infrastructure in latin america: recent evolution and key...

Infrastructure in Latin America: Recent evolution and key challenges (Seven Country Briefs) – C.B. 3/7: Costa Rica

August 2005

Final document

A d v i s e r sCohen&Co.



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Notes

Higher middle-income countries: Argentina, Brazil, Costa Rica, Mexico Regional average: Argentina, Brazil, Colombia, Costa Rica, Guatemala, Jamaica, Mexico, Peru

Weights and Measures

Metric System

Government Fiscal Year

1 January – 31 December

Acronyms

AAPA: American Association of Ports Authorities

AGI: Airport Group International

ANEEL: Electric Energy National Agency

ARESEP: Agencia Reguladora de Servicios Públicos

ASADAS: Associaciones Administradoras de Acueductos Rurales

AyA: Instituto Costarricence de Acueductos y Alcantarillados

BIRF: Banco Internacional de Reconstrucción y Fomento

CAARs: Comités administradores de acueductos rurales

CAFTA: Central American Free Trade Agreement

CIA: Central Intelligence Agency

CLER: Consejo Latinoamericano de Electrificación Rural

CNC: Consejo Nacional de Concesiones

CNFL: Compañia Nacional de Fuerza y Luz

COCATRAM: Comisiòn Centroamericana de Transporte Maritimo

CONAVI: Consejo Nacional de Vialidade

COSEVI: Cosejo nacional de seguridad vial

DASTRA: Dirección de Aguas, Saneamiento Ambiental y Transporte

DGAC: National Division of Civil Aviation

DHS: Demographic and Health Surveys

DMP: Division of Marittime Ports

ECLAC: Economic Commission for Latin America and the Caribbean

EIA: Energy Information Administration

ENAHO: Encuesta National de Hogares

COUNTRY BRIEF – COSTA RICA

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ENIGFAM: Encuesta Nacional de Ingresos y Gastos Familiares

ENIGH: Encuesta Nacional de Ingresos y Gastos de los Hogares

EPH: Encuesta Permanente de Hogares

ESMAP: Energy Sector Management Assistance Programme

ESPH: Empresa de Servicios Públicos de Heredia

ESPHSA: Empresa de Servicios Públicos de Heredia S.A

GTZ: Deutsche Gesellschaft für Technische Zusammenarbeit

IBGE: Brazil –Instituto Brasileiro de Geografia e Estatística

ICE: Instituto Costarricense de Electricidad

ICE lec: Instituto Costarricense de Electricidad, División Electricidad

ICE tel: Instituto Costarricense de Electricidad, División Telecomunicaciones

IDB: Inter-American Development Bank

IFC: International Finance Corporation

IMF: International Monetary Fund

INCOFER: Instituto Costarricense de Ferrocarriles

INCOP: Instituto Costarricense de Puertos do Pacífico

INDEC: Instituto Nacional de Estadísticas y Censos

INE: Instituto Nacional de Estadística

INEC: Instituto Nacional de Estadística y Censos

INEGI: Instituto Nacional de Estadística, Geografia e Informática

INEI: Instituto Nacional de Estadística e Informática

IPPs: Independent Power Producers

IRF: International Road Federation

ITU: International Telecommunication Union

JAPDEVA: Junta de Administración Portuaria y de Desarollo Económico de la Vertiente

Atlántica

JASEC: Junta Administrativa del Servicio Eléctrico de Cartago

JSLC: Jamaica Survey of Living Conditions

MIDEPLAN: Ministerio de Planificación Nacional y Política Económica

MINAE: Ministry of Environment and Energy

MOPT: Obras Públicas y Transportes

MPEP: Ministry of Planning and Economic Policy

OECD: Organisation for Economic Co-operation and Development

OLADE: Electric Energy National Agency

OMS: Organisation Mondiale de la Santé

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OPS: Organización Panamericana de la Salud

OSINERG: Organismo Supervisor de Inversion en Energía

PHO: Pan American Health Organization

PIJ: Planning Institute of Jamaica

PNAD: Pesquisa Nacional por Amostra de Domicílios

PND: Plan de desarollo nacional

PPAs: Power Purchase Agreements

RACSA: Radiográfica Costarricense

SEN: Sistema Eléctrico Nacional

SIDES: Sistema de Indicadores sobre Desarrollo Sostenible

SIECA: Secretaría de Integracción Economica Centroamericana

SISS: Superintendencia de Servicios Sanitarios

UN: United Nations

UNCTAT: United Nations Conference on Trade and Development

UNICEF: United Nations Children’s Fund

UNSTAT: United Nations Statistical Division

WDI: World Development Indicators

WEF: World Economic Forum

Task Team

This report was written by a team under the direction of Gianluca Pastena – Ernst & Young Italy, Project Manager, with the Quality Scientific Supervisors Team: Alessandro Cenderello, E&Y Italy; Prof. Remy Cohen, C&c; Prof. Riccardo Faini, C&c and included the following Team: Prof. Daniel Artana, Expert in Regulation; Prof. Andrè Rossi de Oliveira, Expert in Energy and Electricity; Gonzalo Tamayo, Expert in Telecommunications; Prof. Rudnei Toneto Junior, Expert in Transportation and Infrastructure Stock and Water and Sanitation; Simone Aroni, Consultant – C&c; Simone Capolupo, Consultant – E&Y Italy; Fabrizio De Grandis, Consultant – E&Y Italy; Benedetta Falletti di Villafalletto, Consultant – E&Y Italy; Antonio Gisimundo, Consultant – E&Y Italy; Antonella Scotese, Senior Consultant – E&Y Italy; Marco Percoco, Senior Consultant, C&c. The study received considerable guidance and input from Marianne Fay, Lead Economist, Finance Private Sector and Infrastructure, Latin America Region – The World Bank; Nicolas Peltier-Thiberge, Infrastructure Economist, Finance Private Sector and Infrastructure Latin America and the Caribbean – The World Bank and Paulina Beato Blanco – Inter-American Development Bank.

TABLE OF CONTENTS

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TABLE OF CONTENTS

1. OVERVIEW ________________________________________________________________5

2. TRANSPORT________________________________________________________________9

2.1. OVERVIEW _____________________________________________________________9

2.2. ASSESSMENT OF THE KEY POLICY AREAS ____________________________________10 2.2.1. ANALYSIS OF THE TECHNICAL DIMENSIONS OF THE SECTOR __________________10 2.2.2. ECONOMIC EFFICIENCY AND PRIVATE SECTOR FINANCING ___________________25 2.2.3. REGULATORY FRAMEWORK AND INSTITUTIONAL DEVELOPMENT______________28

2.3. POLICY OPTIONS AND IMPLICATIONS________________________________________31

2.4. PRIORITIES FOR FUTURE REFORMS _________________________________________33

3. ENERGY__________________________________________________________________34

3.1. OVERVIEW ____________________________________________________________34




4. WATER AND SANITATION ____________________________________________________55

4.1. OVERVIEW ____________________________________________________________55




5. TELECOMMUNICATIONS _____________________________________________________70

5.1. OVERVIEW ____________________________________________________________70

5.2. ASSESSMENT OF THE KEY POLICY AREAS ____________________________________71 5.2.1. ANALYSIS OF THE TECHNICAL DIMENSIONS OF THE SECTOR __________________71 5.2.2. ECONOMIC EFFICIENCY AND PRIVATE SECTOR FINANCING ___________________77 5.2.3.REGULATORY FRAMEWORK AND INSTITUTIONAL DEVELOPMENT ______________79



6. REGULATION: THE WAY FORWARD_____________________________________________83

7. ESTIMATES OF INVESTMENT NEEDS ____________________________________________87

8. CONCLUDING REMARKS _____________________________________________________90

MAIN REFERENCES ___________________________________________________________94


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List of Tables

Table 2.1 – Indicators of Road Density – Selected Countries – 2001 11

Table 2.2 – Freight Breakdown by Type in Tons – 2003 17

Table 2.3 – Freight Evolution (Tons) – Costa Rica’s Ports 21

Table 2.4 – Public Investments on Infrastructure Provided in National Development Plan -

2002-2006 26

Table 3.1 – Access to Electricity in Latin American Countries 38

Table 3.2 – Main Cooking Fuel Used by Households 38

Table 3.3 - Main Cooking Fuel Used by Households in Some Latin American Countries

39

Table 3.4 – Service Quality - CNFL 43

Table 3.5 – Electricity Production by Source – Regional and Higher-Middle Income

Average. 45

Table 3.6 – Electricity Transmission and Distribution Losses 46

Table 3.7 – Comparison in Energy Consumption per Unit of GDP 47

Table 3.8 – Private Investments in Energy 48

Table 3.9 – Fiscal Dependence of the Electricity Sector 49

Table 4.1– Water coverage: Percentage of Population – 2000 56

Table 4.2 – Water Coverage: Percentage of Population – 2000 58

Table 4.3 – Costa Rica – Sanitation Coverage: Percentage of Population – 2000 59

Table 4.4 – Access to Improved Sanitation: % of Population – 2000 60

Table 4.5 – Costa Rica and Selected Countries – Quality Indicators – 2000 62

Table 5.1 - Evolution of Worker Productivity – ICE 77

Table 6.1 – Regulation: The Way Forward 86

Table 7.1 - Description of Variables 87

Table 7.2 - Estimated Models for Infrastructure Predictions 88

Table 7.3 - Projected Values 88

Table 7.4 - Infrastructure Investment Needs (% of GDP) 89

TABLE OF CONTENTS

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List of Figures

Figure 1.1 – Map of Costa Rica 5

Figure 1.2 – Value Added by Sector (% GDP) 6

Figure 1.3 – Total and Youth Unemployment Rate 7

Figure 2.1 – Road Density in Terms of Population and Land 10

Figure 2.2 – Motorized Vehicles: Total Vehicles and Vehicles per Thousand People – 2000

12

Figure 2.3 – Road Length 12

Figure 2.4 – Rail density in terms of Population and Land 15

Figure 2.5 – Railroad Infrastructure Quality - 2004 16

Figure 2.6 – Freight handled in Central American countries – 2003 17

Figure 2.7 – Freight Handled: Distribution Between Coasts – 2003 18

Figure 2.8 – Share of Total Passengers Carried – 2003 19

Figure 2.9 – Port Infrastructure Quality – 2004 20

Figure 2.10 – Main Airports in Costa Rica, by Location and Category 22

Figure 2.11 – Passengers Carried and Tonnage of Freight 23

Figure 2.12 – Air Transport Infrastructure Quality – 2004 24

Figure 2.13 – Public Investment in Transport/GDP Trend 25

Figure 2.14 – Distribution of Public Investment in Transport by Sector 26

Figure 3.1 – Population with Access to the Electricity Network – 2000 36

Figure 3.2 – Households Reporting Access to Electricity in Costa Rica 37

Figure 3.3 –Residential and Non-Residential Electricity Price Trend 40

Figure 3.4 – Per Capita Consumption of Tariffs Trend 40

Figure 3.5 – Electricity Tariffs in Some Latin American Countries – 2002 41

Figure 3.6 – Electricity Prices Index – 2001 42

Figure 3.7 – Electricity Supply Time 42

Figure 3.8 – Service Quality - CNFL 43

Figure 3.9 – Total Electricity Production 44

Figure 3.10 – Electricity Production by Source 44

Figure 3.11 – Electricity Transmission and Distribution Losses 46

Figure 3.12 – ICE’s Profit Margin’s Evolution 48

Figure 4.1 – Water Coverage – 2000 57

Figure 4.2 – Water Coverage – 2000 58

Figure 4.3 – Sewerage coverage – 2000 60


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Figure 4.4 – Production and Distribution Costs and Tariffs Water and Sanitation – 2000 64

Figure 5.1 – Telephone Service Coverage 71

Figure 5.2 – Fixed and Mobile Diffusion 72

Figure 5.3 – Unmet Demand Evolution 73

Figure 5.4 – Internet Users per 100 Inhabitants 74

Figure 5.5 – Evolution of ICE Revenues and Expenses 77

Figure 5.6 – Investments in Telecommunications (% of GDP) 78

OVERVIEW

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1. OVERVIEW The Republic of Costa Rica is one of the most stable democracies in Latin America, and has had uninterrupted, democratically elected governments since the enactment of the constitution in 1949. The administrative divisions include seven provinces: Alajuela, Cartago, Guanacaste, Heredia, Limón, Puntarenas and San José, the capital of the country. Currently, the chief of state and head of government is President Abel Pacheco, who was democratically elected in May 2002. The legislative branch in Costa Rica consists of the unicameral Legislative Assembly – Asamblea Legislativa – which comprises 57 seats and whose members are elected by direct, popular vote to serve four-year terms.

Costa Rica is a higher middle-income country, neither very large nor populous, with a total area of 51,100 square kilometers1 and a population of 3,956,5072 in 2004; it had a growth rate of 1.52%3 for the same year. In addition, the population of Costa Rica is quite young: the average age is 25.74 years, with a difference of approximately one year between the male and female population’s medium age (respectively 25.2 and 26.2) 5.

Figure 1.1 – Map of Costa Rica

Over the last ten years, however, the average age has gradually shifted to around 28-30 years, the configuration typical of a nation at an intermediate stage of standard demographic transition6, characteristic of the more developed countries. Moreover, Costa Rica has the highest life expectancy in Latin America, at an overall average of nearly 77 years,7 in 2004. As for territorial distribution, almost 40% of the Costa Rican population lived in rural areas in 20028, a trend which has been decreasing since the 1970s9.

With regard to macroeconomic performance, it should first be noted that in 2002 GDP (PPP10) in Costa Rica was international $29,713,000,00011, meaning a per capita GDP (PPP) for the same year

of international $7,831.4012, one of the highest in the region (until 1999 it was just behind

1 Source: The World Factbook – Costa Rica 2004 – CIA. 2 Ibidem. 3 Ibidem. 4 Ibidem. 5 Ibidem. 6 Source: Johannesburg Summit 2002 – Costa Rica Review, United Nations. 7 Source: The World Factbook – Costa Rica 2004 – CIA estimates. 8 Source: The World Development Indicators 2004. 9 Ibidem. 10 Purchasing Power Parity. 11 Source World Development Indicators 2004 – The World Bank. Values calculated in constant 1995 International $. 12 Source World Development Indicators 2004 – The World Bank. Values calculated in constant 1995 International $.

Source: The World Factbook, Costa Rica 2004, CIA


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Argentina13). Costa Rican per capita GDP (PPP) showed an increasing trend in recent years, even if highly changeable, with a growth of 4% in the period 2000-200214 and an average trend of +5% in the last decade. Moreover, according to the latest official information15 it was considerably higher, with an annual economic rate of growth of 5.6%, suggesting that some positive short-term results could be expected with the launch of the new government economic plan16. As shown in Figure 1.2 below, the composition of GDP reveals that services made a considerable contribution to GDP in 2002, as in most of the other Latin American countries in the region. In contrast to the common trend in the region, the industry and agriculture sectors still have relevant weight in Costa Rica’s economic model, representing 29% and 8.5% of GDP respectively.

Figure 1.2 – Value Added by Sector (% GDP)

Services 62.43%

Agriculture8.45%

Industry29.12%

Source: World Development Indicators 2004 – The World Bank

It is important to highlight that since the mid-1980s, Costa Rica has followed a successful strategy of outward-oriented export-led growth, openness to foreign investment and gradual trade liberalization. As a result, the structure of exports and the economy itself has enabled a transformation from dependence upon agriculture and agro-industry (i.e. coffee and bananas represented 56% of exports in 1985 compared to only 12% in 200317), to an economy led by high-tech computer and electronics industries, services, non-traditional agriculture and tourism.

The export ratio of GDP grew from 20.8% in 1991 to 36.5% in 2000, and a greater trade openness contributed greatly to growth during the last decade18. Moreover, in recent years, Costa Rica has attracted foreign direct investment at a rate of about 3% of GDP annually, and it has successfully drawn in some major high-tech companies. As a result, the economy grew by an average 5% rate in the 1990s, with factor productivity accounting for two fifths of this performance19.

In the future, it is expected that the free trade agreement recently negotiated with the United States (the Central American Free Trade Agreement, or CAFTA) will further boost exports and

13 Ibidem. 14 Source World Development Indicators 2004 – The World Bank. 15 Source: Central Bank of Costa Rica and International Monetary Fund (IMF). 16 Namely, the Economic Recovery Plan, 2002. 17 Source: Central Bank of Costa Rica. 18 Ibidem. 19 Ibidem.

OVERVIEW

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attract new national and foreign investments, thus increasing the country’s development prospects.

