural problem i s not solved, and investment continues to rely solely on subsidies, it will be nearly impossible for the state to meet its service targets. Rural areas, where coverage problems are most severe, received only 10percent of the total water investment inthe state. WATER SECTORMAINCHALLENGESAND STRATEGIC OPTIONS 6.18 At the beginning of its term the current administration issued its state water program, called APAVER, which aimed to make Veracruz one of the top 10 states in water coverage. To achieve this the APAVER drew a twofold strategy: (i) carryout a large investment program worth up to MxP 5,000 million (US$ 500 m), or MxP 1000 million per year, in the next five years, mostly in rural areas and small and medium sized cities; and (ii)bring private operators into the eight largest cities, in the form of concessionaires that would make investments. In parallel, the state would work on adjusting the legal and regulatory framework to allow private-sector participation. The state has been very slow at implementing the plan, with the scarce and declining investments so far, and only modest advances in bringing private-sector participation to the sector. There are promising steps, like getting a grant from the Inter-American Development Bank and signing an agreement for PROMAGUA with BANOBRAS, both oriented at boosting private-sector participation. The original coverage goal will now be hardto reach by 2004, given the state's investment trend. 6.19 The APAVER estimate of costs seems reasonable. Bank staff estimates, based on typical costs in the Latin America, suggest that Veracruz will require about M x P 500 milliodyear of investment to maintain existing coverage rates in the face of growing population, and that it would cost M x P 1,200 milliodyear for five years to expand coverage to 95 percent and 80 percent water and sewage coverage in urban and rural areas respectively (assuming these are the national averages then). On top of this, it would cost MxP 450 milliodyear for maintenance andreplacement to offset depreciation. So, the total annual cost would be M x P 1,650 million, for the large municipalities (to raise their own financing) as well as the medium, small and rural municipalities on which the state would concentrate its funding. Even the MxP 1000 million intended from the state i s three times the average combined state and federal funding in 1999-2001. It would require increasing the state investment budget by about 20 percent, at time when the overall fiscal picture calls for tightening, as described inChapter 2. So the state needs to consider several co-financing options. State subsidies could be put to better use as matching grants to motivate funding by municipalities and water utilities, and private sector funding i s another promising medium-term option. The PROMAGUA could provide a window of opportunity to help carry out the proposed sector strategy for large cities. It would be unrealistic to assume that private-sector participation funds will ~~ like those in rural areas and small towns, or to assist places of extreme poverty and with externalities, such as wastewater treatment plants. 67 A Federal supported Program administered by BANOBRAS, and designed to promote private participation in the provision of water and sanitation services by providing grant funds, to partially finance investment programs, to those water utilities which include private schemes in their operations -83- come in at a fast pace; results of the current efforts in Poza Rica and the PROMAGUA project will provide a realistic signal of what to expect from the private sector. CONCLUSIONS AND RECOMMENDATIONS 6.20 The water and sanitation sector in the state o f Veracruz faces problems of relatively low coverage, inefficient services where provided. Most water utilities are in financial crisis and hence fully dependant on subsidies to expand and in many cases to survive. This situation contrasts with the natural abundance of water resources the state enjoys. The state administration i s clearly aware of the problem and i s taking important steps to face it. The recent state Water Law, the creation of the Veracruz Advisory Water Council, and initial efforts to bring private operators into the state's larger cities are all steps in the right direction and are indicative of an agenda of modernization and change. These actions appear isolated, however, since there i s no apparent integrated strategy or clear management responsible for carrying out sector development in a coordinated way. Investments are not well prioritized and targeted and are not made within a comprehensive development strategy; hence they become diffuse and have only marginal impact. Four recommendations standout: improving the regulatory framework, enhancing the Water Council, increasing funds for investment, and giving stronger incentives for cost recovery. e Improve the regulatory framework for modernization, especially to attract private- sector operators and investors. This framework should at least have the following elements: (i)better tariff-setting arrangements, based on technical and cost considerations; (ii)mechanisms for follow-up and control of quality of water and sanitation services; and (iii) a mechanism to resolve disputes and enforce rights between municipalities, providers, and consumers. It is worth considering expanding the scope of the System and o f the Water Council by including a better regulatory framework for the state and studying whether the Water Council could harbor the entire regulatory function. Establishing benchmarks for comparative regulation could also enhance incentives for improved performance b y utilities. e Strengthen the legal mandate and technical capacity o f the Water Consultative Council so that it can do adequate data collection and studies, plan for the sector, and carry out the regulatory function. e Mobilize additional funds to speed up the investment process, especially in rural area. Private sector funds will most likely come, but it i s unrealistic to expect high investments in the coming years. The volume of state funds also cannot increase much, given overall fiscal constraints, but they could be converted to matching grants that would motivate municipalities to use their disposable resources (such as the property tax and the federal uportuciones for municipal investment). 6.21 Since the municipal utilities need to increase cost recovery, at least to cover operational costs, the state funding should be conditioned on better-cost recovery, with -84- steadily rising standards over time. The standards-should also be higher for larger and higher-income localities. The state should consider outsourcing to private operators of the provision of services in a group of municipalities in order to improve efficiency and reduce or eliminate the need for continuous State subsidies to the sector. Municipalities unable to attract private operators can consider the option of corporatization, in the sense of increased autonomy and full commercial orientation of their water utilities. -85- 7. COMUNNICATIONSAND TRANSPORT 7.1 Veracruz has strategic importance for the national economy because of its privileged location-stretching over 700 km along the east coast and thus having the east-coast seaports for central Mexico. The coastal plain provides space for various economic activities-agriculture, petroleum, and increasingly manufacturing-and all of these are linked with transport connections along the coast. Inland a range of mountains, steep inplaces, forms a barrier through which roads and railroads must pass to the rest of Mexico. Thus transportation i s itself an important business and type of value added in Veracruz, as well as a key service to other productive sectors. 7.2 Problems with communications leave many parts of the state in poverty-mostly inthe mountainous rural areas where the population is dispersed and does not have good connections to the main transport nodes and growth poles. There i s a correlation between the lack of transport access and the degree of socio-economic marginality. In areas of high and very high marginality, according to the CONAPO survey, there were fewer kilometers of road per localit than the average. Also, the condition of these roads was certainly worse than average? From isolatedcommunities in the central part of the state, it often takes up to four hours to reach centers of health and education services.69 For workers considering commuting, the fare in a bus or truck could be 10 percent o f their daily earnings, and more if children need to commute to school. Thus improvements in these transport links will be critical for poverty reduction. PORTS 7.3 The seaports of Veracruz, Tuxpan, Coatzocoalcos, and Pajaritos are among the most important ports of the whole country. Veracruz i s the most important port in Mexico, in both volume and value, and has held that prominence since the Spanish conquest. Veracruz and Tuxpan handle a variety of cargo, especially in containers, and thus they depend on their connections with highway and railroads to the rest of Veracruz and Mexico. Coatzocoalcos and Pajaritos in the South handle petroleum and petroleum products, which i s piped either to tanker ships or to the rest of Mexico. The overall volume of transport in these ports has grown rapidly in recent years-35 percent from 1997 to 2000 (see Table A7.1). The fastest growth was 54 percent in Veracruz, which handles mostly imports, and 27 percent in Pajaritos which specializes in exports (see Table A7.2). 7.4 An Integrated Port Administration manages each port. The one for Veracruz, the largest, was established in 1994 with a 50-year concession. The state government has a 42 percent share in the concession enterprise and thus plays some role in guiding it. The port has implemented many technical improvements in recent years, particularly for handling containers and automobiles, which have fueled its rapid expansion. It now SEFIPLAN. Evaluaci6n de la Pobreza y Programas de Desarrollo Social en Veracruz. July, 2001 69The standards of the state program say that travel to a health center should take no more than one hour. -86- handles 40 percent of the nation's container traffic and 70 percent of the sea-borne imports and exports of automobiles. The commercial attractiveness of the port operation opens possibilities for bringing in private sector participation and financing to support further expansion that should be necessary in the next few years, given the expected expansion of the state economy. ROADS 7.5 The ports and railroads created the growth poles of Veracruz, linking them with markets abroad and in the rest of Mexico. Now, the relative importance of railways i s declining, as in other countries, and the road network i s more critical for linkingthe poles to the people and producers of the rest of the state. Veracruz has over 23,000 km of highways and roads, but only a little over one-fourth was paved as of 2000, and over one- third was macadam. See Tables 7.1 and A7.3. With about one km of paved roads per 1000 inhabitants, Veracruz is above the national average, and about three times the national average of countries like Colombia and Peru. About a tenth of the paved roads are autopistas charging tolls. Table A7.4 shows the extent of each type of roads in Veracruz in 1998, compared to other states. Table 7.1Veracruz Road Network Type of Road 2001 % Paved 6,293 27 Turnpikes 556 2 Federal highways 2,634 11 Feeder roads 2,810 12 Rural roads 293 1 Macadam 8,686 37 Federal 1,722 7 State 6,964 30 Unpaved 8,357 36 Total 23,336 100 Source: SECOM 7.6 The state government has responsibility for 10,200 km, with almost half o f the paved roads. The federal Secretariat of Transport and Communication (SCT) has responsibility for about one-fifth of the total road net and over half of the paved roads. The other roads pertain to municipalities, PEMEX and other public enterprises, mostly unpaved. 7.7 Concerningthe condition of roads, there are only statistics on the part managed by the SCT and the State Highway Committee (Junta Estatal de Caminos), which i s only about half of the state-owned network. O f this, 21% i s in good condition, 54% i s passable, and 31% i s in bad condition in 2000. The rest of the non-federal roads are -87- surely worse, which indicates the need for a stronger and better-coordinated maintenance program, discussed below. 