Document of The World Bank FOR OFFICIAL USE ONLY Report No. 60980-CR INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY (FY2012-2015) FOR THE REPUBLIC OF COSTA RICA June 10, 2011 Central America Country Management Unit Latin America and the Caribbean Region International Bank for Reconstruction and Development This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s Policy on Access to information. The date of the last Country Partnership Strategy was September 4, 2008. CURRENCY EQUIVALENTS Currency Unit = Colon US $ 1.0 = 510.01 Fiscal Year: January 1 - December 31 ABBREVIATION AND ACRONYMS AAA Analytical and Advisory Services BPIP Public Investment Projects (Banco de Proyectos de Inversion Publico) CABEI Central American Bank for Economic Integration CAFTA Dominican Republic-Central America Free Trade Agreement CAPRA Central American Probabilistic Risk Assessment Initiative CASCR CAS Completion Review CCSS Social Security Institution (Caja Costarricense del Seguro Social) CCT Conditional Cash Transfer CEM Country Economic Memorandum CER Certified Emission Reductions CNE National Risk Prevention and Emergency Management Commission CPS Country Partnership Strategy DRM Disaster Risk Management ERPA Emission Reduction Payment Agreement ESW Economic and Sector Work FCPF The Forest Carbon Partnership Facility FDI Foreign Direct Investment FIRST Financial Sector Reform and Strengthening Initiative FONAFIFO Costa Rica's National Forestry Financing Fund (Fondo Nacional de Financiamiento Forestal) FY Fiscal Year GDP Gross Domestic Product GEF Global Environment Facility IBRD International Bank for Reconstruction and Development ICE State Electricity Company (Instituto Costarricense de Electricidad) IDB Inter-American Development Bank IDF Institutional Development Fund IFC International Finance Corporation IMF International Monetary Fund INCAE Regional Business School (Instituto Centroamericano de Administración de Empresas) INEC National Statistics and Census Bureau (Instituto Nacional de Estadisticas y Censos) LAC Latin American Countries MDG Millennium Development Goals MEP Ministry of Public Education (Ministerio de Educacion Publica) MIGA Multilateral Investment Guarantee Agency NLTA Lending Technical Assistance PEFA Public Expenditure and Financial Accountability PER Public Expenditure Review PPP Public Private Partnerships PSE Payment for Environmental Services Program (Pago por Servicios Ambientales) RAMP Reserves Advisory and Management Program REDD Reducing Emissions from Deforestation and Forest Degradation ROSC Report on Observance of Standards and Codes SESA Strategic Environmental and Social Assessment SICA Central American Integration System SIECA Secretariat of Economic Integration of Central America UMI Upper Middle Income TA Technical Assistance TRE World Bank Treasury WBG World Bank Group WDR World Development Report IBRD Vice President: Pamela Cox Country Director: C. Felipe Jaramillo Task Team Leader Andrea C. Kucey IFC Regional Director: Paolo M. Martelli Country Manager: Roberto Albisetti Task Team Leader John Barham   COUNTRY PARTNERSHIP STRATEGY FOR THE REPUBLIC OF COSTA RICA TABLE OF CONTENTS Executive Summary I.  Introduction ..................................................................................................................................... 1  II.  Country Context.............................................................................................................................. 1  . Poverty and Gender  .................................................................................................................................. 2  Recent Economic Developments .............................................................................................................. 4  Economic Outlook .................................................................................................................................... 5  III.  Government Program and Development Challenges .................................................................. 7  IV.  Lessons from Past World Bank Experience ............................................................................... 15  The Last CPS .......................................................................................................................................... 15  . Lessons Learned  ..................................................................................................................................... 15  V.  The Country Partnership Strategy .............................................................................................. 16  Cluster I – Supporting Competitiveness ........................................................................................ 17  Cluster II – Improving Efficiency and Equity in Social Sectors .................................................... 19  . Cluster III – Supporting the Environment and Disaster Risk Management  .................................. 19  Proposed Program of Support ................................................................................................................. 21  Monitoring and Evaluation ..................................................................................................................... 22  Regional .................................................................................................................................................. 22  Partnerships ............................................................................................................................................. 23  . Consultations  .......................................................................................................................................... 24  VI.  Risks ............................................................................................................................................... 24  TABLES AND FIGURES Figure 1. Poverty levels and changes ........................................................................................................... 2 Table 1. Costa Rica: Key Macroeconomic Indicators and Projections ....................................................... 5 Box 1. Costa Rica Competiveness Diagnostic and Recommendations Report.......................................... 10 Box 2. OECD Global Forum to Implement Internationally Agreed Tax Standards .................................. 14 Box 3. Bank Support for Regional Integration in Central America ........................................................... 23 ANNEXES Annex 1. Results Matrix Annex 2. CPS Completion Report Annex 3. Gender At A Glance Annex 4. Costa Rica At-a-Glance Annex 5. Selected Indicators of Bank Portfolio Performance and Management Annex 6. IBRD Program Summary Annex 7. Social Indicators Annex 8. Operations Portfolio (IBRD and Grants) and Statement of IFC’s Held and Disbursed Portfolio Annex 9. Key Economic Indicators Annex 10. Key Exposure Indicators Annex 11. Overview of Analytical Work and Trust Funds COUNTRY PARTNERSHIP STRATEGY FY2012-15 REPUBLIC OF COSTA RICA EXECUTIVE SUMMARY 1. Costa Rica is one of the strongest performers in the Latin American Region. Due in large part to its political stability, strong institutions, and open export-driven economy, the country has been successful at attracting high technology firms and developing a sustainable tourism sector. This has contributed to a diversified economy, and robust economic growth. Costa Rica also stands out for its environmental policies and determined mission to achieve carbon neutrality by 2021. Poverty and inequality are lower in Costa Rica than in other Latin American countries, while social indicators are above regional standards. Inequality increased somewhat in the second half of the 2000s, but it remains well below most LAC countries. 2. Growth performance in the years before the crisis was one of the most impressive in Latin America. Gross domestic product (GDP) growth reached 8.8 percent in 2006 and 7.9 percent in 2007. This compares to Latin American regional averages of 5 percent and 4.5 percent for the same years. The food and fuel crises of 2008 and the global financial crisis of 2009 hit Costa Rica hard as the country relies heavily on foreign markets for investment, exports and fiscal revenue. GDP growth slowed significantly in 2008 to 2.7 percent, with a contraction in 2009 of -1.3 percent. In addition, the expansion of current spending during the crisis, particularly for wages and salaries, has significantly limited the Government’s fiscal space (the deficit for 2011 is currently projected at 5.6 percent of GDP). 3. Growth reached 4.2 percent in 2010 and is expected to continue at about the same level in coming year. Current projections have growth at between 4 and 4.5 percent over 2011- 15 driven by robust private consumption and domestic investment. However, increased fiscal pressures will limit public capital expenditures, curtailing the plans of the incoming administration to eliminate important bottlenecks in the infrastructure sector. To address the long term growth constraints across many sectors, including infrastructure, energy, and education, the Government is considering alternative financing mechanisms such as PPPs and concessions. 4. The Government has also articulated a strategy for medium term fiscal consolidation. The comprehensive fiscal reform includes measures to reduce inefficiencies in the tax collection system, modernize tax information systems and strengthen the fight against tax evasion. The Government is also implementing measures on the expenditure side to create fiscal space. However the prospects for approval of the fiscal reform are uncertain in an opposition- controlled Congress. While current debt levels can accommodate deficits in the short-term, failure to pass the fiscal reform would increase debt sustainability risks. 5. In the years leading up to the last Country Partnership Strategy (CPS) the country’s level of engagement with international financial institutions was limited. The FY09-11 World Bank Country Partnership Strategy (CPS, Report No. 43276-CR) was the second strategy to be prepared for Costa Rica following a nearly 10-year period of very limited Bank engagement. During the global financial crisis, however, Costa Rica worked closely with the World Bank and other multilaterals to put in place precautionary programs which served as an i important signal to the financial markets, and included a US$500 million Development Policy Loan with Deferred Draw-Down Option to boost the country’s competitiveness and strengthen its public finances in response to the global financial crisis.1 This level of responsiveness and cooperation has set the foundation for a renewed interest from the Government in working with the World Bank Group (WBG). 6. Adjustment to the global crisis, however, implied a major change in the structure of lending with budget support taking the place of investment lending. Despite this shift in the composition of the program, the CPS maintained a focus on the key results in areas such as telecommunications, health care, and secondary education. This approach combined with good quality supporting analytical work shows how a country can adjust to changing circumstances while maintaining the commitment to deliver results in the areas targeted by the CPS program. 7. CPS builds on this key lesson of providing responsive and flexible support, and reflects the Costa Rican authorities’ desire to maintain a strong financial and knowledge- based relationship with the Bank. To provide flexible support and taking into account lessons learned, the CPS focuses on outcomes, recognizing that in trying to influence results a variety of instruments will be used. In this way, the CPS program will be better aligned with the Government’s priorities and tailor made to address key policy issues as well as responsive to the government’s request that the Bank concentrate its support in areas where it can build on its extensive knowledge and experience. 8. The Bank program is focused in three clusters which are closely aligned with the Government’s strategic view and investment program. The support under these clusters falls in areas where the WBG has maintained a sustained engagement. The three clusters are: (i) developing competitiveness; (ii) improving efficiency and quality in the social sectors; and (iii) supporting environment and disaster management. IFC is also looking to step up its program in Costa Rica after several years of limited activity in the country, and expects to concentrate on: (i) renewable energy and energy efficiency projects; (ii) manufacturing and agribusiness sectors with an emphasis on companies with plans to increase regional expansion and raise exports; and (iii) private sector educational and healthcare institutions; (iv) financial services; and (v) advisory engagements to support infrastructure and sustainable agribusiness projects.                                                              1 This loan was drawn down in full by October, 2010. ii I. Introduction   9. Costa Rica stands out as a strong performer in the Latin American region. Costa Rica has been able to diversify its economy and post a long record of sustained economic growth enabled by political stability, strong institutions, and an open export-driven economy. The country has also been successful at attracting high technology firms and developing a sustainable tourism sector. Economic growth and pro-active social policies have resulted in one of the lowest poverty rates in Latin America. Costa Rica also stands out in the international arena for its environmental policies and determined mission to achieve carbon neutrality by 2021. 10. The FY12-FY15 World Bank Country Partnership Strategy (CPS) accompanies a new government, and will cover the full four year political cycle. This will be the third CPS following a period of limited engagement, and reflects a further strengthening of the country relationship. Support during the global financial crisis demonstrated the Bank could be a responsive, flexible and effective partner in a time of crisis. The Bank program during this CPS period will be demand driven and flexible, in line with the type of engagement in other upper middle-income countries. In turn, IFC is also looking to step up its program in Costa Rica after several years of limited activity in the country. IFC’s renewed interest in Costa Rica is consistent with its increased commitment to Central America. 11. The framework of the CPS includes a consolidation of activities in a few priority clusters, in line with the Government’s National Development Plan (NDP). There is significant continuity in the areas of engagement as the same political party was re-elected and the new government has maintained the overall strategic direction. The partnership strategy will also allow the Bank to learn from Costa Rica in areas where the country has been a pioneer and share its best practice with other neighboring and global clients. At the same time, as the country starts facing increasingly sophisticated challenges, the Bank can provide technical assistance and share with Costa Rica lessons learned in other successful countries. II. Country Context 12. Costa Rica has benefited from its long stable democracy and strong system of constitutional checks and balances. The country abolished its military in 1949, and its strong democratic tradition relies on a system of gradual consensus building and institutional accountability. Furthermore, the country has maintained a determined outward strategy for growth further confirmed by recent developments. In addition to the Dominican Republic Central America Free Trade Agreement (DR-CAFTA), and the Association Agreement with the EU (whose negotiations were concluded in May, 2010) the country has also negotiated several bilateral free trade agreements, including with Canada, Chile and most recently China. This well grounded stability and reliance on an open economy have contributed to the country’s success in attracting foreign direct investment (FDI) in high value added sectors (e.g., electronics, medical equipment) as well as becoming a world class tourism destination. 1 13. The need for democratic consensus building often generates gridlock, and the political situation is further complicated by the fragmentation of political forces in Congress. The needed democratic consensus to advance the development programs of the successive administrations has often delayed implementation of polices and critical programs, as was the case with the Congressional approval of the DR-CAFTA agreement with the US, which required protracted negotiations with a referendum becoming effective only in 2009, two and a half years later than in El Salvador, Honduras, Guatemala, and Nicaragua. Given its ambitious development agenda, the government strategy is to obtain early approval of its core elements, which includes a substantive fiscal overhaul. However, the fact that the ruling party no longer heads the Legislative Assembly is likely to make implementing reforms even more difficult. Poverty and Gender 14. Poverty and inequality indicators are lower in Costa Rica than in other Central and South American countries. Since 2004 poverty (headcount, national definition) has been on a downward trend in Costa Rica, falling from 23 percent in 2004 to 17.7 percent in 2008. Extreme poverty also decreased to 3.5 percentage points in 2008, in line with the relatively high levels of growth and effective social transfer mechanisms. Costa Rica’s inequality increased somewhat in the second half of the 2000s, with the Gini coefficient going from .422 in 2006 to .439 in 2009 (the highest level in the last decade), but still it remains the lowest in the region. This increase is particularly significant in urban areas, which is where roughly 60 percent of the population resides. Figure 1  Poverty levels and changes 30% Percentage of total population 25% 20% 15% 10% 5% 0% 2004 2005 2006 2007 2008 2009 Poverty headcount 15. The variance in poverty incidence between regions is not considerable. Still poverty is the lowest in the highland central area of the country; extreme poverty for example is quite low at 4 percent. In the other areas, the rates of extreme poverty are higher, hovering around 8 percent, with some exceptions. Overall poverty is higher in rural areas. In 2010, urban poverty was around 4 percent and rural poverty around 8 percent. So while poverty is located outside the central region, it also coincides with rural and remote areas. Costa Rica’s indigenous population is relatively small at two percent of the entire population, and includes 24 autonomous indigenous territories. While the overall population is relatively small, indigenous peoples are 2 key stakeholders in Bank operations.2 In addition Costa Rica recently launched the world’s first Strategic Environmental and Social Assessment (SESA) workshop which brought together approximately 120 indigenous stakeholders in the context of the Forest Carbon Partnership Facility (FCPF). 16. Overall the poor have larger households, more barriers to access health services, less schooling, and more underemployment. According to the 2007 Country Poverty Assessment, female-headed households were more likely to be poor than male-headed households. In addition, female-headed households tend to possess characteristics associated with poverty; including high unemployment, high levels of self-employment, and higher than average incidence of part-time work. Traditionally, governments have placed a great emphasis on solidarity, and the current Government has highlighted this even further with a commitment to address concerns of rising inequality as noted above. 17. Effective social spending, including conditional cash transfers, helped mitigate the negative impact of the crisis on poverty. Following the food and fuel crisis, poverty increased to 18.5 percent and extreme poverty to 14.3 percent in 2009. The crisis also increased unemployment, but for those who remained employed, its impact was relatively small. Unemployment had been steadily declining since 2006, reaching a low point of 4.6 percent in 2007. However, in 2008 the unemployment rate started rising, reaching 7.8 percent in 2009. Unemployment rates continue to be higher for women than for men: 6 percent for women versus 4 percent for men (2009), but the gender gap in unemployment was reduced from 2004, when female unemployment was 9 percent and male unemployment was 5 percent.3 In 2010 poverty further increased to 21.3 percent, while unemployment began to fall to 7.3 percent.4 It is expected that with higher economic growth in 2011 and 2012, poverty will revert back to its pre- crisis trajectory. 