This positive economic environment is also reflected in an analysis of the unemployment rate. As suggested in Figure 1.3, the total unemployment rate wavered over the last decade but remained at an average rate of 5.3%, while in 2002 it reached 6.4%20. It should be noted, as shown in the same figure, that the youth unemployment rate has been constantly higher, approximately double the total rate, peaking in 2001 at 13.4% of the labor force.

Figure 1.3 – Total and Youth Unemployment Rate

0%

2%

4%

6%

8%

10%

12%

14%

16%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Perc

enta

ge o

f tot

al la

bor f

orce

Unemployment Unemployment (ages 15 - 24)


Costa Rica’s rapid growth in productivity and its attractiveness to investors do not correspond to the adequate employability of its inhabitants. However, significant investments have been made to improve education and the health of the population during the last two decades.

Coverage in basic education and health care services is nearly universal today in Costa Rica, although some signs in recent years point out the efficiency and effectiveness of social spending have reached a plateau; in some cases (e.g. secondary education), there has even been a decline. However, the literacy rate is very high, with 95.81% of people over 15 years of age21 able to read and write. Moreover, there is no significant difference between the male and female literacy rates of 95.73% and 95.90% respectively in 2002, indicating a good level of success in terms of gender equality.

Furthermore, Costa Rica also performs well in relation to health conditions, despite the regional average. In fact, in 2002, the infant mortality rate was 9 deaths per 1,000 live births, compared to the average of 19 per 1,000 among the upper middle-income countries22. A rather less positive factor is child malnutrition. Between 1996 and 2002 malnutrition affected 5% of children under five years old23, compared to 9% for the Latin American and Caribbean region.

As for overall development indicators, it should be noted that the combination of respectable economic growth, relatively low inequality along both gender and class lines, and large

20 Source World Development Indicators 2004 – The World Bank. 21 Ibidem. 22 Source: World Development Indicators 2004 – The World Bank. 23 Ibidem.


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investments in human development have led to a substantial reduction in poverty in Costa Rica over the past decade. Headcount poverty declined from 31.9% in 1991 to 20.6% in 2000, while the proportion of the population living in extreme poverty fell from 11.7% to 6.1% during the same period24. Moreover, after remaining unchanged for several years, during which time the numbers of poor immigrants entering the country from Nicaragua accelerated, the poverty rate fell sharply in 2003, probably due to the increase in GDP growth.

24 Source: Instituto Nacional de Estadística y Censos (INEC).

TRANSPORT

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2. TRANSPORT

2.1. OVERVIEW Costa Rica has a good level of infrastructure (roads, ports and airports) compared to other countries in the region. However, the overall perception of infrastructure quality suggests that “performance”, at first glance, is slightly below the regional average and that of the higher middle-income countries25.

Like most of the other countries in Central and Latin America, Costa Rica also has some bottlenecks, and some important strengths and opportunities in the transportation system need to be considered. Some of the key factors that could underlie successful transport growth strategies are:

(i) the road density: considering the country’s dimensions and population, is much higher than that of other countries in Central America;

(ii) the high and increasing maritime traffic flows, both in the passenger and cargo segments; and

(iii) the large number of airports and considerable traffic flows over recent years, especially in the passenger segment.

Despite these positive indicators, several problems have caused difficulties in the current transport system. The main issues are:

(i) poor quality roads (and, consequently, safety problems) and a low proportion of paved roads in the total network;

(ii) poor integration of the road system;

(iii) lack of a rail system;

(iv) low productivity and limited capacity in the ports on the Pacific Coast, excluding Puerto Caldera, compared with the standards of the other countries in the region; and

(v) limited fiscal resources for investment in the sector, compared with the regional average.

Moreover, the inadequacy of regulatory and supervisory institutions, along with the absence of coordinated action between the different sectors, implies the lack of real integration between the different modes of transportation.

Transportation provision in Costa Rica was initially handled by the federal government, but fiscal deterioration decreased investment in the sector and not only caused a decline in performance, but also compromised competitiveness and the capacity to attract investments to the economy. All these conditions affecting the sector are to be changed to enable an increase in private interests and investments in highways, airports, ports and other infrastructure.

Finally, the implementation of the Central American Free Trade Agreement (CAFTA)26 requires the reform and restructuring of the transportation sector, which is crucial in order to really exploit the advantages deriving from trade integration.

25 Source: World Economic Forum (WEF) Survey. 26 Central American Free Trade Agreement (known as CAFTA) is a proposed agreement between the United States

and five Central American nations (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua). It was signed on May 28, 2004.


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2.2. ASSESSMENT OF THE KEY POLICY AREAS

2.2.1. ANALYSIS OF THE TECHNICAL DIMENSIONS OF THE SECTOR The analysis of the technical dimensions of the sector, in order to provide a detailed and exhaustive description of Costa Rica’s infrastructure stock and transport situation, will be articulated in the following four major areas:

• roads;

• rail system;

• ports;

• airports.

Roads. It is important to highlight some specific features characterizing the road stock in Costa Rica. First of all, there is a high quantity of roads considering the country’s dimensions and population. In fact, the road density was around 690 km per 1,000 km2 and nearly 9 km per 1,000 inhabitants in 2002. Note that this density is much higher than that of other Central American countries, as shown in Figure 2.1.

Figure 2.1 – Road Density in Terms of Population and Land

0

2

4

6

8

10

12

1998 1999 2000 2001 2002

Road

km

/100

0 pe

ople

Costa Rica Higher middle-income average Regional average

n.a n.a

0

100

200

300

400

500

600

700

800

1998 1999 2000 2001 2002

Road

km

/100

0 sq

Km


n.a n.a

Source: Ernst & Young Italy and Cohen&Co. elaborations on WDI 2004 and IRF data

TRANSPORT

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This superiority also remains when comparing the density of roads with GDP, as shown in Table 2.1 below. Moreover, the significant road coverage allows the different areas of the country to be connected, leaving no region isolated.

Table 2.1 – Indicators of Road Density – Selected Countries - 2001

Costa Rica Panama El Salvador Nicaragua

Roads (total km) 35,881 11,717 10,937 18,712

Paved Roads 7,426 4,165 2,285 2,126

% Paved 22.01% 35.55% 20.89% 11.36%

Dimension (1000 sq Km) 51.1 75.3 21 130

Km Roads/dimension 702.72 155.6 520.81 143.94

Population – million 3.9 2.9 6.4 5.3

Km Roads/population (1000) 9.26 4.04 1.71 3.53

GDP (US$ billion) 16.8 12.3 14.3 4

Highways/GDP 2.14 0.95 0.76 4.68

Source : The World Bank and Secretaría de Integracción Economica Centroamericana (SIECA)

In spite of this positive performance, it is important to highlight the following issues.

The poor quality and inadequacy of the road system in Costa Rica is essentially due to two main elements:

(i) Low incidence of paved roads in the total road network (nearly 22%). These roads are the principal connections for the overall national territory. Moreover, only 17% of the national road network is in good condition 27. The remaining 78% of roads are non-paved and consist of local roads that are only relevant at the regional level28. In addition, most of these roads cannot be considered “all-season roads” as defined by international standards. In fact, they can be used safely only in dry weather conditions. According to data from SIECA, nearly 70% of the approximately 28,000 km of non-paved roads are appropriate only in dry weather conditions. This is confirmed also by a comparison with the other countries in Central and Latin America. In fact, Costa Rica’s pavement index is lower than that of those countries. Considering the density of unpaved roads in terms of the population or the dimensions of the country, Costa Rica’s indicator remains significantly higher;

(ii) High incidence of fatal accidents each year29. During the period 2000 and 2001 Costa Rica’s average rate of fatal accidents per year was more than 5.3 deaths per 10,000 vehicles, higher than the overall regional average (about 4.3/10,000 vehicles); and slightly more than that of the other high-income countries (4.9/10,000 vehicles) (see Figure 2.2).

27 Source: Inter-American Development Bank (2003:12). 28 The majority of non-paved roads are managed by local governments. 29 This indicator evaluates another quality aspect of the road network in Costa Rica. The incidence of road accidents,

in fact, could reflect inadequacies in the infrastructure, the vehicles in use and the interactions between those owning and operating the vehicles.


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Figure 2.2 – Motorized Vehicles: Total Vehicles and Vehicles per Thousand People – 2000

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Costa Rica Panama Guatemala El Salvador Nicaragua

num

ber o

f fle

et

0

2040

60

80100

120

140160

180

vehi

cles

per

thou

sand

peo

ple

Fleet of Vehicles Vehicles/populat ion (1000)

Source: Secretaría de Integración Económica Centroamericana (SIECA)

As mentioned, these data should be considered in relation to the fleet of motorized vehicles in the country and the ratio of vehicles to the population. It should be noted that, comparing this figure with other countries in the region, Costa Rica has a higher ratio of vehicles per inhabitant, behind only Guatemala.

Lack of investment in the Costa Rican road system. According to the Ministerio de Planificacion (MIDEPLAN), the last significant expansion in the highway network was in the early 1980s. Since then, the highway road network has remained the same, showing a lack of investments in the sector in the recent past. Figure 2.3 below shows the recent evolution of highways.

Figure 2.3 – Road Length

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1980 1985 1990 1995 2000

Km

Total National Local

Source: Ministerio de Planificación Nacional y Política Económica (MIDEPLAN)

TRANSPORT

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Moreover, the current problem relates to the quality and expansion of the road system in view of recent decreases in investments, which justify the existing attempts privatization at of service provision.

From the previous analysis, it seems clear that the main issues regarding the road system in Costa Rica are:

(i) improving the road network quality, primarily the local road network (non-paved), and also increasing road safety;

(ii) increasing the rate of paved roads within the overall network; and

(iii) fostering private participation in road management, in order to obtain resources for the implementation of these developments.

Finally it is important to state the main problems that have brought about these difficulties in the current road system:

(i) limited fiscal resources for investments in the sector;

(ii) fragmented responsibility for the overall road network: nearly 80% of roads are managed by local government. This issue also affects the quality of the road system and the central government’s capacity for improving it, in spite of the existence of several institutions such as the Cosejo Nacional de Seguridad Vial (COSEVI); according to its estimates, of the 81 groups of roads directly controlled, 31 are classified as high risk30;

(iii) low level of private sector participation in road administration and management. In fact, according to the ECLAC analysis (2003), only 0.2% of the system (86 km of roads) has been granted to the private sector in Costa Rica so far. This low level still remains despite the existence of the concession program (Programa de Concesiones) from 1998 by the Consejio Nacional de Concesiones and the approval of a more recent Decree (Decree 31,836-MOPT of 2004) laying down the rules for Private Concessions of Public Works and Services, with the aim of stimulating private sector participation in the development of these works. Moreover, in agenda for this programme31, still pending in 2004, there were only three considerable projects32 regarding private participation in road construction and management, relating to almost 300 km of length and more than US$ 400 million of estimated costs.

However, with regard to the latter point, this low weight does not mean low private interest in this field. In 1998, for instance, the “Regionalization of the Participatory Road Maintenance Concept in Costa Rica”33 project was introduced. Its objective was to disseminate the concepts of participatory road maintenance in order to overcome the notorious financial bottlenecks within the relevant governmental and municipal institutions in Costa Rica. Given the active participation of civil society, it sought also to establish a certain “ownership-relationship” among the local population who could turn out to provide the foundation for maintenance measures.

30 Source: Plan nacional de seguridad vial Costa Rica 2001-2005 – COSEVI. 31 Source: Cartera de Proyectos – Consejo Nacional de Concesiones – Costa Rica. 32 Specifically, the projects of extension or of the national roads San José – Caldera (78 km), San José – Limón (201

km) and San José – Cartago (20.5 km). 33 Project approved and implemented by the Ministerio de Obras Públicas y Transportes (MOPT) and the The

Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) in Costa Rica and in Guatemala, Nicaragua and Panama. The Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) is a government-owned corporation for international cooperation with worldwide operation (see also, http://www.gtz.de).

http://www.gtz.de)


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Rail system. During the last century the rail system was the main mode of transport in Costa Rica, connecting the center of the country with its principal ports. Rail services were originally implemented with the aim of exporting coffee and bananas to the United States and Europe, and were strictly connected to the economic development of the country. Significantly, the railway system was constructed and developed by private national and international companies. In 1962, rail services were recognized as public,34 and provision was made for concessions to private investors. Until 1985, there were several projects and investments that aimed to extend the rail network, with both public and private participation. In the same period, research and studies regarding the modernization and enlargement of the system were conducted by the national administration and specific institutions were created for this purpose (such as the Instituto Costarricense de Ferrocarriles – INCOFER, in 1985). Unfortunately, in 1990 the rail network on the Atlantic side was seriously damaged by several natural events, including an earthquake.

According to the MOPT – Direcciòn General de Planificaciòn – these events, as well as financial restraints, forced the government35 to suspend and then to completely deactivate rail services in 1995.

The stagnation of the sector is clearly represented by the recent data on railway network extension. The official length is about 800 km; however, the useful segment accounts for some 276 km, mostly distributed in three main lines: Limón-San Cristóbal (109 km), Limón-Valle de Estrela (59 km) and San José-Puntaneras (108 km). The railway network, moreover, is basically divided into two large branches: the Atlantic side, which connects the Valle Central with the Limón and Moìn ports and the Pacific side that includes connections with the capital San José.

The overall railway lengths constitute a rail density slightly below the average regional density, as shown in Figure 2.4. First, in terms of population, in 2001, this index was 0.22 km for every 1,000 people in Costa Rica, compared with 0.30 for the regional average and almost double for the other higher middle-income countries (0.41). This comparison appears to be less modest when considering rail density in terms of land. From this perspective, notwithstanding its limited relevance, the values for Costa Rica in the period 1998 to 2001 are higher than those of the higher middle-income benchmark group (nearly 1.66 against 1.18 respectively), while its values remain below the regional average in the same period (1.32).

34 Law 5,066, 30.08.62. 35 During the administration of Figueres (1994-1998).

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Figure 2.4 – Rail Density in Terms of Population and Land

0

0.1

0.2

0.3

0.4

0.5

1998 1999 2000 2001 2002

Rail

Km/1

000

peop

le


n.a

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

1998 1999 2000 2001 2002

Road

km

/100

0 sq

Km


n.a

Source: Economic Commission for Latin America and the Caribbean - ECLAC

As shown in Figure 2.4, the rail density in terms of land, after remaining unchanged from 1998 to 2000, peaked in 2001 due to an attempt to reactivate the network, but with no success.36

The critical condition of the country’s rail infrastructure is also highlighted by the results of the World Economic Forum’s 2004 Executive Opinion Survey37. In this survey showed that users perceive Costa Rica’s railroad infrastructure38 to be quite underdeveloped, resulting in a value index of 1.3 (where 1 = underdeveloped and 7 = as extensive and efficient, the world’s best) against a regional average estimated at 1.8 level (Figure 2.5). Moreover, as the following graph shows, the gap between the Latin American countries is more significant within the higher

36 In 2000, in fact, the President of the Republic and MOPT launched (28,949-Act) the concession process for the

administration, rehabilitation, management and maintenance of the railroad system with the support of INCOFER. 37 Source: World Economic Forum (WEF) 2004 Executive Opinion Survey Results, produced in collaboration with

the Center for International Development at Harvard University and the Institute for Strategy and Competitiveness, Harvard Business School.

38 Variable 5.05.


16




middle-income cluster where the index is quoted as 2.2 (more than 2.4 not including Costa Rica).

Figure 2.5 – Railroad Infrastructure Development Index – 20041

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Argentina Brazil Costa Rica Guatemala Jamaica Mexico Peru Colombia

Dev

elop

men

t Ind

ex

H M Income

Regional Average

Source: World Economic Forum 2004 Executive Opinion Survey 1Scoring: 1= underdeveloped and 7= as extensive and efficient, the world’s best

From these results, it seems clear that the railway sector’s main issues regard:

(i) rehabilitation of the existing rail lines and creation of new ones in order to support economic development, essentially driven by exports;

(ii) fostering private participation in the railroad management; and

(iii) increasing public investments in the sector, which have disappeared completely in the last five years (see further section).

Moreover, only the combination of the two last aspects – public and private participation – can guarantee a better performance of the railroad sector, given the overall fiscal restraints. According to INCOFER estimates, re-opening the railway lines would cost more that US$ 3 million and almost US$ 5,500 for the restoration of each wagon.