7.8 The state has made some agreements with Puebla for building new roads. This will help to improve the connections between Veracruz and the Central part of Mexico. PUBLIC TRANSPORTATION SYSTEM 7.9 Public transportation, mainly buses and minibuses, is mainly a municipal responsibility. The operators are private companies and individuals with concessions. The government has made new agreements with private companies to provide financing for new buses and taxis. RAILROADS 7.10 The rail system in Veracruz i s federally run, as everywhere. It includes some of the oldest lines in the nation and has suffered the decline the passenger and freight that has affected rail throughout Mexico. Only two routes seem viable for expansion-from Veracruz to the center of the country, via Xalapa and via C6rdobdCoatzacoalcos. These routes have been conceded to the private sector that should be able to operate these profitably. AIRPORTS 7.11 The Federal government operates three largest airports in the state, as i s in common in Mexico, with the private sector handling the administration on the basis of concessions. The state operates 31 smaller airports. The state i s discussing and studying the possibility of puttinga new larger airport at Xalapa. If this has the commercial value that i s alleged, then the private sector should also be willing to participate to a large extent in the financing and construction. With the construction o f the new Veracruz- Xalapa highway, however, the priority of the new airport i s not clear. For the purposes of broad economic development and poverty reduction, it would be a better use of state money to improve the road connections from rural areas to cities, the seaports, and major airports. STATESPENDING 7.12 The Veracruz Development Plan 1999-2004 called for a strategy of promoting the construction of modern highways, railroads and airports. Investment on roads has focused on two goals. The first i s to provide access to mountainous marginal zones, which are prioritized according to the number of beneficiary communities and the degree of marginality. The investment for rural roads has aimed to create connections with indigenous communities in order to facilitate the interchange of products and the integration of markets. According to studies, investment in the main road net reduces by 18 to 25% the direct cost o f transporting goods from the southeast Veracruz to the national and international markets. -88- 7.13 The second goal i s to interconnect the main growth poles with high quality roads to reduce transit time and the cost of operating vehicles, which translates into lower overall costs for businesses. Within this framework the Plan defined a series of projects, among them the Tuxpan-Mexico City turnpike (to be financed with federal resources), the northern access turnpike, paving roads in the municipal capitals, and construction o f bridges and new roads. 7.14 State investment in the transport sector was 80-90 pesos per capita in 1998-2000, which i s similar to Guanajuato and over twice as much as in the state of Mexico. It was about one-fifth of the total state investment budget in 2000. And then in 2001 the investment jumped by about 150%, to over 40 percent of the state capital budget. 7.15 The areas of investment have varied some from year to year, although state highways i s always the largest category and was the main point of increase in 2001. See Table 7.2. Maintenance has held relatively steady at around one-sixth of total transport investment. This i s better than many states but not sufficient. The problem i s that the maintenance spending i s not very efficient and mostly goes for salaries of a large workforce. Table7.2 StatePublicInvestmentinCommunicationsandTransportBy Program (3) (Thousands of 2000 MxP) Program 1998 1999 2000(4) 2001 Total % Stateroads 309,252 217,137 160,292 785,354 1,472,035 49 Rural roads 60,623 84,532 83,583 106,159 334,896 11 Pathwaysand 21,102 93,115 98,711 212,928 7 Bridges Planningand 23,800 33,370 57,170 2 Projects (5) Special 75,040 138,555 46,833 37,718 298,147 10 Programs(1) Telecommunicat 5,411 14,898 1,067 2,820 24,196 1 ions Conservation(2) 86,403 124,615 112,184 167,076 490,278 16 OPV Maver 28,740 40,4 11 8,037 25,212 102,340 4 Total 565,468 641,249 528,911 1,256,421 2,992,057 100 1. Includes emergencies, state airports and boats, andthe railroads office in 1999. 2. Resources received by the Junta Estatal de Caminos. 3. Includes Federal Investment. 4. Includes $1.615 millions from municipal public investment towards the Pathways and Bridges program. 5. Includes the office of Public Works in 1998 and 1999. Source: Direcci6n de Inversi6n Pliblica. Secretariade Finanzas y Planeaci6n. 7.16 The sources of funding for the state's transport investment have varied considerable over the last few years. See Table A7.5. In 1999, an increase was funded by State Fundfor Social Investment (FISE) from Ram0 33, while the regular funds of the state declined in importance. In 2000, the Program for Support for Federal Entities (PAFEF) came in, while other funding sources declined. Then in 2001 the regular state funding recovered to earlier levels, and the state took a large loan from Programa de -89- Fortulecimiento u Estudos y Municipios (FORTEM), drawing on funds from the Inter- American Development Bank. 7.17 Part of the direct state f u n d s 4 0 to 50 percent in recent years-are generated in the transport sector itself. See Table A7.6. Licensing fees and tolls are the most important sources. SEFIPLAN in coordination with SSP i s planning to introduce new permits and license plates to buses and taxi cabs, which will increase local revenue b y M x P 350 million. INSTITUTIONS AND AGENCIES 7.18 The Secretariat of Communications (SECOM) has the main responsibility for the transport system. Within it are several Directorates: planning and projects, state roads, rural roads, road and bridges with concessions, telecommunications, special programs, maintenance (State Highway Committee-Junta Estutul de Cuminos), and the machinery unit. 7.19 The planning process for road investment comes under the umbrella of the prioritization process for all the state's public investment. SEFIPLAN recently established a method for evaluating investments, based on the weighted average o f five criteria: i)socio-economic evaluation, ii)the degreeofcontributionto the Veracruz Development Plan, iii)the number of beneficiaries as a share of total population (compared to the project cost as a share of total spending, because large projects should benefit more people), and iv) the distribution per capita of the investment program, to assure some equity in the distribution of benefits. The evaluation thus defines a prioritized list of projects, and SEFIPLAN only finances the projects that achieve a high enough rating. Given this framework, now being implemented in the overall budgeting process, SECOM needs to apply this method to its own investment planning and assure that potential transport investments are put into coherent packages. 7.20 The Federal Secretariat of Communications and Transport i s in charge of the expansion and modernization of interstate highways, as well as the feeder roads and the rural roads under federaljurisdiction (not yet decentralized). 7.21 The State Highway Committee has responsibility for maintenance and rehabilitation of all state-owned roads and highways. It was created in 1988 as a decentralized entity when the federal government decentralized the road maintenance function to the state. It has nine Residencies and Sub-Residencies, in order to have presence throughout all the state. Rather than contracting out work, it does the maintenance through its own workers and equipment, most of which were inherited from the previous Local Road Committees and the federal level maintenance crews. The almost 600 personnel consist of 15 percent administrators, almost 75 percent field workers, and over 10 percent semi-retired-too old to actually work but not having enough seniority to afford to retire. With an unmotivated work force, cumbersome union rules, and antiquated machinery, it i s no surprise that maintenance i s substandard, even though it absorbs 16 percent of transport spending. -90- 7.22 Machinery pool (Maquinaria de Veracruz).. In action to the machinery owned by the State Highway Committee, there is a machinery pool. It keeps a stock of 265 machines, 42 of which are permanently commandeered by SECOM, 44 are out of service, and 179 are in general use, as of March 2002. These latter are hired out to municipalities and other entities, supposedly on cost recovery basis, although costs are never covered. Purchase of 92 new machines was under consideration, in early 2002. Given the other capital needs of the state, it would be much more efficient to rent or lease such machinery as needed, and the need would be much less if maintenance were contracted out, as recommended below. RECOMMENDATIONS 7.23 Transport planning model. To improve planning, the state should develop a quantitative model of the transportation system, to analyze the traffic patterns and demand for transport services within the state and the inward and outward flows. The model would identify the origins, destinations, volumes and types of cargo and passengers. Then alternate simulations could help determine the best transport modes for accommodating the demand. Such a model would allow analysis of the impact of investments in roads and other parts of the transport network, and evaluation of the social and economic costs and benefits. For example, this type of model could evaluate the potential investment in a new airport for Xalapa, in comparison with an alternative like expanding the cargo facility at the Veracruz international airport and improving the Veracruz-Xalapa highway, now inprogress. Similarly, the model could help evaluate the expansions of the ports of Veracruz and Tuxpan that are being contemplated. And it could evaluate more commonplace decisions, like whether to invest in paving a road, or whether to pave it with asphalt or concrete. A model i s needed in such cases, rather than just measuring current traffic, because improvement of one stretch of road will increase its use, increase the use of roads feeding into it, and perhaps decrease the use of parallel roads-a complex interaction. 7.24 Integrated interventions in isolated areas. Isolated areas often need roads, but that i s rarely sufficient. The development of the road network in isolated areas must be part of an integrated social and economic development plan. People there rarely have vehicles, at least not initially, so a complementary system of trucks and minibuses providing public transport i s needed in order to have the desired effects in reducing marginality and poverty. There must be some cost recovery, to promote efficient use, but there usually needs to be some subsidy so that people can build up the connections between the marginal areas and the growth poles. In addition to making local products more competitive in wider markets, improved transport will improve the access to social services by persons living inmarginal areas. 7.25 Strengthen road maintenance. To rectify the poor condition of many roads, despite substantial expenditures over recent years, reforms need to make the maintenance function more efficient. First, there needs to be better information on the road network and strategic planning of maintenance. One important technical tool i s the HDM-4 -91- Model, which i s a tool for economic evaluation, planning and investment programming in roads. The SECOM should do a thorough inventory of the roads, their uses and conditions. The inventory activity should probably be contracted out, for at least the initial build-up would be a large one-time effort. The inventory would be a key input to the road network administration model, which would then identify the priorities for maintenance. This process should start with the most heavily used roads, but once the inventory i s complete (and kept up to date), the information system and model would also identify bottlenecks where an inadequate or poorly maintained road segment was diverting or discouraging traffic, at a high economic cost. Second, the maintenance activities themselves need to be made more efficient. Experience elsewhere in Mexico and in other countries shows that, compared with direct government administration, it i s more efficient to contract with small community enterprises for routine maintenance activities. Other activities could be contracted to private firms. The current workforce could be encouraged to move to the private sector and form maintenance companies, with pension and health insurance for the transition, and with grants of most of the state's road maintenance equipment as start-up capital. (Experience indicates that private firms use and maintain equipment more efficiently than the public sector.) The new firms could sell their services to others as well as the state. The State Highway Committee should focus on inspection, planning, and making good contracts with the new road maintenance firms.70 7.26 Private participation. Large-scale private-sector participation in transport sector has had good success in activities like toll roads and port facilities. Such investments provide private benefits that can be well priced, so they should not be undertaken unless they are commercially viable. Allowing and attracting private capital frees up the state's investment budget for socially and economically beneficial projects that are not commercially viable. The private entrepreneurs usually want some state guarantees for this type of investment, but the state should be careful not to assume all of the risk. Guarantees should be limited; private firms that hope to make a profit should put up substantial amounts of their own capital. Good examples of private-sector participation already in Veracruz include some port facilities and the concession for rehabilitation and expansion of the Veracruz-Cardel highway. ~~ ~ ' OThe Proyecto de Mantenimiento de Vias Federales could help finance this transition. -93- 8. BUDGETINGINSTITUTIONSAND FISCAL OUTCOMES: STABILITY,EFFICACY,AND EFFICIENCY 8.1 Stability, efficacy, and efficiency o f public finances are closely connected, and institutions strongly influence a state's fiscal stability and its effectiveness in meeting the demands of citizens. While fiscal stability helps to define the amount of affordable resources, efficacy considerations affect decisions on strategic goals and assignment of resources to meet the goals. Cost-efficiency considerations guide managers in the adequate and timely provision of targeted goods and services. A well-performing system for planning, assigning, executing, and controlling public resource management contributes not only to macroeconomic stability, but also to the achievement of strategic priorities and managerialefficiency. 