18. Costa Rica’s social indicators rank higher than those of other countries of the region. Basic education and health indicators are above the regional standard and gender indicators also compare favorably (Annex 3). Costa Rica has achieved universal primary education and is making gains in secondary coverage and completion rates. The country is also closing the education gender gap. At the primary level, the female-male primary gross enrollment ratio is roughly equal (0.99 for 2008). At the secondary levels, there is even a slight tendency in favor of girls with a female-male ratio of 1.06 (2008). In health, 99 percent of all births in 2009 were attended by skilled health staff, which is better than the averages for upper middle income (UMI) countries (96 percent, 2009) and the LAC region (89 percent, 2009). The contraceptive prevalence rate of 80 percent (2009) is also better than the average for UMI countries (75 percent, 2009) and the LAC region (75 percent, 2009). Other important health achievements include a life expectancy rate of 79, and low infant mortality rates, outcomes that                                                              2 Both in the ongoing Education Effectiveness and Efficiency Project (all schools are being built within indigenous protected territories) and within the Reduced Emissions from Degradation and Deforestation (REDD) process. 3 All data up to this sentence were drawn from Genderstats (World Bank). 4 There was a change in methodology for poverty and unemployment figures in 2010. To date only the 2009 figures have been adjusted to allow comparison. The adjusted 2009 figure for poverty is 19.9 percent, and for unemployment is 8.4 percent. 3 are impressive, not only in a regional context, but at a global level. Not surprisingly, Costa Rica consistently performs well on the Human Development Index and is ranked 62 of 169 in 2010. 19. To further improve the quality of service delivery will require the introduction of new and more sophisticated approaches that respond to emerging challenges in the country, like the aging of the population. The Government is now considering third generation reforms that go beyond addressing simply coverage to concentrate on quality, efficiency and effectiveness. For example, the Government and many stakeholders are increasingly concerned, not only about the skills of university graduates and the quality of health services, but also about the need to improve monitoring and cost management in both university education and health services. Recent Economic Developments 20. Costa Rica entered the global crisis in a position of relative strength. Previous to the crisis GDP growth peaked at 8.8 percent in 2006 and 7.9 percent in 2007, well exceeding the Latin America regional averages.5 High growth rates and fiscal surpluses combined with sound debt management contributed to a decline of public debt from 55.2 percent of GDP in 2005 to 45.9 percent in 2007. Costa Rica’s external position remained stable between 2005 and 2007, with a high import bill financed by growing exports and robust capital inflows, especially FDI. While the current account deficit was hovering around 5 to 6 percent of GDP in 2005-2007, FDI inflows alone averaged around 6 percent of GDP, leading to an increase in international reserves to over US$4 billion by the end of 2007. 21. Costa Rica’s economy was hit hard by the food, fuel and financial crisis. Costa Rica relies heavily on foreign markets for investment, exports and fiscal revenue. The global financial crisis resulted in a contraction of international trade with 2009 exports and imports falling (in value terms) 7.5 percent and 25.4 percent respectively with respect to values in 2008. The decline in the volume of imports was the main factor for the current account deficit falling sharply to 2 percent of GDP in 2009, from 9.3 percent of GDP in 2008. Tax revenues linked to trade also fell, contributing to a decline in tax revenues from 15.5 percent of GDP in 2008 to 13.7 percent in 2009 and 13.4 percent in 2010. GDP growth slowed significantly in 2008 to 2.7 percent, with a contraction in 2009 of -1.3 percent. 22. The fiscal space accumulated prior to the crisis provided room for some expansionary policies. Some of the fiscal space was used to scale-up social transfer programs to help cushion the impact of higher food prices in 2008 and the economic slowdown in 2009. Admittedly, a significant share of the fiscal expansion took the form of higher wages. As a result, the fiscal surpluses of 2007 and 2008 of 1.2 percent of GDP and 0.2 percent of GDP respectively, turned in 2009 and 2010 into deficits of 4.0 percent of GDP and 5.5 percent of GDP. 23. The expansion of current spending during the crisis, particularly for wages and salaries, increased rigidities in the budget and has significantly limited the space of the Government to adjust the fiscal stance. Even if growth picked up in 2010 (4.2 percent) which                                                              5 This compares to Latin American regional averages of 5 percent and 4.5 percent for the same years. 4 next to Panama was the highest in the Central American Region, fiscal pressures in 2010 meant limited capital expenditures, curtailing the plans of the incoming administration to eliminate important bottlenecks in the infrastructure sector. To address the long term growth constraints across many sectors, including infrastructure, energy, and education, the Government is pursuing a fiscal reform and considering alternative financing mechanisms, such as PPPs and concessions, for many of the infrastructure components in the public investment program. Table 1 Costa Rica: Key Macroeconomic Indicators and Projections As percentage of GDP, unless indicated otherwise 2007 2008 2009 2010 2011* 2012* 2013* 2014* 2015* Growth and Prices (%) Real GDP (% annual growth) 7.9 2.7 -1.3 4.2 4.3 4.4 4.5 4.5 4.5 CPI Inflation (eop) 10.8 13.9 4.0 5.8 7.5 6.5 5.5 4.5 4.0 Savings and Investment National savings 18.4 18.2 13.9 16.3 15.4 15.8 16.4 16.9 17.2 Gross Domestic Investment 24.7 27.6 15.9 20.0 20.2 20.8 21.5 22.0 22.4 Public Sector 3.2 4.0 3.6 4.2 3.6 3.7 3.7 3.8 3.8 Public sector Combined public sector overall 1.2 0.2 -4.0 -5.5 -5.6 -4.2 -4.1 -4.1 -4.2 Nonfinancial public sector balance 1.9 0.4 -3.2 -5.1 -5.1 -3.7 -3.6 -3.6 -3.7 Revenues 23.4 23.6 22.5 22.2 22.5 24.3 24.5 24.7 24.9 Expenditures 21.5 23.2 25.7 27.3 27.7 28.0 28.1 28.4 28.6 Central Bank balance -0.7 -0.2 -0.8 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 Public Debt (excluding ICE) 42.5 36.0 38.4 39.4 41.8 42.3 43.0 43.8 44.8 Domestic debt 32.8 27.4 31.2 32.3 35.1 35.6 36.1 36.6 37.3 External debt 9.7 8.6 7.2 7.1 6.7 6.7 6.9 7.2 7.5 External Sector Indicators Current account balance -6.3 -9.3 -2.0 -3.6 -4.8 -5.0 -5.1 -5.2 -5.2 Trade balance -11.3 -16.8 -7.0 -10.0 -11.6 -12.2 --13.0 -13.5 -13.5 Foreign direct investment 6.2 6.9 4.6 4.1 4.6 4.5 4.1 4.2 4.2 Net international reserves (US$m) 4,114 3,799 4,066 4,627 5,277 5,327 5,627 5,902 6,152 Memorandum: GDP (US$ million) 26,322 29,838 29,241 35,780 40,297 43,170 45,364 47,761 49,944 *Projected. Source: Ministry of Finance, Central Bank of Costa Rica, and IMF & World Bank estimates. Note: REER denotes Real Effective Exchange Rate. Economic Outlook   24. The Government has presented a strategy for medium term fiscal consolidation. The main element is a fiscal reform that was submitted to Congress in January 2011. The proposal would extend the current sales tax to services and allow financial deduction of VAT paid on inputs. It also levels at 15 percent the tax rate on dividends, interest and capital gains. The Government’s program includes measures to reduce inefficiencies in the tax collection system, modernize tax information systems and strengthen the fight against tax evasion. In the short 5 term, the Government is implementing expenditure measures which should imply savings of approximately 0.25 percent of GDP in 2011. 25. While a comprehensive tax reform is a step in the right direction, important risks remain in terms of fiscal consolidation. As the timing of the approval of a tax reform package is still uncertain, it is not clear if the Government has enough space for the ambitious public investment outlined in the National Development Plan. Even though debt levels can accommodate the projected deficits in the short-term, the fiscal dynamics are such that the situation could become complicated if consolidation does not take place. 26. Growth is expected to continue at about the same level as 2010 in coming years. Current projections have growth at between 4 and 4.5 percent over 2011-15 driven by robust private consumption and domestic investment growth. Over this period, the external sector could contribute negatively to growth by about 1 percentage point per year, as imports growth is projected to be above exports growth. While Costa Rica is likely to benefit from higher export demand and increased investment, relatively high unemployment and other domestic factors may limit the country’s ability to achieve pre-crisis growth levels in the near term. 27. The Central Bank estimates inflation at the upper band of its target, 6 percent for 2011, and falling to 4 percent for 2012. The slowing down of the economy contributed to a drop in inflationary pressures that had emerged in 2007 and 2008, driven by the global surge in food and fuel prices and easing of monetary policy. CPI inflation reached 10.8 percent at end- 2007 and 13.9 percent by end-December 2008. Inflationary pressures, however, subdued in 2009 and CPI inflation fell to 4 percent (the lowest level in 25 years). In 2010 inflation rebounded to 5.8 percent. The current targets set by the Central Bank for the medium term may need to be revised upward depending on the evolution of fuel and food prices. As in many other countries, food price inflation has also increased in Costa Rica recently (from a negative rate in early 2010 to about 8 percent at the end of the first quarter of 2011) but the situation is considerably different to the one in 2008 when food inflation was above 25 percent. 28. As the economy recovers and fuel prices continue to increase the current account deficit is expected to deteriorate slightly. The current account deficit is now projected to average around 5 percent of GDP over 2011-2015. This represents a modest deterioration with respect to the 2009 and 2010 outcomes, but it is roughly in line with the 5.2 percent of GDP average over 2004-2009. It is expected that the deficit will be mostly financed by FDI flows projected at 4.3 percent of GDP on average over the coming 5 years. 29. The financial system in Costa Rica remains sound, despite the crisis. After posting credit growth rates in the range of 30 to 40 percent in 2007 and 2008, credit to the private sector increased only by 4.8 percent in national currency and declined by 0.3 percent in foreign currency by year-end 2009. Nonperforming loans, which in September 2009 represented 2.2 percent and seem to have remained stable around this level. However, the risk-adjusted adequacy ratio of the banking sector increased to 16.3 percent in the first quarter of 2010. Moreover, as a result of lower intermediation levels and higher funding costs, profitability ratios have been under pressure. The system’s return on equity went down to 7.6 percent in March 2010, from 12.4 percent in March 2009. 6 30. On the whole, the Costa Rican growth outlook is positive. The international finance community has adopted a positive outlook through an upgrading of its credit rating to lower investment-grade (Baa3/BBB-) by Moody’s and Fitch (BB+).6 Moreover, there is a chance the fiscal challenges mentioned above do not materialize to the extent forecasted, and that FDI and growth are higher than expected, particularly if a tax reform package is approved and the Government is able to control spending and implement its public investment plan. To improve long term growth prospects, the country is committed to addressing development challenges across many fronts. III. Government Program and Development Challenges 31. The development plan set forth by the Chinchilla government builds on, and consolidates achievements to date. The four year National Development Plan (2011-2014) seeks to position Costa Rica as one of the most developed countries in Latin America, with an economy driven by innovation and sustainable development and capable of offering a high quality of life to the population. 32. The Government’s ambitious reform program addresses not only challenges in the aftermath of the global crisis, but also existing structural limitations. The development plan includes improving the country’s aging infrastructure (the last important road was built 30 years ago), achieving carbon neutrality by 2021, and addressing emerging issues including increasing levels of crime and violence and challenges of enhancing the country’s competitiveness. 33. Citizen security is the highest development priority for this administration, as the country faces rising levels of crime linked to drug trade. The national concern with security is growing as Costa Rica is increasingly used as a transit point by both Mexican and Colombian drug cartels. Although crime rates in Costa Rica are significantly below those of other Central American countries, the steady rise of crime rates in recent years has raised serious concern. Homicides have increased from 8.2 per 100,000 people in 2008 to 11.8 in 2009; and property crimes have also increased by more than 263 percent. A recent regional Bank Study (Crime and Violence in Central America) found the annual economic cost of crime in Costa Rica can be estimated at about 3.6 percent of GDP. 34. The Government has launched a comprehensive approach to fighting violence and crime which includes using preventive and proactive approaches to engage institutions and civil society, address risk factors and improve the institutional response to crime. Specific actions include: (i) increasing the strength of the public police force by 50 percent during the period 2010-2014 through recruitment and training programs; (ii) increasing resources and equipment for the police; (iii) improving working conditions of officials and personnel and strictly controlling acts of corruption; (iv) creating a National Anti-Drug Commission to fight against drug trafficking and organized crime; (v) developing a national policy of public safety based on a national consensus of the issues at stake and ensuring the sustainability of efforts; (vi) increasing funding for public safety by at least 50 percent; and (vii) strengthening the municipal police and promoting community participation in crime prevention efforts. Given the regional                                                              6 Standard & Poor maintains a rating of speculative investment (BB) for Costa Rica. 7 dimension of the problem, better coordination to address this issue within Central America is also important. 35. Costa Rica has the main ingredients to compete successfully in the global economy and increase productivity. The Government has launched a competitiveness strategy to build on the country’s comparative advantages and which recognizes areas for improvement. The authorities are aware that while its strong institutions have provided the basis for sustained growth, severe constraints are limiting what could be an even more outstanding performance. As a result, the Government has drawn on the successful experience of other countries and recommendations of a Bank study (Box 1), including putting in place a Competitiveness and Innovation Council chaired by the President. As a small open economy, the Government recognizes that to achieve sustained productivity growth the country needs a stable macroeconomic and political framework, a strong institutional infrastructure to coordinate with the labor and business community, administrative capabilities of the state to frame and implement policies, good quality human capital, opportunities for technology, innovation and research, low cost logistics and supply chain management, and an environment of solidarity that affords opportunities for all, especially the poor. To address this, the Government’s competitiveness strategy is organized around five main areas which include human capital and innovation; trade and external FDI; capital markets development; infrastructure; and business simplification. 36. Costa Rica’s human capital strategy recognizes: (a) the need to build a skilled labor force as a basis for a competitive economy; and (b) the continued role of education in maintaining an equitable society. While the country has done relatively well in primary education, close to one-half of Costa Rican workers have not completed secondary education and can only access low quality jobs. In 2009, only 80 percent of 15 year olds were in school and most of these would not have been at the age appropriate grade level (9th grade) due to a high repetition rate. While progress has been made in ensuring that more children start secondary education, the proportion of young people who had finished secondary education was only 40 percent. Girls are more likely than boys to complete secondary education, which could suggest some gender-sensitive actions could be useful: (i) continue the efforts to increase completion of secondary education, particularly among boys, through the Avancemos CCT program, and (ii) ensure that girls as well as boys are provided guidance and opportunities to go into vocational and technical training as well as into priority disciplines in tertiary education (see below). 37. The Government will continue efforts to increase the number of secondary graduates, with a special focus on the poor. The relatively low completion rates of secondary education, despite strong labor market signals favoring secondary education completion, point to structural problems of the education system. Until 2008, the conditions for passing a grade in secondary education were very strict resulting in a large dropout rate among those students that were required to repeat grades. The liberalization of these conditions has facilitated progression through successive grades eliminating an important bottleneck. In addition, in 2006 the Government introduced the Conditional Cash Transfer (CCT) program Avancemos targeted at those students in the two bottom quintiles (about 125,000 students). The transfer size increases with the grade to increase incentives for graduation. The impact of these measures has yet to be proven, but it is expected that they will boost secondary completion rates. In 2010, the secondary dropout rate improved for the fourth consecutive year from 10.9 percent to 10.2 8 percent. The strong government commitment to education has been reconfirmed recently with the passage of legislation to increase the budget allocation to the sector from 6 to 8 percent of GDP. 38. In addition, the Government has taken steps to increase the number of “technical” upper secondary schools which expand options for young people who complete lower secondary education. The Government has committed to further expanding coverage of technical and vocational schools at the secondary level to provide additional opportunities for lower secondary graduates to acquire skills and enter the job market. A special emphasis is also being made to improve employment opportunities for women and vulnerable groups. A complementary program to achieve this goal includes a "National Network of Care" which targets children and older adults, especially female heads of households, who are unable to have full-time jobs and thereby have limited incomes to support their families. 39. Although private universities account for 30 percent of the enrollment, the system of accreditation is weak and public universities remain the core of the tertiary education system. Most private universities offer only a limited number of programs and are also more liberal in allowing access, as they do not organize entrance examinations, unlike public universities. Due to high costs, private universities also exclude students from poorer socio- economic backgrounds. The main issue at the tertiary level is to improve the quality and access of programs. Fewer than 60 of the over 1,100 programs at the university level are accredited, and of these, the majority are in the public universities. The Government is focused on increasing the number of tertiary education graduates by expanding access to public universities, encouraging universities to improve quality and relevance of programs, promoting university research and collaborative projects with industry. 40. Costa Rica’s emergence as a knowledge economy, with the ability to generate good quality jobs, will depend not only on how it addresses the problem of universal coverage and quality in secondary education, but also how it develops scientific and technological capabilities. Moving from a selective development of technological capabilities to a comprehensive approach, the country has to develop the technological capabilities of its entire workforce to improve productivity, as well as create the capacity for technological innovation by producing or applying new knowledge. The country’s selective development of science and technology since the early nineties, focusing primarily on electronics, has positioned it to make this leap. FDI played a major role, starting with Intel’s sizeable investment in Costa Rica’s electronics industry in the mid 1980s. This impacted the education system through the creation of new programs in Universities. The Ministry of Science of Technology has also been instrumental in creating partnerships with the private sector, for example with technological institutions such as Hewlett Packard’s ProCurve Research Laboratory. Electronic parts for microprocessors is the highest single export category in Costa Rica and accounts for about a third of industrial exports. 