Even so, this goal appears to be one of the most important priorities for future governments, primarily due to the following key issues:

(i) given the current petroleum crisis, the rail system could be a more convenient and sustainable form of transport, considering that it uses hydroelectric energy; and

(ii) increasing railway lines and services can significantly reduce road traffic density, both on the private and commercial side.

Ports. An important aspect to mention first is Costa Rica’s geographic location – access to two oceans represents a good opportunity and an advantage for the country’s economy. In fact, as shown in Figure 2.6, Costa Rica’s two main ports39 in 2003 were responsible for 16% of the

39 In Costa Rica, there are also two smaller ports (Puntarenas and Punta Morales) on the Pacific Coast and one river

port (Puerto Moín) on the Atlantic Coast.

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Source: Comisiòn Centroamericana de Transporte Maritimo (COCATRAM)

El Salvador7.00%

Honduras12.00% Nicaragua

3.00%

Costa Rica16.00%

Guatemala23.00%

Panamà39.00%

total freight handled in Central American ports, just below Guatemala (23%) and Panama (39%).

Figure 2.6 – Freight Handled in Central American Countries – 2003

It is important to note the dominance of general cargo as well as container freight, as in other countries there transport in bulk is usually dominant. This seems to be proof of the high contribution of industrialized activities in Costa Rica’s economic structure, compared with the other countries in the region. This assumption would appear to be confirmed by the analysis on the freight breakdown of Costa Rican ports. Table 2.2 summarizes the most important information about port flows in the region. The level of “general” freight in Costa Rica is lower only than that of Panama, and surpasses Guatemala’s by 100%. With regard to “container” freight, Panama

continues to handle around three times the level of Costa Rica, where flows are slightly lower than in Guatemala.

Table 2.2 – Freight Breakdown by Type in Tons – 2003

Country Total General Container Solid Granel Liquid Granel Others

Costa Rica 10,439.0 2,356.1 4,087.4 1,470.0 2,143.6 381.9 Guatemala 14,639.9 1,255.8 4,209.9 3,541.5 4,627.0 1,005.7 El Salvador 4,698.0 322.1 470.6 1,495.4 2,410.0 0.0 Honduras 7,658.3 459.7 2,741.8 1,111.8 1,974.2 1,370.8 Nicarágua 2,145.7 39.5 75.6 693.8 1,326.0 10.9 Panamá 24,625.8 526.6 13,951.0 669.8 8,834.2 644.1 Total 64,206.7 4,959.8 25,536.3 8,982.3 21,315 3,413.4


Another factor to be considered is the distribution of the freight handled between the different ports and also between the two oceanic coasts of Central America, and a comparison of this distribution with Costa Rica’s. Figure 2.7 shows that in 2003 the distribution of freight handled was quite different from the other Central American countries. In fact, in Central American countries a certain symmetry exists between the two coasts, although more than half of the freight is concentrated on the Atlantic coast (55%). Costa Rica, however, has developed its port traffic mostly on the Atlantic side (73%)40.

40 Source: Resumen Estadístico Portuario Regional del Istmo Centroamericano – 2003; Comision centroamericana

de transporte maritimo.


18




Figure 2.7 – Freight Handled: Distribution Between Coasts – 2003


The focus on the Atlantic Coast does not reflect the distribution of the ports in the country, since three are located on the Pacific Coast (Caldera, Puntarenas, Punta Morales) and two on the Atlantic Coast (Puerto Limón and Puerto Moìn). Specifically, considering the distribution among the different ports, it is important to point out that two main ports – Puerto Limón and Puerto Caldera – account for nearly 97% of the national flow (nearly 73.4%41 and 23.3% respectively), while the remaining 3.3% is distributed between Puntaneras and Morales42.

The main products loaded in Costa Rica’s ports in bulk are bananas, fresh fruit, vegetables, coffee and cement. Raw materials (oil, resin, paper, chemical products, fertilizers and others) dominate unloading activity

Moreover, it should be noted that Costa Rica’s ports have the highest number of passengers carried of all the isthmus countries. In fact, as shown in Figure 2.8, in 2003 Costa Rica43 had more than 53% of total passenger traffic in the region, even more than Panama’s share of 42%44.

41 Ibidem, including flows through Moìn, considered as a whole. 42 Ibidem. 43 Most passenger flow is concentrated in Puerto Limón- Moìn. 44 Ibidem.

Costa Rica

Pacific Coast

26.59%Atlantic Coastand

Caribbean73.41%

Central American Countries

Pacific Coast

45.00%

Atlantic Coastand

Caribbean55.00%

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Figure 2.8 – Share of Total Passengers Carried – 2003

As mentioned, the most important port in the country is Puerto Limón, which is equipped with:45

(i) 5 berths, including two alternate berths for Ro/Ro ships;

(ii) 80 reefer plugs; and

(iii) 1 multipurpose berth located in the port of Moín.

With regard to the latter, it is important to state that Puerto Limón has such strong synergies with Puerto Moín that it is often considered to be a one port system. The river port of Moín, is in fact nearly 9 km from Puerto Limón, and was designed and built as a multipurpose facility to handle Panama-size vessels,

conventional vessels transporting grain, and general cargo and cruise ships.

In addition, according to the American Association of Port Authorities, one of the main advantages of the Limón-Moín port system is the amount of space still available for port infrastructure development and port-related industries, representing a potential key asset in the overall Costa Rican transport system.

Overall, two autonomous public companies manage the port system:

(i) JAPDEVA (Junta de Administración Portuaria y de Desarollo Económico de la Vertiente Atlántica)46, which manages the Atlantic ports (Puerto Limón and Puerto Moín). This authority is divided into two different administrations: Administración Portuaria and Administración de Desarollo. The latter is particularly interesting as it is in charge of the administration of the canalization project on the Atlantic side and the implementation of the regional development plan, Plan Regional de Desarrollo. The plan involves several economic issues including those relating to agro-industrial development, social deprivation and health, which are not only strictly connected to the port or overall transport sector development;

(ii) INCOP (Instituto Costarricense de Puertos do Pacífico)47 is in charge of managing the Pacific ports (Puerto Caldera, Puntarenas and Punta Morales), with the aim of increasing their competitiveness and thereby increasing freight flows.

It is also important to highlight that the Costa Rica port system has some problems of inefficiency. In fact, regarding the port infrastructure quality index, as mentioned in the World Economic Forum 2004 Executive Opinion Survey, Costa Rica’s score was 2.548, indicating insufficient development. This performance, shown in Figure 2.9, is about 20% lower than the regional level and that of the other higher-middle income countries (which had an average rate of about 3.1).

45 Source: American Association of Port Authorities (AAPA), 2004. 46 JAPDEVA is a public utility company. The harbor authority was created in 1963 (by Law n.3,091 18.21963) and

reformed ten years later (by Law n.5,337 9.8.1973). 47 INCOP is a harbor authority created in 1953 (by Law n.1,721 28.12.1953) and it has been reformed several times

until 1984 (most recently by Law n.6,982 18.12.1984). 48 Where 1= underdeveloped and 7= as extensive and efficient, the world’s best.


Nicaragua1.48%

Panama41.79%

Costa Rica53.25%

Guatemala3.26%

El Salvador0.22%


20




Figure 2.9 – Port Infrastructure Quality – 20041

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00


Dev

elop

men

t Ind

ex

H M Income

Regional Average

Source: World Economic Forum 2004 Executive Opinion Survey

1Scoring: 1= underdeveloped and 7= as extensive and efficient, the world’s best

The quality index score is similar only to Guatemala’s and Peru’s, the lower-income countries. This evaluation suggests that it is important to proceed with efforts and investment to improve the overall condition of ports, in order to successfully face major challenges in this infrastructure sector as it seeks to improve the country’s regional and international competitiveness.

The low quality index figure could be also explained by the absence of a clear and homogeneous tariff system across the country. According to the national regulatory agency (Agencia Reguladora de Servicios Públicos – ARESEP), the rate schedule is different according to the different port systems. In addition, it can range from 3 categories with 16 rates (Junta de Administración Portuaria de Golfito), to 27 categories with 130 rates for the Atlantic ports (JADEPVA). Moreover, some charges are denominated in domestic currency while others are denominated in US dollars – and the tariff schedule does not include all port services since several services are rendered by private companies. In some ports (e.g., Moín), users pay for non-existent services. Finally, according to an ARESEP research study, some charges do not clearly reflect the relative costs.

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Another important aspect to underline is the evolution of tonnage of freight, as shown in Table 2.3; it increased by more than 5% in 2003, with more than 10 million tons handled. The trend is driven by the port activities of Limón-Moín (+10% in 2003); however it was affected by the collapse of activities in Puerto Morales, which diminished by 99% between 2002 and 200349.

Table 2.3 – Freight Evolution (Tons) – Costa Rica’s Ports

2000 2001 2002 2003

Puerto Limón-Moin 6,738,474 6,731,124 7,032,800 7,663,540

Punta Morales n.a. n.a. 235,321 2,688

Caldera n.a. n.a. 2,306,204 2,429,900

Total 6,738,474 6,731,124 9,574,325 10,096,128

Source: Economic Commission for Latin America and the Caribbean (ECLAC)

The positive trend is strictly related to the expansion of both international trade (the ratio of exports to GDP grew from 20.8% in 1991 to 36.5% in 2000) and the tourism industry.

In conclusion, the current situation of the port sector in Costa Rica can be summarized as follows:

(i) Low productivity and limited capacity of the ports on the Pacific Coast, excluding Puerto Caldera, compared with the standard of the other countries in the region which concentrate their activities on this coast. This and the recent positive trend in tourism may be considered key opportunities for enhancing the sector’s performance;

(ii) No uniformity and a wide range of tariffs applied to port services in Costa Rica. This confusion can contribute to increasing the final costs for users, and can also affect the balanced development of the sector across the country; and

(iii) Lack of private investment in the sector, due to the absence of concessions.

49 Source: ECLAC.


22




Airports. The airport infrastructure consists50 of more than 100 airports51, of which:

(i) 30 have paved runways; and

(ii) 4 are specifically international:

- Juan Santamaría Airport and Tobías Bolaños Airport, located near the capital of San José;

- Limón Airport in the city of Limón; and

- Daniel Oduber Airport in Guanacaste province, near the city of Liberia.

Figure 2.10 – Main Airports in Costa Rica, by Location and Category

Costa Rica’s main airport is Juan Santamaría Airport, where the most important international airlines operate. This airport represents more than 90% of international traffic, thus constituting the center of the sector. According to the International Finance Corporation (IFC)52, it is the busiest airport in Central America, serving an estimated 2.3 million passengers annually. Annual passenger growth rates average over 8% in the last ten years.

Juan Santamaría airport is managed by Airport Group International (AGI), a company that combines international airport management firms with engineering firms and local companies (including Motorola of Costa Rica and La nueva tecnologia S.A.). In 2000 AGI was awarded a 20-year concession for the operation, management, maintenance, restoration and development of the airport’s infrastructure. During the overall life of the contract it was established that approximately US$ 180 million of investments would be devoted to the project, which also included IFC participation53. However, in the first period, 2000-2003, investments were just US$ 100 million. Conversely, between 2002 and 2003 profits were nearly US$ 50 million54.

The large number of airports in Costa Rica is justified mainly by the considerable traffic flow during recent years, as suggested by Figure 2.11. In fact, two main indicators should be considered:

(i) The number of passengers per 1,000 people in Costa Rica remained consistently above the regional average throughout the period 1996-199955, with a rate of nearly 283 and 236, respectively. This positive performance was also evident against the one registered

50 Source: MOPT. 51 Most, however, are private. 52 Source: IFC, The World Bank Group. 53 IFC investment consists of a $35 million loan on its own account and a syndicated loan of $85 million arranged

jointly by Deutsche Banc Alex Brown and Dresdner Kleinwort Wasserstein. 54 Source: OECD (2003) – Caribbean Rim Investment Initiative – Business Environment Report. 55 Source: ECLAC.

Source: elaboration on MOPT data

International airports

State airports

Private airports

Puntaneras

LimónSan Josè

Guanacaste


State airports

Private airports


State airports

Private airports

Puntaneras

LimónSan Josè

Guanacaste


State airports

Private airports

Puntaneras

LimónSan Josè

Guanacaste


State airports

Private airports


State airports

Private airports

Puntaneras

LimónSan Josè

Guanacaste

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for the higher middle-income countries group, which was 227 passengers carried per 1,000 people, 20% lower than Costa Rica’s value (see Figure 2.11); and

(ii) Since 2000, on the contrary, this rate has sharply decreased by nearly 18% per year, quite in line with the benchmark group (-3% in 2000 and -14% in 2001), but completely in contrast with the positive trend exhibited by the other countries in the region (+14% in 2001).

Figure 2.11 – Passengers Carried and Tonnage of Freight

Source:Ernst & Young Italy and Cohen&Co. elaborations on ECLAC data

The tonnage of freight per 1,000 people56, as shown in Figure 2.11 above, was constantly and significantly higher than the level observed for the other countries in the region and for the benchmark group. Specifically, it presented a positive trend from 1996 to 1999, and peaked in 1998 with a sharp growth (+62%) versus the previous year level. In 1999, the country’s incidence of ton-kilometers of freight carried was a little below 23,000 per 1,000 people, nearly three times the regional average and more than double of the benchmark group’s level.

According to the positive performance just mentioned, it is important to highlight that the quality perception of air transport is considered adequate57. As the graph in Figure 2.12 suggests, Costa Rica’s performance was in line with the one of the higher middle-income countries’ cluster (equal to 4.8)58, and above the regional average of 4.5.

56 Source: ECLAC. 57 Source: WEF Survey. 58 Where rank 1 means an infrequent and inefficient mode and 7 an extensive and most efficient one.

0

5,000

10,000

15,000

20,000

25,000

30,000

1996 1997 1998 1999

Ton-

Km o

f fre

ight

per

1.0

00 p

eopl

e

Costa Rica Regional Average Higher middle-income

0

50

100

150

200

250

300

350

1996 1997 1998 1999 2000 2001

N. o

f pas

seng

ers p

er 1

.000

peo

ple

Costa Rica Regional Average Higher middle-income


24




Figure 2.12 – Air Transport Infrastructure Quality – 20041

2.25

2.75

3.25

3.75

4.25

4.75

5.25

5.75

6.25


Dev

elop

men

t Ind

ex

Regional average

H M income

2.25

2.75

3.25

3.75

4.25

4.75

5.25

5.75


Dev

elop

men

t Ind

ex

Regional average

H M income



Another important aspect to be considered is the low level of government investment in Costa Rica’s airport sector (to be thoroughly analyzed in the next section). Costa Rica’s new economic structure can be considered substantially export-led, with an increasing presence of highly developed and diversified sectors (such as electronic components), against a decreasing importance of the primary sectors. As is well known, these sectors require extensive air services for international transactions. It has therefore become urgently necessary to modernize and develop airports, in response to the needs of local producers who may push for solutions to improve airport conditions. The other transportation segments, in spite of some problems, do not pose any obstacles and do not seriously affect the main economic activities of the country.

In conclusion, the airport system displays some discordant characteristics that may be assessed as opportunities for, or threats to, its future development. These are:

(i) the presence of a large amount of runways across the country, most of which are of limited dimensions and in poor condition (unpaved);

(ii) the limited number of airports (only four) able to guarantee the adequacy both of services and facilities for passengers, and of infrastructure for cargo compared to international requirements and standards;

(iii) the limited fiscal resources for investment in the sector have significantly diminished in recent years(as detailed in the next section); and

(iv) the need to foster private participation in the administration and management of state-owned airports, such as Juan Santamaría Airport.

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2.2.2. ECONOMIC EFFICIENCY AND PRIVATE SECTOR FINANCING As shown so far, a large part of the transport sector is still under government control. Private participation is relatively limited, except in the case of Juan Santamaría Airport, as mentioned above. In fact, the state is responsible for a large part of the administration of infrastructure. This situation – and all its consequences (mainly fiscal difficulties) – replicates the recent trend of decreasing public investments in order to face public debt growth as well as the necessity of generating a primary surplus.

Figure 2.13 shows the evolution of public investment in transportation as a percentage of GDP in the last decade. The first point to be considered is the limited amount of investments, about 0.45% of GDP 59 in the considered period. This is extremely low in comparison with, for example, Guatemala (1.3%) or Nicaragua (3.1%), which are also lower-middle countries; or even with the 2% estimated as standard at international level.

Figure 2.13 – Public Investment in Transport/GDP Trend

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

1991 1992 1993 1994 1995 1996 1997 1998 1999

Perc

enta

ge o

f GD

P

Source: MIDEPLAN, Sistema de Indicadores sobre Desarrollo Sostenible (SIDES)

In recent years national institutions have recognized the inadequacy of investment in the transport sector compared with the real needs of the system (especially for roads and railways), and they have started to address the problem.