8.2 Legal or quantitative restraints, or the lack thereof, help to explain why a budget i s balanced or unbalanced. Poterba (1996) finds, based on experiences from U.S. states, that though there i s some creative accounting to satisfy balanced-budget restrictions, their rules are effective in reducing budget deficits. Most state and local governments in the United States have balanced-budget restrictions, but they take a wide variety of forms. Every state except Vermont has such legal restrictions-in the constitutions of 41 states and in the regular legislation of the others-and many states have restrictions on the amount of debt that can be issued (Drazen 2000). Experience across states and over time shows that not only the existence of such restrictions matters, but also their details, such as the autonomy of the courts to enforce them and the scope for exceptional circumstances (Inman and Rubenfeld 1992). Von Hagen (1991) and Von Hagen and Harden (1994) find evidence that spending will be lower under more hierarchical and transparent budget procedures. 8.3 Formal and informal planning and budgeting procedures-to establish people's demands, set goals, allocate resources, approve and execute the budget-also help explain the state's effectiveness in responding to popular demands. The timely provision of public goods in a cost-efficient manner seems to depend on the regulations managers mustfollow, and on their incentives to operate within those constraints. For example, the public sector modernization programs of Australia, New Zealand, the United Kingdom, and the United States are based on delegating responsibilities through a wide variety of institutional arrangements, while retaining close control of these arrangements through timely and reliable information on decisions and results. 8.4 Institutional transparency, with simple rules for monitoring and controlling outcomes, contribute to making fiscal programs credible. Stein, Talvi, and Grissanti (1998) show that institutions with a more comprehensive view of government programs and their costs and benefits tend to lead to lower deficits and debt levels. Von Hagen and Harden (1994) found that the hardness of budget constraints largely depends on the power of the executive to monitor and enforce existing restraints. -94- 8.5 In the case of Veracruz, one can also see the effects of institutions on policy decisions. Veracruz' s fiscal balances follow a recurrent cyclical pattern for several reasons. First, the cycles of federal revenue pass on to the states immediately and automatically through revenue-sharing transfers, the participaciones. Second, allocations for other transfers, like Ram0 33, reflect the state of federal revenues as well, although not automatically by formula and usually not within a budget year. Third, the state government's expenditure decisions also explain the growth of imbalances. Since coming to office, the present government has increased both current and capital outlays, exceeding current income despite strong efforts to raise its own tax revenues. Fourth, the rules, procedures, governing structures, and regulations by which the budget i s made and executed contribute to explaining the deficits and debt. Thus, changing these budgeting rules, as described below, may help to keep the deficit at sustainable levels. 8.6 Decisions on the provision of goods and services are becoming less ideological in Veracruz, focusing instead on how productive and cost-effective such activities are and considering alternate methods that might improve these indicators. Efforts such as the recently enacted law of public services, the reform o f the tax structure, and new regulation of intergovernmental state-municipal interactions are already helping to improve fiscal outcomes. 8.7 The unification of finance and planning in one secretariat-the Secretariat of Finance and Planning (SEFIPLAN)-affects the other institutional dimensions. Some other Mexican states have this unification, like Estado de MCxico, while others like Chiapas and Guanajuato have the planning function (allocation of investment to realize the state strategic plan, while keeping the implications of recurrent cost within the budget constraints) in a separate secretariat of Planning or Social Development. Although investment and planning control only a fraction of the total state budget, i t is the most discretionary part, and thus deserves extra attention. The Comite` de Planeacidn para el Desarrollo del Estado de Veracruz (COPLADEVER), discussed below, helps with this function, but not yet enough.71 8.8 Section 1 of this chapter deals with fiscal stability issues such as deficit size, trends, and balanced paths, and how budgeting rules (from planning through execution and debt financing) may affect this stability. Section 2 explores the relationship between institutions and the allocation of resources across sectors. Section 3 discusses how budget regulations and organization affect the incentives for cost-efficient provision of public goods and services. Section 4 discusses the state's fiscal relations with other levels of government. Section 5 summarizes the strategy for strengthening budget institutions in order to ensure better fiscal outcomes. FISCALSTABILITY The commonly held view i s that fiscal sustainability ultimately rests on the impact of associated borrowing, whether originating from the private sector or the creation of 7'Nevertheless, one weakness i s that the government has not yet issued regulations for the planning law, which is why COPLADEVER functions are different than the ones define under this law. -95- money or foreign credit. There are two other forms o f financing -for further consideration: the sale of public assets and financing through the accumulation of arrears.72 At the national level, this means that balanced budget rules also affect other aspects of economic policy, such as the balance of payments, growth, and inflation objectives. Such a wide spectrum of concerns may help explain the heated debate over legislative budget restrictions in the United States and inother countries. What matters in practice for stability indeveloping countries i s how to define affordable resources, how to establish goals, how to prioritize within those limits, and how to uphold hard budget constraints (Rodden, Litvack, and Eskeland2002). 8.9 International experience verifies the importance of four kinds of legal restrictions for stability purposes: (a) norms to impose fiscal equilibrium; (b) procedures to prioritize programs and activities; (c) requirements to publishinformation and assure transparency; and (d) rules to monitor and evaluate fiscal discipline. FiscalNorms 8.10 Veracruz now has a constitutional norm mandating balanced fiscal finances, which are defined only as having fiscal inflows (including approved borrowing) equal to outlays. No explicit restriction on aggregate spending deficits exists, although the budget laws contain non-binding exhortations regarding the preservation of balanced budgets. The Programa Veracruzano de Finanzas Pziblicas describes quantitative yearly goals for overall fiscal balances in 1999-2004, but these are declarative intentions, not legally bindingrestrictions. 8.11 According to the state constitution, credit should be used only to finance capital outlays, although it leaves open the possibility of using financial resources in order to solve short-term liquidity problems or to smooth unforeseen shocks to state revenues. Everything needed for a credit operation (sources, agent responsible, procedures, and so forth) i s included in this law, but it includes no quantitative restraint or debt ceiling, thus allowing the Congress to decide what indebtedness it deems affordable. 8.12 A long tradition in Veracruz gives broad legal authority to the state's executive to deal with diverse matters of the state. The Governor approves the state's development plan and can legally create private financing schemes to handle public resources. Congress plays a limited role throughout the budget process and provides no effective check on executive decisions about the budget. Traditionally there has been mainly an unwritten restraint through the strong expectation, based on the continued reelection of PRI governors that healthy public finances are handed in at the end of the term. This combination creates incentives for only short-term indebtedness, which i s repaid at the end of the term, thereby at times exacerbating the cyclical pattern induced by federal transfers. The pattern has been observed elsewhere, such as in explaining the differences 72 This is in accord with the IMFrecommendation that privatization should not be included as revenue, but rather as a below-the-line item. -96- infiscal performance among various states in the UnitedStates. When a single party has control over the state legislature, it i s in the best interest o f the party to show well- managed public finances in the coming elections, and also to avoid burdening fellow party members with the political costs of a fiscal adjustment after the election (Poterba 1996). Higher probabilities of a party change, on the other hand, give incentives for fiscal imprudence at the end of the term. Procedures 8.13 The Programa Veracruzano de Finanzas Pu'blicas 1999-2004 provides a good example of an effort to plan within affordable resources. It provides a medium-term framework for public expenditures within the resources expected to be available for the period. At the time of its inception (1998), it was a useful planning instrument that forced the government to think about what it could afford and then to address sectoral priorities strategically. It provided a threshold to screen out non-priority expenditure requests. Since 1998, however, the national and international economic environment has evolved in unforeseen ways. Declining international coffee prices, worldwide recession, and political events have negatively affected the state's revenues, while preserving and even increasing expenditure expectations. 8.14 The Veracruz government has acted diligently on several fronts to preserve the initial mid-term fiscal stance, but it has not systematically or comprehensively revised the Plan, although the Planning Law allows that possibility. Such a review would help rationalize most of the ongoing adjustment measures and would help to reformulate priorities, scrutinize programs, reconsider cost-efficient alternatives, and explore new institutional arrangements. 8.15 SEFIPLAN has a variety of budgeting procedures and mechanisms to make expenditures consistent with disposable resources at approval and implementation stages. For the years reviewed (1999-2001), projected state revenues and federal transfers were systematically below actual figures. Based on the conservative revenue estimates, SEFIPLAN assigns budget ceilings to each dependency, thereby keeping aggregate spending under control. Not even the Congress dares to remove overall ceilings, although it does modify programs and projects within those ceilings. 8.16 In December, the executive presents the budget to the Congress with figures showing aggregate expected revenues, proposed expenditures, and financial requirements to balance the next year's budget. Congress approves the budget, including an aggregate financial plan for each dependency. Inthis manner the executive retains control over the budget's content, having only to inform the Congress of any subsequent changes. Overspending o f budgeted allotments by operative agencies i s almost impossible. The Secretary keeps full control over resources by using the SIAFEV and by making weekly payments to operative agencies (unidades administrativas), according to previous cash- flow agreements. Well-established procedures to contract, initiate, and pay for any -97- spending operation leave no room for overspending; furthermore, managers and budgets officers are held legally responsible should any overspending occur. 8.17 Despite the procedures to restrain overspending, some weak spots still deserve attention. Some funds or financial mechanisms are not fully reported in the budget, and the attempts to calculate and forecast recurrent-cost implications of actual investments are still rudimentary and incomplete; for instance, they do not take all legally binding contingencies into account. Using federal advances to finance budgetary expenditures also creates problems; it distorts the perception of real financial conditions and creates a severe problem for the state treasury when it i s stopped from the federal side, as happened recently. Information and Transparency 8.18 In 1997-98, the State of Veracruz started an ambitious program to decentralize its central administration by establishing expenditure ceilings for each autonomous public agency and to decentralize its local expenditure by transferring resources and responsibilities to municipalities. It soon realized, however, the need for adequate information to enable efficient and effective government decision-making, control by the Congress and oversight by civil society. 