41. There is a strong government commitment to improving the business environment and reducing red tape, and an ambitious reform program is underway to streamline processes and procedures. The World Bank Competitiveness Study (Report No. AAA39 - CR) and follow up Non Lending Technical Assistance (NLTA) found removing burdensome red tape for businesses could have the potential to dramatically improve the investment climate. The 9 Government is pursuing improvements to facilitate business start-up, and the recent implementation of DR-CAFTA and new trade agreements with China and the EU offer opportunities to further expand and diversify export markets. Box 1: Costa Rica Competiveness Diagnostic and Recommendations Report The report outlined a program to address critical bottlenecks that hamper Costa Rica growth prospects in diverse fields including infrastructure, technological innovation, human capital and access to credit. The top five priority actions identified by the report with the potential for the greatest impact are:  First, make competitiveness a high priority: a “política de estado”, by establishing a competitiveness ministry by law, rather than by decree.  Second, award a concession of the Limon-Moin Port, transforming it into a best-practice operation, logistic center, and the anchor of Costa Rican exports.  Third, transform the current Ministry of Science and Technology into an effective champion of knowledge transfer, innovation, and articulation of SMEs by revamping their programs and procedures.  Fourth, address the dramatically high attrition rate of secondary education by improving the curriculum, strengthening teacher training programs, and expanding currently successful technical and scientific education programs.  And fifth, establish an encompassing deregulation initiative to revise the somewhat obsolete and costly procedures that govern daily business life in Costa Rica. Source: Costa Rica Competitiveness Diagnostic and Recommendations, The World Bank (2009) 42. Efforts to increase competitiveness should also address outdated and overly restrictive business regulations. For Costa Rica to become more competitive in the global economy, reform efforts should stretch beyond reducing bureaucracy to improving the outdated legislation currently governing much of the country’s economic activities. This includes, among other things, legislation and regulatory practices affecting access to credit, restructuring and exit of insolvent companies, and the protection of the rights of shareholders. A reduction in inefficiencies for tax collection would also limit the burden on firms and increase revenue collection. 43. Further progress in financial sector reform, including passage of legislation to strengthen supervision and prudential regulations, should strengthen the financial system’s capacity to finance investment. Implementation of the recommendations from the 2008 FSAP has been slow. The main challenges for the financial sector in the country relate to the introduction of a risk based and consolidated supervision, to the adherence to the Basel Core Principles, the establishment of a deposit insurance scheme (which is underway) and to introduce improvements to the credit information system. Additional concerns relate to the level of dollarization of the economy. 44. The country faces a major challenge in improving the quality of infrastructure services and reducing critical logistic bottlenecks. According to the Global Competitiveness Index, international business executives perceive Costa Rica to have the worst overall quality of roads and ports among the six countries of Central America (World Economic Forum, 2010). The country’s overall infrastructure score is closer to that of Honduras and Nicaragua than to the regional infrastructure quality leaders, Panama and El Salvador. The impact of a lack of adequate infrastructure is increasing the costs of logistics and hampering exports; for instance, key 10 agricultural exports from Costa Rica, not only face poor quality rural roads connecting with Puerto Limon, but a lack of storage facilities for refrigerated containers, as well as limited capacity to handle high volumes of containers. These factors and cumbersome customs procedures combined, increase transport times, costs, and losses of perishable goods. Not only has the level of public sector investment in infrastructure been low but the involvement of the private sector has been low as well. Of over US$1 billion invested through Public Private Partnerships in infrastructure from 2000 to 2009 in Central America, Costa Rica was responsible for securing little more than 10 percent – a smaller proportion than every other country in the region with the exception of Nicaragua. 45. The incoming Government has made a commitment to investing in infrastructure to improve competitiveness in global markets. Significant investments are envisioned in infrastructure, transport, and telecommunications. Given the sizable investments required to address the aging fiscal infrastructure and the tight fiscal situation, government investments will be complemented with the private sector and FDI. To this end, the Government is actively seeking to create the institutional conditions to engage the private sector in the financial construction and management of infrastructure projects (PPPs). Already the Government has begun to open insurance, electricity and telecommunications to the private sector. In addition, to stimulate innovation the Ministry of Science and Technology is working across sectors to develop priority actions to create mechanisms that promote the adoption and use of new technologies. 46. The Government is committed to improve border management. There is a need to modernize customs to improve trade facilitation and duty collection. The system of Information Technology for Customs Control (TICA) operated by Customs allows all customs transactions to be processed electronically, however, coordination with other institutions is not smooth and control is not automated. This often leads to long delays in release of goods for both imports and exports. The problem is compounded at land borders, as the infrastructure is deteriorating, and coordination with neighboring countries is poor. Also, the complexity of the transit of goods and the above mentioned weakness in infrastructure, increase opportunities for irregularities such as smuggling. 47. Costa Rica is well-positioned to build on its strength as a global leader on environmental issues, and is the first country to pledge to reach carbon-neutrality by 2021. The country has been pioneering incentive-based environmental programs since 1976, and this unique experience now provides the foundation for piloting performance-based Reducing Emissions from Deforestation and Forest Degradation (REDD) payments and serves as an example for other countries. Once known as having one of the world’s highest deforestation rates, Costa Rica achieved negative net deforestation in the early 2000s, due in part to the program (Pago por Servicios Ambientales, PSA), which financially compensates the owners of forests and forestlands who carry out conservation, natural regeneration and reforestation projects. Over the past decade the PSA has supported forest conservation on privately-owned and community-owned lands in priority watersheds and key areas within Costa Rica’s portion of the Mesoamerican Biological Corridor. Costa Rica is also a front runner in the 50-country Forest Carbon Partnership Facility (FCPF) and will receive a US$3.4 million preparation grant from the FCPF Readiness Fund. Testifying to its global leadership is Costa Rica’s willingness to share its expertise in the environment and climate change with other countries. For example, Costa Rica 11 has participated since 2002 in a program supporting South-South Knowledge Exchange with Benin and Bhutan in sustainable biodiversity practices, natural resource management, energy efficiency, and other topics.7 48. After introducing PSA, Costa Rica has continued to lead in environmental innovation. The country also pioneered efforts at introducing financial incentives for the reduction of greenhouse gas emissions, promoting the Certified Tradable Offsets, or carbon credits, which subsequently, within the Clean Development Mechanism of the Convention on Climate Change, served as a source of inspiration for the development of Certified Emission Reductions (CERs). The new administration is continuing to implement programs in support of carbon neutrality and has established a National Environmental Council. The Government is also developing its low carbon growth strategy to help prioritize key actions across sectors. Building on its experience with the FCPF Readiness Fund, Costa Rica might also pilot the new FCPF Carbon Fund, preparing a first-of-its-kind Emission Reduction Payment Agreement (ERPA) of about US$40 million, which would provide valuable experience for other countries worldwide. In line with the Carbon Fund rules of operations, the signature of an ERPA under the FCPF Carbon Fund is contingent upon an Emission Reductions Program from Costa Rica being selected by the Carbon Fund Participants, and upon a positive assessment of the Country’s Readiness Package by the FCPF Participants Committee. 49. Despite these significant advances the country still faces environmental challenges. Solid waste is a serious problem with the main destination for waste disposal being unregulated dumps. The country’s sanitary landfill is already at capacity, and river contamination is an issue with rivers being used as a dumping site for raw sewage and industrial effluents. In addition, the capital, San José, does not have a centralized sewage collection system. Addressing these challenges would ensure a comprehensive approach to reaching the country’s climate change goals and help position the country to maintain its global leadership in this area. 50. Expanding access to clean energy is also a challenge. Even though Costa Rica is doing well in implementing a clean energy agenda with a 90 percent share of the power generation total coming from renewable sources, in the last few years most of their power generation expansion came in the form of fuel-based thermal generation. In accordance with its development plan, Costa Rica (and its vertically integrated power utility - ICE) must develop new clean, renewable power resources. While the Government is pushing to forbid any development of non-renewable resources and continues to protect many of the areas where hydro and geo-thermal could be developed, the country faces the challenge of identifying sources for the additional generation required to meet growing demand. A new Electricity Law proposal has been sent to Congress which would open the market to some degree of competition (at a wholesale level) and promote the development of renewable energy resources, not only by ICE but also by private investors. 51. The Government is recognized as one of the best in the region for its efficient and effective response to natural disasters. Costa Rica is particularly exposed to natural disasters, including seismic events, volcanoes and seasonal hydro-meteorological  events. A recent study from the Ministry of Planning estimated that between 1988 and 2009 the country suffered                                                              7 See http://www.south-southcooperation.org/ 12 economic losses representing US$1.8 billion, and in 2009 alone of US$450 million. To address this vulnerability, Costa Rica was the first country to adopt the innovative World Bank financed Catastrophe Deferred Drawdown Option (CAT DDO), which acts as a source of bridge financing if a country declares a state of emergency as a result of a natural disaster. This proved to be an extremely effective tool in responding to the aftermath of the January 2009 earthquake. The country also has a comprehensive legal and institutional framework for disaster risk management (DRM). In the event of a national emergency, the National Risk Prevention and Emergency Management Commission (CNE) acts as the highest ranked coordinating authority. 52. Rapid demographic changes in Costa Rica will require significant public sector investments in quality health care and continuing efforts to improve efficiency. The population is aging rapidly. It is expected that by 2050 over 20 percent will be over 65 years of age, compared to almost 6 percent today. This demographic transition will put pressure on the health system given the emergence of new risk factors and non-communicable diseases among large groups of the population such as hypertension and diabetes, as well as multiple concurrent chronic conditions among the elderly. Past patient satisfaction surveys suggest that the population is relatively satisfied with services provided by the Social Security Institute (Caja Costarrisence de Seguridad Social) which covers almost 90 percent of the population. However, there is evidence that increased demand is creating pressure at all levels of care, particularly diagnostic and therapeutic interventions in outpatient, inpatient and hospital emergency services. This situation has given rise to inequities as mid and low-income groups only have access to public services while higher income individuals can access private health services. To address these challenges, it is important to modernize management systems for decision-makers and develop sustainable policies and interventions with evidence-based medicine and principles of cost-efficiency, as well as to increase capacity. 53. The immediate challenge for the Government is to improve public sector health infrastructure and meet the expansion of demand for quality secondary and tertiary services. To respond to the challenges, the government is taking stock of the sustainability of the main health institution, la Caja de Seguridad Social, and is exploring options to rehabilitate and build new public health infrastructure. In addition, other options under consideration include: (i) establishing a center to guide the adoption of the public health sector of clinical protocols based on international standards of evidence-based medicine and cost-effectiveness; (ii) moving to information-based decision making to better monitor quality of care, costs and health outcomes; and (iii) improving responsiveness of health care networks. 54. To ensure not only delivery on its commitments, but their sustainability, the Government has begun to focus on strengthening the role of the state and bridging the gap with OECD countries. The Government is seeking to improve public sector capacity in key areas, including public expenditure management, regulatory capacity, ability to carry out extensive PPP arrangements, procurement and revenue mobilization. In some areas the process of identifying gaps with OECD countries is well advanced. For example, an issue of particular importance for Costa Rica is to reassure its partners of the commitment to bring the tax system in line with OECD countries and establish the necessary mechanisms of cooperation for a thorough enforcement of the tax legislation (see Box 2). 13 Box 2 OECD Global Forum to Implement Internationally Agreed Tax Standards Following the G20 Summit in London in April 2009, Costa Rica has sought to improve the exchange of tax information to meet the OECD standards. The country is committed to reform its legislation to improve access to financial information and sign tax information exchange agreements. In April 2010, Costa Rica signed a Memorandum of Understanding with the Global Forum on Transparency and Exchange Information for Tax Purposes, confirming its membership. Efforts towards tax information exchange agreements include: · On April 14, 2010, Costa Rica submitted to the National Assembly new legislation (Transparency Bill) to improve access to financial information and facilitate the signing of bilateral tax information exchange agreements. New additions include access to information and stock information. This Bill is in the advanced stages of approval in Congress, and is expected to enter into force in the second half of 2011. · As of May 2010 Costa Rica has made progress on 23 bilateral tax treaties, including signed agreements with Argentina, France, Mexico and The Netherlands. Negotiations with Australia, Canada, Korea (Rep.), India, Indonesia, Italy and South Africa have been finalized and agreements are expected to be signed soon. Costa Rica is scheduled to sign on June 29, 2011 bilateral tax information exchange agreements with Denmark, Finland, Faeroes, Greenland, Iceland, Norway and Sweden. · On October 4, 2010 Congress approved a tax treaty with Spain to avoid double taxation, which facilitates the tax information exchange. This agreement entered into force on January 1, 2011. · Negotiations with Germany have been finalized and the tax treaty is being officially translated prior to its signature. · Costa Rica is working to adjust an existing tax information exchange agreement with the Unites States to conform to OECD standards. · The Convention for Mutual Assistance and Technical Cooperation among Central American Tax and Customs Administration signed by Costa Rica, Honduras, Guatemala, El Salvador and Nicaragua has been recognized by the OECD Global Forum on Transparency as one which complies with international standards providing an effective exchange of information. A technical note setting forth how the international standards are to be interpreted regarding this convention has to be approved by COSEFIN and COMIECO. Costa Rica is currently working on a final draft of this note along with Guatemala. . Costa Rica expressed its interest in the May-June 2011 Global Forum Meeting in joining the Multilateral Convention on Mutual Administrative Assistance on Tax Matters. It is expected to sign on officially before the next G20 Summit in November 2011. Source: Ministry of Finance 55. The Government’s four year National Development Plan addresses the key development challenges mentioned above, but it may be overly ambitious. The Government will require significant resources to build and rehabilitate key infrastructure, develop the energy sector in a sustainable manner, as well as to increase spending on education and welfare, and tackle health care for a rapidly aging population and citizen security. Given the limited fiscal space it will be challenging to find alternative options to move forward in all of these areas 14 simultaneously. These investments are necessary, however, to set the country on the right trajectory to compete on a global scale. IV. Lessons from Past World Bank Experience The Last CPS 56. The FY09-FY11 CPS was the second strategy to be prepared for Costa Rica following a nearly 10-year period of very limited Bank engagement. The preceding FY04-07 CPS, presented to the Board in mid-2004, established a framework for a closer partnership between the World Bank Group and Costa Rica based on mutual learning and knowledge sharing, rather than significant resource transfer via lending operations. The FY09-FY11 CPS took a similar approach and its design focused on three sets of challenges the country faced, namely to improve competitiveness to maintain and improve long-term growth prospects; build on advances in health and education service delivery, social security and social assistance to improve the conditions of the poor; and to enhance environmental sustainability and mitigate vulnerability to natural disasters. 57. The FY09-FY11 CPS included four operations that were under implementation and four new operations to be approved under the CPS for an estimated US$258 million. In addition, in line with an emphasis on knowledge, the CPS program proposed a new AAA program that included both reimbursable and non-reimbursable activities. However, at the height of the crisis the Government requested a US$500 million Public Finance and Competitiveness Development Policy Loan with deferred Draw-down Option (DPL-DDO) which was approved in FY09 to help the country build buffers that might have allowed the country to react to unanticipated fiscal deterioration. The loans which were originally envisaged were not prepared due to the change in government priorities.   Lessons Learned 58. Keep a focus on results but be flexible on the use of instruments. Adjustment to the global crisis meant a major change in the structure of lending with budget support taking the place of investment lending. Despite this drastic shift in the composition of the program, the CPS maintained a focus on the key results in areas such as telecommunications, health care, and secondary education. This approach combined with good quality supporting analytical work shows how a country can adjust to changing circumstances while maintaining the commitment to deliver results in the areas targeted by the CPS program. Maintaining a focus on results is facilitated by designing a results framework that is aligned with the country’s strategic priorities, such as competitiveness, education, health insurance, environment and social assistance. 