In 2000, in fact, the Costa Rican government launched a countrywide development program – Plan de desarollo nacional (PND) – for the period 2002 to 200660. The PND is to allocate nearly US$ 2,000 million, equivalent to 33% of the total financial resources provided, for developing transport infrastructure, emphasizing its crucial role in ensuring the competitiveness and overall economic development of the country. More specifically, resources are to be allocated principally to the road sector (90%), with the remaining 10% going to the other modes of transport, as indicated in Table 2.4.

59 Source: MIDEPLAN, Sistema de Indicadores sobre Desarrollo Sostenible (SIDES). 60 Source: MIDEPLAN.


26




Table 2.4 – Public Investments on Infrastructure Provided in National Development Plan – 2002-2006

Public Investment (millions of US dollars)

Transport infrastructure 2,008.50 Roads 1,812.00 Ports 120.60 Airports 10.90 Railways 65.00

Source: Plan de desarollo nacional (PND)

Starting from the above considerations, it is important to analyze the current distribution of investments among the different sectors. As indicated in Figure 2.14 below, the road sector receives most resources, currently between 50% and 70% of the total.

Figure 2.14 – Distribution of Public Investment in Transport by Sector

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1991 1992 1993 1994 1995 1996 1997 1998 1999

Perc

enta

ge o

f Pub

lic In

vestm

ent

Roads Ports Airports Railways Pipelines

Source: MIDEPLAN, Sistema de Indicadores sobre Desarrollo Sostenible (SIDES)

More specifically, the increase shown at the end of the decade is due to the establishment of Consejo Nacional de Vialidade (CONAVI) in 1998 under the Ministry of Public Works and Transport. In fact, CONAVI is responsible for the preservation, maintenance, and expansion of land carriage. The resources for the Council come from a dedicated fund whose resources are derived from taxes on fuel and on the ownership of motorized vehicles, also including toll charges and traffic infraction fines. Therefore, also Costa Rica has followed the tendency, observed in several countries, to create a specific Council endowed with dedicated funds in order to reduce fluctuations in resources directed towards investments in highways.

However, the existence of the Council and the Fund, as in other countries, has not prevented some problems from emerging, especially in relation to the independence of management. An important consequence of this issue is that the allocation of resources depends directly on the

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Ministry of Finance. The government first receives the funds which are subsequently redistributed. Given the presence of fiscal constraints to control the public debt, transfers to CONAVI have not been effected according to the stipulated amounts. As a result, investment in transportation is not only affected by fiscal resources, but also becomes dependent on the distribution policies of the Ministry of Finance.

Another issue concerns private sector participation in the road system, which is very limited in spite of the great need to increase coverage of services and to improve their quality. There are currently several grant projects in the portfolio of the National Council of Grants under the purview of the Ministry of Public Works and Transport. However, the design and selection of these projects has been too slow and most of them are still at an early stage of development. In general, private participation in infrastructure management should change once the new concession Law is implemented (Decree 31,836-MOPT).

In relation to railways, following the earthquake of 1990, significant investments for reactivating services (nearly 10% of the total amount of public investments) had been taken. Over recent years, however, that participation has been steadily reduced, as stated earlier, almost disappearing in 1995. From this perspective, it is worth considering that the sector will receive the equivalent of US$ 65 million in investments by 2006, as planned in the PND, and all of this amount will be dedicated to construction through concessions.

The port system is the mode of transport that has received the second largest share of investments after the road system. This sector has received between 10% and 23% of the total, representing an average of 0.06% of GDP61, which has noticeably decreased in recent years. This has run counter to the increasing need for investments in port infrastructure (Costa Rica is the country with the third highest level of traffic flows in Central America). Furthermore, if greater integration is achieved, both regionally and with North America, increased international trade is likely to create a need for new investment, also from the private sector, to develop the existing port infrastructure.

As for investments in airports, the increase in the percentage of total investment throughout the decade seems to confirm the gradual change of Costa Rica’s economy, in particular the increasing dominance of the electronics industry. Investment in this sector should therefore become a key goal in the national strategy for attracting investment. Indeed, as for the other sectors analyzed so far, investment flows into the airport sector have decreased due to fiscal constraints and have been replaced with private capital (as in the case of Juan Santamaría Airport, as mentioned above).

61 Source: MIDEPLAN.


28




2.2.3. REGULATORY FRAMEWORK AND INSTITUTIONAL DEVELOPMENT As shown so far, a key factor in the assessment of the overall quality and structure of the transport sector is the regulatory framework, which is still in the early transitional stages with regard to some important aspects.

First of all, the national constitution establishes that all contracts for public works to be undertaken by the state, municipalities, or autonomous institutions should be allocated through auctions, in accordance with the Law, depending on the value of the project (Article 181). The Executive Power and the Ministry of Government are responsible for signing administrative contracts, with prior approval by the Legislative Power in pre-stipulated cases regarding public service provision or the allocation of public resources. Article 121 establishes that railways, ports and national airports shall neither be out of the control and domain of the state nor transferred to the private sector.

Given these provisions, Law 7,593/199662 established an autonomous institution, the national regulatory agency, ARESEP (Agencia Reguladora de Servicios Públicos), whose independence is guaranteed by the constitution. Its basic responsibilities are tariff setting, regulation and the dictation of norms for service quality and receiving complaints from users of the different services. There are nine services regulated by the agency: electricity, telecommunications, water and sanitation, petroleum and gas, paid transportation of passengers (with the exception of air transportation), port and airport services, railway transportation of loads, postal services, and irrigation and drainage63. ARESEP is composed of a board of five Directors, whose president is the General Regulator. Directors are proposed by the Executive Power and ratified by the Legislative Power; all directors can be reelected. The institution is also structured by into Technical Divisions (Direcciones Técnicas), divided according to the type of service to be regulated. For financial autonomy, it is also important to note that ARESEP is financed with canons paid by the regulated companies.

The recent regulatory framework for the transportation sector is basically composed of Law 7593/1996 (which creates ARESEP) and Law 7762/1998 (Ley General de Concesión de Obras Públicas). The latter, supplemented by Decrees and Rules64, regulates concessions for public works and the corresponding services. Its main goal is to foster private investment in infrastructure at all levels. Moreover, the aforementioned Decree 31,836-MOPT of 2004 establishes rules for Private Concessions of Public Works and Services, with the aim of stimulating private sector participation for the development of these works. These regulatory changes confirm that the government and regulators are increasingly moving towards the introduction and implementation of private concessions for the provision of public works and services, which is relatively new in Costa Rica.

As regards the system of roles and responsibilities, the Ministry of Public Works and Transportation (MOPT) is responsible for the general planning, coordination, regulation, control and supervision of the transportation sector. Its general objective is to endow the country with the required transportation infrastructure and to supervise the correct operation of the transportation system. Its main functions are:

(i) identification of priorities for building roads, ports and airports in coordination with the Ministry of Planning and Economic Policy (MPEP);

(ii) planning, construction and improvement of roads (including collaboration with municipalities to preserve local roads);

62 Regulated by Decree 29,732/2001. 63 Therefore, this information is applicable to all sections of the regulatory framework. 64 The Law and regulations exclude telecommunications and electricity.

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(iii) regulation and control of traffic, transportation along public roads, and environmental issues;

(iv) planning, construction, improvement, administration and operation of national airports, as well as the regulation and control of air transportation through the National Board of Civil Aviation;

(v) planning, construction and improvement of ports and the regulation and control of water transportation (international or within country borders); and

(vi) regulation, control and supervision of railway transportation.

Law 7762/1998 also creates the National Board of Concessions (Consejo Nacional de Concesiones, CNC) under MOPT65. CNC is responsible for implementing concessions and the administration of a Concessions Fund. Concession projects, instead, are granted through public auction mechanisms, whose guiding principles are efficiency, free competition, equality and publicity66. The concessionaire is selected according to factors (one or more, in accordance with the Law), such as the current value of revenues for the concession, charges or tolls, the duration of the contract, the level of subsidies required from the government, payments offered to the state by the company, minimum revenues for the state, etc.67 Service charges, as well as the corresponding adjustments, are defined in the contract68. In the event of discrepancies between CNC and the concessionaire with respect to tariff revisions, ARESEP intervenes and decides on a resolution of the conflict. ARESEP also decides on the complaints presented by users (billing irregularities, quality, continuity, etc.) and imposes sanctions on the concessionaire when necessary.

The Division of Water, Sanitation and Transport (Dirección de Aguas, Saneamiento Ambiental y Transporte, DASTRA), under ARESEP, is responsible for the studying the regulation of prices, quality and provision of sanitation services (unless rendered under municipal jurisdiction). It also regulates paid passenger transportation (except by air), national port and airport services, and load transportation by rail. It also advises ARESEP in the approval of tariffs under consideration, in accordance with the legislative framework (Law 7593/96 and Decree 29,732/2001) and following the principle of cost recovery on the basis of a model firm (where applicable; otherwise it considers the specific situation of the firm). Its decisions are also subject to standards of quality, quantity, reliability, opportunity, social equity and environmental sustainability.

DASTRA has to coordinate its operations with the other governmental institutions which hare responsible for regulating certain specific aspects of transportation. Some supplementary legislation for DASTRA is given by Law 3503/1965 (which regulates paid automobile traffic), Law 6,324 (Road Administration) and Law 7,969/1999 (Taxi transportation services).

Starting from these cross-sector considerations and rules, it is useful to clarify the main features or key actors involved in each mode of transport (roads, ports, airports, railways) and the relevant legal or institutional framework.

Roads. The institutional environment in relation to road transport is composed of several actors. In 1998 the MOPT created the Consejo Nacional de Vialidad (CONAVI) by Law 7798/199869

65 The CNC is composed of the Ministers of Public Works and Transportation, Finance, Planning and Economic

Policy, the President of the Central Bank, and three members elected by the board of government, each from a list of three candidates proposed by the Chamber of Enterprise, labor unions and professional boards. These three members are appointed for periods of four years.

66 See also Law 7,762/1998. 67 See article 28 of Law 7,762/1998. 68 CNC should consult ARESEP about the tariff structure and corresponding adjustments, as well as the parameters

for quality to be defined in the specifications. See article 21 of the Law. 69 See general objectives of MOPT under general comments for Transport.


30




in order to complement the activities of DASTRA (described above). CONAVI’s main objective is the administration of a National Road Fund (Fondo Nacional Vial) for the preservation and extension of the National Road Network (Red Nacional Vial). CONAVI also works in collaboration with another MOPT institution, the Cosejo de seguridad vial (COSEVI). This institution was created in 1996 and is responsible for overall safety regulation of the National Road Network.

Railways. DASTRA (under ARESEP) is in charge of regulating railway transportation of passengers and loads. It is important to emphasize that, for the greater part of the last century, the railways constituted the most important system of communication between the center of the country and its main ports. At present, operations are still suspended and the situation of the sector remains uncertain.

Ports. DASTRA in charge of regulating passenger water transportation and the services provided at maritime ports. The Division of Maritime Ports (DMP) was created by Decree 29,547-MOPT of 2001, and its responsibilities include the formulation of policies, regulations and procedures for the design, construction, improvement and maintenance of ports, safety regulations, and the control and supervision of infrastructure works in ports. It should be noted that, according to ARESEP, there is not a uniform tariff system in relation to port services in Costa Rica, as mentioned above.

Airports. DASTRA is also in charge of regulating air transportation services provided at the national level. The specific legal basis for this sector is provided by Law 5150 (General Law of Civil Aviation) and Decree 37,380/1998-MOPT (Ruling of Airport Services). In this field, it is important to note that, according to ARESEP, the economic regulation of the airport sector is oriented towards efficient management on the part of the service provider, and the improvement of service quality. ARESEP is exclusively responsible for approving service charges70. In addition, as noted above, the MOPT is in charge of the planning, construction, improvement, management and operation of national airports, as well as the regulation and control of air transportation through the National Division of Civil Aviation (DGAC).

70 See ARESEP for description of regulated airport services.

TRANSPORT

31




2.3. POLICY OPTIONS AND IMPLICATIONS On the whole Costa Rica performs well in relation to transport indicators, and generally better than other Central American countries, especially in relation to road density, port and airport flows, and has made advances in the last few decades. However, there are still some problems in the transport infrastructure system, especially in relation to quality.

(i) There are some deficiencies in quality in the road infrastructure, such as the limited number of “all-season roads”, and roads that considered to be in “good condition”, reaching only 17% in 200371. These indicators suggest that the investment needs in road infrastructure maintenance are much more important than expansion in Costa Rica, given the high road density.

Private sector participation in transport is insufficient. This factor is particularly critical when cross-analyzed with the decreasing trend in public investment, due to fiscal constraints. In particular, over the last decade, resources provided by the Transport System Fund have been diverted from their original goals. As a result, in order to maintain and improve the country’s competitiveness it seems crucial to:

- enlarge private participation through concessions or devolution of some specific activities, and

- guarantee that Fund resources will be used for road maintenance and renovation.

These targets acquire greater importance in view of the increasing commercial integration of Central and North America;

(ii) The rehabilitation of the railway system depends on the development of an appropriate institutional framework and the encouragement of private investments in this sector, even though, as mentioned previously, the role of the state will remain crucial. In fact, only the combination of these two aspects – public and private participation – can guarantee a better performance of the railroad sector given the overall fiscal restraints;

(iii) The port system could be enlarged and improved, although it requires investments to increase capacity and efficiency. Nonetheless, the ongoing decentralization process, through private participation or increased competitiveness, is limited to certain ports only. All these factors affect the actual capability of reaching a better performance; Moreover, the current lack of transparency and poor confidence in the sector will persist as long as there is fragmentation and non-uniformity in the tariff system.

These goals may be achieved through privatization of the main national ports, or the award of their activities in concession. However, it would also appear necessary to rationalize the trade traffic on the Pacific Coast through the specialization of the ports situated on the west coast of the country. Investment policies should be directed towards the adjustment and enlargement of Puerto Caldera, Puntarenas and Punta Morales, given their potential to develop the marketable traffic in the Pacific area, which currently represents only a quarter of the overall traffic in Costa Rica.

(iv) In the airport sector, it is important to focus on modernization and streamlining through the concession of the main airports in the country to the private sector, as in the case of the concession for Juan Santamaría Airport. In fact, as mentioned, the economic diversification of the country due to the recent growth of greater added-value economic activities (high-technology and electronics, for example) require modern airports, with greater capacity for cargo transportation. In addition, Costa Rica’s highly developed

71 Source: MOPT.


32




tourism segment, (and the potentially greater demand), requires modern and comfortable airports with a superior level of service and quality.

In view of these considerations, a policy to attract private investment must be implemented in order to overcome the restrictions imposed by the fiscal situation, and also to maintain Costa Rica’s significant comparative advantage against the other countries in the region.

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33




2.4. PRIORITIES FOR FUTURE REFORMS The infrastructure sectors in Costa Rica are highly dependent upon governmental support, which gives rise to several problems related to the stability of resources for investment and to efficiency in management. In the current context, fiscal difficulties compromise investments directed towards the infrastructure, which has important implications for Costa Rica’s economic competitiveness and its possibilities for growth. In fact, in the transport sector overall, private participation is very limited, consisting of a few road concessions, the management and enlargement of the international airport (Juan Santamaría Airport), and a number of port activities.

However, in order to attract the private sector, the first cross-sector priority remains the modernization and rationalization of the institutional framework through:

(i) the more effective implementation of the Concessions Law; and

(ii) the definition and reorganization of the sector and regulatory agencies, as well as the autonomous agency in charge of contracting, planning and setting tariffs.

Thus, the priority in Costa Rica’s transport sector is the recovery of investments, which can be achieved through the greater involvement of the private sector, reducing dependence on fiscal resources.

Concerning the road system, the main priorities are:

(i) the participation of the private sector in maintenance and management to guarantee better quality roads and to improve efficiency, either by financially sustainable and feasible projects (through the introduction of tolls and by contracting out some maintenance and renovation services) or by transfers from the Transport System Fund; and

(ii) the rationalization of responsibilities which are currently scattered throughout the network as a whole.

Regarding the railway system, the main priorities are:

(i) the reactivation of rail transport, making the sector interesting for private investors; this could be achieved by temporary promoting freight traffic towards the main Costa Rican ports; and

(ii) the involvement of the private sector in railway sector management.