8.19 The shifting of spending authority to other entities caused a crisis in the availability of timely and consistent aggregate public sector data. The government reacted rapidly and in March of 1999, the Governor signed an agreement with the SHCP to receive technical assistance and training in order to modernize and systematize the state's fiscal and financial information, which led to the Integrated Information and Management System of the State of Veracruz (SIAFEV). 8.20 The SIAFEV has five main sub-systems, which have already replaced the two dozen previously existing information systems. The Expenditure sub-system includes budget planning and execution. It covers 13 line ministries with close to 300 users. The Revenue sub-system, though not yet fully implemented, will provide revenue information in real-time once the 34 tax offices are connected. The Control and Follow-up sub- system allows the accounting to be done simultaneously while each transaction i s being executed. The Financial sub-system, recently finished, optimizes Treasury's cash-flow management and electronic payment, avoiding idle resources and suspicions operations. A payroll/personnel sub-system will be added at a later stage. There are also plans to extend the SIAFEV to decentralized agencies and even to municipalities. Obviously, the pace of the extension of the system will depend on the pace of modernization of communication systems. 8.21 Though not yet working at its full potential, SIAFEV has come a long way to integrate budget operations of the central government and has the capacity now to produce timely and complete information o f this sub-sector. Budget decision-making i s now beingdone based on reliable information allowing for transparency and efficiency in -98- public resource management. Furthermore, as the system implementation moves, along freeing human resources and reducing administrative costs, more resources can be devoted to control results and performance specially at local level. 8.22 Accounting and budgeting records in Veracruz seem to be accurate, with coding schemes fully integrated into a common classification. The financial management system produces both types of required reports-monthly revenue and expenditure reports and the more detailed annual statement, Cuenta Pziblica, presented to Congress in May after the end of the fiscal year. The Cuenta Pziblica provides a basic report of public finance conditions, but not a thorough analysis of fiscal stability. The present accounting and budgetingcould easily be rearranged to create a more useful report (see chapter 2). Monitoringand control 8.23 InVeracruz, fiscal discipline is an internal government affair, mostly restricted to the Secretary, with a very lesser role for other dependencies. The low profile kept by Congress in these matters i s also apparent. Stability i s important to Congress, but it exercises control only indirectly. It has a general aversion to indebtedness and respects an informal accountability mechanism within the party structure that endorses the submission of healthy public finances at the end of the term. Recommendations 8.24 In Veracruz, a rigid balanced budget rule annually would be excessively restrictive, and a six-year balanced budget rule would not by itself be credible nor necessarily wise outside the context of a medium-term debt policy, including short-term limits. The debt policy should establish a debt ceiling, including all government operations and closely related to budget targets, with sub-ceilings on debt of different maturities. This ceiling could be expressed as numeric limits or as a debthncome ratio. The Congress should need to give its approval within this limit or remove it according to specific conditions. The aggregate ceiling and length-of-term debt limits should also take into account the political cycle, allowing a relatively liberal amount of debt at the beginning of the governor's term but tightening toward the end. SECTORALALLOCATION AND EFFICACY OFSPENDING 8.25 Findinga mixture of goods and services that meets citizen requirements and stays within the limits of fixed resource availability i s a complex task. First, an effective and efficient way of screening citizen requirements must be established. Second, it requires prioritizing among the many programs and alternatives to attend to the requests made of the government. Third, it demands funding, executing, and controlling the multitude of government programs and projects. -99- 8.26 Allocative efficacy also considers coordinating those political, technological, and management issues across sectors, levels of government, and public and private agents. Once the formulation, design, implementation, andresults have been attained, a variety of formal and informal institutional procedures implement the government's original intentions, or distorts them.73 The institutional arrangements that affect the adequate provision of public goods and services, and the recommendations that improve their functioning, have several key aspects: (a) the norms to turn social demands into government actions; (b) the instruments to prioritize programs and activities; (c) the procedures to assign resources and to control proposed outcomes; and (d) the governance structure to coordinate those tasks. Norms 8.27 Veracruz's planning law, Ley de Planeacio'n del Estado de Veracruz-Lluve (1987), provides the framework for elaborating the government's six-year Plan. The governor develops and presents the Plan, and then Congress reviews it and provides an opinion. The Plan must address society's demands, thereby establishing the government's objectives, strategies, and priorities. It should also reflect sectoral, regional, institutional, and special policy guidelines, and consider the resources and responsibilities for carrying out the proposed endeavors. Instruments 8.28 The comprehensive development plan with macro restrictions, targeted sectoral outcomes, and cost-benefit analysis establishes priorities to ensure allocative efficiency of the budget. A large part of the budget i s earmarked by the federal government, however, which makes the use of objective criteria less effective. Federal transfers rightfully ensure resources for education and health purposes, but the earmarking of the great majority of the resources has detrimental effects when it i s destined only for the wage bill, andbecomes effectively the property of special interest groups, as discussed in more detail inthe sectoral chapters. 8.29 SEFIPLAN has the mandate to scrutinize all projects financed by state resources, but the financial- and fiscal-control mandate of the Secretariat overshadows this planning function. It checks allocation requests for technical soundness and relevance to deal with a given problem, but does not look at wider allocation issues. Despite the efforts by the inter-sectoral planning committee of COPLADEVER, discussed below, internal comparisons are done only within each sector. Earmarkingof transfers effectively limits any progress by COPLADEVER to take inter-sectoral analysis into consideration. This results in a fragmented and weak system for setting priorities, which does not provide 73 In 2002 Veracruz hired a consultant company to evaluate the state's priority programs, utilizing effectiveness and efficiency indicators. These indicators could perhaps be used to improve the budgeting of expenditures. -100- adequate information for future decision-making. As the devolution o f responsibilities and resources to the states continues, Veracruz should develop the capability to prioritize and coordinate inter-sectoral plans and programs. Procedures 8.30 Each sector makes annual requests for resources to the Secretary through the Plan Operativo Anual, which is interlocked with sectoral programs in the Plan. Then, the Secretary allocates resources according to availability, past budget records, and targeted programs. Once a bulk sum and a monthly cash flow agreement i s reached, each administrative unit i s responsible for managing its own resources, including related payments. It i s a good decentralized management system, although it presents some problems in the non-financial aspects of control, particularly because of the lack of feedback of information for evaluatingresults and performance. 8.31 Actual control focuses on procedures and products, with less emphasis given to outcomes and performance. This happens because the budget structure does not really consider specific goals and outcomes for activities, making it difficult to establish program effectiveness by components. There are currently several layers of control-the Secretary, the Controlaria, and the Congress-and some layers could easily and fruitfully be shifted to evaluate actual outcomes. Governance Structure 8.32 As it is established in the Planning Law, the COPLADEVER evaluates and monitors the Plan's results and outcomes while the Secretary controls its day-to-day implementation. COPLADEVER i s an ad hoc organization of representatives from various secretariats, presided over by the Governor and coordinated by the Secretary o f Finance. The sub-committee for evaluation and control, which i s headed by the Governor's Office of the Plan, reviews annual sectoral reports and the Cuenta Phblica to establish Plan's advances. Though, these efforts have shown valuable results, it i s still hardfor COPLADEVER to cope with the problem of autonomous secretariats (education and health), particularly when public officers do their own sectoral reviews. Despite these efforts to integrate the state administration around the Plan and to promote its ownership, the Plan i s still fragmented and has operative weakness. Under present circumstances, the Secretary o f Finance and Planning has a double function, which further complicates matters -representing the planning function of his own secretariat and coordinating COPLADEVER. Guanajuato offers one example of how this work could be organized within the state administration, as discussed inBox 8.1. -101- Box 8.1 PlanninginGuanajuato Guanajuato's planning law of 2001 established a Planning Council (Consejo de Planeacidn), with representation from all parts of the state government, from municipal governments, from the federal government, and from the organized nongovernmental sectors. Although a full evaluation of the Guanajuato experience will have to wait until it has operated longer, the example gives some ideas for how to strengthen planning. The Secretariat of Social and Human Development has a lead role, as technical secretariat of the council, and is also mandated in the Organic Law of Executive Power with the task of elaborating, executing, and evaluating the Government Plan. Each of the nine line secretariats (Education, Health, Transport, Communications, and so forth) and the independent agencies of the state produces a six- year sectoral plan, based on the Government Plan, and from the sectoral plans the secretariats and agencies propose their annual budget programs, including investment. While this could turn into time-consuming window dressing on business as usual, the planning process was taken seriously in preparation of the 2002 budget. The Secretariat of Social and Human Development and the Secretariat of Finance worked closely together to select a coherent program of investment in accordance with the priorities in the overall Government Plan and with the state's financing constraints. The two main criteria for choosing projects were their social imDact and their uotential for cost recoverv. Recommendations 8.33 For allocative efficacy, the main challenge i s to coordinate political, technical, and administrative issues between sectors and government levels, and to regulate public- private ventures. Budgeting institutions and procedures help to establish goals, define priorities, and fund and control outcomes, but by themselves they are insufficient without a governance mechanismin charge of monitoring and enforcing the rules. 8.34 Today, Veracruz i s assuming a leading role inregional development and i s clearly going beyond a decentralization model where the state only implements federal directives and programs. There i s growing tension around finding a planning mechanism to fully implement public works. The Plan's scope shows the complexity of the task ahead, and the technical and administrative requirements to carry it out. Despite its formal authority, COPLADEVER lacks the operative autonomy and technical capacity to control fully the Plan's development and future requirements. It shows the need for a full-time, independent, and effective organization, technically able to control the Plan and capable of coordinating its funding and implementation across all parts of the state administration. There are two possible options to fulfill this task: (a) gradually building up an independent new organization based on COPLADEVER, and (b) nursing the organization within the Secretary's supervision with the commitment to subsequently create an independent body. International experience indicates the benefits of having the investment planning functions somewhat separate from, although coordinated with, the fiscal control function. 