59. The results framework of the CPS should be consistent with the time period of CPS implementation and the size and scope of the supporting program. The design of the results framework of the CPS did not take appropriate account of the limited implementation period (two and a half years) and rather followed a standard format. While the idea of aligning the period of the CPS with the political cycle was appropriate, the team could have considered other options in the circumstances of Costa Rica at the time of design. One option could have been the 15 extension and updating of the previous strategy for a two year period; or, alternatively, the results framework could have been adapted to the shorter period of implementation. 60. Simplification of project design in future operations is critical to avoid implementation delays. The previous CPS Completion Report addressed the high implementation risks in Costa Rica (beginning with long delays in achieving effectiveness) by suggesting the design of larger operations to minimize the costs of effectiveness. While this remains a valid lesson, the experience during this CPS is that larger is only better if care is taken to simplify design and minimize risks to implementation. For example, introducing heavy demands on coordination, as in the case of the Limon Project, leads to implementation delays. Further efforts to prepare projects for prompt implementation once effective are also needed to maximize opportunities for success. As suggested under the previous CPS, given the effectiveness and implementation challenges, preparation and delivery of new projects should preferably take place at the early part of the CPS period. Experience has demonstrated that preparation of projects towards the end of the political cycle has led to longer delays, both in effectiveness, as well as delays related to political transitions. 61. The effectiveness of Bank programs in middle-income countries should be enhanced by aligning design with a greater emphasis on knowledge and South-South cooperation. Costa Rica is a middle income country at the cutting edge of several development initiatives and with a solid demand for knowledge products. Partnerships in such cases require responding to the client demand for high quality, timely analytical products that deliver results without the traditional institutional support found in technical assistance operations. So far, the experience shows that continued engagement through substantive analytical work, well disseminated and accompanied by complementary notes as needed, can have an impact. However, as the knowledge relationship develops into the main area of engagement, its effectiveness demands aligning the design of the strategy with the characteristics of knowledge products, including developing ways to measure effectiveness. One possible opening for the future could include developing a fee for service technical assistance program. In fact, the Government has proposed this approach for World Bank Group (WBG) technical assistance to improve the business environment. Lastly, the innovative experiences in Costa Rica (e.g., environment, institutional readiness for managing natural disasters) could help other countries address similar concerns. In turn, this intensified South-South cooperation could also allow Costa Rica to benefit from the experiences of similar countries in the region or further abroad. V. The Country Partnership Strategy FY2012-2015 62. Building on the lessons learned during CPS implementation, the new strategy proposes a selective program of engagement with a realistic framework of results. The Bank program is concentrated in three clusters which are closely aligned with the Government’s strategic view and investment program. The support under these clusters falls in areas where the WBG has maintained a sustained engagement. The three clusters are: (i) developing competitiveness; (ii) improving efficiency and quality in the social sectors; and (iii) supporting environment and disaster management. In Costa Rica, IFC expects to concentrate on: (i) renewable energy and energy efficiency projects; (ii) manufacturing and agribusiness sectors with an emphasis on companies with plans to increase regional expansion and raise exports; and 16 (iii) private sector educational and healthcare institutions; (iv) financial services; and (v) advisory engagements to support infrastructure and sustainable agribusiness projects. 63. The CPS builds on the Costa Rican authorities’ desire to maintain a strong financial and knowledge-based relationship with the Bank, based on the need for increasingly flexible, on-demand services. To provide flexible support and taking into account lessons learned, the CPS focuses on outcomes, recognizing that in trying to influence results a variety of instruments will be used. As a result, the composition of instruments will be revisited if circumstances change, as they did during the previous CPS period. The instruments will include investment lending, analytical work, just in time policy advice, and trust funded activities. In all cases, however, the CPS proposes an enhanced focus on analytical work, including moving to an annual programming exercise. In this way, the CPS program will be better aligned with the Government’s priorities and tailor made to address key policy issues as well as responsive to the government’s request that the Bank concentrate its support in areas where it can build on its extensive knowledge and experience. The CPS is also aligned with the political cycle and, consistent with the lessons learned, proposes a frontloading of the lending program to minimize risks of delays given the often lengthy approval processes in Congress. 64. The CPS also proposes fewer, larger operations to facilitate approval and implementation. Given the high transaction costs related with National Assembly approval, the Government has requested that the CPS consider fewer, larger operations. However, it is possible that if circumstances change, the Government may request a shift to budget support. Should this become necessary and appropriate, the design of such an operation would be aligned with the results framework of the CPS. Two possible investment operations being considered are in higher education and health, following the Government’s decision to articulate a clear division of labor among donors, whereby the Bank would continue to focus investment support in the social sectors where there has been a sustained level of engagement over time. 65. To avoid the undue complexity in the design of large investment operations, the Bank would explore alternative design options that have proven effective in delivering results in other countries in the region. This could include results-based investment lending for example. In addition, project design would emphasize innovation and create added value, in line with Costa Rica’s profile as a sophisticated middle income country. As the proposed operations under consideration would be larger and innovative, additional effort would need to be made during design and prior to effectiveness, to maximize the opportunities for success. This strategic approach of larger, well thought out operations should minimize the risk of implementation issues in future operations and maximize the impact of relatively limited Bank resources. Cluster I – Supporting Competitiveness 66. The Bank will support the Government’s efforts to give more prominence to the competitiveness agenda, including strengthening human capital and skills development, logistics, private sector involvement in infrastructure and improvements in the quality of the business environment. The Bank’s engagement to support improved quality and access to higher education builds on extensive analytical work on the links between education, employment and competitiveness. The CPS program expects to contribute to the national goal of 17 improving human capital as the basis of maintaining solidarity in society and improving competitiveness. The specific focus of WBG engagement would be the Government’s reforms of higher education that seek to increase the number of tertiary education students and graduates in priority disciplines, to strengthen accreditation and quality assurance and the quantity and quality of university research. Outcomes include increasing the share of students obtaining tertiary education that come from poor and under-privileged households and putting a system of higher education accreditation in place. 67. The Bank will support the Government’s plans to scale up investments in public infrastructure. This would include carrying out a diagnostic of the current PPP framework and providing complementary technical assistance to build capacity, as well as possible advisory services for specific sectors. The IFC is exploring potential opportunities in promoting PPP projects, including in the urban transport sector. Throughout the CPS, the Bank and IFC will work together to help build capacity so that by the end of the CPS period the country will have in place the institutions and personnel capable of negotiating, monitoring and improving performance of PPPs. MIGA has also received interest for new projects in infrastructure, owing to a closer relationship between MIGA and some of the lenders interested in participating in these deals. The actual deals and amount of coverage, however, will depend on the pace at which these PPPs are procured and the composition of the winning consortia. MIGA continues to look forward to supporting investments into Costa Rica, as well as partnering with Costa Rican firms interested in cross-border investments to other developing countries. 68. The Government and the Bank are under significant pressure to deliver the results expected from the Puerto Limon Project. The project was conceived as a regional development initiative around a port that handles approximately 80 percent of the goods entering the country. The expected results include revitalizing the Caribbean port and related infrastructure as a means of improving the logistics of the country and its competitiveness as well as reducing the region’s relatively high poverty rates and improving the access of its population to basic services. The project has suffered delays in reaching effectiveness and its complex design has led to a slow start in implementation. However, the authorities maintain a strong commitment to the project, which has recently been restructured to the extent allowed by the law. Further support on logistics could include working with the customs agency in revising and streamlining procedures to reduce transaction costs. This would include an evaluation of performance through the Customs Assessment Tool for Trade, as well as support for strategic planning and auditing. 69. The Bank will support the Presidential Competitiveness and Innovation Council. The Council was created in line with the recommendations of the World Bank Study, and its agenda will be supported through a variety of instruments that may include follow up analytical work on the Competitiveness study, as needed. The WBG will provide technical assistance on a fee for service basis to improve the business environment and simplify red tape in strategic areas, as well as to improve business regulation affecting key areas. Specifically, IFC advisory services may also expand its Investment Climate and Sustainable Business operations to Costa Rica which focus on Micro Small and Medium Enterprises (MSME). 70. In addition, the IFC is ready to support competitive companies that are seeking to expand regionally. IFC may support small and micro enterprises by providing dedicated lines 18 of credit through the formal banking system. IFC support would also include women entrepreneurs in areas such as access to finance and creation of new companies. 71. The Bank will also support efforts to strengthen the financial system. As a first step the Bank will carry out a financial crisis simulation exercise (funded by FIRST) in June 2011, which may lead to further actions of the Bank in support of the country's financial sector. 72. Instruments: Puerto Limon Project (US$72.5 million) and proposed Higher Education Project, Competitiveness ESW and follow-up NLTA and ongoing AAA on PPPs. Cluster II – Improving Efficiency and Equity in Social Sectors 73. The Government has requested a strong Bank presence in the social sectors, building on its experience to date. The ongoing Education Project is expected to contribute to a further improvement in the efficiency and equity of primary and secondary education, particularly in expanding access to poorer populations in rural and indigenous communities. 74. Building on past engagements in the health sector, the CPS program will support a major institutional effort to rationalize delivery of health care through the introduction of best practices. Innovations would enhance the continuum of care and the performance of health networks to better serve the poor and other vulnerable populations. In this regard, results of a proposed operation could include strengthening infrastructure to meet new accreditation standards for health facilities and improving the efficiency and quality of inpatient care through, for instance, the expansion of ambulatory procedures, and improving capacity of secondary hospitals to allow more costly tertiary hospitals focus on the more complex care.8 IFC may also finance, or provide advisory support, for private sector health and diagnostic services. 75. Instruments: Equity and Efficiency of Education ($30 million) and proposed Innovations to Enhance Performance of Health Care Networks loan, recently completed regional AAA on pharmaceutical drugs. Cluster III – Supporting the Environment and Disaster Risk Management 76. Selected strategic CPS interventions will support Costa Rica’s efforts to consolidate its position as a global leader in the environment and strengthen its disaster management institutions. CPS work will be geared to support the long-term country goal of reaching carbon neutrality by 2021. First, the Bank will continue to support the Government’s commitment to including more land under the System of Payments for Environmental Services (PSA), which compensates owners of forest and forestlands for carrying out conservation, natural regeneration and reforestation. Second, the Bank will contribute to the capitalization of the Biodiversity Endowment Fund through a GEF facility already approved, once matching resources come available. The expectation is that the capitalization of the Biodiversity Endowment Fund by the end of the CPS period will contribute to ensuring the sustainability of the PES. Third, in support of the implementation of the REDD initiative, the Bank will provide technical assistance for the development of a comprehensive policy framework for the reduction of emissions across sectors, and, engage multiple stakeholder groups. This support will extend to include assistance, as                                                              8 Targets and results will be refined in the context of a proposed intervention in the health sector. 19 requested, with the US$3.4 million Grant from the FCPF Readiness Fund and the preparation of an ERPA for up to US$40 million within the framework of the new FCPF Carbon Fund.9 To reinforce Costa Rica’s international leadership in addressing environmental challenges, the CPS may also support Costa Rica’s participation in a Pilot program coordinated by the World Bank Institute to document the country’s successes in developing and expanding the PES program, and sharing these experiences with other countries through South-South Knowledge Exchange. 77. Following the opening of the energy sector to private sector involvement, the IFC would like to be an active participant in helping engage private agents in the sector. IFC’s participation could help address challenges Costa Rica faces in finding sources for additional generation. In this regard, IFC could mobilize resources that finance new renewable generating capacity IFC could also support projects that enhance energy efficiency in the industrial and commercial real estate sectors. 78. The Bank will help further strengthen Costa Rica’s institutional set-up to respond to natural disasters, which are prevalent in the region and often have devastating impacts. The CPS supports the lines of action of the Costa Rica’s 2010-2015 Disaster Risk Management National Plan, particularly on: (i) disaster risk reduction, (ii) probabilistic risk modeling through the Central American Probabilistic Risk Assessment Initiative (CAPRA), (iii) disaster risk financial protection strategy, and (iv) legal and institutional strengthening. Results include the implementation of a multi-hazard disaster risk analysis tool that supports the decision-making process in risk reduction, public and private investments, emergency management, and financial risk transfer strategies, among others. As part of the Bank’s assistance the Government will also carry out a pilot project to estimate seismic risk for the country’s critical drinking water infrastructure using CAPRA, an innovative knowledge product that uses open-source information to create a comprehensive approach to risk management. Findings from this pilot will help authorities design and implement preventive and mitigation measures. The Bank, also supports the incorporation of disaster risk financing and insurance10 as part of its national disaster risk management strategy by providing capacity building and technical assistance for the design and implementation of a disaster risk financing and insurance program. 79. Instruments: Ecomarkets Project (US$30 million) and accompanying GEF (US$10 million). Grant from the FCPF Readiness Fund (US$3.4 million), and preparation of an Emission Reduction Payment Agreement (ERPA) with the new FCPF Carbon Fund (up to US$40 million). Proposed analytical work and trust funded activities, and the possibility of Bank support to design a government-issued green bond. 80. As foundational support towards the achievements of results in all clusters, the Bank will maintain its support to strengthen the fundamentals of the public sector. The specific support will be targeted towards helping the Government achieve its goal of aligning public sector practices with OECD standards. The policy dialogue and technical assistance will be based on the recently completed Public Expenditure and Financial Accountability (PEFA)                                                              9 Targets and results from this initiative will be introduced in the Progress Report. 10 Disaster Risk Financing and Insurance (DRFI) can be broadly defined as financial protection against natural disasters. Global Facility for Disaster Reduction and Recovery (GFDRR). http://www.gfdrr.org/gfdrr/node/337 accessed on March 20,2011 20 exercise and an Accounting and Auditing ROSC, both undertaken jointly with the authorities. Special attention will be placed on improving the efficiency of public finance management through better linking procurement and budget execution. Results in this area include developing information standards that would capture and link procurement processes and results to the financial management system. The resulting information system would enable the authorities to monitor public procurement performance, identify bottlenecks and constraints in the system, and develop strategies to address them. The agenda on improving public sector management practices will remain open and could include revenue mobilization issues, should the Government request such support. Proposed Program of Support 81. Given the strong degree of continuity from the previous CPS, implementation of the ongoing portfolio will be crucial to achieving CPS outcomes for the FY12-15 period. The current Bank portfolio of investment lending includes three operations and a GEF grant for a total of US$197.5 and is 90 percent undisbursed. Systemic issues include long delays in congressional approval, and cumbersome national procedures once approved. Portfolio performance has been improving as the projects move past issues related to early implementation delays. The previous CPS did not properly anticipate the impact of these delays and was overly ambitious in terms of the results it could expect to achieve through recently approved projects. For example, the Puerto Limon Project in particular suffered long delays in terms of readiness for implementation, and is only just now beginning to disburse. All three projects are in the process of being restructured to maximize opportunities for success. 82. IFC’s current committed portfolio in Costa Rica is US$41.4 million composed of loans, equity, and guarantees. The portfolio is concentrated in financial markets (67 percent) and infrastructure (33 percent). 83. As of December 31, 2010 MIGA’s gross exposure in Costa Rica was US$158.5 million, equivalent to 1.9 percent of MIGA’s gross portfolio, with exposure net of reinsurance of US$71.0 million (1.5 percent of MIGA’s net portfolio). This exposure represents one outstanding project, the San José-Caldera toll road, which was one of the first PPPs in the infrastructure sector to achieve financial closing. 