In the port system, policies should be centered on key priorities:

(i) the improvement of transparency and uniformity in the tariff system; and

(ii) the rationalization of freight traffic flows and improvements in the infrastructure of the Pacific Coast ports.

In the airport sector, one of the main priorities for policy action is the privatization or concession of the main airports (Limón and Daniel Oduber), which may help to improve performance in the existing airport network.

COUNTRY BRIEF - COSTA RICA

34




3. ENERGY

3.1. OVERVIEW Historically, electricity services in Costa Rica were initially provided by private companies, both domestic and foreign, but the quality of service was generally low. The creation of a monopoly in 1922, granted to “The Electric Bond and Share” company, did not improve matters and in the 1930s pressure mounted to nationalize the provision of electricity services. In July 1949, the Instituto Costarricense de Electricidad (ICE) was created, with the aim of solving the existing problems in the electricity sector and guaranteeing the future availability of energy.

In 1991, the state’s iron grip over the electricity sector was loosened by a law that authorized the independent generation or cogeneration of electricity, in plants with capacities up to 20 MW, by companies or cooperatives of rural electrification. This law also specified that the total capacity of those plants could not exceed 15% of the country’s total generating capacity. Moreover, 65% of the shares of all companies created under this law should be owned by Costa Rican nationals.

However, despite the changes introduced by law, the electricity sector in Costa Rica is still dominated by state-owned companies.

More specifically, looking at the sector’s structure and ownership, three main features stand out:

(i) in the generation segment, public companies accounted for almost 85% of net production of electricity in 200272;

(ii) the distribution segment is dominated by two official public companies:

- Compañia Nacional de Fuerza y Luz (CNFL), with almost 43%73 of the market in 2002, and

- Instituto Costarricense de Electricidad (ICE), with a little less than 39%74 in the same year. Currently, however, ICE owns more than 98% of CNFL’s shares;

(iii) the existence of several municipal companies or cooperatives created for specific areas, relating to two main levels:

- at the provincial level, there are the Junta Administrativa del Servicio Eléctrico de Cartago (JASEC) and the Empresa de Servicios Públicos de Heredia (ESPH), both created to generate and distribute electricity in their corresponding provinces, and

- at the rural level, there are four rural electrification cooperatives – Coope-Guanacaste, Coope-Santos, Coopelesca and Coope-Alfaro Ruiz – all created in 1963 to distribute electricity in specific communities.

Finally, the energy sector, as well as the other infrastructure sectors, is regulated by the Autoridad Reguladora de Servicio Publico (ARESEP). It is responsible for approving the electricity tariffs charged by public and private companies and for supervising the quality of service.

According to the National Electric System (Sistema Eléctrico Nacional – SEN), in 2003 there were nearly 1,170 consumers served through 28,500 km of electric lines across the country. In addition, among these consumers, 25 are considered to be large. These data indicate high global coverage of the population (97%), higher than the regional average. Moreover, one of the most

72 Source: ICE, Sector electricidad 2003.. 73 Ibidem. 74 Ibidem.

ENERGY

35




important goals of SEN and other companies operating in the sector is to reach 100% coverage within the next three years75. It will be achieved by effectively implementing the national program of rural electrification, constructing new utility lines and installing solar panels in areas that are otherwise impossible to reach.

This latter aspect is particularly important, considering that renewable sources in Costa Rica account for less than 15% of the 7.5 MWh of total energy production in 2002; production was and still remains predominantly hydraulic (constantly over 84% from 1998 to 2002). The relevance of this type of generation is consistently higher than the regional average or that of the benchmark group (nearly 54.5% and 51.3% respectively, in 2001).

Finally, from a distribution perspective, it is worth mentioning that Costa Rica is also well interconnected at the international level. Electricity is, in fact transported through a grid called the National Interconnected System (Sistema Nacional Interconectado) allowing energy to be exchanged with Honduras, Nicaragua and Panama.

In this respect, it is also important to highlight the opportunity represented by the SIEPAC Project (the Spanish acronym for Electricity Interconnection System for the Central American Countries). This initiative involves the construction of about 1,800 km of 230 kV energy distribution line between southern Mexico and Panama. The total cost of the new line will be US $320 million, excluding investments in the Mexican grid. In particular, the project includes a 462.4 km 230kV interconnection between the Costa Rica, Nicaragua and Panama.

This electrical interconnection initiative, which is one of the most important projects within the Plan Puebla-Panamá, is intended to improve the region’s power infrastructure and to create a regional energy market in order to reduce the cost of energy, facilitating the entry of larger power generation projects and technological innovation, and rapidly expanding energy capacity by attracting private sector investments. In fact, one of the most important results expected from the SIEPAC Project, especially for Costa Rica, is the generation of greater competition in the energy sector, helping to mitigate the dominant position that existing agents have achieved through horizontal concentration and vertical integration. The new transmission line is expected to be operable by 2007.

75 Source: ICE–Sector electricidad 2003.


36





3.2.1. ANALYSIS OF THE TECHNICAL DIMENSIONS OF THE SECTOR The first issue to be considered in an assessment of the sector’s overall performance is the access and service coverage of the electricity network throughout the country. Considering the percentage of the population with access to the electricity network, Costa Rica’s performance may be considered high by Latin American standards. In fact, as shown in Figure 3.1, roughly 97% of the national population had access to the electricity network from 1999 to 2002. This indicator shows a growing trend until 2000: starting with 94.4% coverage in 1998, rising to 94.9% in 1999, and peaking in 2000 with an increase of 2% in one year. After 2000, however, it remained at the same level, indicating that no considerable improvements have been made in recent years.

This performance may be better assessed by comparing the country’s figures with those of other Latin American countries. As shown in Figure 3.1, Costa Rica’s overall coverage is above the regional average (a little more than 85%76) and in line with that of the higher middle-income countries (nearly 95%).

Figure 3.1 – Population with Access to the Electricity Network – 2000

78%80%82%84%86%88%90%92%94%96%98%

100%

1998 1999 2000 2001 2002

Perc

enta

ge o

f Pop

ulat

ion

Costa Rica Regional average Higher middle-income

Source: Segundo Informe Sobre Desarrollo Humano en Centroamerica y Panama, Estado de la Nacion - Compendio Estadistico; World Development Indicators 2004 – The World Bank

The high coverage of electricity services in Costa Rica is confirmed by the data on household access to electricity. As shown in Figure 3.2, there was a significant increase in access to rural households in the period 2000 to 2003, from little more than 93% in 2000 to almost 97% in 2003. Combined with an almost complete coverage of urban households (99.88% in 2003), the total coverage of households amounted to 98.68% in 2003.

76 Note that this value appears to have been underestimated for 2000 in WDI 2004, since Costa Rica’s quoted coverage was 95.70.

ENERGY

37




Figure 3.2 – Households Reporting Access to Electricity in Costa Rica

88%

90%

92%

94%

96%

98%

100%

2000 2001 2002 2003

Perc

enta

ge o

f Hou

seho

lds

Total Rural Urban

Source: Encuesta de Hogares de Propósitos Múltiples, Instituto Nacional de Estadística y Censos (INEC)

This performance can be better understood by making a comparison with other Latin American countries. From the information in Table 3.1, it is clear that Costa Rica has the best coverage in the sample, outperforming almost all the other higher middle-income countries, particularly Argentina, Brazil and Mexico.

Moreover, it is important to underline, as mentioned in the overview, that one of the most important goals of SEN and the other companies operating in the sector is to reach 100% coverage in the next three years77. This goal could be reached through two initiatives:

(i) a more effective implementation of the national program of rural electrification, included in the national plan for maintenance and energy efficiency – Programas de Conservaciòn y Eficiencia Energética. This plan is supervised mainly by CNFL, in accordance with the programs launched by the Latin American Council for rural electrification (Consejo Latinoamericano de Electrificación Rural – CLER), which is based in Costa Rica itself; and

(ii) the construction of new lines and the installation of solar panels in areas that are otherwise impossible to reach. This project – following several others launched since 1994 – will provide 250 new connections in rural areas which include households, hospitals, schools and national parks.

77 Source: ICE – Sector electricidad 2003.


38




Table 3.1 – Access to Electricity in Latin American Countries

Households reporting access to electricity Country

Total Urban Rural

Argentina (2002) n.a 99.57% n.a.

Brazil (2002) 96.25% 99.42% 79.48%

Costa Rica (2002) 98.41% 99.81% 96.30%

Guatemala (2000) 73.11% 95.34% 56.20%

Jamaica (2000) 86.88% 92.04% 79.49%

Mexico (2000) 97.18% n.a. n.a.

Peru (2002) 71.90% 93.70% 30.80%

Source: Argentina – Instituto Nacional de Estadísticas y Censos (INDEC), Encuesta Permanente de Hogares (EPH) 2002; Brazil –Instituto Brasileiro de Geografia e Estatística (IBGE), Pesquisa Nacional por Amostra de Domicílios (PNAD) several issues, and Brazilian Census (2000); Costa Rica – Instituto Nacional de Estadística y Censos (INEC), Encuesta de Hogares de Propósitos Múltiples 2002; Guatemala – Instituto Nacional de Estadística (INE), Encuesta Nacional de Ingresos y Gastos Familiares (ENIGFAM) 2000; Jamaica – Planning Institute of Jamaica (PIJ), Jamaica Survey of Living Conditions (JSLC) 2000; Mexico – Instituto Nacional de Estadística, Geografia e Informática (INEGI), Encuesta Nacional de Ingresos y Gastos de los Hogares (ENIGH) 2000; Peru – DHS (Demographic and Health Surveys), Instituto Nacional de Estadística e Informática (INEI), Encuesta National de Hogares (ENAHO) 1999, and Household Energy Use in Developing Countries-A Multicountry Study-2003-ESMAP

Another useful indicator to consider is an analysis of the breakdown of cooking fuels used by families in Costa Rica. In fact, the more widespread use of modern fuels, including electricity, instead of solid fuels, implies a greater functional access to electricity. As exemplified in Table 3.2 below, nearly 90% of households used modern fuels in 200378, with an increase of 3% since 2000 (9% in rural areas). Conversely, the use of solid fuels in these areas steadily diminished, from 25.7% in 2000 to nearly 19.3% in 2003. In only three years Costa Rica was able to significantly reduce the percentage of households using solid fuels, especially in rural areas (-22% and -25% respectively).

Table 3.2 – Main cooking Fuel Used by Households

Source: Instituto Nacional de Estadística y Censos (INEC), Censo 2000 and Encuesta de Hogares de Propósitos Múltiples (2001, 2002, 2003)

78 Source: Instituto Nacional de Estadística y Censos (INEC), Censo 2000 and Encuesta de Hogares de Propósitos

Múltiples (2001, 2002, 2003).

% of households using: 2000 2001 2002 2003

Modern fuels 87.28% 88.22% 89.47% 89.83%

- Urban 96.43% 96.13% 96.61% 96.63%

- Rural 73.25% 76.15% 78.71% 79.53%

Solid fuels 11.86% 10.44% 9.30% 9.24%

- Urban 2.81% 2.65% 2.49% 2.59%

- Rural 25.74% 22.33% 19.57% 19.30%

ENERGY

39




When comparing the data on the usage of modern fuels by households with that of other Latin American countries, the country appears to be in the same league as Argentina and Brazil (see Table 3.3). However, compared with Jamaica or Mexico in 2000, Costa Rica fared better in terms of the use of modern cooking fuels. In that year, for example, about 12% of Costa Rican households used solid fuels for their cooking needs, compared to 47% in Jamaica or 18% in Mexico.

Table 3.3 – Main Cooking Fuel Used by Households in Some Latin American Countries

Source: Argentina – World Health Report, Statistical Annex, and Instituto Nacional de Estadísticas y Censos (INDEC), Censo Nacional de Población, Hogares y Viviendas 2001; Brazil, Guatemala and Jamaica – World Health Report, Statistical Annex; Mexico – Instituto Nacional de Estadística, Geografia e Informática (INEGI), Encuesta Nacional de Ingresos y Gastos de los Hogares (ENIGH) 2000

This indicator could also be seen as a proxy for sector affordability, as it is affected by the price level, especially when compared with the solid fuel indicator. Although there are no data available on the percentage of household income spent on electricity in Costa Rica, it is possible to assess overall sector affordability by analyzing the evolution of electricity prices and consumption by residential consumers. From 1998 to 2000, prices stayed relatively constant, then increased significantly in 2001 by 21% in dollar terms, and then remained constant in 2002 (Figure 3.3), at the level of 6.4 US cents/kWh for the residential tariff and 7.2 US cents/kWh for the non-residential79 tariff. At the same time, the rate of residential consumption per customer rose steadily from 1998 to 2002 (as a result of a 3.2% increase for the whole period), as did the number of customers (see Figure 3.4). These concordant trends can be seen as an indication that electricity has been relatively affordable for households in Costa Rica.

79 Source: ECLAC data, where “non-residential” is equivalent to industrial tariff.

Percentage of households using as main cooking fuel:

Country Modern Solid

Argentina (2001) 95% 5%

Brazil (1999) 90.69% 8.15% Guatemala (1999) 26.65% 72.10%

Jamaica (2000) n.a. 47%

Mexico (2000) 81.05% 18.32%


40




Figure 3.3 – Residential and Non-Residential Electricity Price Trend

4

5

6

7

8

1998 1999 2000 2001 2002

US

cent

s/kW

h

Residential tariffs Non-residential tariffs

Source: ECLAC - Istmo Centroamericano: Estadísticas del Subsector Eléctrico

Figure 3.4 – Per Capita Consumption of Tariffs Trend

2,620

2,640

2,660

2,680

2,700

2,720

2,740

2,760

1998 1999 2000 2001 2002

kWh

per c

usto

mer

Source: Anuarios Estadísticos 1999-2001 and 1993-1998, Instituto Nacional de Estadística y Censos (INEC)

As suggested in the graphs analyzed above, the residential and non-residential price levels have moved closer together from 2000 to 2002, when the gap between them became only 1.2 US cents per kWh.

A comparison with electricity tariffs in other Latin American countries may be helpful. As shown in Figure 3.5, tariffs for Costa Rica were both below the regional average (calculated without Costa Rica) and notably below the tariffs of Jamaica.

The distance from the average is more significant if comparing the average residential tariffs; in fact, in 2002 Costa Rica’s was lower than in all the other Latin American countries. This

ENERGY

41




tendency could be interpreted as another sign that the affordability of electricity services is not a major concern in Costa Rica.

Figure 3.5 – Electricity Tariffs in Some Latin American Countries – 20021

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

Argentina Brazil Guatemala Jamaica Mexico Peru Costa Rica

US$

/kW

h

Residential Tariffs Non-residential Tariffs

Residential Average

Non-residential Average

Source: World Development Indicators 2004 – WDI, Organización Latinoamericana de Energía – OLADE, Electric Energy National Agency – ANEEL, Organismo Supervisor de Inversion en Energía – OSINERG, Estatisticas de Subsector Electrico – ECLAC

1 Data for Argentina and Mexico 2001

This assumption can also be partially confirmed by data in the quality perception index for electricity prices, as indicated by the aforementioned WEF survey, in relation to other countries in the region (see Figure 3.6). The data show that Costa Rica’s performance is just in the middle, below the higher middle-income countries’ average (4.15), in line with the overall regional one (3.8), and a little above the performance of other low-income countries (3.45).


42




Figure 3.6 – Electricity Prices Index – 20011

2.25

2.75

3.25

3.75

4.25

4.75


Elec

trici

ty p

rices

Inde

x

Regional Average

H M Income



Moreover, the price level analysis has to be correlated with the assessment of service quality in Costa Rica, indicated by an analysis of electricity supply time. As shown in Figure 3.7, according to the analysis of Instituto Costarricense de Electricidad (ICE)80, most consumers had access to electricity almost all day long (23.95 hours per day in 2002).

Figure 3.7 – Electricity Supply Time

Performance constantly increased from 1998 to 2002, albeit by small increments (0.1%).

This performance aligns the energy sector in Costa Rica with that of other developed nations; it is also very similar to Brazil’s.

80 It is important to mention that the two public companies ICE and Compania Nacional de Fuerza y Luz (CNFL)

represent the group responsible for approximately 80% (2003 figure) of the electricity distribution market in Costa Rica.