8.35 Plan Veracruzano has had some success in translating social demands into government activities; although after three years o f continuous efforts, it i s useful to review Plan's results and goals in the light of unforeseen national and international changes and corresponding fiscal and financial developments. The sub-committee for evaluation and control, which also helped to formulate the Plan, i s now leading a full review and evaluation and redefining goals for the 2002-2004 period. This i s a superb -102- opportunity to coordinate efforts and search for a more efficient combination of inputs and new institutional arrangements in order to reach the state's objectives. 8.36 Earmarking is the key obstacle to comprehensive prioritization of state interventions. The struggle for increased flexibility in federal transfers i s central in the ongoing dialogue between the federal government and the states. 8.37 While cost-benefit analysis cannot realistically apply to every investment decision, the program-project culture should have a more prominent role in the state administration. Budget allocations should be made in terms of measurable goals with inputs linked to specific activities, and then it will be easier to develop indicators to monitor and evaluate performance in terms of efficacy and efficiency of outcomes. To this end, SEFIPLAN must play a leading role, progressing from implementation surveillance to outcome evaluation. SEFIPLAN has to start scrutinizing all budget allocations by identifying their contribution to previously established goals. In doing this, it may need to introduce some changes in the budget structure and in the actual information system. Monitoring implementation and first-hand evaluation definitively belongs to SEFIPLAN, but control functions should still be conducted and strengthened by an independent agency such as the Organo de Fiscalizacidn Superior (ORFIS74), under the authority of Congress. It would help to review and evaluate all the different organizations in charge of this function and to integrate and specialize them to support the desired changes in public management. COST-EFFICIENCYOFSPENDING 8.38 O f the four sectors reviewed in this study, health and education in Veracruz have higher performance and efficiency, while the communications and water sectors perform less well. Some reasons for this are institutional. Budgeting institutions affect the incentives for state government agencies and thus their efficiency in the provision of public goods and services for the least cost per quality. Efficiency and inefficiency are often explained in terms of technical considerations such as inadequate resource management, lack of leadership, deficient technology, and low labor commitment. This usually leads to the conclusion that the government does not use the least-cost productive function. Institutional incentives, specifically those embedded inthe budgeting rules, can lead to inadequate planning, insufficient resources, poorly motivated management, ineffective monitoring and control, and the resultant lack of accountability. 8.39 The positive externalities associated with the public provision of education and health are well established, as i s the segmentation between public and private provision of services in these two sectors, which facilitates the emphasis on the public character of the part provided by the state. On the other hand, road and water systems, though public goods, are becoming more private, due to the privatization of their production, which has subjected them more to judgment according to market logic. In spite of the strong ties 74 ORFIS is a pioneer and breakthroughorganism on controlling government expenditures inMexico. ORFIS provides Congress with detailed informationon legalcomplianceand public expenditure outcomes. Other states such as Guanajuatoare following this type of institutionaldevelopment. -103- that the education and health sectors have with the federal government, these two are considered part of the state administration, and their main functions (hiring, labor relations, controls, and so forth) are clearly under state control. In the road and water sectors, however, the assignment of ownership, functions, products, and agencies i s vague, and this causes endless disagreements between various government levels and the beneficiaries, thus allowing for excessesand causing inefficiencies. Management 8.40 To address these problems, the State of Veracruz i s moving toward a management model where operative agencies play an active role in planning their sectors' programs, and in budgeting and ensuring funds. The Planning Law requires the effective participation of sectors in planning their programs, while the Plan Operativo AnuaZ allows each agency to interlock annual budgets with its financial targets in the Plan. Finally, once differences in terms of ceilings are settled, the Secretary and the respective agency agree on an equivalent monthly flow of resources. 8.41 Such a planning model requires close monitoring and evaluation o f agency output and an exacting accountability for outcomes. Here success depends on the ability of the government to establish goals in an explicit and measurable way and to assess outputs as well, thus making it possible to hold managers responsible for them. The first part o f the model i s progressing relatively well, although there i s uneven technical capability among sectors-strong for education and health, but weaker for water and roads-which i s not the fault of the budgeting institutions. 8.42 The second part of the model, however, has several problems, which may limit and reduce the benefits of this approach. First, the actual budget structure does not provide accurate measures for outcomes. Most of the project designs reviewed concentrate on processes and give no attention to the evaluation o f their impact. Henceforth, control agencies should focus on auditing procedures and on intended service, while paying less attention to the process to reach proposed outcomes. (The implementing agency, not the control agency, should worry about process, as well as output.) Finally, the lack of reliable information and subsequent absence o f civil society interest and participation weakens accountability. Recommendations 8.43 To enhance agency autonomy and ensure manager accountability, the budget structure at the project level should have clearly established goals and attainable cost/output indicators. This would make comparative cost analysis into a reliable instrument for decision-making. Monitoring and auditing mechanisms should be given a performance-oriented evaluation. Furthermore, the different audit layers need to be reduced and specialized. -104- 8.44 Pressure needs to come also.from citizens and civil society, as they hold the government accountable for efficiently providing services with taxpayer money. To foster and facilitate citizen involvement, the government should regularly publish accounts of the results of various programs and the amounts of resources spent. STATE RELATIONS WITH OTHER LEVELSGOVERNMENT OF 8.45 The Veracruz state government has made substantial efforts to coordinate relations with local governments in a precise and transparent manner. Now municipalities have at least as many resources as the state itself (outside education) to attend to their sectors, such as housing, local roads, and water and sewage systems. Consequently, the state i s building an institutional framework to coordinate planning, strengthen local revenue collection, and monitor program outcomes. This type of action i s required to fix problems in areas such as water provision, road construction, and maintenance. 8.46 The state i s also bringing a private-sector resource and management approach to help meet social needs. Private-sector participation i s usually thought of in terms of buying out inefficient public ventures or unproductive assets under conditions that allow it to keep the profits itself, while transferring as much risk as possible to the public sector. But Veracruz is taking a different approach. The State i s teaming with the private sector in some endeavors where it shares the risk and the economic benefits, without giving up its equity participation. The recently enacted public-service law draws from these experiences, preparingthe way for further developments. SUMMARY RECOMMENDATIONS 8.47 Improved rules for fiscal stability need to address three problems: current fiscal deficits, the sharp decline in federal transfers (like the one experienced in 2002), and the need to finance critical social and infrastructure projects. The state needs to design a financing path to carry it from the actual fiscal stance to a more sustainable balance, while providing adequate and affordable flows o f resources to carry out key government programs. Within this plan, credit and other financial arrangements would play a complementary and supportive role, ensuring feasibility. Systemic and uncontrolled indebtedness i s without doubt an invitation for instability problems, which Veracruz i s acting to avoid, and for larger disturbances inthe fiscal structure. But paying off all debts i s not the only alternative. The challenge i s to find a tradeoff that ensures solvency while responding to urgent needs of society. 8.48 Procedural and organizational reforms need to improve allocative efficacy and cost-efficiency in the provision of public goods and services. These include doing a midterm review of the Plan, strengthening ongoing planning capability, and improving the regulation for private sector participation in service provision. 8.49 To take account of the rapid changes in the economic and political environment that derailed initial government projections and perspectives for 1999-2004, it would be -105- useful to review proposed targets and objectives in light of the new fiscal and financial scenario. This exercise should emphasize objective prioritization, realistic and measurable goal setting, inter- and intrasectorial coordination, cost-effective alternatives, and design of indicators that monitor and evaluate results. In doing so, there i s the opportunity to adjust the budget structure while advancing the program-project culture. SEFPLAN should play a more active role scrutinizing programs in terms of their contribution to the state's established goals and objectives. Likewise, SEFIPLAN should enlarge the scope o f its surveillance to include monitoring and evaluating results and outcomes, rather than focusing mainly on public works implementation. 8.50 Management capability i s unevenly distributed among sectors, thereby affecting the adequate provision of public goods and services. The low-performing sectors clearly need to enhance their technical and managerial capabilities. Clarifying the division of responsibilities among different levels of government would help, but water and transport would benefit even more from bringing in private management elements and/or direct private production with continued public sector equity participation. 8.5 1 Finally, COPLADEVER needs more technical and administrative capacity in order to exert adequate control of the Plan, because the further devolution of responsibilities to states will make this gap more evident and costly. COPLADEVER should be considered an initial step toward the formation of a more developed, independent, and capable organization that would take full charge of the coordination of planning, budgeting,monitoring, and evaluation. -107- BIBLIOGRAPHY Amieva-Huerta, Juan. 2003. Temas Selectos de Finanzas Pu'blicas. Editorial Pomia. Berg and Allan Krueger 2002. "Trade, Growth, and Poverty" ABCDE Conferences. Mimeo. Colmenares, David. "El Sistema Mexicano de Coordinacih Fiscal." Experiencias de Reformas Fiscales en el Mundo y el Cas0 Mexicano. Colegio Nacional de EconomistasA.C. El Economista Mexicano, N6mero 2. DBvila, and Levy. 1999. "Pobreza y Dispersih Social" en La Seguridad Social en Mkxico. Fernando Solis y Alejandro Villag6mez Compiladores El Trimestre Econdmico No. 88. Centro de Investigacih y Docencia Econ6mica y Fondo de Cultura Econ6mico. Drazen, Allan. 2000. Political Economy in Macroeconomics. Princeton: Princeton University Press. Gobierno del Estado de Veracruz-Llave. 1999. Plan Veracruzano de Desarrollo. Veracruz, MCxico. Harberger, A. 2001. "Finanzas P6blicas y Crecimiento Econ6mico" en Experiencias Fiscales en el Mundo y el Caso Mexicano. David Colmenares Coordinador. Colegio de EconomistasMexicanos AC El Economista Mexicano No. 2. International Monetary Fund. 2000. Technical Report on the Pensions System in Veracruz-Llave. Lnstituto Nacional de Estadistica, Geografia e InformBtica. 1996,1998, and 2000. "Encuesta Nacional de Empleo" Inman, Robert, and Daniel Rubenfield. 