84. Country demand for the CPS period FY12-15 is estimated at US$600 million in investment lending and is expected to be front loaded. No lending is foreseen for the second half of the CPS (FY14-15) given the high risk in Costa Rica of projects not becoming effective towards the end of a political cycle. Instead the Bank would increase its focus on implementing operations which will then be at the end of their life cycle, and on undertaking the necessary analytical work to support the ongoing policy dialogue and prepare for new operations with the incoming administration. The indicative IBRD lending program for FY12 is US$400 million. The lending program in FY13 will depend on how government demand and performance evolves in the course of the CPS period, and on IBRD’s lending capacity and demand from other borrowers. In line with the principle of flexibility, if circumstances change, demand for a fast disbursing instrument could be considered but would require a trade off vis-a-vis the amount of investment lending currently under consideration. 21 Monitoring and Evaluation 85. This CPS proposes a streamlined approach to monitoring and evaluation. Taking into account the limited size and selective nature of the engagement outlined in the CPS period, and recognizing that the WBG has a focused and selective engagement in Costa Rica, the CPS proposes a realistic framework and mechanisms to track the modest outcomes of the program and its impact. 86. The results matrix reflects primarily the ongoing portfolio, which after some delay, is beginning to pick up the pace of implementation. The results framework reflects long term government development goals in areas where the Bank is engaged; however, as it is difficult to be able to directly attribute the Bank program with higher level results, an effort has been made to keep Bank-influenced outcomes modest. Given that the first year of the CPS will focus on approval of the lending operations, the results matrix will not yet capture the proposed lending and analytical work envisioned beyond this current fiscal year. As a result, the CPS Progress Report will be updated to expand the current results framework. Finally, in order to measure the continued relevance of the WBG as a knowledge broker, the CPS proposes to track the impact of the analytical program, including quality and strategic dissemination. To the extent possible, the impact of Bank operations on gender issues will be monitored as part of the results indicators of individual projects and analytical work. Regional 87. The regional dimension is an important area to be considered as part of this CPS. The Bank is providing support for regional approaches in a number of cross-cutting areas which are relevant for Costa Rica, including improving intraregional trade and addressing crime and violence (see Box 3). On trade, the Bank will work with Costa Rica as part of a regional effort to facilitate trade by reducing barriers between countries, for example customs procedures and border crossing standards. More broadly the Bank is supporting several regional initiatives which include: (i) support for the creation of a Central American Private Sector Task Force; (ii) support to strengthen the public sector through a Regional Integration Training Program (launched in January 2011) and a Central American Leadership program (to be launched in late 2011); (iv) support to the Central American Council of Ministers of Finance (COSEFIN) for the preparation of a Central America-DR Regional Investment Plan and a trade facilitation window; and (v) support for the preparation of a Central American Disaster Risk policy. The Bank is also supporting the organization of a second Presidential Summit on Regional Integration to take place in the second half of 2011. 88. Crime and violence is a particular area where a regional solution is needed. Bank support in this area centers on the Bank’s convening power, including analytical work and technical assistance, as well as participation and co-organization of high level events in the region. In addition, the 2011 Security Conflict and Development World Development Report (WDR) and the regional study on Central America Crime and Violence are informing the regional debate on the topic with analytical work. The Bank is also contributing to the institutional strengthening of the regional institution responsible for the citizen security agenda in Central America (i.e., SICA) with financial resources from the Institutional Development Facility (IDF). Similarly the Bank, together with the Inter-American Development Bank (IDB) 22 and other bilateral donors, is providing technical assistance to the region’s efforts to prepare a Central America citizen security strategy. Finally, the Bank is also making significant efforts to improve donor coordination efforts as an integral member of the Group of Friends of Central America (Grupo de Amigos de Centroamérica), which was created to support the preparation of the International Conference on Citizen Security that will take place in Guatemala on June 22- 23, 2011.     Box 3. Bank Support for Regional Integration in Central America The Bank has stepped up its efforts to support Central American integration following the Presidential Summit in July, 2010. To advance this agenda, the Bank is collaborating with key regional partners including the Secretariat of Economic Integration of Central America (SIECA) and INCAE (the regional business university) to: strengthen the region’s institutions and work with the private sector to address important regional development issues such as trade integration and rising levels of crime and violence. Specifically, the Bank is working with INCAE on a public sector training program for trade integration, as well as a Leadership Training Program to address regional capacity constraints more generally. The Bank is also supporting INCAE’s initiative to create a Central American Private Sector Task Force. Following a first meeting in March 2011, two Executive Committees have been established to: (i) improve the flow of merchandise (particularly basic foodstuffs) across regional borders, extend hours and enhance capabilities at border inspection posts, as well as strengthen key aspects of the regional institutional trade framework; and (ii) identify areas the private sector could help address crime and violence, including through creating jobs for young people. Partnerships 89. The Government has taken a lead in promoting an efficient division of labor among key development partners. This has traditionally been the approach in Costa Rica where there are few external partners. The President hosted a full day event in July 2010, to present the country’s development challenges and outline financing priorities for various multilateral organizations. In an effort to minimize duplication, a division of labor was suggested which leverages each institutions’ comparative advantage and experience working in Costa Rica. The main active partners in the country are the Central American Bank for Economic Integration (CABEI), IDB, the Japan International Cooperation Agency (JICA), the United Nations agencies and the World Bank Group (WBG). 90. The WBG program is selective and focuses on the social sectors, as well as the environment, areas where it has a history of engagement and can bring global best practice to bear. There is a high degree of complementarity between the Bank and IDB program, particularly in the area of competitiveness where the IDB program is heavily concentrated in transportation and energy, areas where it has traditionally played a lead role. IDB has three operations pending legislative ratification: a program for water and sanitation, a cantonal road network program, and a sustainable tourism program. Most recently, IDB approved a multi sector project to address citizen security. IDB has also taken the lead on providing technical assistance on tax reform. The Bank and IDB work together closely on the crime and violence agenda at the regional level. The Bank has worked closely with the IDB during the preparation 23 of the respective country partnership strategies and will continue to coordinate regularly in areas of joint concern, for example regional integration efforts and competitiveness as mentioned above, as well as poverty monitoring. The Bank is also keeping a close dialogue with the IMF in the context of macroeconomic monitoring activities. The IMF is taking the lead on the financial sector, monetary policy and macro-fiscal issues. The Bank is coordinating with the IMF who in the area of customs and tax policy and administration. Consultations 91. During the week of May 4, 2011, the Bank held a series of CPS consultations. These consultations included meetings with government representatives, the private sector, Non Governmental Organizations (NGOs) and Congressmen and women from five of the eight political parties of the country. The purpose of the consultations was to solicit views on the Bank’s role in Costa Rica and discuss key development challenges facing the country. Participants raised some priorities for the Bank to consider, primarily in the areas of enhancing competitiveness, reducing inequality, addressing rising levels of crime and violence, and providing support for higher education and innovation. There was also a sense conveyed that state modernization and decentralization were key themes that needed careful reflection to ensure efficient use of resources. VI. Risks   92. The most important risks to the CPS are economic in nature and are related to sharper-than-anticipated acceleration in food and oil prices, slower than anticipated recovery in the United States, and the timely approval of a tax reform package. These potential events could negatively affect economic activity and fiscal performance therefore further limiting the fiscal space to implement the public investment plan. The growth outlook could also be affected by an appreciating real exchange rate, which could put a dent in the country's competitiveness. In turn these risks could also be compounded by delays with the approval of the Government’s fiscal reform proposal. The plans of borrowing from the Bank and other multilaterals is contingent on having the fiscal space to accommodate an increase in investment projects. Given the loss of control of the Government’s party in Congress, and the past difficulties in passing tax reform packages, this could result in a shift in priority of government demand for Bank services. The Bank will seek to mitigate this risk through continuous macroeconomic policy dialogue, in close coordination with other developing partners, and will adjust its program accordingly. 93. A pertinent risk to implementation of the CPS lending program derives from portfolio implementation delays, due in part to the lengthy legislative approvals process which applies to externally funded operations. During the previous CPS, lags in project implementation contributed to delays in expected results. Part of the issue stems from a protracted approval process, which continues to be a risk given the divided Congress (see paragraph 13). The CPS attempts to minimize the risk of delays by: (i) focusing operations on areas of high strategic importance to a wide range of political actors and consulting with all stakeholders, including Congress; (ii) ensuring that the size of operations is adequate to ensure high level political commitment within the executive; and (iii) building wide consensus on the 24 content of the operations throughout the development phase. Once approved, execution will also be a challenge, due in part to the need to comply with national procedures set by the Contraloria. To mitigate this risk, the CPS is proposing that any new lending be focused in areas where the Bank is actively engaged with counterparts that have a reasonable track record of implementation. To minimize the impact of delays, efforts will continue during the approval process to ensure implementation readiness. The design of operations will also take lessons learned and implementation challenges into account. 94. Costa Rica has been a leader among Central American countries in deepening the regional dialogue on risk management (including both economic and natural disaster risks). While the country remains highly vulnerable to natural disasters, Bank support through the CAT DDO, the CAPRA platform and assistance to the National Commission for Emergencies, has helped the country to better prepare itself for future natural hazards. 25 Annex 1. CPS Results Matrix Country Development Issues and Obstacles CAS Outcomes Milestones Bank Program Goals Cluster 1. Supporting Competitiveness Increase level of FDI in Reduce red tape and Improvement in business Red tape reduction Action Ongoing Puerto Limon US$m strengthen business environment as measured Plan with a timetable for Project (US$72.5 million) Baseline: 1,300 (2009) regulation to promote by a reduction in red tape implementation of reforms Target: 1,800 (2014) competitiveness and attract and improvement in Doing articulated (note: outcome Proposed Higher Education Source: NDP investment, including foreign Business rankings indicators may be adjusted Project (US$200 million) but also to improve the Days to start a business depending on final Action Simplify red tape in business environment for Baseline: 60 (2011) Plan) Completed competitiveness strategic areas local firms and add to Target: 35 (2015) ESW and follow-up NLTA Target: Simplify 41 processes diversification, productivity, innovation and employment Firms' increased access to New secured transactions law Ongoing NLTA on Public generation finance using movable assets enacted Private Partnerships as collateral in place Baseline: 0 (2011) Study prepared to strengthen Proposed WBG Investment Target: > 0 (2015) corporate financial reporting Climate Advisory aligned with international engagements Improved investor protection accounting and auditing Strength of investment standards prepared Report on the Observance on protection index Standards and Codes (ROSC) Baseline: 3 (2011) - Accounting and Auditing Target: 5 (2015) IFC financing for corporate Improved insolvency regimes with regional integration and Closing a business export-led strategies Baseline: 3.5 years (2011) Target: 2.5 years (2015) IFC support for in private Improve access to economic This is a multi sector effort SME growth in Limon Business training provided to sector technical and opportunities and services in which requires strong (baseline: 0 new SMEs in SMEs in the tourism and vocational education Limon government leadership, 2007) cultural sectors. institutions coordination and extra Improve competitiveness support to remove potential Score in city’s image in Public Relations firm through better logistics as roadblocks tourists’ perception contracted to implement measured by the Logistics Baseline: Survey TBD surveys and communication Performance Index (LPI) plan 26 Country Development Issues and Obstacles CAS Outcomes Milestones Bank Program Goals Baseline: 2.91 (2010) Reduce waiting times of trucks, lengths of queues to Study Prepared Port as measured by Gate Dispatch Time Indicator Baseline and Target: [Study to be prepared] Customs Assessment Tool for Trade Report prepared Successful completion of the An institutional system in Provide recommendations to Moin concession place that facilitates efficient, improve the structure of the transparent and accountable PPP management unit within PPP arrangements, as the Government. evidenced by at least one PPP in place under the new system Increase number of Enrollment in public Increase in percentage of Strategy and performance Proposed Higher Education graduates from public universities has remained students from first and second agreements put in place for Project universities in science and relatively flat since 2002 quintile enrolled in public each of the four public technology disciplines universities universities Baseline (2009): Baseline: 6% and 12% Engineering: 957 students (2009) Source: Estado de la Technical study on options Ongoing WBI Technical Basic Sciences: 940 students Educación for science and technology Assistance Source: Estado de la clusters (software, Educacion Improve the quality and biotechnology and advanced relevance of the higher manufacturing) completed education curricula as measured by the number of professions accredited and reduction in the dropout rates *Baseline and targets to be confirmed when project approved 27 Country Development Issues and Obstacles CAS Outcomes Milestones Bank Program Goals Cluster 2. Improving Efficiency and Equity in Social Sectors Increase primary level Increase primary school Number of primary and Ongoing Equity and completion rate completion rate in the secondary schools built in Efficiency of Education Baseline: 95.7% in 2009 targeted areas rural areas Project Baseline 95.5 % in 2009 Baseline: 9 schools (2010) Lower secondary level Target 99 % in 2014 (end of Target: 81 schools completion rate (grade 9) project) Baseline: 77.1 % in 2009 Promote greater investment Investments have been Improved access to Designs completed and works Ongoing City-Port of Limon in poorer areas to stimulate concentrated in San Jose, sewerage in Limon initiated for sewage and flood Project (FY08) equitable growth limiting growth opportunities Baseline: 38% of pop. with control infrastructure in in regional cities and poorer access (2007) Limon. IFC finance or advisory areas. Target: 80% (2015) support for private sector health and diagnostic services IFC dedicated lines of credit for SMEs Sustainable Business operations focus on MSMEs Improve quality and cost- Antiquated tools to generate Center for adoption of new Policy dialogue on financial Proposed Innovations to effectiveness of services and manage public health and technology and health care sustainability of the health Enhance Performance of provided by the CCSS clinical information, and excellence established and services of la Caja. Health Care Networks Project health care networks limitations of existing protocols for management of hospital infrastructure, most prevalent chronic Individual health care cost impede continuous conditions adopted information available for improvements in quality and primary health care efficiency to meet * Baseline and targets to be interventions. epidemiologic and confirmed when project demographic challenges approved 28 Country Development Issues and Obstacles CAS Outcomes Milestones Bank Program Goals Cluster 3. Supporting the Environment and Disaster Risk Management Maintain global leadership The financial sustainability of Land incorporated into the Ongoing Mainstreaming in sustainable this fund, including through PES increased Articulate a multi-sector Market-Based Instruments for environmental practices fuel tax revenues and donor Baseline (2007): 230,000 Ha Action Plan to reduce Environmental Management support is not clear in the Target (2014): 288,000 Ha emissions and move towards Project/GEF grant All new generation of longer term carbon neutrality electric power to be from The number of small and Ongoing REDD and FCPF renewable sources medium land owners (<100 Costa Rica having designed Baseline: 95% Ha) participating in the its national Readiness IFC financing for renewable program increases by 50 Package (emissions baseline, energy generation projects. PES initiative is financially percent reduction strategy, sustainable Baseline (2007): 1,900 measurement system, and IFC financing for energy Target (2014): 2,850 safeguards) and having efficiency projects signed a first performance- Increased contribution to based REDD payment mitigating climate change agreement with the through verified reductions of FCPF/international carbon emissions from forest community, all meeting management. [Baseline UNFCCC standards. (The TBD at Progress Report] payment agreement would be called Emissions Reduction Improved local livelihoods in Payment Agreement (ERPA). forest areas as measured by increases in the income of small farmers and indigenous communities from the REDD payments under the ERPA. [Baseline and Target TBD at Progress Report] Capitalization of the Biodiversity Endowment Fund Baseline: US$7.5 million Target: US$30 million (total) 29 Country Development Issues and Obstacles CAS Outcomes Milestones Bank Program Goals Integration of disaster risk An increase in the number of Ten methodological training Ongoing CAT DDO assessments in projects recorded in the guides for project preparation MIDEPLAN’s investment public investment projects and assessment by sectors, Ongoing IDF Mainstreaming projects selection processes (BPIP) that include a hazards including: drinking water and Disaster Risk Management in assessment component sanitation; solid waste the Costa Rica Investment management facilities; Process Baseline (2011): 22.9 percent of projects recorded in the hospital facilities; educational BPIP include a hazard facilities; irrigations; safety; assessment component and transport infrastructure projects) Target (2015): 75 percent Enactment of Executive Decree ordering the adoption of “Technical Norms, Guidelines and Procedures for Public Investments” applicable to government agencies members of the National System of Public Investments. The above- mentioned norms include the specific valuation of disaster risk on public investments.         