Source: Instituto Costarricense de Electricidad (ICE

23.91

23.9123.92

23.9223.93

23.9323.94

23.9423.95

23.95

23.9623.96

1998 1999 2000 2001 2002

Num

ber o

f hou

rs p

er d

ay

ENERGY

43




Furthermore, it is also worth comparing the values above to those reported in two other quality indexes from the other large distribution company in Costa Rica, the CNFL, which is also part of the ICE group. The first index, Disponibilidad Promedio del Servicio (DPS), is the percentage of time (expressed in days) in which electricity service is available to customers, while the second, Frecuencia Promedio de Interrupción (FPI), is the average time (also expressed in days) in which an interruption of service occurred during the year.

Table 3.4 – Service Quality - CNFL

Quality indicator expressed in days 1998 1999 2000

DPS Disponibilidad Promedio del Servicio 99.86 99.9 99.87

FPI Frecuencia Promedio de Interrupción 3 2.97 2.2

Source: Compania Nacional de Fuerza y Luz (CNFL) Figure 3.8: – Service Quality - CNFL

99.65

99.7

99.75

99.8

99.85

99.9

99.95

1991 1992 1993 1994 1995 1996 1997 1998 1999 20000

1

2

3

4

5

DPS FPI

Source: Compania Nacional de Fuerza y Luz (CNFL)

Table 3.4 and Figure 3.8, show that the quality level of electricity services has varied in the past decade, but nevertheless reveal a positive trend. Especially significant is the FPI index, which shows a notable decrease in interruption time, about -27% from 1998 to 2000.

Figures presented by CNFL are consistent with those coming from ICE’s dataset and represent a good indication of the overall performance of the electricity sector in Costa Rica, since the two companies together were responsible for 80% of the distribution market in 2003.

In order to better assess the overall performance of the sector, it is important to analyze some key indicators concerning its efficiency. As mentioned earlier, electricity production in Costa Rica has increased appreciably over the past six years – by 30.57% from 1998 to 2003, as shown in Figure 3.9.


44




Figure 3.9 – Total electricity Production

Costa Rica is neither a big producer nor consumer of electricity. Electricity production, in fact, was a little over 5.7 million kWh in 1998, which steadily increased to about 7 MWh in 2001 (+12% from 1999), and remained above this level for 2002 and 2003, when it reached more than 7.5 MWh.

This trend was primarily accomplished through hydroelectric generation, as emphasized in the overview.

Costa Rica’s energy supply, in fact, is predominantly hydraulic based, as shown in Figure 3.10 below. In 2002, for instance, more than 84% of total generation was hydroelectric, followed by geothermal and other renewable sources, which accounted for a little less than 15%.

Figure 3.10 – Electricity Production by Source

0%10%20%30%40%50%60%70%80%90%

100%

1998 1999 2000 2001 2002

Perc

enta

ge

Hydroelectric Convent ional thermal Geothermal, Solar, Wind and Wood and Waste

Source: Energy Information Administration (EIA), U.S. government

Particularly interesting is the decreasing trend in the conventional thermal source, which dropped from a 6.75% share in 1998 to a little over 1% in 2002. On the contrary, the relevance of geothermal and other renewable energy sources rapidly increased, from 10.8% in 1998 to 12.8% in 1999, a rate of about 19%, after which it grew steadily to a share of 14.6% in 2002.

In this respect, a comparison between Costa Rica’s electricity generation profile and that of other Latin American countries is helpful. Table 3.5 details the average electricity generation

Source: Informe del Estado de la Nación, Programa Estado de la Nación, Costa Rica

4,000,000

4,500,000

5,000,000

5,500,000

6,000,000

6,500,000

7,000,000

7,500,000

8,000,000

1998 1999 2000 2001 2002 2003

MW

h

ENERGY

45




profile of a sample of Latin American countries, including Argentina, Brazil, Colombia, Guatemala, Jamaica, Mexico and Peru, as well as Costa Rica.

Costa Rica’s profile is significantly different to the regional average: on the one hand, its economy relies much more on hydroelectric generation than the other countries in the sample, as mentioned previously; on the other hand, production of electricity from non-conventional sources is relevant in Costa Rica, in contrast with the other Latin American countries apart from Guatemala (ranging from 12% to 15% of total production from 1998 to 2002).

These dissimilarities concerning the reliance on hydroelectric and non-conventional generation in Costa Rica still remain when considering the data relating to the higher middle-income countries.

Table 3.5 – Electricity Production by Source – Regional and Higher Middle-Income Average

Regional average

Source of electricity production (% of total) 1998 1999 2000 2001

Coal 5.80% 4.69% 5.00% 5.44% Hydropower 50.00% 51.15% 51.46% 51.30% Natural Gas 22.36% 18.73% 19.56% 19.03% Nuclear 5.39% 5.06% 4.23% 5.45% Oil 29.30% 27.24% 25.89% 25.47%

Higher middle-income average

Source of electricity production (% of total) 1998 1999 2000 2001

Coal 4.63% 4.95% 4.66% 5.27% Hydropower 55.18% 53.64% 54.50% 54.46% Natural Gas 31.73% 24.99% 25.14% 24.44% Nuclear 5.39% 5.06% 4.23% 5.45% Oil 16.90% 14.91% 14.22% 13.26%


Hydroelectric power constituted the predominant energy source for the period under analysis. However, since hydroelectric plants are generally located farther away from consumption centers than thermal plants, one would expect transmission losses to be higher than average in Costa Rica. Conversely, as Table 3.6 points out, losses in transmission and distribution in the country have remained constant at around 7% to 8% throughout the four-year period. This is much better than the performance recorded for Brazil (around 17%-18%), another country that relies heavily on hydraulic generation of electricity. However, this difference in performance may also be explained by Costa Rica’s geographic dimensions, in that it is a smaller country than Brazil.

Nevertheless, Costa Rica’s losses are also below the average stated for the other grids in Latin America, especially those of the other higher middle-income countries. For instance, the average loss in Argentina, Brazil, Guatemala, Jamaica, Mexico and Peru was nearly 14.6% in 2001, almost twice the average of Costa Rica (see Figure 3.11).


46




Table 3.6 – Electricity Transmission and Distribution Losses

1998 1999 2000 2001

Electricity transmission and distribution losses (% of total output)

7.89% 7.67% 6.85% 7.20%


Figure 3.11 – Electricity Transmission and Distribution Losses

0%

2%

4%

6%

8%

10%

12%

14%

16%

1998 1999 2000 2001



As for energy consumption as a proportion of GDP, it stood at between 80 and 90 kg of oil equivalent per 1,000 PPP GDP from 1998 to 2000, far below the average of the Latin American countries and also of the higher middle-income countries. Costa Rica is in fact the country with the lowest energy consumption per unit of GDP of all the countries in the sample. This suggests that energy use in Costa Rica is much more efficient than in the other countries, as less energy is needed to generate a unit of domestic product.

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Table 3.7 – Comparison in Energy Consumption Per Unit of GDP

Energy consumption per unit of GDP (Kg of oil equivalent per 1000 PPP GDP)

Country 1998 1999 2000

Argentina 137.72. 144.29 139.74

Brazil 160.13 157.09 148.48

Costa Rica 87.37 80.81 85.49

Guatemala 142.78 147.82 141.73

Jamaica 426.48 419.54 424.93

Mexico 20.99 197.02 182.94

Peru 110.21 113.67 105.71 Average (without Costa Rica) 197.05 196.57 190.59

Regional average 182.35 185.57 186.35

Higher-middle income countries’ average 152.12 155.04 152.81

Source: United Nations Conference on Trade and Development (UNCTAD), United Nations Statistical Division (UNSTAT)


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3.2.2. ECONOMIC EFFICIENCY AND PRIVATE SECTOR FINANCING The financial health of the electricity sector in Costa Rica can be assessed by looking at the financial indicators of electricity companies in the country. As noted previously, Costa Rica’s electricity sector is dominated by public companies, with private companies playing a supporting role. Compania Nacional de Fuerza y Luz (CNFL) and Instituto Costarricense de Electricidad (ICE) are the major players in the distribution sector, with ICE owning most of the generation plants. In fact, ICE has 98.3% of shares in CNFL, whose distribution area includes the capital of Costa Rica, San José.

Figure 3.12 shows the evolution of ICE’s profit margin from 1998 to 2001, and therefore does not include information on other public or private electricity companies in Costa Rica.

Figure 3.12 – ICE’s Profit Margin’s Evolution

19.7%

53.4%

-21.6%

0%

5%

10%

15%

20%

25%

1998 1999 2000 2001

Return on equity variation rate

Source: Instituto Costarricense de Electricidad (ICE)

It can be observed that the profit margin was always above 10% in spite of showing a variable trend over the years, peaking at 19.28% in 2000 (+53%) and then decreasing considerably in 2001 (-21%).

Nevertheless, the trend suggests that the energy sector in Costa Rica is reasonably profitable.

ICE’s profits have not, however, been associated with increased private investment in energy. As Table 3.8 shows, private investment had already been low in 1998, and became insignificant in 1999 and 2000, when it decreased by more than 94%. Moreover, it is difficult to analyze current trends in investments since reliable information is not available for 2001 and 2002.

Table 3.8 – Private Investments in Energy

1998 1999 2000 2001 2002

Private Investment in Energy (current US$) 58,500,000 3,400,000 0 n.a. n.a.

Private Investment in Energy (% GDP) 0.42% 0.02% 0.00% n.a. n.a.


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It is thus easy to conclude that the state stronghold over the energy sector is a factor discouraging participation on the part of private investors in Costa Rica.

Since state-owned companies dominate Costa Rica’s electricity sector, it is also characterized by high fiscal dependence. As a result, a large part of the funds used to finance investments and cover to recurrent expenditure come from the budgets of state-owned companies such as ICE. Table 3.9 shows how the electricity sector depends on both fiscal funds and funds from ICE.

Table 3.9 – Fiscal Dependence of the Electricity Sector

1998 1999 2000 2001 2002 Total national energy expenditure (US$)

835,543,943 880,560,982 1,025,517,973 1,208,569,140 1,508,811,272

Total national energy expenditure/GDP

5.93% 5.57% 6.43% 7.38% 8.96%

Total expenditure by ICE (US$) 536,365,234 642,873,770 623,378,945 704,540,506 870,560,770

Total expenditure by ICE/GDP 3.81% 4.07% 3.91% 4.30% 5.17%

Source: Ministerio de Hacienda de Costa Rica, Secretaria Técnica de la Autoridad Presupuestaria

Evidently, the electricity sector is largely dependent on fiscal funds; this is best confirmed by a comparison, for example, with the performance figures of Brazil and Guatemala81, where budget expenditure for energy was less than 1% during the same period of 1998-2002. Looking at ICE’s total expenditure/GDP ratio, it is apparent that it is similar to the total national expenditure on energy ratio; both increased consistently during the 1998-2002 period, peaking at 5% and 9% respectively in the same year.

It is also clear that a large proportion of public resources destined for electricity programs came from ICE (total national expenditure on energy includes ICE expenditure); part of these resources were clearly revenues raised by ICE from the provision of electricity services.

81 Source: Balanço Geral da União, Ministério do Planejamento,” and “Ministério de Finanzas Públicas Guatemala.”


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3.2.3. REGULATORY FRAMEWORK AND INSTITUTIONAL DEVELOPMENT As mentioned in the transport section, the basic legal framework for the energy sector is composed of Law 7593/199682, regarding the creation of Costa Rica’s general regulatory agency (ARESEP), and Decree 29,732/2001 regulating the Law cited.

Specifically, the institutional environment of the electricity sector in Costa Rica is composed of the Ministry of Environment and Energy (MINAE), ARESEP (the regulatory agency) and the electricity companies. MINAE is responsible for defining the energy policy of the country. Also, given that Law 7593 establishes the public interest in all parts of the electricity sector and states that a concession is required for their operation, MINAE grants such concessions. ARESEP, indeed, sets prices and tariffs and supervises the fulfillment of requirements in relation to quality, quantity, reliability, continuity, opportunity and optimal provision in the generation, transmission, distribution and commercialization of electricity.

Moreover, the state-owned company ICE participates in all stages of the sector. The company is the largest generator of electric power (representing 77% of installed capacity in 2003), it is responsible for the transmission of electricity, and it handles about 40% of distribution (increasing to over 80% if the subsidiary CNFL is included).

Finally, there are private generators and some distribution companies at two different levels:

(i) at the provincial level, there are the Junta Administrativa del Servicio Eléctrico de Cartago (JASEC) and the Empresa de Servicios Públicos de Heredia (ESPH), created to both generate and distribute electricity in their corresponding provinces; and

(ii) at the rural level, there are four rural electrification cooperatives – Coope-Guanacaste, Coope-Santos, Coopelesca and Coope-Alfaro – all created in 1963 to distribute electricity to specific communities.

These companies also generate electric power, but at a very low scale. Law 7200/1990, in fact, allows for independent power producers (IPPs), but requires the sale of privately generated energy exclusively to ICE through power purchase agreements (PPAs). Hence, the electricity market is vertically integrated in generation and transmission.

The regulatory conditions therefore allow the application of yardstick competition. Furthermore, the general principle for the determination of charges and prices is the recovery of operational and maintenance costs (on the basis of a model firm when applicable, or the real conditions of the firm), alongside the aim of ensuring a reasonable margin for the electricity industry. Charges and prices are also intended to enable the use of technologies guaranteeing quality, continuity and safety of services. These principles apply in particular to generation prices charged to distribution companies and large users. In the case of generation of electricity by distribution companies, indeed, the final price will also include a value recognizing costs and a reasonable margin, which cannot be higher than the electricity tariff in the market.

For the first time in the country’s history, ARESEP set a charge for power transmission in 1999, using ICE’s transmission cost as a basis. Decree 29,847/2001, in fact, establishes that transmission tariffs should allow for connection charges to the transmission network and costs of transmission over the network.

With regard to distribution, eight companies operate in the country at present. Each company has a concession for a specific geographical region, with the exception of ICE, which by Law 149 has the power to distribute throughout the whole country. Distribution charges are calculated in accordance with the general principles specified above (Decree 29,847/2001), to cover operating costs, to maintain and to replace assets, and to guarantee a reasonable margin.

82 See previous section for comments on this Law.

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Moreover, a set of norms regulates quality and safety at all stages, reliability and stability for generation and transmission, technical conditions relating to voltage (level, interruptions and variations) for distribution, safety conditions for connections and so on.

The development of the electricity sector in Costa Rica does not seem to correspond to that of other Latin American countries, such as Argentina, Brazil, Chile or Ecuador, although there have recently been signs that Costa Rica will move in the direction taken by those countries. As an illustrative example, Chile started a far-reaching reform process during the 1970 and 1980s involving the restructuring and privatization of enterprises, the creation of the Electricity Bureau (Comisión Nacional de Energía) and the enactment of the Electricity Law. There was unbundling at different stages (generation, transmission and distribution) and the introduction of open access requirements. An independent operator is in charge of the dispatch and coordination of both contract and spot transactions. Margins of natural monopoly activities are regulated by price caps. Chile is currently facing some challenges in the contract market (specifically, incentives for distribution companies to contract power), the creation of more competitive conditions, the liberation of nodal prices and the application of the regulatory model for distribution margins.

The regulatory framework for hydrocarbons must also be analyzed to allow for an overall appraisal of the energy sector. Currently, hydrocarbons represents crude oil and natural gas, although the natural gas sector is not developed in Costa Rica, as in most other countries in the region83.

Hydrocarbons represent one of the most important segments of the energy sector, as is clearly reflected in the evolution in regulation over the last twenty years; this has also provided an impetus for the regulation of the entire energy sector, which is still in process. About twenty years ago Law 6588/1981 was approved in order to regulate the activities of RECOPE, Costa Rica’s state oil company. About ten years later, in 1993, Law 7,356/1993 established the state as a monopolist for the import, refinement and wholesale distribution of crude oil, derivatives, asphalts and gasoline. The Law also designated RECOPE as the company responsible for the administration of this monopoly. Currently, the regulation for Law 7593 in the hydrocarbons sector is still under discussion by the different institutions involved84.

At present, while ARESEP regulates imports and refinement, wholesale and final distribution and transportation, RECOPE is also responsible for wholesale distribution, carried out using storage plants and distribution channels throughout the country. This roles and responsibilities’ structure does not influence the pricing policies of the sector. Pricing policies in Costa Rica, in fact, are such that the oil price is uniform across the country – regardless of the distance between destinations and deposits. Although it should be noted that final distribution is carried out by private companies, where gas stations and liquefied petroleum gas fillers are the most important groups in this category; furthermore, distribution to final consumers is carried out largely by cistern tracks. However, as was mentioned in the other sectors, ARESEP’s pricing policy for hydrocarbons reflects the objective of covering production and distribution costs; it intervenes in the case of deviations to this general principle. Thus, all margins, including those of gas stations, are regulated.