1992. "Fiscal Federalism in Europe: Lessons from the United States Experience." European Economic Review, 36 (April): 654-60. L6pez-Aceved0, Gladys. 2002 "Incentivos y Desarrollo Profesional de 10s Profesores en EscuelasMexicanas" El Trimestre Econdmico Vol. LXIX (3), num. 275. Me`xico. Poterba, James. 1996. "Do Budget Rules Work?" National Bureau of Economic ResearchWorking Paper No. 5550. Secretaria de Finanzas P6blicas y Planeacih. 1999. Programa Veracruzano de Finanzas Pu'blicas. Veracruz, MCxico. -108- Stein Emesto, Emesto Talvi, and A. Grisanti. 1998. "Institutional Arrangements and Fiscal Performance: the Latin American Experience." National Bureau of Economic Research Working Paper No. 6358. Von Hagen, Juergen. 1991. "A Note on the Empirical Effectiveness o f Formal Fiscal Restraints." Journal of Public Economics, 44: 99-1 10 Von Hagen, Juergen, and I.J. Harden. 1994. "National Budget Processes and Fiscal Performance." European Economy: Reports and Studies, 3: 311418. World Bank. "EarningsInequality after Mexico's Economic and Educational Reforms" Report No. 19945-MEVolume 11.Backgroundpaper No. 5 "Marginal Willingnessto Pay for Education and the Determinants of Enrollment Rates in Mexico" de Gladys Lopez-Acevedo, Angel Salinas and MonicaTinajero World Bank, 1999. "Government Programs and Poverty in Mexico." Report No. 192214- ME. -109- APPENDIX TO CHAPTER2 -110- Table A.2.1. Veracruz - Fiscal Balance (MxP million) 1998 1999 2000 2001 2002 Current Revenue 16,629.0 20,869.2 26,749.8 30,523.8 33,119.5 State's Own Revenue 292.0 421.1 522.7 1,230.9 1,815.2 FederalTransfers 16,337.0 20,448.1 26,227.1 29,292.9 31,304.3 Participaciones 6,609.6 8,085.6 10,074.6 10,932.9 11,278.8 Aportaciones 9,379.3 11,929.5 15,639.0 17,733.2 19,382.3 Current Expenditure 14,590.0 19,787.0 25,606.2 29,959.8 31,995.3 Current Expenditure 14,590.0 19,787.0 25,606.2 29,876.6 31,802.1 Public Debt Service 0.0 0.0 0.0 83.2 193.2 Current Balance 2,039.0 1,082.2 1,143.6 564.0 1,124.2 Capital Revenue 562.7 692.9 368.1 123.5 123.5 Capital Expenditure 1,721.0 1,981.0 2,482.0 2,719.1 3,615.8 CaDital Balance (1.158.3) (1.288.1) (2,113.9) (2,595.6) (3.492.3) Fiscal Balance 880.7 (205.9) (970.3) (2,031.6) (2,368.1) Source: CuentaPliblica. Table A.2.2. Veracruz - Revenue (MxP million) 1998 1999 2000 2001 2002 State's Own Revenue 854.7 1,114.0 890.8 1,354.4 1,938.7 Taxes 33.2 41.7 70.6 521.3 943.1 Payroll 0.0 0.0 0.0 442.9 863.4 Other 33.2 41.7 70.6 78.4 79.7 Fees 157.2 273.4 287.6 412.7 559.7 Aprovechamientos 101.6 106.0 164.5 296.9 312.4 Financial Products 562.7 692.9 368.1 123.5 123.5 Federal Transfers Participaciones 6,609.6 8,085.6 10,074.6 10,932.9 11,278.8 Aportaciones 9,379.3 11,929.5 15,639.0 17,733.2 19,382.3 Ram033 9,038.9 11,890.0 14,286.0 15,805.9 17,249.6 Others 340.4 39.5 1,353.0 1,927.3 2,132.7 Incentives 348.1 433.0 513.5 626.8 643.2 Total Revenue 17,191.7 21,562.1 27,117.9 30,647.3 33,243.0 Source: Cuenta Wblica -111- Table A.2.3. Veracruz - Revenue (MxP million) 1998 1999 2000 2001 2002 ProgrammableExpenditure 13,403.0 17,514.0 22,839.2 26,646.8 29,017.8 Current Expenditure 11,368.0 15,157.0 19,640.8 23,187.8 24,659.6 olw Personnel 7,796.0 9,861.0 12,089.3 14,832.8 16,649.5 CapitalExpenditure 1,721.0 1,981.0 2,482.0 2,719.1 3,615.8 o/w Infrastructurefor Development 1,356.0 1,667.0 2,159.8 2,540.8 3,343.9 Transfersto AutonomousOrganizations 314.0 376.0 716.4 739.9 742.4 Non-programmableExpenditure 2,908.0 4,254.0 5,249.0 6,032.1 6,593.3 Purticipuciones and Subsidies to Municipalities 2,908.0 4,254.0 5,249.0 5,948.9 6,400.1 Public Debt Service 0.0 0.0 0.0 83.2 193.2 Total Expenditure 16,311.0 21,768.0 28,088.2 32,678.9 35,611.1 Source: Cuenta Wblica. Table A.2.4. Veracruz -Education and Health expenditures, by source of funds (MxP million) 1998 1999 2000 2001 2002 Education Earmarked Federal Transfers 6,862.2 8,062.4 10,384.7 11,281.1 12,420.5 State Disposable Funds 2,403.4 3,448.6 4,099.7 5,264.5 6,243.6 Health Earmarked Federal Transfers 622.0 916.0 1,132.2 1,294.7 1,471.6 State Disposable Funds 391.5 481.0 597.8 1,052.4 1,163.4 Source:Cuenta Wblica and World Bank calculations. Table A.2.5. Veracruz -Debt (MxP million) 2000 2001 2002 Documented Public Debt 0.0 1,027.3 2,000.0 Floating Debt (Adefas) 2,209.2 2,321.1 3,693.9 Total Debt 2.209.2 3.348.4 5.693.9 Source: Cuenta Wblica and Worlc Bank calculations. APPENDIX TO CHAPTER 4 -114- Box A.4.1. Learning from NuevaEscuela A major challenge for Mexico has been the provision of high-quality basic education to children in poor, isolated, and small communities. To address this challenge the government established community and multigrade schools. The low quality of these schools, however, has become a key issue, and several programs have been undertaken to address it. Tabasco, the primary education system that consists mostly of multigrade schools, is a leader in this regard. But it wants to do more. Tabasco has looked at Colombia's Nueva Escuela for ideas on how to further improve student learning in its multigrade schools. Nueva Escuela offers a tested strategy for providing modern and effective education to children in small rural schools. Various countries have adapted it. Researchers from both developed and developing countries have studied and praised it. The consensus i s that it i s an effective approach to improvingteaching practices and student learning. The main features of Nueva Escuela are: Active Learning. The teacher's traditional role as source of knowledge and custodial controller of students changes to one in which he or she plays the role o f facilitator, ensuring that written instructions are understood, motivating students to do extra work, counseling students with problems, helping students learn through cooperative interaction and increased self- determination, and showing students an appropriate response for handling stimuli. Student-centeredcurriculum,using (a) detailed self-instructional guides; (b) learning corners that facilitate simultaneous class activities; and (c) local context, community information, and accumulation o f knowledge. Use of peer teachingand small work groups to facilitate learning. Modular evaluationand flexible promotioninstead of grade repetition, so students can learn at their own pace; this allows working students to go back to school, without having to repeat the whole grade. Establishmentof student government body to develop civic and democratic values, stimulate leadership and organizational skills, and involve students inschool management. Emphasison socio-emotionaldevelopmentof students to promote creativity and self-esteem. Communityinvolvement in school activities. Psacharopoulos, Rojas, and Velez (1992) and other researchers have found that Nueva Escuela schools had significantly improved student outcomes (as measured by Spanish and math test scores), reduced dropout rates among the rural poor, and raised student and community participation. Moreover, social self-esteem and civic behavior were higher in Nueva Escuela schools than in traditional schools. -115- Box A.4.2. Japan's School-Based ProfessionalDevelopment Japanese educators have instituted a system that leads to gradual, but sustained improvements in teaching over time. The system includes clear learning goalsfor students, a shared curriculum, the support of administrators,and the hard work of teacherssbfving to makegradual improvementsin theirpractice. Japan has given teachers themselves primary responsibility for the improvement o f classroom practice. Kounaikenshuui s the word used to describe the continuous process of school-basedprofessional development that Japanese teachers engage inonce they begin their teaching careers. Participation in school-based professional development groups is considered part of the teacher's job in Japan. These groups play a dual role: not only do they provide a context in which teachers are mentored and trained, they also provide a laboratory for the development and testing of new teaching techniques. Virtually every elementary and middle school in Japan i s engaged in kounaikenshuu. Run by teachers, kounaikenshuuconsists of a diverse set of activities that together constitute a comprehensive process of school improvement. Teachers work together in grade- level groups, in subject matter groups (for example, math or language arts), and in special committees (technology committee, for example). The activities of these various groups are coordinated by a school-improvement plan that sets the goals and focus for each year's efforts. A significant percentage o f teachers also engage in district wide groups that meet in the evenings, generally on a monthly basis. Teachers spend a considerable amount of time each month on kounaikenshuu. One of the most common components of kounaikenshuu i s lesson study (jugyou kenkyuu). Inlesson study, groups of teachers meet regularly over long periods o f time (ranging from several months to a year) to work on the design, implementation, testing, and improvement of one or several "research lessons" (kenkyuujugyou). B y all indications, lesson study i s extremely popular and highly valued by Japanese teachers, especially at the elementary school level. It i s the linchpin of the improvement process. The premise behind lesson study i s simple: If you want to improve teaching, the most effective place to do so i s in the context of a classroom lesson. If you start with lessons, the problem o f how to apply research findings in the classroom disappears. The improvements are devised within the classroom in the first place. The challenge now becomes identifying the kinds o f changes that will improve student learning in the classroom and, once the changes are identified, o f sharing this knowledge with other teachers who face similar problems or share similar goals, in the classroom. Source: Adapted from J. W. Stigler, and J. Hiebert, The Teaching Gap,The Free Press, 1999 -116- Box A.4.3. Typical Process of Japan's Lesson Study to Improve Classroom Teaching Although the form of lesson study varies throughout Japan, the following steps seem to typify the process: Step 1: Defining the Problem. Lesson study is, fundamentally, a problem-solving process. The first step, therefore, i s to define the problem that will motivate and direct the work of the lesson-study group. The problem can start as a general one (for example, to awaken students' interest in mathematics), or it can be specific (for example, to improve students' understanding of how to add fractions with unlike denominators). The group will then shape and focus the problem until it can be addressed by a specific classroom lesson. Usually the problem teachers choose i s one they have identified from their own practice, something that has posed particular challenges for their own students. Sometimes, however, the problem i s posed from above, perhaps by educational policymakers seeking teacher input on problems identified as national priorities. Step 2: Planning the Lesson. Once a learning goal has been chosen, teachers begin meeting to plan the lesson. Although one teacher will ultimately teach the lesson as part of the process, the lesson itself i s seen by all involved as a group product. Often the teachers will start their planning by looking at books and articles produced by other teachers who have studied a similar problem. The useful research lesson should be designed with a hypothesis in mind: some idea to be tested and worked out within the context of classroom practice. The goal i s not only to produce an effective lesson but also to understand why and how the lesson works to promote understanding among students. The initial plan that the group produces i s often presented at a school wide faculty meeting in order to solicit criticism. Based on such feedback, a revision i s produced, ready for implementation. Step 3: Teaching the Lesson. A date is set to teach the lesson. One teacher will teach the lesson, but everyone in the group will participate fully in the preparation. On the day of the lesson, the other teachers inthe group leave their classrooms to observe the lessonbeing taught. Teachers stand or sit in the back as the lesson begins, but when students are asked to work at their desks, the teacher-observers walk around, observing and taking careful notes on what the students are doing as the lesson progresses. Sometimes the lesson i s videotaped for later analysis and discussion. Step 4: Evaluating the Lesson and Reflecting on its Effect. The group generally stays after school to meet on the day the lesson has been taught. Usually, the teacher who taught the lesson i s allowed to speak first, outlining in his or her own view of how the lesson worked and what the major problems were. Then other members o f the groups speak, usually critically, about parts of the lesson they saw as problematic. Focus i s on the lesson, not on the teacher who taught the lesson. Step 5: Revising the Lesson. Based on their observations and reflections, teachers in the lesson-study group revise the lesson. They might change the materials, the activities, the problems posed, the questions asked, or all these things. They often will base their changes on specific misunderstandings evidenced by students as the lesson progressed. Step 6: Teaching the Revised Lesson. Once the revised lesson i s ready, the lesson i s taught again