30 Annex 2. CPS Completion Report 1. The Costa Rica FY09-FY11 CPS, the second strategy after the Bank resumed operations in Costa Rica following a 10 year hiatus, was designed for a two and a half year period to coincide with the term remaining in the previous administration and align with the political cycle thereafter. This CPS, similar to the previous strategy, sought to position the Bank as a knowledge partner rather than simply a provider of resources. The CPS focused on supporting the country’s efforts to continue the path of steady increases in income through higher productivity as well as to enhance the leadership position of the country in sustainable development and improve the capacity of the country to deliver quality social services for all. 2. The global crisis affected the implementation of the program and the Government requested support from the multilateral organizations to manage its impact. In December, 2008, the IDB approved a contingent line for US$500 million under its Liquidity Program for Growth Sustainability Program. In April 2009, The IMF approved a 15-month, US$735 million Stand-By Arrangement to support the country’s strategy to cope with the adverse global economic environment. The resources for these two programs were treated as precautionary and were not drawn-down, however served as important signals for financial markets. Also in April 2009, the Bank approved a US$500 million Development Policy Loan with Deferred Draw-Down Option to boost the country’s competitiveness and strengthen its public finances in response to the global financial crisis.11 The DPL design proposed to mitigate the social impact of the crisis by supporting continued expansion of the Avancemos program in order to reduce the likelihood of children dropping out of schools. Preliminary evidence suggests positive results in terms of cushioning the impact of the crisis. For example, secondary enrollment improved from 2009 to 2010 (see paragraph x).12The size of the budget support operation—almost twice the volume of intended new commitments under the CPS—plus the Catastrophic Risk Deferred Draw-Down Operation, that was approved in 2009 exhausted the available IBRD envelope. The remaining proposed operations (telecommunications, education, the Puntarenas port) were dropped as a result of this shift in government priorities. Thus, as in the previous CPS, albeit for different reasons, the bulk of the intended operations were not delivered. 3. Despite the fact that the instruments used during the CPS period were different than what was outlined in the CPS, the alignment of the results framework of the Competitiveness DPL and the use of alternative support instruments (TA, AAA) enabled delivery of most results expected under the CPS, including: (a) setting the analytical basis for a new competitiveness strategy; (b) revising the institutional framework in telecommunications and property rights to better compete in a WTO world; (c) developing (and testing) effective institutions to respond quickly to natural disasters; (d) advancing the higher education agenda to meet the demands of a more sophisticated and competitive economy; and, (e) maintaining Costa Rica’s position as a leader in environmental innovation. The fiscal agenda was strengthened as a result of the crisis and the DPL resources went to help improve the debt profile. The Competitiveness DPL ICR has rated achievement of development outcomes and Bank performance as satisfactory. The shortcomings came with the delays in the implementation of Bank supported investment projects as the CPS did not properly account for the often long congressional delays as was the case with the Limon                                                              11 This loan was drawn down in full by October, 2010. 12 IDB is preparing an impact evaluation of the Avancemos program. 31 Port Project. Because of the mixed performance, the team rates the program performance as moderately satisfactory. 4. Similarly, Bank performance is considered to be moderately satisfactory because, despite a rapid response to the crisis and substantive delivery of outcomes in a difficult environment, the implementation of investment operations remains slow and the results framework was not only overly ambitious but inappropriate for such a short period of time. Progress towards Costa Rica Long-term Development Outcomes 5. In tracking progress towards the long-term development outcomes during a short period of time dominated by the impact of the crisis, the completion report would like to highlight three points. First, a key achievement of the country has been to the containment of the impact of the global crisis, which hit Costa Rica hard. In 2009, merchandise exports dropped 7.5 percent and tax revenues came down two points of GDP leading to a reduction of public revenues from 23.6 in 2008 to 22.5 percent of GDP in 2009. In an effort to protect economic activity, the government maintained the rhythm of public expenditures which contributed to driving the primary fiscal balance from positive to negative (2.4 to -1.3 percent of GDP from 2008 to 2009) jointly with the overall fiscal balance (-0.3 in 2008 to -3.6 percent of GDP in 2009). GDP growth slowed down from 7.9 percent in 2007 to 2.7 in 2008 and then dropped to -1.3 percent in 2009. As a result, the stock of public debt to GDP will increase from 36.0 percent in 2008 to an expected 39.4 percent in 2010. However, the ratio of external public debt to GDP will remain around 7 percent of GDP. The economy is recovering and the estimate is that it has grown by 4.2 percent in 2010 and is back on track to resume a trend of around 4 percent over the medium term. 6. Second, before the global crisis poverty, extreme poverty and unemployment were declining. However as the economy slowed in 2009, unemployment increased markedly from 4.6 percent in 2007 and 4.9 percent in 2008 to 7.8 percent in 2009. Poverty increased from 16.7 percent in 2007 to 18.5 percent and in 2009 and extreme poverty increased from 13.4 percent to 14.3 percent during the same period. With growth of 4 percent in 2010 and roughly the same levels projected for 2011 and 2012 it is expected that the poverty trend will revert back to is pre- crisis trajectory. The limited information available suggests that the social programs of the government softened the impact of the crisis on the poor. 7. Third, the country has continued building the institutions for competitiveness and the country remains a leader in the environment sector. The process of revamping the nation’s approach to competitiveness continued throughout the period of the crisis, with a specific focus on trade and investment. Program Performance 8. The Completion Report focuses on: (a) the intended results and the milestones as presented in the original CPS document; and (b) the development outcomes expected under the Public Finance and Competitiveness DPL under the respective clusters. Since the design of the 2009 DPL included results areas that had featured in the CPS, the spirit of the original results framework was maintained even if the intended support operations were not delivered. Thus, this 32 Completion Report incorporates the results under the CPS and the findings of its ICR. Presentation of the results follows the organization of the CPS programs around two areas. The first covers programs that are intended to promote sustainable growth and the second area covers programs that directly or indirectly would have an impact on poverty. An effort is made to identify the key result clusters in each pillar. Results lacking any supporting instrument have been dropped. Promoting sustainable growth 9. To promote sustainable economic growth, the CPS focused on the following results clusters: (a) revamping the competitiveness strategy; (b) modernizing the telecom sector and updating of intellectual property legislation; (c) promoting regional development around key port areas; (c) modernizing the telecommunications sector; (d) regional development around main ports; (e) strengthening fiscal institutions, (f) secondary education and skills, (g) environment and disaster risk management. 10. Revamping the Competitiveness Strategy. The CPS delivered the promised analytical work in support of launching a revamped competitiveness strategy. The CPS Country Economic Memorandum (CEM) examined the main constraints to rapid productivity increase in Costa Rica.13 The Competitiveness CEM emphasized buttressing the institutional foundations around the most critical bottlenecks—logistics, education and skills, technology and deregulation. The CEM was amply disseminated to the outgoing and incoming governments, civil society and private sector institutions. At the Government’s request, follow-up analytical work developed CEM themes in the areas of: (i) innovation; (ii) business regulation; and (iii) harmonization of free trade agreements. The new administration (in office since May 8, 2010) has taken the analysis and several of the recommendations of the CEM into account in the design of its own competitiveness agenda: A Consejo Presidencial de Competitividad e Innovación has been established (which was one of the recommendations of the Competitiveness ESW) to elevate the importance of innovation within the Government and coordinate across ministries. This body is chaired by the President and meets monthly to discuss the competitiveness agenda. The Government has defined several concrete deadlines for regulatory improvements over the next several months, including legal reforms, catalogues of regulations, and reform proposals in the five institutions most responsible for regulations. The first regulatory improvement steps were timed to coincide with the Government’s first 100 days in office. The Government has also requested fee-for-service technical support from IFC to improve the business environment. 11. Enabling Competition in a WTO framework. The bulk of the telecommunications agenda was delivered, even if the Telecommunications Reform Project (FY09, US$13 million) that was intended to bring global experience to bear on the opening up of the telecommunications sector in Costa Rica was not delivered. Technical assistance ongoing from the preceding CPS, together with the prioritization of the telecommunications agenda under the 2009 DPL, supported an institutional overhaul of the telecommunications sector through legislation (Law No. 8642 and Law No. 8660) that provided the basis for the creation of a new regulatory authority (SUTEL) and a Universal Service Fund (FONATEL). In December 2010 an                                                              13 Costa Rica: Competitiveness Diagnostic and Recommendations, World Bank July 1, 2009. 33 international bidding process took place to open the cellular market and, as a result SUTEL and FONATEL have the resources to operate satisfactorily. In addition to a legal framework for telecommunications, the 2009 DPL supported a revision of the intellectual property laws and the update of the insurance institutions through the passage of Law 8660 as part of an effort to increase the depth of the non-banking financial sector. Revision of these legislative frameworks strengthened the DR-CAFTA Free Trade Agreement, which had been approved in a national referendum in 2008, and enhanced the attractiveness of the country for investment, especially in knowledge-based activities. 12. Promoting Regional Development. The CPS regional development has advanced slowly because of delays in implementation. The proposal under the CPS was combining improvements in sea port logistics with regional economic and social development in the surrounding areas. Thus the Puerto Limon Project is seeking the revitalization of the port and urban environment, while leveraging the interface and synergies between the port and the city. The Puerto Limon Project is just beginning its implementation due to delays in achieving congressional approval, meeting the effectiveness conditions and the political transition between the previous and the current government. In hindsight, the design of the project is unduly complex, requiring coordination among several ministries and agencies. However, developing Puerto Limon remains a high priority for this administration and is a key recommendation of the Bank’s Competitiveness Study. The CPS proposed the Puntarenas Integrated Infrastructure Development Project (FY10 US$100 million.), with a similar objective in mind, however this project was dropped due to the shift in government priorities. 13. Aligning Education and Competitiveness. Progress in enhancing the relevance of secondary education to the competitiveness demands of the country continued despite being unable to deliver the Secondary Education and Skills Development Project (FY10, US$80 million). In its place the Bank provided non-reimbursable technical assistance and maintained the corresponding results agenda under the 2009 DPL. The expectation is that the development outcomes under the budget support operation (and thus the CPS) have been met. 14. In addition, the Bank also undertook two pieces of analytical work/technical assistance: (i) Strengthening the Role of the Education Sector in Enhancing Competitiveness and Social Cohesion’ and (ii) Country Note prepared under the Regional Study on Job Creation. Under the former, the Bank shared international experience to improve the quality and relevance of technical education in the area of competency-based curricula and teacher training strategies. Moreover, as part of Bank-wide studies on education, the Bank undertook case studies on the governance of university education and equity in public spending of education which also provided useful in the preparation of new lending. The Government has requested Bank support for tertiary education as part ofthe new CPS. 15. Enhancing capacity to respond quickly to natural disasters. The CPS program contributed to building an institutional set-up that allows Costa Rica to respond promptly to the impact of natural emergencies. Costa Rica, like all Central American countries, is heavily exposed to natural calamities, which in the past have stretched the capacity of governments. The CPS supported implementation of comprehensive mitigation measures through the Catastrophic Risk Deferred Draw-Down Operation (DPL with CAT DDO) (FY09 US$65 million) that built on ongoing and previous AAA. Costa Rica was the first country to use this World Bank 34 instrument, which has since proven to be a popular option for mitigation among disaster-prone countries. Following the earthquake that took place in January 2009, the authorities promptly approved and drew some of the funds available from this operation to finance the corresponding emergency expenditures. Implementation of the institution building program supported by the project is on track in support of two key policy initiatives of the Costa Rica Disaster Risk Management Program: (a) strengthening the institutional and legal framework and (b) mainstreaming disaster risk in the National Development and National Development and Investment Programs. 16. Promoting a sustainable fiscal profile. The CPS focus on improving fiscal institutions was further highlighted by the crisis, which showed the fragility of government revenues to the global economic slowdown and hence the need to maintain a strong fiscal and external position to weather external shocks. The 2009 DPL supported the government efforts of bringing back the ratio of public revenues as a percentage of GDP to the pre-crisis level in 2007. Although this goal has not been achieved by the end of 2010 as had been foreseen; the new government has launched an ambitious fiscal reform that would strengthen revenue collection and facilitate compliance. The crisis also brought attention to improving public expenditure practices, mainly: (a) achieving a better alignment between national priorities and budgetary allocations; and (b) improving the capacity for monitoring and evaluation. Under the 2009 DPL new budget guidelines for the preparation of results-based budgets were put into place and technical assistance was provided to train personnel in ministries to enable them to apply the new budgetary procedures. The analysis presented by the 2007 Public Expenditure Review outlined options that contributed to the design of the new budgetary procedures. The first phase of intended technical assistance on debt management (Public Debt Management and Domestic Debt Market) enhanced the technical capacity for risk evaluation of the central government debt resulting in a general debt management policy (published on the MoF website) and in clear annual borrowing plans of central government domestic debt. The second phase did not take place. However, upon DPL effectiveness the authorities drew all of the eligible resources (US$500 million) as part of a strategy to improve the quality of the public debt profile of the country. 17. Maintaining a leadership position in sustainable development. During the CPS period, Costa Rica enhanced its position as leader in the protection of biodiversity and natural resources through innovative methods. Contribution to improved environment outcomes has relied on the Mainstreaming Markets-based Instruments for Environment Management Project and accompanying GEF Grant, both of which were already under implementation. Progress under the Mainstreaming Markets-based Instruments for Environment Management Project and GEF Grant is satisfactory with the governance structure and the capitalization strategy developed for the Biodiversity Endowment Fund in place; in addition, and in the context of REDD+ (Reducing Emissions from Deforestation and Forest Degradation), the Payment for Environmental Services Program (PSA) has fostered the development of a local market for environmental services produced from avoided deforestation and the maintenance and enhancement of carbon stocks. Costa Rica continues to innovate with new instruments: it offers Environmental Service Certificates in forest, water and transport modalities. Disbursements under the Mainstreaming Project have proceeded at a pace slower than programmed as the government has opted to use its own resources for the implementation of the program for calendar year 2010. 35 Reduce Poverty and Improve Service Delivery 18. To help the Government’s efforts at reducing poverty and improving service delivery this CPS relied on two operations already underway: the Health Sector Modernization Project and the Equity and Efficiency in Education Project. In addition, the CPS foresaw technical assistance on poverty monitoring and included potential reimbursable technical assistance to improve the governance and operations of the Caja Costarricense de Seguro Social (CCSS) pension assets. 19. Monitoring poverty trends The CPS envisioned follow-on technical assistance supporting improvements in the capacity of the government to monitor poverty trends and to target public resources to the poorest and most vulnerable groups in the population. This TA did not materialize during the CPS period due to a change in counterpart at the Ministry of Housing and then the subsequent political transition. However, the DPL focus on poverty alleviation in the context of the crisis support resulted in the expansion of the Avancemos program. Intended support to improve the governance and investment management of CCSS’ pension assets through reimbursable technical assistance was delayed at the request of CCSS in view of impending national elections. Discussions resumed after completion of these elections, and the new Executive President of CCSS has responded favorably to this proposal. 20. Expanding secondary education. Secondary level indicators have improved in the last 3 years: the dropout rate decreased from 13.2 percent in 2006 to 10.2 percent in 2010, and the secondary level net enrollment rate (13-17 age group) increased from 71.5 percent in 2006 to 75.1 percent in 2010. About half of the secondary students are beneficiaries of the cash transfer program “Avancemos”. The number of beneficiaries increased from 156,909 in 2008 to 189,740 in 2010. The Bank is also supporting the education sector through the Equity and Efficiency in Education Project approved by the Board on March 29, 2005, which became effective on December 21, 2006, but execution began only in 2009. Since the beginning of 2010 the pace of implementation has picked up reaching 30percent of the total amount by June 30, 2010. 