Finally, as mentioned in the overview, the full implementation of the SIEPAC Project is another important issue regarding the regulatory framework of the energy sector in Costa Rica.

83 Currently, there is no consumption of natural gas in Central America. In December 1999, however, Guatemala and

Mexico signed a protocol agreeing to construct a natural gas pipeline from Ciudad Pemex, in southern Mexico, to the southern Guatemalan city of Escuintla. The 347-mile, $450-million line would follow the path of an existing oil pipeline in Guatemala's Petén jungle region. The natural gas would be used both for industrial purposes and the generation of electricity. Initial demand is estimated at about 40 million cubic feet per day (MMcf/d). The pipeline could eventually be extended to the Honduran and Salvadoran borders, and possibly to Nicaragua and Costa Rica.

84 Source: ARESEP.


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In fact, SIEPAC is strictly linked to the hypothesis of the establishment of an interconnected market in the region, and is the most advanced of all the PPP mega-projects in terms of its institutional design and the allocation of funding. The initiative creates two supranational institutions – a Regional Regulatory Commission over Electrical Interconnection and a Regional Operations Entity – both of which are to have greater authority than national governments over key energy decisions.

The Entidad Propietaria de la Red/Linea (EPR/EPL), a consortium of mixed public and private capital, is the owner of the transmission line, and includes as its initial members the region’s electric power companies – CEL of El Salvador, ENEE of Honduras, INDE of Guatemala, ETESA of Panama, ICE group of Costa Rica, and ENEL of Nicaragua. The EPR will constitute the formal borrower of the loans to finance SIEPAC, and will establish the fee for use of the transmission line. The Regional Operating Entity board is formed by two members of each country, while the Regional Regulatory Commission board is formed by one member from each country.

Added to the six Central American states, a Spanish energy giant, ENDESA, is a shareholder in the operations consortium. ENDESA invested 20% of total SIEPAC investments; another US$70 million comes from a Spanish trust fund at the IDB, while $35 million comes from the state-owned utilities’ in-kind contribution of land and equipment and the balance (53%) comes from IDB loans (different instruments-amortization periods ranging from 25-40 years, and with interest rates ranging from 1-6%). By lowering the costs and risks inherent in energy distribution, the construction of a regional power line is expected to stimulate the investment of an estimated U$700 million per year in additional energy generation over the next decade through the construction of hydro-electric, geothermal, natural gas and biomass power plants.

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3.3. POLICY OPTIONS AND IMPLICATIONS In order to assess the efficiency of infrastructure investment, it is necessary to consider several factors: access, affordability, technical efficiency and service quality. According to the data and analyses carried out so far, it is clear that the performance of the electricity sector in Costa Rica is much better than that of its counterparts in Latin America (in particular Argentina, Brazil, Guatemala, Jamaica, Mexico, Peru and Columbia). In relation to most indicators examined, Costa Rica’s values are above average and very often it is the best in the sample. These results suggest that the efficiency of infrastructure investment in Costa Rica, made mainly with the aid of public funds, is high by Latin American standards. On the other hand, it also suggests that further gains will be difficult to achieve as there are decreasing returns on investments.

Public policy should focus on increasing household access and reducing the use of solid fuels in rural areas as the key future development challenges for the sector. Affordability is not yet a major issue in the sector, although it could become a problem if public companies have to increase their tariffs should difficulties arise in the provision of fiscal support.

The issue of affordability is also important when considering universal coverage targets, as it is not sufficient to reach the target of 100% of new households served 100%; it is also necessary for these households to pay for services. Even if electricity prices in Costa Rica are largely in line with those of other Latin American countries, social tariffs do not exist (as in Guatemala). Moreover, it is difficult to assess the value of this option as there is no available information on the annual proportion of household spending on electricity, especially for those sectors of the population living in extreme poverty (i.e. immigrants from neighboring countries, such as Nicaragua). These figures could be significant given that Costa Rica’s headcount poverty, in spite of constantly declining throughout the past decade, was still at 6.1% of the population in 2000 and 5.1 in 200385.

The quality of electricity services provided by the public companies ICE and CNFL, as measured in terms of the availability of electricity to consumers and the average number of interruptions, was very high until 2002. There is evidence, however, that due to the decline in investment by public companies, power interruptions and voltage fluctuations have become more frequent86. Since the provision of electricity services is mainly in the hands of the state, it should strengthen quality standards and set conditions for public companies in order to avoid deterioration in quality.

The technical efficiency of the energy sector in Costa Rica is also high compared to other Latin American countries, as reported in the previous section. Transmission and distribution losses, for instance, were equal to only 49% of the average in Argentina, Brazil, Guatemala, Jamaica, Mexico and Peru in 2001. The high quality and technical efficiency of the electricity industry in Costa Rica can be attributed mainly to the high level of expenditure on energy projects financed by public funds, which reached almost 9% of GDP in 2002. The main issue to be assessed is therefore whether quality and efficiency would be compromised by a tighter public budget.

Concerning sector efficiency and profitability, instead, the financial health of the main providers and the fiscal dependence of the sector are the main issues to be considered. Private investment in the energy sector dropped dramatically from 1998 to 2000 – the last year for which data are available – despite the reasonable profit margin achieved by the main public company ICE. This is even more problematic when considering the fiscal dependence of the sector, with public expenditure increasing from slightly less than 6% in 1998 to almost 9% in 2002. This provides reason for concern as public deficits have increased in Costa Rica, revealing that fiscal funds are becoming more and more limited.

85 Source: Social Spending and the Poor Report (World Bank, 2002); INEC. 86 Source: IDB, Costa Rica: IDB Strategy with Costa Rica, May 2003, p. 13.


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In conclusion, there is certainly room for private initiatives in Costa Rica, but the government’s presence in the sector is so overwhelming that private investors are likely to stay out, unless changes are made to create a more suitable environment for private ventures. In view of the Central American Free Trade Agreement (CAFTA) signed in May 2004, this becomes a major issue, as Costa Rica has agreed to open up to private participation, both domestic and foreign, in this key sector. It will be a gradual process taking place over the next four years87.

3.4. PRIORITIES FOR FUTURE REFORMS Despite the success of its model based on investment by public companies, Costa Rica faces important challenges in the energy sector. First, the national model already shows significant signs of stress, due mainly to the fiscal constraints faced by public companies. In the 1990s, Costa Rica’s public deficit averaged 3.4% of GDP but it has since increased, reaching 5.9% of GDP in 2002. This has prompted the government to propose a restructuring of the tax system, based mainly on a reform of income taxes, the transformation of the existing general tax on sales into a value-added tax, the modernization of customs and the improvement of the government’s enforcement capacities. No matter how successful the reform of the tax system, it is highly unlikely that Costa Rica will be able to preserve the achievements obtained in the past in infrastructure sectors, let alone improve upon them, if public companies are not capable of financing investment needs and if private projects remain marginal.

It is also extremely important for Costa Rica not to let the efficiency of its infrastructure industries, energy included, lag behind those of other countries, especially now that it is a member of CAFTA. The agreement aims to eliminate trade barriers between the signatories (the United States, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic), starting in 2005; it is therefore bound to increase competition in the region.

According to ICE’s estimates, electricity demand will grow at an annual rate of 5.7% until 2020, thus necessitating important investments in supply. Given the lack of natural gas in Costa Rica, new projects will mainly take the form of hydropower plants, which are subject to seasonality, and fuel-fired plants. In order to continue to maintain a high level of efficiency in infrastructure and on the supply side, it will therefore be important to foster production and to streamline energy consumption. The latter may also be achieved by means of an effective implementation of the national project for rational consumption, especially for industries and large consumers, launched by the ICE group88.

Therefore, another priority for future reform is to allow public companies an opportunity to increase tariffs by the amount needed to finance their investment projects and to cover other costs. However, although electricity is relatively affordable to households in Costa Rica, such tariff increases have to be well balanced in order not to exclude parts of the population.

Finally, another priority is to sponsor new private investment into the sector but, obviously this can only be done if a favorable environment is created. Political circumstances in the recent past have not favored privatization, but there are signs that this attitude has changed, with efforts being made to increase support for greater private sector participation in infrastructure, including the electricity sector. A good way of reaching this goal would be to issue management contracts and concessions, as the sale of public assets to the private sector would not appear to be an option in the near future.

87 Starting in December 2004 and concluding with a full opening of the sector in 2008. 88 Source: ICE – Memoria institucional 2004.


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4. WATER AND SANITATION

4.1. OVERVIEW The water and sanitation sector in Costa Rica is characterized by the following main macro-factors, which run counter to each other:

(i) high coverage of water services in comparison with other countries, due to government efforts to expand in urban areas over the past decade89, this contrasts with the low-quality of services, especially the availability of drinkable water;

(ii) bad performance in the case of sewerage coverage and quality, especially in urban areas; in the San José metropolitan area, for instance, only 47% of the population is connected to sewerage networks, which also discharge raw sewage into the water courses that cross the city; and

(iii) high and growing environmental risks related primarily to the low level of wastewater treatment.

Sewage treatment has become a key issue in recent years as it has caused environmental problems related to the contamination of rivers and soil. In the past decade, some improvements has been undertaken by the national government, resulting in the reduction of water- transmissible diseases such as cholera and diarrhea. An important consequence has been the significant decrease in the infant mortality rate (from 17% in 1990 to 11% in 200190).

Services are provided by several types of agents, largely state-managed: AyA (Instituto Costarricence de Acueductos y Alcantarillados), municipalities, ASADAS (Associaciones Administradoras de Acueductos Rurales), ESPHSA (Empresa de Servicios Públicos de Heredia S.A.) and some small private services providers. Generally, suppliers receive poor financial returns, since tariffs are too low to balance the costs. This aspect, along with fiscal constraints, contributes to reducing the flow of investments in the sector.

Moreover, the regulatory framework is ill-defined and fragmented, preventing private sector investment.

In conclusion, despite demonstrating good performance at the national level, some important issues remain to be resolved, namely:

(i) the lack of suitable management in the water and sanitation infrastructures; and

(ii) fiscal restrictions reflected in the limited resources for investment.

89 See also World Bank report 28,570, April 20, 2004. 90 Ibidem.


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4.2.1. ANALYSIS OF THE TECHNICAL DIMENSIONS OF THE SECTOR The first key element to assess with regard to the technical dimension of the sector is coverage of services, in terms of the percentage of population with access to these utilities.

Considering access to the water network, as shown in Table 4.1, the level in Costa Rica is very high; in fact, approximately 95% of the whole population has access to this service. 89% of the population has a household connection, while a small proportion (5.77%) has adequate91 access to improved water sources. There is still, however, a significant difference between levels of coverage in urban and rural areas. In fact, in urban areas, nearly 99.5% of the population has direct household access to this service, compared to 81.4% in rural areas. However, this figure increases to 91.5% when including the 10.1% of the population with adequate access; overall coverage for the rural area is therefore very high in absolute terms92.

Table 4.1 – Water Coverage: Percentage of Population – 2000

Total Urban Rural

With Connection 89.22 99.48 81.44

Without Connection - Adequate Access (1) - Without Service

10.78 5.77 5.01

0.52 0.08 0.44

18.56 10.08 8.48

Source: Pan American Health Organization (PHO)

1Availability of at least 20 litres of safe water per person from a public water point (public standpipes, rain water collection, etc) located within 200 meters from users.

This positive aspect is well illustrated by comparing the indicators of other Latin American countries. First, according to Pan American Health Organization estimates, Costa Rica had the highest level of coverage in 2000, followed by Belize and Panama. Considering the whole region – countries of Central America, Hispanic Caribbean and Haiti – the average coverage (connection and adequate access) was almost 78.6% of the whole population, about 20% lower than in Costa Rica; however, the only other country that showed a better indicator in the sample (with 100% coverage) was Puerto Rico.

91 Daily availability of at least 20 litres of safe water per person from a public water point (public standpipes, rain

water collection, etc) located within 200 meters from users. 92 According to World Bank estimates, however, the coverage levels are approximately 98% in urban areas and 97%

in rural ones.

WATER AND SANITATION

57




Figure 4.1 – Water Coverage – 2000

0%10%20%

30%40%50%60%70%

80%90%

100%

Costa Rica Belize Guatemala Honduras Panama

Perc

enta

ge

With Conecct ion Reasonable Access Without Service

Source: Pan American Health Organization. (PHO)

Another useful comparison can be made by considering the figures quoted for the benchmark group, the higher middle-income countries, in 200093, as shown in Figure 4.2. This cluster shows a average of 87.3% of the population with access to water services, approximately 8% lower than in Costa Rica.

93 Source: Pan American Health Organization.(PHO)


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Figure 4.2 – Water Coverage – 2000

0%10%20%30%40%50%60%70%80%90%

100%

Total Rural Urban Total Rural Urban Total Rural Urban

Perc

enta

ge o

f Pop

ulat

ion

C osta Rica H M income average Regional average


Moreover, as shown in Table 4.2, Costa Rica had the highest percentage of the population with access to water connections in the sample, reaching nearly 90% compared to almost 85% in Mexico or 67% in Argentina. Another important positive sign is given by the percentage of population without service: while the group average was nearly 13%, the level in Costa Rica is far lower, at only 5%.

Table 4.2 – Water Coverage: Percentage of Population – 2000

Costa Rica Argentina Brazil Mexico Higher middle-income countries

With Connection 89.22 67.00 75.28 84.99 79.12 Without Connection 10.78 33.00 24.72 15.01 20.87

Reasonable Access 5.77 11.55 13.74 1.55 8.15 Without Service 5.01 21.45 10.99 13.46 12.72


This difference becomes more important when comparing rural and urban areas: the average percentage of population with access to water services in the rural areas of higher middle-income countries is 62.7%, more than 30% lower than in Costa Rica; the figures of the benchmark group are also very similar to the regional average (63.4%)94.

However, in spite of these positive indicators, it is important to highlight that, according to Ministry of Health estimates, the level of drinkable water is inadequate, reaching nearly 76% of the overall population. This performance is highly variable within the country, as it depends both on geographical location and the different providers involved (AyA or local providers).

According to AyA estimates, in recent years there has been a continuous and systematic deterioration of basic infrastructure for the supply of drinkable water, and this has a negative

94 Source: PHO, limited sample.


59




impact on the capacity for facing increasing demand, especially in the metropolitan area and in the Nicoya, Puriscal and Tilaran areas95.

Here it may be useful to cross-analyze these issues with those more closely related to sanitation services. Costa Rica’s performance in this sector is more limited than in relation to water provision. As shown in Table 4.3, when considering only connection and on-site installations, 93.5% of the population had sanitation coverage in 2000. However, this result is due largely to the predominance of septic tanks, which serve 72.5% of the population. When considering connected sewerage services only, the level of coverage is sharply reduced to 21% of the population. It is worth noting that, contrary to the regional tendency, total coverage was higher in rural zones than in urban areas, considering both the connection system and septic tanks. In rural areas, coverage reaches nearly 97% of the population, although this is achieved mostly through septic tanks (96%) with only 1.1% served by the connection system.

Nevertheless, it is important to state that only 3% of the rural population has no access to sanitation services. In urban areas, coverage is slightly lower: 88.8% of the population has access, 47.27% through connection systems and nearly 41.5% by means of septic tanks.

Thus, more than 11.2% of the urban population does not have access to sanitation services, which would appear to be an important indicator. Furthermore, as mentioned earlier, in the metropolitan area of San José only 47% of the population is connected to the sewerage networks, which also discharge raw sewage into the water courses crossing the city.

Table 4.3 – Costa Rica – Sanitation Coverage: Percentage of Population – 2000

Total Urban Rural

With Connection 21.01 47.27 1.11

Without Connection - On Site (1)

- Without Service

78.91 72.51 6.48

52.73 41.49 11.24

98.89 96.02 2.87

(1) On site sanitation system includes any of the following technologies: connection to septic systems; latrines, wet or dry, etc. Obs.: Adequate disposal of human excreta refers to use of a satisfactory private or shared sanitary means of excreta disposal, as above, hygienically separating human excreta from human contact.


The difference between rural and urban average coverage is also evident when considering the Central American countries and the Hispanic-Caribbean area. In these areas, nearly 77% of the whole population was covered by the sewerage system, 91.2% in urban areas and 60.5% in rural ones96. Therefore, on the one hand, total coverage in Costa Rica was higher than the group average, but on the other hand, coverage in urban aeas was slightly lower. Specifically, as shown in Figure 4.3, total coverage in Costa Rica was higher than that of other countries, and equivalent to Panama.