to a different class. This time all members of the school faculty are invited to attend the research lesson. Step 7: Evaluating and Rejlecting Again. This time, it i s common for all members o f the school faculty to participate in a long meeting. Sometimes an outside expert will be invited to attend as well. As before, the teacher who taught the lesson i s allowed to speak first, discussing what the group was trying to accomplish, her or his own assessment o f how successful the lesson was, and what parts of the lesson still need rethinking. Observers then critique the lesson and suggest changes. Not only i s the lesson discussed with respect to what the students learned and understood, but also with respect to more general issues raised by the hypotheses that guided the design of the research lesson. Step 8: Sharing the Results. All this work has focused on a single lesson. But because Japan i s a country with national education goals and cumcular guidelines, what this group of teachers has learned will have immediate relevance for other Japanese teachers trying to teach the same concepts at the same grade level. Indeed, the teachers in one lesson-study group see the sharing of their findings as a significant part of the lesson-study process. The sharing can be done in several ways. One i s to write a report, and most lesson-study groups do produce a report that tells the story of their group's work. Often these reports are published inbook form, even if only for the school's teacher resource room. They are read by the faculty and the principal, and might be forwarded to educational authorities at the prefectural level ifjudged to be interesting enough. Source: Adapted from J. W. Stigler, and J. Hiebert, The TeachingGap,The Free Press, 1999 I -117- TableA.4.1. InfrastructureDevelopmentProgramSummary,Veracruz Concept 1995 1996 I997 1998 1999 20001/ 20012/ Totalspacesconstructed and rehabilitated 2,773 5,100 3,837 3,025 3531 3,491 3,541 Classrooms 1,237 3,374 1,867 1,227 1,464 1,472 1,346 Laboratories 53 57 28 41 22 33 30 Workshops 107 104 129 117 69 103 120 Annex 1,376 1,565 1,813 1,640 1,776 1,883 2,045 Preschool 586 1,039 752 520 690 663 779 Classrooms 356 736 370 255 319 255 323 Annex 230 303 382 265 371 408 456 Primary education 551 1,741 1,433 743 1,184 1,298 1,180 Classrooms 448 1,353 900 405 607 597 487 Annex 103 388 533 338 577 701 693 Lower secondary 713 982 1,085 930 797 797 944 Classrooms 202 523 364 338 349 397 323 Laboratories 6 4 11 10 6 3 8 Workshops 61 76 103 71 53 47 89 Annex 444 319 607 511 389 350 524 Capacitacibn 99 45 37 22 8 74 42 Classrooms 6 3 3 1 n.a. 1 1 Laboratories 1 1 1 4 2 1 1 Workshops 18 9 5 2 2 22 13 Annex 74 32 28 15 4 50 27 Upper secondary (Profesional media -t6cnica) 145 13 60 n.a. n.a. ma. 268 Classrooms 29 ma. 8 n.a. n.a. n.a. 138 Liboratories 14 3 2 n.a. n.a. n.a. 5 Workshops 7 n.a. 4 n.a. n.a. n.a. 6 Annex 95 10 46 n.a. n.a. n.a. 119 (Media superior -bachillerato) 266 930 391 339 264 348 17 Classrooms 140 719 215 121 148 162 6 Laboratories 13 38 11 11 3 14 3 Workshops 11 13 15 28 8 21 5 Annex 102 160 150 179 105 151 3 Superior (licenciatura) 357 285 61 319 137 197 149 Classrooms 39 32 3 80 14 33 23 Laboratories 19 11 3 16 11 15 13 Workshops 8 6 n.a. 7 2 7 5 Annex 291 236 55 216 110 142 108 Extraescolar 45 43 13 132 251 60 125 Classrooms 17 8 4 17 27 12 24 Workshops 2 n.a. 2 9 4 6 2 Annex 26 35 7 106 220 42 99 Special works 11 22 5 20 n.a. 54 37 Classrooms n.a. n.a. n.a. 10 n.a. 15 21 c in Source: SEC. -118- Table A.4.2. Selected EducationalFlow Indicators School Year 90-91 91-92 92-93 93-94 949.5 95-96 96-97 97-98 98-99 99-00 0&01 OiL02 Primarv School Drop-Out Rate National 4.6 4.1 3.6 3.4 3.0 3.1 2.9 2.4 2.3 2.1 1.8 1.6 D.F. 1.5 1.7 0.3 0.5 1.o 1.3 1.1 1.4 1.4 1.6 1.4 1.3 Guanajuato 4.7 4.4 3.5 3.8 3.0 3.1 2.9 2.2 2.1 2.5 2.1 1.9 Tabasco 6.1 3.9 2.8 3.3 2.6 3.0 3.0 2.5 2.4 2.3 2.0 1.8 Veracruz 6.9 7.0 6.5 4.8 5.0 4.4 4.1 3.2 3.3 2.8 2.4 2.1 Repetition Rate National 10.1 9.8 8.3 8.3 8.1 7.8 7.6 7.3 6.8 6.4 6.2 6.1 D.F. 5.9 5.4 4.8 4.6 4.5 4.1 3.8 3.5 2.8 2.6 2.6 2.6 Guanajuato 10.0 9.9 8.6 8.5 8.5 8.2 8.0 7.8 6.8 6.5 6.3 6.2 Tabasco 12.0 11.9 10.1 9.7 9.1 8.5 7.9 8.0 7.2 6.4 6.2 6.0 Veracruz 12.6 12.2 10.3 10.7 10.3 10.2 10.1 9.9 9.7 9.5 9.2 8.9 Terminal Efjiciency Rate National 70.1 71.6 72.9 74.2 77.7 80.0 82.8 84.9 85.8 84.7 86.5 87.9 D.F. 88.8 89.6 90.9 91.5 95.6 95.9 96.3 99.0 95.8 94.3 94.1 94.5 Guanajuato 70.5 71.8 72.4 72.6 75.9 79.3 80.6 83.3 84.7 85.9 88.4 89.0 Tabasco 69.0 70.8 72.6 74.4 77.5 83.2 98.0 87.5 85.8 83.6 86.8 86.7 Veracruz 55.4 58.0 58.9 60.2 64.6 68.0 71.2 75.3 80.6 76.7 79.1 80.4 Lower Secondarv ~~~ ~~ Drop-Out Rate National 8.8 8.4 7.4 8.2 7.7 8.8 8.9 9.7 8.5 8.7 7.9 7.5 D.F. 9.0 8.0 7.1 7.6 8.9 8.6 9.2 8.9 7.6 7.2 6.6 6.2 Guanajuato 10.6 9.4 9.1 9.8 8.8 10.6 11.4 9.7 10.7 10.2 9.3 8.8 Tabasco 7.2 7.1 6.4 7.5 6.3 8.8 9.2 9.3 8.1 7.1 6.5 6.1 Veracruz 8.2 8.4 7.4 8.0 7.0 7.7 8.3 8.6 8.6 8.9 8 1 7.6 Repetition rate National 26.5 26.3 26.4 24.7 23.5 23.7 22.8 22.3 21.1 20.7 20.4 19.8 D. F. 37.3 36.5 34.2 33.3 32.7 31.8 32.1 22.1 17.0 18.4 18.7 18.6 Guanajuato 28.1 27.3 25.2 23.4 22.6 23.9 23.3 23.7 22.2 21.4 20.7 19.8 Tabasco 20.1 19.9 21.6 19.3 18.7 19.3 16.1 19.5 18.7 15.0 15.5 15.4 Veracruz 27.6 26.3 26.4 24.4 22.3 22.4 21.1 21.4 20.6 20.6 20.3 19.6 Terminal Eficiency Rate National 73.9 75.3 76.4 77.5 76.2 75.8 74.8 73.8 76.1 75.1 76.1 77.5 D.F. 73.4 73.9 75.9 78.6 72.8 74.7 73.7 74.4 78.0 80.0 80.8 82.1 Guanajuato 69.3 71.4 73.1 72.2 74.3 71.3 69.3 73.5 71.6 71.8 72.1 74.0 Tabasco 77.2 79.2 79.8 78.0 81.1 76.2 76.2 76.0 76.6 76.7 80.0 81.3 Veracruz 75.4 76.8 78.2 77.1 77.5 78.8 77.9 76.8 76.5 77.1 76.3 77.5 Absorption Rate National 82.3 82.9 83.8 85.8 87.7 87.0 86.7 87.8 90.0 91.0 91.8 92.7 D.F. 107.0 105.6 105.4 105.6 105.9 104.7 103.5 103.5 103.5 103.4 104.3 103.8 Guanajuato 66.4 67.1 70.6 72.7 75.6 75.8 74.7 78.8 83.8 83.9 85.1 86.7 Tabasco 81.9 85.5 86.6 89.0 92.0 90.7 90.1 86.4 94.2 94.8 95.5 96.0 Veracruz 79.1 82.1 81.1 83.3 85.3 84.0 83.9 84.5 89.4 90.4 90.2 91.3 Source: SEC. -119- Figure A.4.1. "Estindares Nacionales," MeasuringAbility, Veracruz 6o 1 50 40 30 20 10 0 1998 1999 2000 Communitycourses I 37.9632 44.20694 47.25188 ~ `DIndigenouseducation` 38.27983 42.92712 45.41661 Publicrural . 42.63086 45.18056 47.59516 0 Publicurban 44.85404 48.11365 51.19525 Privateurban 52.3296 54.61639 50.71115 I Figure A.4.2. "Estindares Nacionales," Measuring Ability (2ndgrade of primary students in 1998and 2000) i 47 I 46 45 44 43 42 41 40 11 National I1 Edo.Mex. Edo. Mex. II Guanaluato Guanajuato 1 Tabasco 1 Veracruz 8 2 0 1998 1 45.36508- 46.8594 1 1 45.37683 1 46.07034 1 43.94439 ~ 2 0 2 0 0 0 1 42.96232 1 46.91743 1 42.87054 1 43.76219 I 43.55972 Note: Inthis exercise the populationconsidered were children that in 1998 studied 2"dgrade of primary, and in 2000, 2nd grade. The test measures ability, not knowledge. Standardized grades range from 0 to 100. Source: Direccibn General de Evaluacibn, SEP. t -120- FigureA.4.3. "Esthndares Nacionales," MeasuringAbility (3rdgradeof primary students in 1998 and 1999) 44 7- --__I_ 43.5 43 42.5 42 41.5 41 40.5 1 National 1 Edo. Mex. Edo.Mex. 1 Guanaiuato I Tabasco 1 Veracruz ______~ I 1 ~ 030 1998 -42.24821 41.65548 43.73857 42.43283 41.76537 Nore: Inthis exercisethe population considered were childrenthat in 1998 studied 3rdgradeof primary, and in 1999, 3`dgrade. The test measuresability, not knowledge. Standardized grades range from 0 to 100. Source; Direccidn General de Evaluacidn, SEP. FigureA.4.4. "Esthndares Nacionales," MeasuringAbility (4`hgrade of primary students in 1998 and 2000) 50 p40 1998 43.09922 44.10725 44.17591 41.57428 42.40767 ~ E40 2000 46.57127 48.30555 1 46.93056 44.84784 45.85886 Note: Inthis exercise the population considered were children that in 1998 studied 4" gradeof primary, and in 2000,4" grade. The test measuresability, not knowledge. Standardized grades range from 0 to 100. Source: Direccidn General de Evaluacibn, SEP. -121- FigureA.4.5. "Estandares Nacionales," MeasuringAbility (5thgrade of primary students in 1998and 1999) 47 46.5 46 45.5 45 44.5 44 43.5 43 National 1 Edo. Mex. 1 Guanaiuato 1 Tabasco I Veracruz 1 I-E4 50 19% 45.81815 46.44721 I 46.41112 I 45.77859 1 44.57217 050 199! 50 1998 m50 1999 1 Note: In this exercise the populationconsidered were childrenthat in 1998 studied 5" grade of primary. and in 2000.5" grade. The test measures ability, not knowledge. Standardized grades range from 0 to 100. Source: Direccibn General de Evaluacibn, SEP. FigureA.4.6. "Estandares Nacionales," MeasuringAbility (lstofsecondarystudentsin1998and2000) grade 51.5 51 50.5 50 49.5 49 48.5 A Q .fu 1 National I Edo.Mex. 1 Guanajuato 1 Tabasco 1 Veracruz EJ l o-1998 sec 1 50.12285 1 50.33566 1 49.61806 1 49.57021 1 49.31384 1o sec 2000 1 50.32479 I 51.90377 I 51.12153 1 50.09674 1 50.58245 1 B2l o sec 1998 E10 sec 2000 1 Note: Inthis exercise the populationconsidered were children that in 1998 and 2000 studied 1` grade of secondary. The test measuresability, not knowledge, Standardized grades range from 0 to 100. Source: Direccih General de Evaluacibn, SEP. -122- FigureA.4.7, "Esthndares Nacionales," MeasuringAbility (2ndgrade of secondary students in 1998and 2000) 53 52 51 50 49 40 47 National 1 do. Mex. I Guanaiuato 1 Tabasco 1 Veracruz 20 sec 199L 52.59903 52.71903 52.42818 51.53285 52.29978 49.64613 1I 51.69776 11 49.05231 49.55913 11 49.14397 020 sec 1998W20 sec 2000 Nore: Inthis exercise the population considered were childrenthat in 1998and 2000 studied 2"dgrade of secondary. The test measuresability, not knowledge. Standardized grades range from 0 to 100. Source: Direcci6nGeneral de Evaluacih, SEP. FigureA.4.8. "EsthndaresNacionales," MeasuringAbility by Type of School (lstofsecondarystudentsin1998and2000) grade 51 50 i 49 40 47 46 45 `+lt I " 1 Secundaria General Secundaria Tecnica 1 Telesecundana millo sec 1998 I 50.22554 48.76658 47.72724 ~ l o sec 2000 I 51.73544 49.65145 47.03402 Nore: Inthis exercisethe populationconsidered were children that in 1998 and 2000 studied 1'` grade of secondary. The test measuresability, not knowledge. Standardized grades range from 0 to 100. Source: Direccih General de Evaluacih, SEP. -123- Figure-A.4.9. "Estiindares Nacionales," MeasuringAbility by Type of School - (2ndgrade of secondary students in1998and 2000) 54 52 50 48 46 44 42 1 SecundariaGeneral 1 SecundariaTecnica 1 Telesecundaria ~ H20 sec 2000 [ 50.60492 47.52992 46.2349 20 sec 1998 H20 sec 2000 I Note: Inthis exercise the population considered were children that in 1998and 2000 studied 2"dgrade of secondary. The test measuresability, not knowledge. Standardized grades range from 0 to 100. Source: Direcci6n General de Evaluaci6n, SEP. -125- APPENDIX TO CHAPTER 5 -126- TableA.5.1. PublicHealthSpendingandPer Capita GDP, by State Per Capita Public Expenditure Uninsured and Insured, 2000 - StatePublic Expenditures in Current Prices Health as a Percentage of State's GDP Uninsured Social Per STATE Population Security Capita a h 1 Insured' Average STATE % GDP (a) (b) Puebla 385 1,558 971 0.25 Aguascalientes 2.5 Guanajuato 404 1,304 854 0.31 BajaCalifomia 2 Michoach 434 1,322 878 0.33 BajaCalifomia Sur 3.9 Veracruz 497 1,470 983 0.34 Campeche 1.8 Morelos 580 1,685 1,132 0.34 Coahuila 2.6 Jalisco 577 1,628 1,103 0.35 Colima 3.5 BajaCalifomia 720 1,927 1,323 0.37 Chiapas 3.8 DistritoFederal 2,060 4,688 3,374 0.44 Chihuahua 1.9 San Luis Potosi 595 1,332 963 0.45 Distrito Federal 2.7 Tlaxcala 602 1,328 965 0.45 Durango 3.4 Chiapas 595 1,255 925 0.47 Guanajuato 2.5 Guerrero 653 1,364 1,009 0.48 Guerrero 3.2 Nayarit 907 1,799 1,353 0.50 Hidalgo 3.1 Yucatin 1,014 1,960 1,487 0.52 Jalisco 2.4 Nuevo Le6n 939 1,771 1,355 0.53 Mtxico 1.8 Sinaloa 822 1,528 1,175 0.54 Michoacin 2.8 Zacatecas 690 1,258 974 0.55 Morelos 2.5 Chihuahua 935 1,691 1,313 0.55 Nayarit 4.9 MCxico 483 870 676 0.55 NuevoLe6n 1.7 Querttaro 830 1,402 1,116 0.59 Oaxaca 3.5 Hidalgo 698 1,160 929 0.60 Puebla 2.1 Quintana Roo 1,240 2,014 1,627 0.62 Querttaro 1.9 Oaxaca 613 951 782 0.64 QuintanaRoo 2 Coahuila 1,268 1,707 1,487 0.74 SanLuis Potosi 2.7 BajaCalifomia Sur 2,141 2,807 2,474 0.76 Sinaloa 3.4 Tamaulipas 1,084 1,416 1,250 0.77 Sonora 2.8 Colima 1,615 1,854 1,734 0.87 Tabasco 4 Durango 1,206 1,379 1,292 0.87 Tamaulipas 2.3 Tabasco 1,179 1,348 1,263 0.87 Tlaxcala 3.4 Aguascalientes 1,453 1,501 1,477 0.97 Veracruz 3.2 Campeche 1,462 1,509 1,486 0.97 Yucatin 3.8 Sonora 1,616 1,641 1,628 0.98 Total 745 1,811 1,278 0.41 EUM 2.5 1. Uninsuredpopulation expenditureincludesRamo 12 and Ramo 33 (FASSA) of SSA and state contribution. 2. Insuredpopulation expendituresincludeIMSS, ISSSTE, and PEMEX. Source: SSA. -127- 16.8 16.5 15.9 15.5 15.0 14 Mortality rate of children less than 5 years old Veracruz 4.4 4.0 4.1 4.1 3.8 National 5.1 4.9 4.7 4.5 4.1 15 Mortality rate due to nutritional deficiency of children less than 5years old Veracruz 23.1 24.1 20.7 15.6 15.1 National 19.2 16.8 17.1 16.9 16.8 21 Mortality rate due to diarrhea of children less than 5 years old Veracruz 32 30 29.