21. Strengthening the institutions that deliver Primary Health Care. The Health Sector Modernization Project completed during the CPS period helped achieve improvements in the delivery and quality of primary health care. The ICR for this project rated the achievement of outcomes as moderately satisfactory. A key institutional achievement has been the consolidation of the separation of functions in the Costa Rican Health System between with the Caja Costarricense de Seguro Social (CCSS) and the Ministry of Health. The accreditation of hospitals has been launched with pilots for three public and one private hospitals. Dispersion of allocation of resources has been reduced with a more strategic vision to move towards a more cost-effective and equitable provision of services. The ICR stressed the need for more intense monitoring and supervision during project implementation. 36 Results Rating 22. The CPS Completion Report rates the achievements of results foreseen in the CPS as moderately satisfactory. The CPS results framework was overly ambitious for an implementation period of two and a half years. In addition, efforts to help the country soften the impact of the global crisis led to the delivery of a program significantly different from the one that had been initially envisaged. Still, because the design of the DPL was aligned with the CPS objectives and use was made of alternative supporting instruments, the partners managed to deliver on a substantial part of the results program: (a) setting the analytical basis for a new competitiveness strategy; (b) revising the institutional framework in telecommunications and property rights to better compete in a WTO world; (c) developing (and testing) effective institutions to respond quickly to natural disasters; (d) advancing the higher education agenda to meet the demands of a more sophisticated and competitive economy; and, (e) keeping Costa Rica as front-runner in environmental innovation. The shortcomings came with the delays in the implementation of investment projects as was the case of regional development. The fiscal agenda was strengthened as a result of the crisis and the DPL resources went to help improve the debt profile, even if the envisaged technical assistance was not delivered. Bank Performance Design and Relevance 23. The FY09-FY11 CPS focused on three sets of challenges. The first challenge was to enhance the competitiveness of the country in order to maintain and improve on the long-term growth trend of the previous 25 years. The second challenge was to build on the advances made in health and education service delivery and social security and social assistance to improve the conditions of the most poor and vulnerable. As a third set of challenges the CPS identified: (a) enhancing the sustainability and extending the reach of the pioneering program of Payments for Environmental Services (PSA) that had been successfully promoting forest and biodiversity conservation; and, (b) putting in place institutions that would help mitigate the country’s vulnerability to natural disasters by moving away from reactive action to pro-active readiness. The FY09-FY11 CPS organized the program to help Costa Rica meet these challenges in two groups: (a) promote sustainable economic growth; and (b) reduce poverty. The program proposed to rely on four operations that were under implementation and four new operations to be approved under the CPS for an estimated US$258 million. In addition, in line with an emphasis on knowledge, the CPS program included AAA that had been completed or was underway, and proposed a new AAA program that included both reimbursable and non- reimbursable activities. 24. The design of the FY09-FY11 CPS was aligned with the political cycle. As the Arias Administration was already well into its term, the FY09-FY11 CPS adopted a short timeframe— August 2008-December 2010—covering the remainder of its term and an additional seven months following the presidential transition in May 2010 to enable development of the next CPS with a new, incoming government. Because of the shorter timeframe envisaged, just over two and a half years of implementation, the CPS did not foresee a Progress Report. While the idea of linking the CPS period to the political cycle was appropriate, the design of the CPS was not fully 37 adequate, as it posted a full standard result framework that included milestones (usually assessed at the time of the Progress Report) and results in some cases associated to operations not yet in place, meaning that the strategy design left a short time for the partnership to achieve its results. The result was an overly ambitious design for a two-year period, especially when at the beginning of the CPS few projects were under implementation. 25. In hindsight, the implications of linking the CPS timing and design to the political cycle could have been fleshed out or discussed more thoroughly. The CPS was designed and approved during the second half of the previous (Arias) administration, which meant that with two and a half years remaining the CPS had a transitional character. Perhaps the transitional character of the CPS did not warrant a traditional design structure; agreement on new operations could have been left to the follow-up strategy with the priority given to developing more fully the role of the Bank as a knowledge institution and the implementation of the operations in place, which a two- year extension of the CPS could have delivered without engaging in a full-fledged strategy. Implementation 26. The Bank response to the Government’s call for support to enable the country to handle the challenges of the global crisis was timely; the volume of resources transferred increased significantly the volume of Bank lending during the CPS period. The results framework of the DPL maintained the focus of the CPS agenda and allows the country to improve its debt profile strengthening its fiscal position. Arguably, the design could have placed greater emphasis on the impact of the crisis on the poor. 27. The delivery of AAA followed the intended objective to emphasize knowledge sharing rather than exclusively the transfer of financial resources. The AAA work during this CPS period continued on setting in place platforms to deliver cutting-edge technical assistance based on high absorptive capacity of the country as has been the strategy since the Bank reengaged in Costa Rica in 2003. The AAA covered priority areas of the national agenda that cut across political parties and the core set of AAA products on competitiveness, skills and education, public expenditure, and poverty monitoring are having an impact through their contribution to the new Government’s strategy. The fact that the expectations of building a fee-for-service portfolio proved premature highlights the fact that works remains to be done to fully consolidate the role of the Bank as a knowledge partner. 28. The partners failed to improve the pace of implementation of investment projects. The slow speed of project implementation constrains the ability of the Bank to commit to the timely delivery of results. During the CPS under review the challenge to deliver on results was partially addressed by relying on policy dialogue and the results framework of the DPL. The previous CPS CR had already emphasized the need to address the time-consuming effectiveness periods by concentrating on larger operations. The experience under this CPS is that additional facts need attention, such as complexity of project design and the client’s limited experience with Bank operations in the country. A complex design heavy on inter-institutional cooperation is likely to be difficult to implement given the country context which includes a tradition of consensus building and cumbersome national procedures. 38 Bank Performance Rating 29. The Completion Report rates Bank performance as moderately satisfactory. Positive aspects of bank performance included: (a) delivery of quality AAA in line with the intended objective of the CPS; and (b) the rapid response of the Bank to the call of the authorities for support during the crisis. The DPL ICR rated Bank performance as satisfactory. Although the original design of the CPS was over optimistic, efforts in implementation through AAA and the DPL-DDO managed to deliver a good part of the results. Performance fell short in two key areas: (i) project preparation of the City-Port Limon project was overly protracted while failing to incorporate best practice design principles and, more broadly; (ii) implementation issues in the ongoing portfolio were addressed only half heartedly. Summary Findings and Recommendations 30. Keep a focus on results but be flexible on the use of instruments. Adjustment to the global crisis meant a major change in the structure of lending with budget support taking the place of investment lending. Despite this drastic shift in the composition of the program, the CPS maintained a focus on the key results in areas such as telecommunications, secondary education, etc. This approach combined with good quality supporting analytical work shows how a country can adjust to changing circumstances while maintaining the commitment to deliver results in the areas targeted by the CPS program. Maintaining a focus on results is facilitated by designing a results framework that is aligned with the country’s strategic priorities, such as competitiveness, education, environment and social assistance in Costa Rica. 31. The results framework of the CPS should be consistent with the time period of CPS implementation and size and scope of the supporting program. The design of the results framework of the CPS did not take appropriate account of the limited implementation period (two and a half years) and rather followed a standard format. While the idea of aligning the period of the CPS with the political cycle was appropriate, the team could have considered other options in the circumstances of Costa Rica at the time of design. One option could have been the extension and updating of the previous strategy for a two year period; or, alternatively, the results framework could have been adapted to the shorter period of implementation. 32. Simplification of project design in future operations is critical to avoid implementation delays. The previous CPS Completion Report addressed the high implementation risks in Costa Rica (beginning with long delays in achieving effectiveness) by suggesting the design of larger operations to minimize the costs of effectiveness. While this remains a valid lesson, the experience during this CPS is that larger is only better if care is taken to simplify design and minimize risks to implementation. For example, introducing heavy demands on coordination, as in the case of the Limon Project, leads to implementation delays. Further efforts to prepare projects for prompt implementation once effective are also needed to maximize opportunities for success. As suggested under the previous CPS, given the effectiveness and implementation challenges, preparation and delivery of new projects should preferably take place at the early part of the CPS period. Experience has demonstrated that preparation of projects towards the end of the political cycle has lead to longer delays, both in effectiveness, as well as delays related to political transitions. 39 33. The effectiveness of Bank programs in middle-income countries should be enhanced by aligning design with a greater emphasis on knowledge and South-South cooperation. Costa Rica is a middle income country at the cutting edge of several development initiatives and with a solid demand for knowledge products. Partnerships in such cases require responding to the client demand for high quality timely analytical products that deliver results without the traditional institutional support found in technical assistance operations. So far, the experience shows that continued engagement through substantive analytical work, well disseminated and accompanied by complementary notes as needed, can have an impact. However, as the knowledge relationship develops into the main area of engagement, its effectiveness demands aligning the design of the strategy (selection of areas of engagement, results framework, etc.) with the characteristics of the knowledge products. In particular, it is important to develop ways to measure the effectiveness of the Bank in delivering knowledge products in the country. Lastly, the innovative experiences in Costa Rica (e.g., payment for environmental services, institutional readiness for managing natural disasters) can help other countries address similar concerns. In turn, this intensified South-South cooperation would allow Costa Rica to benefit from the experiences of similar countries in the region or further abroad. 40 Table 1. Summary of CPS Program Self-evaluation CPS Outcome and Status and Evaluation Lending and Non- Lessons for the new Outcome Indicators Summary lending Activities that CPS (baselines and targets) contributed to the outcome CPS Objective 1. Promote sustainable economic growth Govt. has begun Achieved. Competitiveness Study Analytical work aligned implementation of its Competitiveness Study (FY09) with clients’ priorities competitiveness and growth completed and and that engages their strategy, with an emphasis on disseminated in a high Follow up NLTA cooperation can serve to infrastructure, the investment level event in June 2009 (FY10) deliver knowledge climate, and skills with the Minister of platforms. The new development. Finance. Gov requested CPS can build on these follow up NLTA to go platforms to deliver further in detail in three follow-up targeted areas: innovation, notes, as has already business regulation, and happened. harmonization of free trade agreements which was presented to the Cabinet in June 2010. The new administration has implemented some recommendations of the Bank’s study.  Increase in Achieved. FDI reached US$500 m DPL with expression of interest by 1.5 billion at end 2010 DDO foreign investors in compared to 1.3 billion collaborative FDI projects of 2009. About 70 in technology intensive percent of the FDI is sectors. directed to high technology projects in manufacture and services.  The GDP share of Not achieved. Given US$500 m DPL with The one-tranche DPL tax revenues is maintained the impact of the DDO highlighted the at or above the level international financial relevance of a strong achieved in 2007 (15.2 crisis the targets fiscal system. The new percent of GDP) established for 2009 and Government has set 2010 were revised. fiscal reform at the top of its policy agenda. The new CPS should stand ready to continue that support bringing to bear relevant international experience.  No. of users of Achieved US$500 m DPL with ebased taxation increases DDO to represent at least 50 percent of all central government tax revenues  on of the exports regime Achieved US$500 m DPL with TICA project in all customs The exports regime is DDO fully incorporated to the 41 CPS Outcome and Status and Evaluation Lending and Non- Lessons for the new Outcome Indicators Summary lending Activities that CPS (baselines and targets) contributed to the outcome TICA project since end 2009 in all customs agency posts. Since April 2010 the Free Zones regime is fully operative under the TICA project in all customs agency posts.  The new regulatory Achieved . In December US$500 m DPL with DPL DDO results authority SUTEL is in the 2010 an international DDO framework design process of hiring the bidding process took helped achieve results necessary staff (expected place to open up the that were expected from to be fully staffed in cellular phone market. operations (telecom) 2011) to be completely As a result, FONATEL that were not delivered. operative. This will also has the resources and This experience shows ensure the provision of institutional capacity to the importance of staff for the functioning of function satisfactorily, flexibility in the use of FONATEL SUTEL is also operating instruments to deliver within the established results. The new CPS parameters. should maintain this flexible stance on how best to support the country in the areas of engagement that will included in the partnership.  Approval of Achieved. The staffing US$500 m DPL with implementation plan, of FONATEL is pending DDO including rules and the transfer of financial regulations, of the resources to SUTEL Universal Service Fund from the Executive and (FONATEL) has been ICE. done (November 2010)  The opening of the Partially achieved US$500 m DPL with telecommunication sector DDO has started. The bidding process to choose new operators will finalize December 14, 2010. Five international companies are participating in the bidding process .The outcome will be known in the first term of 2011. 42 CPS Outcome and Status and Evaluation Lending and Non- Lessons for the new Outcome Indicators Summary lending Activities that CPS (baselines and targets) contributed to the outcome Reforms to modernize the Achieved. Telecom Sector telecom sector and to SUTEL has issued modernization program strengthen its regulatory concessions for new (FY09) – DROPPED authority (ARESEP) are mobile phone operators producing: – ICE returns spectrum Strategy for Telecom - Greater private sector to Gov, to be used by Sector Reform (FY07) participation in the sector private companies in the (baseline: state-owned ICE is provision of cellular FIAS Study on the only cellular provider in services; SUTEL issued Competition Issues in 2007) concessions to private Telecom Sector (FY06) - Increased telecom service companies to provide penetration and investments, Internet, international Study on Radio particularly in rural and leased line and other Spectrum Issues: Dutch isolated poor areas (baseline: telecom services. Trust Fund (FY06) telephone density 60% in -In 2010, the density of 2007; target 100% by 2012) cellular telephones is 68 % having increased from 40% at end 2008. Fixed lines the density remains around 30 percent. Improve economic Not Achieved. City-Port of Limon Slow project competitiveness and Implementation Delayed. Project (FY08) implementation, due to opportunities in Limon Project is being complex design, through: restructured and outcome hasaffected the capacity - SME growth in the tourism indicators will be of the Bank to deliver and cultural sectors (baseline: revised. results. The new CPS 0 new SMEs in 2007) should (a) sharpen the - Improved access to focus on sewerage in Limoncito implementation and (b) (baseline: 38% of pop. with ensure design is access in 2007). straightforward and - Reduced port handling costs innovative. (baseline: US$ 0.08/ton in 2007) Participatory strategic plan Dropped City-Port of Puntarenas It is not prudent to developed for Puntarenas. Project (FY10) - include results from DROPPED projects that have not National education plans Dropped Secondary Education been approved. The text initiated improving the Quality & of the CPS can be used relevance of the curriculum Competitiveness (FY10) to describe possible to labor market demands, - DROPPED areas of engagements, facilitating school to work with the updating of the transitions, and improving results framework efficiency and management taking place once the within the sector. supporting program is (baseline: secondary school in place. completion rate 33% in 2007)  Secondary drop-our Achieved. Drop out rate US$500 m DPL with DPL DDO results rate falls from 13.2% in fell to 10.2% in 2010. DDO framework design 2006 to less than 10% helped achieve results  Net Secondary Achieved. Net that were expected from enrollment rate (13-17 Secondary enrollment operations that were not 43 CPS Outcome and Status and Evaluation Lending and Non- Lessons for the new Outcome Indicators Summary lending Activities that CPS (baselines and targets) contributed to the outcome year olds) increases from rate (13-17 year olds) delivered. This 71.5% in 2006 to at least increased to 75.2% 14 experience shows the 74%. importance of  Participation in the Achieved. Following the flexibility in the use of PISA and publication of pilot survey of 2009 instruments to deliver results. to750 students, Costa results. The new CPS Rica participated for the should maintain this first time (June 2010) in flexible stance on how PISA together with more best to support the than 5000 students of country in the areas of 184 secondary education engagement that will institutions of the world. included in the The publication of partnership. results will take place in 2011. MOF and BCCR are issuing Not Achieved. More Completed: The lack of Progress debt according to a recently, with increase in Public Debt Report, due to the short coordinated strategy. fiscal deficit each entity Management and CPS period, prevented is focusing more on its Domestic Debt Market adjusting the results own objectives, and Development Project - framework. Annual there is less First Phase (FY07) reviews can be used to coordination. update the results Regulatory framework Public Debt framework to take supports the implementation Dropped after the Management account of new of a risk-based debt strategy scandal regarding and Domestic Debt developments and and the development of a government contracts in Market - DROPPED efforts to deliver results domestic debt market. 2008. with alternative A new Debt instruments. Management Law A unified IT architecture is unlikely; instead, capturing information on reforms to Law 8131 external and domestic debt as being proposed. well as guarantees. Partially Achieved. Credito Publico is considering contracting IT consultants to create interfaces between the MoF and Central Bank debt databases. Risk reduction strategies for Achieved. Costa Rica DPL with CAT-DDO emergency response and has made substantial (FY09) diversified risk management progress toward instruments developed. implementing a robust Conferences on Macro- disaster risk management Issues (FY09/10) framework, focusing on actions to mitigate CA Macroeconomic natural disaster risks and Monitoring Report lower the country’s (FY10)                                                              1414 In 2008 the total population figure was adjusted following the census. All data series were adjusted which explains the change in the base year 2006. 44 CPS Outcome and Status and Evaluation Lending and Non- Lessons for the new Outcome Indicators Summary lending Activities that CPS (baselines and targets) contributed to the outcome vulnerability. The DPL with CAT DDO enhances the government’s capacity to implement its Disaster Risk Management Program for natural disasters as it complements other instruments in the country as part of a comprehensive framework for disaster risk management and emphasis on disaster prevention, as opposed to only disaster response. Land under Costa Rica’s PES Achieved. Ecomarkets I (FY06) The results were program increased. (270,000 achieved even if ha. in 2007). 700,000 in 2009 Mainstreaming Market- disbursement under the Based Instruments for Bank project were PES financial sustainability Environmental lower than expected as improved through: Management the government - Increased allocation of US$2.47 million by 2010 Project/GEF Grant financed program water tariff revenue to the (FY06) implementation with PES (0% in 2007) In final discussion with alternative sources. - Full capitalization of the outside donors. Expected COOPEAGRI (FY06) The lesson for the new Biodiversity Endowment FY11 at the latest. (Carbon Sequestration) CPS in the achievement Fund. of results is the Achieved. importance of financing PES targeting improved priority activities, while through: maintaining flexibility - increased participation - 9,293 families in in the use of resources of small farmers and 2009 overtime. landowners (1,900 in 2007). - Being implemented - Application of differentiated payments among farmers. - 907 ha by February - Increased reforestation 2010 of degraded agricultural   land in Perez Zeledon   (241 ha. in 2007)         CPS Objective 2. Reduce Poverty Government capacity to Dropped Poverty Assessment The lack of Progress monitor poverty trends and (FY07) Report, due to the short 45 CPS Outcome and Status and Evaluation Lending and Non- Lessons for the new Outcome Indicators Summary lending Activities that CPS (baselines and targets) contributed to the outcome target resources enhanced CPS period, prevented through: Poverty Measurement & adjusting the results - Introduction of improved Targeting AAA (Phase framework. Annual poverty measurement and II) (FY08) reviews can be used to policy tools across ministries. update the results - Development of a new TFSCB Support for the framework to take poverty targeting system in National Statistical account of new Ministry of Housing and Development Strategy developments and Human Development with a (FY08) efforts to deliver results unified registry of social with alternative program beneficiaries. Poverty Measurement instruments. and Targeting AAA (Phase III) (FY09) - dropped  Number of Partially Achieved. US$500 m DPL with beneficiaries of the Number of beneficiaries DDO Avancemos program of the Avancemos ´ reaches 200,000 program reached Baseline 156,909 in 2008 180.740 below the target of 200.000.15 Primary school completion Indicators dropped as Public Expenditure rates increase in four targeted part of project Review (included a areas (Norte, Atlantico, restructuring. New public expenditure Puntarenas, Guanacaste) with indicators include tracking survey on the high indigenous populations. national completion MoE’s school lunch Baseline: 69.3% in 2004 rates. Primary program) (FY08) Completion Rates Over-age and drop-out rates increased from 93.5 % in Equity & Efficiency in decrease in the four targeted 2006 to 96% in 2010; Education (FY06) regions: and lower secondary (9th Baselines: grade) increased from Over-age rate: 11.8% in 2007 19.9 percent to 82.7 Drop-out rate: 5.3% in 2007 percent in the same period. Increased percentage of low The revised indicators income students in four will also track impact in targeted areas served by areas of influence, poverty-targeted programs. however this data is Baseline: 10% in 2007 under preparation. Delivery and quality of Achieved. Public Expenditure The Project ICR primary healthcare services - Increased access to Review (included a stresses the importance improved though: integrated networks of public expenditure of design and - Expansion of primary care health services. About 92 tracking survey on implementation to coverage % of the population is integrated child care deliver results on time.                                                              15  The delay in incorporating more secondary students is related to the analysis that the Ministry of Education, in coordination with IMAS, has been doing to ensure that the program (Avancemos) is well targeted. In 2009 the program´s evaluation revealed that 5 percent of the beneficiaries did not need the financial support. The national scholarship fund (FONABE)is working towards a synchronization of data so that those students that have scholarships in the primary education continue with the support in the secondary. 46 CPS Outcome and Status and Evaluation Lending and Non- Lessons for the new Outcome Indicators Summary lending Activities that CPS (baselines and targets) contributed to the outcome - Strengthened compliance of covered by health centers under the MoH) In addition, it calls for primary care services with insurance that finances (FY08) making monitoring and MOH standards. access and continuity of evaluation an integral - Greater equity in funding care for primary health Health Sector part of project allocations across regional care services as well as Modernization Project implementation. health districts secondary and tertiary (FY02) – now closed - Modernization of the level of care pharmaceutical system, - 100 % of performance Regional including reductions in agreements between Pharmaceutical Study procurement time. central authorities and (FY09) social security health care providers include Health sector outcome indicators in modernization (fee for line with priorities service TA for CCSS) established by the MOH (FY09) - dropped - The establishment of a new management unit devoted to improve procurement and distribution of pharmaceuticals along with development of some new electronic tools have increased efficiency of management from purchasing to delivery at the health center units CCSS has taken actions to Dropped Pension Investments improve the financial Partnership Program sustainability of its pension (fee for service TA for and social security schemes CCSS) (FY09) - Dropped  Oversight agency Achieved. SUGESE is US$500 m DPL with supervising the fully staffed and DDO insurance sector is fully operating.  The participation of staffed and operating. 6 new operators (fully authorized) and 4 operators (finalizing process of approval) in the insurance sector, has resulted in improved insurance services at a lower cost to consumers. 47   Table 2. Planned Lending Program and Actual Deliveries CPS Plans CPS Completion Report (August 2008 to December 2010) (as of January 2010) FY Project US$m Status US$m 2009 Telecom Sector Modernization US$ 27 Dropped CAT DDO 65 Delivered 65 Additional Actual Projects: DPL DDO 500 Subtotal 92 Subtotal 565 Secondary Education Quality & 2010 Competitiveness 80 Dropped Port of Puntarenas 100 Dropped Subtotal 180 Subtotal 0 Total FY09-FY10 372 565 Table 3. Planned Non lending services and Actual Deliveries CPS Plans CPS Completion Report (August 2008 to December 2010) (as of January 2010) FY Products Status 2009 Competitiveness Study Delivered FY09 Conference on Macro-Issues Dropped Development Policy Notes Dropped Poverty Measuring & Targeting Phase III: FY08 Dropped Health Sector Modernization (fee for service Dropped TA for CCSS) Pension Investments Partnership Program (fee Dropped for service TA for CCSS) 2010 Conferences on Macro-Issues Dropped CA Macroeconomic Monitoring Report Dropped Additional Actual Products: Competitiveness Follow-up NLTA 2011 Additional Actual Products: NLTA Public Private Partnerships Strengthening the Role of the Education Sector in Enhancing Competitiveness and Social Cohesion NLTA (P116002) PEFA 48 Annex 3. Gender At A Glance Costa Rica has made impressive gains in addressing gender disparities. The country is closing the education gender gap. At the primary level, the female-male primary gross enrollment ratio is roughly equal (0.99 for 2008). At the secondary levels, there is even a slight tendency in favor of girls with a female-male ratio of 1.06 (2008), which points to an issue for males. In health, 99 percent of all births in 2009 were attended by skilled health staff, which is better than the averages for upper middle income (UMI) countries (96 percent, 2009) and the LAC region (89 percent, 2009). The contraceptive prevalence rate of 80 percent (2009) is also better than the average for UMI countries (75 percent, 2009) and the LAC region (75 percent, 2009). Female life expectancy at birth is about 5 years higher than for males (2008), approximating the difference prevailing in high income countries. However, the adolescent fertility rate (67 percent, 2009) deserves policy attention because it is higher than the UMI average (49 percent, 2009), although the rate fell in recent years, from 82 percent in 2000. The Bank is also working on a LAC regional study for FY12 on teen pregnancy that will try to better understand the reasons behind high pregnancy rates and explore possible policy options. In terms of economic opportunities, female participation in the labor force is still comparably low. Although it improved from 40 percent in 2000 to 49 percent in 2009, it was much lower than male labor force participation in the same year, 84 percent, and than the average for LAC countries (56 percent in 2009). Unemployment rates continue to be higher for women than for men: 6 percent for women versus 4 percent for men (2009), but the gender gap in unemployment was reduced from 2004, when female unemployment was 9 percent and male unemployment was 5 percent.16 With regards to the quality of women’s labor force participation, women are somewhat more likely than men to work in the informal sector: 49 percent of working women and 43 percent of working men are in the informal sector in Costa Rica.17 This is consistent with findings for other countries in Central America, with the exception of Honduras, where men are more likely to work in the informal sector than women.18 In addition, sectoral gender segregation still persists, with very little changes over the last decade: The Duncan Index for sectoral gender segregation is 0.37. The highest segregation in the Central America region is observed for Nicaragua with a Duncan Index of 0.5419. However, there were almost no wage gaps in 1997 and in 2007. Women’s contribution to national income has been increasing at an annual rate of 1.12 percent over the last decade: women currently earn 35 percent of total income in Costa Rica. When it comes to poverty and gender, an issue of concern is the connection between female- headed households and poverty in Costa Rica. According to the 2007 Country Poverty Assessment, the poverty headcount is higher for female-headed households than for male-headed households. This is important because, with a rate of 30 percent in 2007, Costa Rica was the country with the second-highest rate of female-headed households in the region (after Honduras).20                                                              16 All data up to this sentence were drawn from Genderstats (World Bank). 17 Vakis, Renos, Ana Maria Munoz and Barbara Coello: A gender (r)evolution in the making? Expanding women’s economic opportunities in Central America: A decade in review, World Bank 2011. 18 Ibid. 19 Ibid. 20 Ibid. 49 Thus, female headship in Costa Rica seems to be correlated to poverty. While the share of households headed by women (FHH) increased from 16 percent in 1987 to 27 percent in 2004, the share of poor households headed by women increased even more.21 The Poverty Assessment also found that, in 2004, two-thirds of female-headed households were composed of single mothers with young children. Except for education levels, female-headed households disproportionately possessed characteristics associated with poverty, including high unemployment, high levels of self-employment, and higher than average incidence of part-time work. The evidence suggested that single mothers with young children lack the ability to work full-time jobs with standard working hours due to lack of affordable child care options.22 In terms of political participation and representation Costa Rica is doing better than most other countries in LAC: Parliamentary seats occupied by women during the 2000-2008 period increased from 19 percent to 37 percent. This stands out as more than twice the average for UMI countries (18 percent, 2008) and also much higher than the average for LAC countries (22 percent, 2008).23 Selected Gender Indicators: Costa Rica vs Upper Middle  Income Countries vs Latin America Births attended by  skilled health staff % 1.0 0.8 Proportion of seats  0.6 held by women in  0.4 Contraceptive  national parliaments  0.2 prevalence % % 0.0 Female labor force  Adolescent fertility  participation rate (%  rate (births per 1,000  of population ages 15‐ women ages 15‐19) 64) Costa Rica UMI LAC                                                              21 Gender as a Barrier for Shared Growth: The Case of Costa Rica Poverty Assessment. Presentation at PREM Learning Week -2007 (Lucia Fort, Andrew D. Mason, Maria Beatriz Orlando, and Carlos Sobrado). 22 Costa Rica Country Poverty Assessment 2007. 23 Genderstats. 50 Annex 4. Country-At-A-Glance 51 Annex 4. Country-At-A-Glance 52   Annex 5. Selected Indicators* of Bank Portfolio Performance and Management As Of Date 5/11/2011 Indicator 2008 2009 2010 2011 Portfolio Assessment Number of Projects Under Implementation a 4 6 5 4 b Average Implementation Period (years) 3.7 3.5 3.8 5.5 a, c Percent of Problem Projects by Number 50.0 50.0 40.0 50.0 a, c Percent of Problem Projects by Amount 28.1 16.1 14.5 49.4 Percent of Projects at Risk by Number a, d 50.0 50.0 40.0 50.0 a, d Percent of Projects at Risk by Amount 28.1 16.1 14.5 49.4 e Disbursement Ratio (%) 4.0 2.7 10.5 7.4 Portfolio Management CPPR during the year (yes/no) No No No tbd Supervision Resources (total US$) 256 419 594 619 Average Supervision (US$/project) 64 84 99 103 Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 27 2 Proj Eval by OED by Amt (US$ millions) 611.5 5.2 % of OED Projects Rated U or HU by Number 8.0 0.0 % of OED Projects Rated U or HU by Amt 10.6 0.0 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 53   Annex 6 - IBRD Program Summary – Costa Rica as of 06/02/2011 Proposed IBRD/IDA Base-Case Lending Program a Strategic Implementation Fiscal Proj ID US$(M) Rewards b b Risks year (H/M/L) (H/M/L) 2012 Proposed Higher Education Project 200 H H Proposed Innovations to Enhance Performance of Health Care 200 Networks Project (APL 1) H H Overall Result 400 54   Annex 7. Social Indicators 55         56   IFC Costa Rica Committed and Disbursed Outstanding Investment Portfolio As of 06/10/2011 (In USD millions) Committed Disbursed Outstanding FY Committed Company Loan Equity Quasi-Equity** GT/RM* Participant Loan Equity Quasi-Equity** GT/RM* Participant 2010/2011 Banco Improsa 10.00 - 10.00 3.00 - 10.00 - 10.00 3.00 - 2011 Banco LAFISE CR - - - 4.99 - - - - 4.99 - CH de Escazu SA 3.58 0.98 - - - 3.58 0.98 - - - 2009/2010/2011 Promerica CR 5.33 - - 3.14 - 5.33 - - 3.14 - Total Portfolio 18.91 0.98 10.00 11.13 - 18.91 0.98 10.00 11.13 - *Denotes Guarantee and Risk Management Products **Quasi- Equity includes both loan and equity types      57   Annex 9. Key Economic Indicators Actual Projected Indicator 2005 2006 2007 2008 2009 2010 2011 2012 National accounts (as % of GDP) Gross domestic producta 100 100 100 100 100 100 100 100 Agriculture 9 9 8 7 7 6 6 6 Industry 29 29 29 29 27 24 25 25 Services 62 62 62 64 66 69 69 68 Total Consumption 81 80 80 75 17 86 85 85 Gross domestic fixed investment 19 20 22 30 5 16 18 18 Government investment 1 1 1 2 0 2 1 1 Private investment 18 19 20 28 5 14 17 17 Exports (GNFS)b 49 49 49 42 87 40 39 39 Imports (GNFS) 54 55 54 51 9 43 43 43 Gross domestic savings 19 20 20 25 83 14 15 15 c Gross national savings 16 19 19 24 83 13 14 14 Memorandum items Gross domestic product 19965 22526 26322 29838 29241 35780 40167 43112 (US$ million at current prices) GNI per capita (US$, Atlas method) 4660 5030 5540 6240 8890 17240 95520 .. Real annual growth rates Real GDP growth 5.9 8.8 7.9 2.7 -1.3 4.2 4.3 4.4 Gross Domestic Income 3.2 6.9 6.0 1.2 488.0 -81.5 2.9 -1.3 Real annual per capita growth rates (%, calculated from 91 prices) Gross domestic product at market prices 4.1 7.0 6.3 1.2 -2.9 2.0 2.7 3.1 Total consumption 2.1 3.7 5.3 2.8 -0.2 3.7 -1.6 2.7 Private consumption 2.6 4.0 5.9 3.0 -2.8 -14.0 -2.1 4.0   58   Actual Projected Indicator 2005 2006 2007 2008 2009 2010 2011 2012 Balance of Payments (US$ millions) Exports (GNFS)b 9721 11044 12851 13700 12659 14248 15519 16464 Merchandise FOB 7099 8068 9299 9555 8838 9417 10382 11220 Imports (GNFS)b 10757 12451 14103 16462 12605 15271 16991 18114 Merchandise FOB 9252 10836 12285 14569 10875 13004 15024 16479 Resource balance -1037 -1407 -1252 -2761 54 -1023 -1472 -1651 Net current transfers 270 349 470 442 359 368 382 507 Current account balance -985 -1060 -1646 -2787 -574 -1299 -1936 -2156 Foreign direct investment 904 1371 1634 2072 1339 1450 1841 1936 Long-term loans (net) .. .. .. 138 218 102 -143 -139 Official .. .. -167 -211 158 -25 88 37 Private .. .. .. 349 59 127 -231 -176 Other capital (net, incl. errors & ommissions) .. .. .. 905 -1087 247 664 765 Change in reservesd -393 -1034 -839 315 -59 -561 -400 -300 Public finance (as % of GDP at market prices)e Current revenues 13.9 14.2 23.4 23.6 22.5 22.2 22.5 24.3 Current expenditures 14.9 14.4 21.5 23.2 25.7 27.3 27.7 28.0 Current account surplus (+) or deficit (-) -1.0 -0.1 -0.2 -2.8 -6.1 -8.5 -8.1 -6.7 Capital expenditure 1.1 0.9 2.1 3.2 2.9 3.4 2.9 3.0 Foreign financing .. .. -0.1 -0.3 -1.1 1.3 0.0 0.5   59     Actual Estimate Projected Indicator 2005 2006 2007 2008 2009 2010 2011 2012 Monetary indicators M4/GDP .. .. 54.8 55.1 56.5 51.0 52.0 .. .. .. Growth of M4 (%) 17.9 16.1 9.6 1.3 12.6 .. Private sector credit growth / .. .. 25.5 28.0 28.4 28.2 29.1 .. total credit growth (%) Price indices( YR91 =100) Merchandise export price index .. .. .. .. .. .. .. .. Merchandise import price index .. .. .. .. .. .. .. .. Merchandise terms of trade index .. .. .. .. .. .. .. .. Real effective exchange rate (eop; depreciation -) .. .. 10.8 13.9 4.0 5.8 7.5 6.5 Real interest rates Consumer price index (% change) 13.8 11.5 10.8 13.9 4.0 5.8 7.5 6.5 GDP deflator (% change) 10.6 11.0 9.4 12.4 8.2 7.8 5.8 7.2 a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Combined Public Sector Operations   60   Annex 10. Key Exposure Indicators – Costa Rica Actual Estimated Projected Indicator 2005 2006 2007 2008 2009 2010 2011 2012 Total debt outstanding and 6487 6994 8341 8812 8826 8402 8941 9567 a disbursed (TDO) (US$m) Net disbursements (US$m)a 0 0 0 0 21 350 521 626 Total debt service (TDS) 274 293 368 557 1240 1199 1306 1316 a (US$m) Debt and debt service indicators (%) TDO/XGSb 62.2 57.9 58.8 59.9 64.6 54.9 53.4 59.6 TDO/GDP 32.5 31.0 31.8 27.1 6.2 .. .. .. TDS/XGS 2.6 2.4 2.6 3.8 9.1 7.8 7.8 8.2 Concessional/TDO 5.8 5.8 5.5 6.4 7.0 7.7 7.8 7.3 IBRD exposure indicators (%) IBRD DS/public DS .. .. .. .. 1.7 2.6 1.5 1.4 Preferred creditor DS/public .. .. .. .. 26.6 50.0 30.5 27.6 c DS (%) IBRD DS/XGS 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 d IBRD TDO (US$m) 59 53 45 41 164 73 91 110 Of which present value of guarantees (US$m) Share of IBRD portfolio (%) 0 0 0 0 0 0 0 0 d IDA TDO (US$m) 1 1 1 0 0 0 0 0 IFC (US$m) Loans Equity and quasi-equity /c MIGA MIGA guarantees (US$m) 124.2 98.7 75.2 192.3 158.5 158.5 158.5 152.5(e) a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments. 61   Annex 11. Overview of Analytical Work and Trust Funds Project Grant Uncommitted Closing Amount Balance Date Trust Funds Financial Crisis Simulation Program (FIRST) 169,900 158,060 6/30/11 Disaster Risk Management for Water and Sanitation 90,000 50,865 12/30/11 Systems Integration of Disaster Risk Information in Planning 450,000 0 10/18/13 (IDF) Pilot Project on Early Warning Systems for Hydro- 264,000 264,000 6/14/13 meteorological Hazards Building the Capacity of Procurement Institutions to 300,080 300,080 TBD Achieve Development Outcomes Project (IDF) Total 973,900 472,925 Analytical Work FY09 Competitiveness Study ESW FY10 Competitiveness NLTA FY11 Education NLTA FY11 PEFA 62