* 24., 20.. National 38.4 33.3 30.2 26.5 24.2 22 Mortality rate of children less than 5 years old due to ARI Veracruz 51.C 41.2 39.5 37.1 28.7 National 73.5 67.7 64.1 59.7 51.1 23 Mortality rate due to accidents Veracruz 25.1 26.8 32.1 28.2 27.1 National 37.6 37.9 37.5 35.2 33.5 24 Morbidity rate due to pulmonary tuberculosis Veracruz 31.3 35.5 28.3 26.5 27.' National 18.2 20.7 18.7 19.6 19.8 36 Mortality rate due to heart diseuse Veracruz 67.1 69.2 73.9 69.1 65.1 National 70.4 71.8 72.6 73.5 74.5 38 Mortality rate due to cerebrovuscular disease Veracruz 29.1 32.2 30.6 32.1 30.1 National 26.1 26.1 26.4 26.4 26.5 40 Mortality rate due to diabetes mellitus Veracruz 37.1 35.3 37.6 45.6 47.1 National 37.4 38.0 40.2 41.8 43.0 -128- Table A.5.3. SelectedMorbidity Indicators: Veracruz, Guanajuato, and National IND 1996 1997 1998 1999 2000 18 New Casesof Measles Veracruz 0 0 0 0 0 Guanajuato 0 0 0 0 0 National 2 0 0 0 0 19 New Casesof Tuberculosis (Rate) Veracruz 34.5 38.7 35.7 30.8 29.5 Guanajuato 1 0 1 0 1 National 48 39 29 42 41 20 New Cases of Tetanus (Neonatal) Veracruz 9 5 4 2 2 Guanajuato 2 1 2 0 1 National 64 39 25 17 10 30 New Cases ofRabies Veracruz 0 5 1 0 1 Guanajuato 0 0 0 0 0 National 16 20 7 5 4 31 New Cases of Malaria Veracruz 91 42 51 39 36 Guanajuato 0 0 0 0 0 National 6,206 4,788 15,100 3,993 4,072 32 New Cases of Malaria by P. Fakiparum Veracruz 4 2 1 1 0 Guanajuato 0 0 0 0 0 National 87 65 21 42 36 33 Morbidity rate due to classical dengue Veracruz 92.7 158.4 35.5 33.4 8.7 Guanajuato 0 0.1 0 0 0 National 37.6 55.5 24.2 30.7 24.3 34 Dengue aemorrhagicfatality rate Veracruz 0.24 0.09 0.04 0.01 0 Guanajuato 0 0 0 0 0 National 3.02 3.77 3.76 2.09 2.08 35 New Cases of (oncocercosis) Veracruz 0 0 0 0 0 Guanajuato 0 0 0 0 0 National 37 New Cases ofArteria1 Hypertension Veracruz 298.8 361.7 323.8 263.65 256.2 Guanajuato 367 373.1 359.1 228 345.7 National 247.4 271.8 272.7 274.5 274.8 39 New Cases of Diabetes Mellitus (Rate) Veracruz 189.2 253.7 264 209.1 226 Guanajuato 345.7 386.8 388 248.9 355.5 National 198.3 215.4 235.69 235.3 237.3 -129- IND 1996 1997 1998 1999 2000 41 Cholerafatality rate Veracruz 2.2 0 0 0 0 Guanajuato 0 2 0 0 0 National 0.46 0.76 0 0.54 0.4 42 New Casesof Cholera Veracruz 45 149 I 0 0 Guanajuato 0 260 4 0 0 National 1,088 2,356 71 2,978 1,500 Source: SSA, SEWER, Ministry of Healthof Guanajuato,INEGI. -130- Table A.5.4. FederalPer CapitaHealthSpendingfor OpenPopulation-Ram033 (FASSA) (ConstantMxP 2000) PEF2001 PEF2002 2000 (Executed) (Budgeted) Puebla 242 260 235 Michoacdn 320 335 310 Veracruz 273 304 291 Guanajuato 349 351 335 Chiapas 363 379 373 Oaxaca 385 385 371 San Luis Potosi 401 428 400 Zacatecas 431 416 404 Mtxico 488 509 486 Hidalgo 476 494 478 Distrito Federal 489 518 519 Morelos 527 545 539 Tabasco 568 577 553 Guerrero 600 584 568 Jalisco 572 613 590 Tlaxcala 594 620 594 Sinaloa 663 704 684 Baja California 720 727 699 Chihuahua 690 729 724 Yucatdn 756 774 762 Nayarit 745 768 751 Queritaro 743 772 717 Nuevo Le6n 863 908 880 Durango 852 908 902 Tamaulipas 918 949 945 Coahuila 1,025 1,096 1,076 Campeche 1,104 1,153 1,102 Sonora 955 1,117 1,099 Quintana Roo 1,177 1,248 1,157 Aguascalientes 1,136 1,215 1,153 Colima 1,729 1,359 1,239 Baja Califomia Sur 2,239 2,274 2,225 Total 723 742 716 Source: SHCP -131- Table ASS. Veracruz Health Services (SSNSESVER) Fundingand Expenditure (1996-2001) (Millionsof 2000MxP) FundingSources 1996 1997 1998 1999 2000 2001 2002* Federal 509.6 704.1 835.9 984.7 1,238.8 1,266.9 1,251.1 (% of total) 65.3% 69.1% 64.6% 66.3% 66.1% 54.9% 56.2% PAC - PROGRESA 28.4 0.00 94.7 79.5 172.6 213.8 23.3 (% of total) 3.6% 0.00% 7.3% 5.4% 9.2% 9.3% 1.1% State 199.7 277 327.1 325.9 372.4 745.7 951.5 (% of total) 25.6% 27.2% 25.3% 22% 19.9% 32.3% 42.8% Others 1.4 0.8 0.4 0.00 0.00 0.00 0.00 (% of total) 0.2% 0.1% 0.03% 0.00% 0.00% 0.00% 0.00% Cost Recovery 41.2 37.6 34.9 94.9 91 82.9 0.00 (% of total) 5.3% 3.7% 2.7% 6.4% 4.9% 3.6% 0.00% Total 780.3 1,019.4 1,293.04 1,485.1 1,874.8 2,309.2 2,225.9 *Budget Expenditureby Chapter (Millionsof 2000 MxF') 1996 1997 1998 1999 2000 2001 2002 Personal Services 439.1 517.6 801.4 951.4 1,177.5 1,343 1,261.2 (% of total operational expenses) 58.3% 55.2% 68.1% 69.4% 70.9% 70.7% 72.2% Materials and Medical Supplies DNgS NA N A N A 108.5 118.6 142.2 54 (% of total operational expenses) 7.9% 7.1% 7.5% 3.1% Others 175.8 165.2 222.6 151.2 159.8 197.8 150.1 (% of total operational expenses) 23.3% 17.6% 18.9% 11% 9 6% 10.4% 8.6% General Services 84.1 151.6 131.7 156 193.4 203 143.2 (% of total operational expenses) 11.2% 16.2% 11.2% 11.3% 11.7% 10.7% 8.2% Ueracruznon Services N A NA N A NA N A N A 110.7 (% of total operational expenses) 6.3% Transferences/ Community Assistants 54.5 103 21.2 7 11 13.1 27.6 (% of total Operational Expenses) 7.2% 11% 1.8% 0.5% 0.7% 0.7% 1.6% Total OperationalExpenses 753.5 937.3 1,176.9 1380. 1,6603 1,899.1 1,746.7 96.6% 92% 91% 92.9% 88.6% 82.2% 78.5% Equipment 24 61.9 38.4 25 43.2 160.3 0.03 (% of total) 3.1% 6.1% 3% 1.7% 2.3% 6.9% 0.00% Public Works 2.7 20.2 77.7 80 171.4 249.9 298.7 (% of total) 0.4% 2% 6.% 5.4% 9.1% 10.8% 13.4% 2% income tax N A N A N A NA N A N A 180.5 (% of total) 8.1% Total Investment 26.8 82.1 116.1 105 214.5 410.2 479.2 3.4% 8.1% 9.0% 7.1% 11.4% 17.8% 21.5% Total 780.3 1,019.4 1,293 1,485.1 1,874.8 2,309.2 2,225.9 Source :SESVER, SEFIPLAN, SSA. -132- Table A.5.6. Comparisonof HealthStaff andFacilitiesbetweenVeracruz, Guanajuato,and the NationalAverage, 1997and 2000 Indicators National Guanajuato Veracruz 1997 1997 1997 2000 ~ Doctorsper 100,000 pop 115.9 78.4 106.2 107.2 Nurses per 100,000 pop 181.9 120.8 126.3 136.7 Hospitalbeds per 100,000 pop 80.5 57.5 59.7 52.7 Health Clinics*per 100,000 pop 50 31.7 41.5 47.3 Consultations(general) per 1000 1,497.1 POP 1,154.8 1,366.6 1,850.2 Surgical interventions per 1000pop 27.3 23.9 22.3 25.6 Births attendedper 1000 women in reproductive age 56,7 57.4 47.5 46.8 Source : INEGI, PerspectivaEstadistica: Guanajuato; Veracruz.. Table A.5.7. Selected Health Service (Supply) Indicators(2000) CONCEPT OPENPOPULATION INSURED POPULATION (Per 100,000 population) SESWR IMSS-SOL IMSS ISSSTE PEMEX SDN SM Physiciansindirect contactwith patients 79.2 48.38 164.25 393.6 508.5 411.2 416 Dentists 7.2 0.8 7.1 18.7 26.8 100.7 71.1 Nurses 93.6 60.3 253.5 420.2 552.1 738.5 618.6 Health workers 5.3 1.3 45.1 75.2 97.2 260.2 71.1 Hospitalbeds (Censables) 46.1 14.7 85.7 135.2 199.4 1,158.1 458.6 Health clinics 20.1 41.7 7.3 50.9 21.8 92.3 35.6 Radiology laboratories 0.9 0.4 2.6 13 NA 16.8 14.2 Surgery operating rooms 2.1 0.4 3 6.2 11.7 25.2 21.3 Delivery rooms 10.6 41.7 1.9 4 N A 16.8 10.7 Bloodbanks 0.2 0 0.2 1.7 N A 0 3.6 Source: SSA. 1 Tr T I I -137- APPENDIX TO CHAPTER 6 -138- Table A 6.1 Water and Sanitation Investment Spending inVeracruz, by source. Year Activity Expenditure (MxP Millions) State Federal Municipality Other/' Total 1999 Water Urban 43.5 11.2 9.9 16.7 81.2 (Actual) Water Rural 31.6 14.0 0.1 45.7 Sewage Urban 45.5 10.7 1.9 14.0 72.1 Sewage Rural 3.8 0.0 3.8 Wastewater T 4.0 2.5 4.4 10.9 Other Activity' l9.1 0.7 19.8 Total 147.4 39.1 11.9 35.1 233.5 Percentage 63.1 16.7 5.1 15.0 100.0 2000 Water Urban 88.8 37.9 1.o 2.3 130.0 (Actual) Water Rural 25.4 20.6 46.0 Sewage Urban 99.6 48.1 5.O 152.8 Sewage Rural 1.1 1.1 Wastewater T 9.6 15.6 4.0 29.2 Other Activity2 32A 8.7 41.3 Total 257.2 131.0 6.0 6.2 400.4 2001 Water Urban 109.5 40.1 149.6 (Actual) Water Rural 0.0 SewageUrban 62.3 22.1 1.9 2.5 88.7 Sewage Rural 0.0 Wastewater T 45.6 45.6 Total 217.4 62.1 1.9 2.5 283.9 2002 Water Urban 52.4 7.4 59.8 (Budgeted) Water Rural 11.6 11.6 Sewage Urban 3.6 1.6 5.2 Sewage Rural 0.3 0.3 Wastewater T 11.8 0.5 12.3 Other Activity' 4.9 0.4 5.3 Total 84.6 9.9 N.A. N.A. 94.5 Note: Year 2002 does not include funds from a recently establishedtrust (2 percent of payroll tax), for which about US$6 million are already allocated. Totals may not add upto due rounding. I/Refers to all other sources includinginternal cash generation. 21Water and sanitation not categorized under the above. Includes solid waste Source: CAEV. -139- APPENDIX TO CHAPTER 7 -140- TableA7.1. Volume of transportinthe mostimportantports (millionsof tons) Port 1997 1998 1999 2000 Growth 1997-2000 Veracruz 9.9 12.9 13.5 15.2 54% Tuxpan 8.4 9.9 9.3 9.9 18% Coatzocoalcos 2.3 3.0 2.5 2.7 17% Paiaritos 31.0 34.7 35.1 39.3 27% Total 20.6 25.8 25.3 27.8 35% Source: SECOM. Table A7.2. Volumeof transport by sourcein2000 (millionsof tons) Port\type of Imports Exports Cabotage Total product Veracruz 11.9 2.9 0.4 15.2 Tuxpan 7.8 0 2.1 9.9. Coatzacoalcos 1.3 0.8 0.4 2.6 Pajaritos 4.9 28.8 5.6 39.3 Total 25.9 32.5 8.5 67.0 Source: SECOM. TableA7.3. Veracruz RoadNetwork (M) Type of Road 1997 % 1998 % 1999 % 2000 % 2001 % Paved 5,315 36 5,741 39 6,079 38 5,733 35 6,293 27 Turnpikes 535 4 536 4 556 3 556 3 556 2 Federalhighways 2,561 17 2,788 19 3,196 20 2,640 16 2,634 11 Feeder roads 2,220 15 2,417 16 2,242 14 2,244 14 2,810 12 Rural roads 85 1 293 2 293 1 Macadam 9,345 64 9,063 61 10,112 62 9,265 58 8,686 37 Federalhighways 3,079 19 1,722 11 1,722 7 State 7,033 43 7,542 47 6,964 30 Unpaved 1,193 7 8,357 36 Total 14,660 100 14,804 100 16,191 100 16,191 100 23,336 100 Source: SECOM. -141- All Roadsper: Paved Roads Der: - Tot' Federal Roads: Intra-citv State Urban and Surface km2 OOO km2 000 ' Length OOOPOP OOoPOP Roads - Roads: Rural Roads: Surface Improved of all - Total Unpa- Trea- Total %Paved in (km) -- - -- - - Total Paved ved ted Paved Pathwavs ofarea state (W (km) state States: 318,953 47,946 47,946 61,436 702 9,031 51,703 157,037 25,083 122.324 9,630 52,531 162.1 3.3 55.6 1.1 Aguascalientes 1,858 369 369 675 19 656 814 814 332.4 2.0 183.4 1.1 Baja Cal. Norte 11,106 1,701 1,701 1.138 77 1,061 4,411 582 3.829 3,856 158.4 4.5 39.4 1.1 Baja Cal. Sur 6,271 1,199 1.199 1,726 690 682 354 1,089 992 97 2.257 85.1 14.8 22.4 3.9 Campeche 4,646 1,353 1,353 908 67 841 1.777 349 512 916 608 89.5 6.7 59.9 4.5 Coahuila 8,523 1.843 1,843 1,934 78 1,856 4,746 4,746 56.2 3.7 24.4 1.6 Colima 1,991 389 389 550 101 449 1,052 9 969 74 365.0 3.7 167.2 1.7 Chiapas 19,270 2,215 2,215 2,106 12 309 1,785 14.890 734 13,939 217 56 260.8 4.9 57.1 1.1 Chihuahua 12,394 2,485 2,485 2,522 62 2,460 7,387 1,037 6,350 50.2 4.1 20.0 1.6 Distrito Federal 149 149 149 99.4 0.0 99.4 0.0 Durango 10,324 2,201 2,201 877 145 732 6,030 5,776 254 1,216 86.3 7.1 26.6 2.2 Guanajuato 10,215 1,243 1,243 2,037 2,037 4,824 4,511 313 2,111 333.9 2.2 117.5 0.8 Guerrero 12,258 2,166 2,166 2,057 I25 1,932 6,858 966 4,831 1,061 1,177 192.3 4.0 80.9 I.7 Hidalgo 7,087 1,020 ,020 2, I83 414 1,769 3,884 238 3,614 32 337.7 3.2 134.4 1.3 Jalisco 24,376 2,564 2,564 2,991 250 2,741 4,815 4,815 14,006 304.2 3.9 66.2 0.8 Estado de Mtxico 9,729 1,234 ,234 6.134 2,139 3,995 2,361 2,361 453.3 0.7 243.7 0.4 Michoacan 12,995 2.621 2,621 2,455 82 2,373 4,069 3,864 205 3,850 217.1 3.3 86.8 1.3 Morelos 2,042 434 434 1,162 77 1,085 446 446 413.3 1.3 307.4 1.0 Nayarit 5,945 982 982 860 154 706 1,691 35 1,586 70 2,412 215.2 6.5 63.6 1.9 Nueva Le6n 7,162 1,434 1,434 2,774 78 2,696 2,954 2,897 57 110.9 1.9 64.9 1.1 Oaxaca 16,003 2,992 2.992 1,243 78 1,165 8,148 8,148 3,620 167.8 4.7 43.6 1.2 Puebla 8,553 1,440 1.440 2,527 77 2,450 4,432 4,299 133 154 252.2 1.7 118.6 0.8 Querktaro 3,170 574 574 816 59 757 1,780 1,701 79 269.4 2.3 119.8 1.o Quintana Roo 5,006 1,007 1,007 1,187 198 989 2,812 2,812 99.4 5.7 39.6 2.3 SanLuis Potosi 10,715 1.656 1,656 1,335 77 1,258 7,724 204 7,379 141 170.5 4.7 48.6 1.3 Sinaloa 16,360 1,071 1.071 2,162 78 2,084 7,567 1,677 5,888 2 5,560 281.6 6.5 54.3 1.2 Sonora 32,860 2,253 2.253 3,738 239 3,499 15,221 15,221 11,648 177.7 14.8 31.1 2.6 Tabasco 7,761 558 558 2,193 77 2,116 5,010 1,844 3.166 314.7 4.1 108.4 1.4 Tamaulipas 12,213 2,208 2.208 2,301 727 1,574 7,704 68 7,508 128 153.0 4.4 49.0 1.4 Tlaxcala 2,373 574 574 694 34 660 1,105 1,105 606.3 2.5 315.3 1.3 Veracruz-Llave 16,780 3,125 3,125 4,343 2,094 2,249 9,312 6,793 2,519 230.4 2.4 108.4 1.1 Yucatan 9,044 1.382 1,382 2,064 78 1,986 5,598 2.119 147 3,332 229.9 5.5 170.3 4.0 Zacatecas 9,774 1,504 1,504 1,744 356 1,388 6,526 6,526 130.3 7.2 38.5 2.1 Source: For MexicanStats-SCT: AnuarioEstadistico, 1998. -142- Table A7.5. State PublicInvestmentinTransportBy Source (thousandsof 2000 MxP) Source 1998 1999 2000 2001 Total % (5) (5) (1) State 526,158 620,098 336,969 1,128,258 2,611,483 87 - Direct 5 12,655 339,725 261,217 468,367 1381,964 53 - FORTEM (4) 523,722 523,722 17 - FISE(3) 216,880 56,531 75,507 348,919 12 Fondo 7,222 25,357 32,580 1 Compensatorio ObrasEmergentes 4,611 38,135 42,746 1 Others 1,670 19,221 60,662 81,552 3 Federal 39,311 3,319 190,327 128,161 361,246 12 - PAFEF(2) 185,327 127,144 312,471 11 - PEMEX 5,000 1,017 6,017 - Otras 39,311 3,319 42,758 1 Municipales 17,832 1,615 19,447 1 Total 565,468 641,249 528,911 1,256,419 2,992,048 100 1 It does not include$ 1.615 million of municiualuublic investment. 2 Programa de Apoyo parael Fortalecimiento de las Entidades Federativas. 3 Fondo para la Infraestructura Social Estatal 4 Programa de FortalecimientoaEstadosy Municipios 5 Includesthe office of Public Works, which in 2000 passedto the Secretm'a de Desarrollo Regional. Source: Direccidn de InversidnWblica. Secretariade Finanzas y Planeacidn. Table A7.6. Revenuesgeneratedby Transports. (thousandsof 2000 MxP) 1998 1999 2000 2001 Total -Taxes 23 26 25 24 98 UrbanPublicTransport 10 10 10 9 39 - Used Vehicles 13 17 15 15 59 Acquisitions Feesand Products 182 91 111 173 558 - Dir.Gral. De Trhnsito y 140 46 61 63 310 Transporte -- Tolls ConcessionHighways 20 29 31 84 164 22 17 18 26 83 Total 206 117 135 197 656 Source: SECOM and SEFPLAN.