95 Source: AyA - Plan Estrategico 2003-2020. 96 Source: PHO (Pan American Health Organization) – Pan American Center for Sanitary Engineering and

Environmental Science.


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Figure 4.3 – Sewerage coverage – 2000

0%10%20%30%40%50%60%70%80%90%

100%

Costa Rica Bel ize Guatemala Honduras Panama

Perc

enta

ge

With Conecct ion On-site Without Service


However, as shown in Table 4.4, considering the access to improved sanitation in 200097 it appears that Costa Rica’s performance was lower than the average of the other higher middle-income countries. In particular, the percentage of the population with access to improved sanitation with connection was nearly 21%, compared to approximately 58% in Mexico or about 49% in Argentina.

Table 4.4 – Access to improved Sanitation: Percentage of population – 2000

Costa Rica Argentina Brazil Mexico Higher middle-income countries

With Connection 21.01 48.69 47.50 58.35 43.88 Without Connection 78.91 51.31 52.50 41.65 56.09

On site 72.51 35.26 37.72 14.12 39.90 Without Service 6.48 16.05 15.18 27.53 16.31


An in-depth assessment of performance in the sector shows that dependence upon septic tanks is extremely high in Costa Rica, and only a small proportion of the population is served by a sewerage connection system. Indeed, from this point of view, the level of sewerage services is lower than in both Honduras and Guatemala – countries with a lower per capita income – as well as the other higher-middle income countries.

With regard to quality of water and sewerage services, Costa Rica performs adequately.

The first important (and ambiguous) aspect to observe is the rate of water disinfection. In 2000, although nearly 100% of the urban water supply was considered to have been decontaminated, only half of the population had access to disinfected water (approximately 50%). In addition,

97 Ibidem.


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only about 70% of the population receives water of potable quality in accordance with the estimates of “A” and “A’s” given by the National Water Laboratory in 200098.

Although this level is still higher than in other Central American countries, it clearly reveals a shortfall in water quality. According to the national Ministry of Health99 analysis, the quality level is affected by fragmented management systems and the institutional framework. In fact, performance changes somewhat depending on the different management systems and providers; for instance in 2001:

(i) AyA – the national institute involved in the management and maintenance of water services – provided coverage to 46.9% of the population, mostly in urban areas, of which 96.6% had access to drinkable water;

(ii) Service provided by the municipalities represented a coverage of 17% of the population of which 64.2% had access to drinkable water; and

(iii) Cooperatives of rural water systems administrations (Comités administradores de acueductos rurales – CAARs) represented 28.7% of the overall population, of which only 51% had access to drinkable water100.

These figures should also be considered along with the water-supply function indicators for rural areas: in 2000 only 56% of the drinkable water supply systems worked.

As for sanitation services, 96% of all urban wastewater collected was discharged into rivers without any treatment101. This fact, along with the strong predominance of septic tanks rather than the system of connection, would explain numerous environmental problems connected with soil and river pollution.

It is therefore necessary to intensify efforts and actions for standardizing management and treatment systems, both in water and sanitation services, in order to ensure the same quality levels for the entire population and also to contribute to the reduction of environmental hazards.

Another important indicator for assessing quality in the sector’s is the number of service interruptions. The first indicator refers to the absence of intermittencies in the provision of services and the continuity of the water supply for 24 hours a day in 2000. This performance appears positive when compared with that of the other Central and Latin American countries. As shown in Table 4.5, all the countries selected have intermittencies in this service (fluctuating from nearly 98% in Honduras to 11% in Belize) and water supply times vary from just six hours a day in Honduras to 20 hours in Panama.

98 Source: World Bank report 28,570, April 20, 2004. 99 Source: Report on health in Costa Rica 2002; Documentación del analisis sectorial de salud 2002. 100 Source: Salud de las Américas – Costa Rica, 2002 – Netsalud. 101 Ibidem.


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Table 4.5 – Costa Rica and Selected Countries – Quality Indicators – 2000


From the results of the analysis so far, one of the major issues in this sector is the technical efficiency of service providers, which appears to be inadequate. As mentioned above, services are provided by the National Institute and regional companies, municipalities and small private companies. The first indicator to be considered refers to the relationship between invoices collected and invoices issued, showing the effectiveness of collection. However, performance is variable among the different providers: the two larger companies (national and regional) reach 90%, while municipalities reach between 40% and 60%. In the latter case, only half of the amount invoiced is actually collected, showing that insufficient attention is paid to invoice collection.

Another indicator to be mentioned is the rate of unaccounted-for water, which refers to the water produced but not charged for, equaling approximately 50% of the total. This high value is due to several factors, such as the lack of system maintenance and surveillance and the absence of up-to-date consumer records. These critical issues show that, in some cases, only 25% of the produced water is charged for, reducing the possible capacity of surplus generation. From this point of view, another indicator revealing low productivity in this sector in Costa Rica is its number of employees: 5 employees/1,000 connections in 2000; according to the PHO, the figures vary between 3 and 4 in efficient Latin American companies102.

In conclusion, these results show positive and negative features in the water and sanitation sector in Costa Rica. On the one hand, meaningful progress has been made in expansion and in improving the quality of water and sanitation services over the past decade. These efforts are also confirmed by other improvements achieved in the same period, especially the reduction of water-transmissible diseases such as cholera and diarrhea and in the decreased infant mortality rate (from 17% in 1990 to 11% in 2001103).

On the other hand, some important issues and problems remain:

(i) low access to sanitation services, mainly in urban and metropolitan areas;

(ii) high dependence on septic tanks and a low level of sewerage connection system coverage;

(iii) high level of environmental hazards due mostly to the low level of wastewater treatment;

(iv) poor quality services, especially in terms of the availability of drinkable water; and

(v) fragmented management systems and institutional framework. 102 Source: indicators of quality was obtained in PHO (2000), Evaluation 2000. 103 Source: INEC.

Costa Rica Nicaragua Guatemala Honduras Belize Panama

% of intermittent water services 0 14 80 98.1 11 27.1

Water Supply Time (hours/day) 24 - 16.67 6 - 20

% urban system with disinfection 100 100 25 51 100 100

Water supplies functioning in rural areas (%) 56 95 96 95 - 100

% collected wasted water treated 4 34 1 3 56.7 18.3


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All these issues require solutions involving consistent investments. In particular, an investment policy should be aimed at improving sewerage treatment, in contrast with the investment policies implemented in the past decade which – as will be analyzed further – have been mostly planned in the water services’ sector. However, some international agreements and the AyA development plan for the future have recently taken steps in this direction104.

4.2.2. ECONOMIC EFFICIENCY AND PRIVATE SECTOR FINANCING Issues of quality connect with matters of economic efficiency. It is therefore important to analyze the main providers’ capacity for investment and recovery of costs.

According to the Pan American Health Organization, in 2000 the average cost of producing and distributing drinkable water in Costa Rica was US$ 0.07 per m3, while the average tariff paid for its use was US$ 0.42 per m3. In the sanitation service sector, the average tariff paid for sewerage services was US$ 0.06 per m3 in the same year.

An easier interpretation of this data emerges from a comparison with other Central and Latin American countries. As suggested in Figure 4.4, the values for Costa Rica are close to those of the other countries in the region and, in most cases, below them. More specifically, the Central American and Hispanic Caribbean countries have an average production and distribution cost for drinkable water of nearly US$ 0.30 per m3 and an average tariff for its use of US$ 0.39 per m3. The highest level is shown in Belize, which has an average tariff equal to US$ 1.15 per m3. In addition, in this comparison group the tariff for sewerage services is approximately US$ 0.33 per m3,105 much higher than in Costa Rica.

104 Source: AyA – Plan Estrategico 2003-2020. 105 Source: PHO (Pan American Health Organization) – Pan American Center for Sanitary Engineering and

Environmental Science


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Figure 4.4 – Production and Distribution Costs and Tariffs Water and Sanitation – 2000


The low cost of water production in Costa Rica is therefore clear. This is mainly due to the widespread availability of hydro resources in this country, along with other factors. Nevertheless, despite the low cost of water production in Costa Rica, tariffs have not enabled the recovery of all costs due to an inefficient and fragmented management system throughout the country. Indeed, it is to be noted that there are no countries in the Latin America region where costs of production are covered by means of the tariffs paid for the use of drinkable water and sewerage services.

However, the unsatisfactory performance of service providers and their poor quality and inefficiency could become increasingly serious given current fiscal and budgetary constraints.

In order to overcome these critical issues, AyA has required a number of regular tariff increases, beginning in October 2000106 to the present. The first increase, approved by ARESEP, was equal to 30% more both for water and sanitation services and it was implemented in 2001, generating additional revenues of more than US$ 14,000107. In 2003, AyA required another increase of roughly 56% on the 2001 tariffs; however, this has been only partially implemented. Nevertheless, the achievement of greater efficiency and financial sustainability by the main providers is important for guaranteeing necessary investments. However, it is crucial to note that these high increases in such a short period of time also affect the overall affordability of water and sanitation services for Costa Rican households.

In this respect, it’s also important to consider investments. According to the PHO Sector Analysis, in the last decade average investments in this sector were estimated at US$ 20 million per year in Costa Rica, of which 54% went to urban zones and the remainder to rural areas, in accordance with the distribution of the population.

An important point to highlight is also the breakdown of the investment in this sector: approximately 96% of the total investment amount was in the water system, compared to only 4% for the sewerage segment. This fact may also explain why latter shows greater deficiencies.

At present, there is a shortage of investments in sanitation compared with water services, especially considering the increasing real needs of the population, especially in urban and metropolitan areas, as recognized by the national institution. In fact, in the aforementioned

106 Source: AyA – Plan Estrategico 2003-2020. 107 Data quoted in the plan was 5 million colones; exchange rate considered at December 31, 2003.

0

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country development program – Plan de Desarollo Nacional (PND) – MIDEPLAN would allocate nearly US$ 60 million to the water and sanitation sector, of which the greater part (US$ 50.8 million) relates to the project for sanitation networks in the San José metropolitan area108. However, the total amount allocated to water and sanitation is equivalent to only 1% of the total financial resources provided (nearly US$ 6,036 million).

In conclusion, there are several constraints on the investment flow in this sector, namely:

(i) low economic efficiency of the main providers, including the companies’ inability to locate external financial resources and pressure due to credit restrictions;

(ii) fiscal constraints in connection with the need of primary surplus of the national budget; and

(iii) limited private participation in the management systems.

All these factors in this sector are clearly reflected in the aforementioned lack of investment, both public and private. Given the above issues, despite the high level of coverage in Costa Rica, the water and sanitation sector has problems related to a lack of suitable management and the inefficiency and limited provision of some important services; these mainly concern sewage treatment and the collection system.

4.2.3. REGULATORY FRAMEWORK AND INSTITUTIONAL DEVELOPMENT The legal and institutional framework in Costa Rica for the water and sanitation sector still appears fragmented, and is characterized by the presence of many different laws and institutional actors. The basic regulatory framework is provided by the Laws of Water (276), of Environment, of Health and of Wild Life. The first important law in this sector relates to the creation of the state-owned company AyA, Law 2726/1961, subsequently amended by Law 5919/1976.

A further key law affecting the water and sanitation sector, as well as all the other infrastructure sectors, is Law 7593/1996 (already discussed in the review of transport) concerning the creation of ARESEP.

More recently, in the late 1990s, there were two further important developments:

(i) the transformation, by Law 7787/1998, of Empresa de Servicios Públicos de Heredia (ESPH) into a special body, a private company in relation to the “public utility”, and giving a certain flexibility; and

(ii) the establishment of the Municipal Code, which governs the calculation of tariffs in the various municipalities.

In terms of the institutional environment, there are several very different actors involved in the governance of the sector; these vary according to both their legal profile (private, public) and their scope, and include, for example:

(i) service providers;

(ii) surveillance and regulatory agencies;

(iii) non-governmental organizations;

(iv) international organizations supporting the sector (such as OPS/OMS, UNICEF, IDB, BIRF); and

108 The overall project would have a cost of US$ 300 million over a period of 12 years.


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(v) several committees responsible for specific areas, including Comité de la Red de Cuencas, Comité del Regulamento de Vertigo y Reuso, Comité para la Calidad del Agua Potable and Organo Asesor de Aguas.

Nevertheless, the key actors in the water and sanitation sector in Costa Rica are the Ministry of Environment and Energy (MINAE), ARESEP, AyA, the company ESPH and the municipalities.

The company AyA has the role of managing the water and sanitation services, policymaking, establishing and applying norms, and planning, financing and solving all issues related to the provision of water throughout the national territory. In general, this institution has a very broad legal mandate combining provision, regulation and policymaking. Specifically, AyA is responsible for ensuring the continuity of water supplies and sanitation services throughout the national territory, which means that it should replace any provider which interrupts the service for any reason. It has also a subsidiary competence with respect to ARESEP on issues related to supervision of services rendered by other companies, specifically regarding the planning, building and operation of infrastructure. Moreover, it provides technical consulting services to municipalities regarding water and sanitation services (in accordance with the Law of Water). Furthermore, AyA is competent to issue technical regulations, as well as those related to the service provision, a function in which it overlaps with ARESEP. In this respect, AyA should have a subsidiary function to ARESEP. However, if ARESEP regulates on an issue related to (or potentially affecting) regulations specified by AyA, it would have to coordinate with AyA.

There is also some overlap between AyA and the Ministry of Environment and Energy (MINAE) with regard to the planning and administration of water services throughout the territory, as both institutions are responsible for coordination in these issues.

Finally, regarding the direct provision of water and sanitation services, AyA is responsible for managing and operating the sewerage and aqueduct systems throughout the country. The administration of these services could be decentralized, with the exception of the metropolitan area, where AyA has financial responsibility. In addition, AyA must approve the construction, extension and modification of the entire drinkable water infrastructure system109.

The municipalities are responsible for managing the drinkable water and sanitation systems in cases where they were fulfilling this role at the moment of AyA’s creation, subject to efficiency conditions110. The municipalities are financially autonomous, so they can set taxes and tariffs to finance the services they provide. In the case of public services, tariffs must be approved by the Municipal Council (Consejo Municipal) in accordance with the Municipal Code. They are subject to control by the General Comptrollership of the Republic rather than by ARESEP. The Municipal Code establishes (Article 74) a procedure for tariff setting, consisting simply of the addition of a 10% return on the accounting cost. Each municipality is autonomous with regard to the calculation of its tariffs, but they are subject to approval.

Moreover, drinkable water and sewerage services could be provided by private companies, in accordance with Article 5 of Law 7,593. However, this form of provision has not been regulated in detail and there is currently little clarity on the issue111. It has been stated that under current conditions it seems that the provision of services and infrastructure can be granted by any modality (e.g. for profit or not for profit). However, the comptrollership stated that only legal entities are accepted, i.e. ASADAS (Asociaciones Administradoras de Acueductos y Alcantarillados Sanitarios Rurales).

ARESEP recognizes the urgency of harmonizing and regulating the positions of private providers (establishing, for example, who grants concessions and under which conditions, the rights and obligations of concessionaires, whether user societies can render services or not). 109 Source: ARESEP. 110 Excluding the aqueducts of the metropolitan area, which must be managed by AyA. 111 Source: ARESEP (2004).


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Regardless of these unresolved legal aspects, any company must be subject to the Department of Water (regarding the use of water), ARESEP (regarding tariffs and supervision of the service), the Ministry of Health (regarding water for human consumption) and AyA (regarding technical controls).

Finally, the Environmental Law establishes the basic criteria for sanitation (collection, disposal and treatment), summarizing environmental protection issues regarding all aspects related to water. In accordance with this law and given the current environmental risks, the national government, municipalities and public institutions will give priority to the establishment and operation of adequate waste disposal and treatment services which, as mentioned before, pose major concerns for the sector.

In addition, it is helpful to compare the relatively decentralized case of Costa Rica with the case of Chile, where the water system was reformed in the late 1980s. After several years of poorly performing decentralized provision, Chile introduced a new regulatory framework for the sector, centralizing a great part of the regulations on provision. This framework was based on the model of the electricity sector, with the application of a price cap regulation with a reasonable return under efficient operation (“empresa modelo”). In 1999, it created the regulatory body Superintendencia de Servicios Sanitarios (SISS). SISS was responsible for inspecting the sector and regulating charges and fees. This institution broke up the pre-existing dual role of operator and regulator, concentrating and centralizing regulatory action. Also, in 1989 the public operators were converted into corporations, and in 1997 they were privatized after an important re-accommodation – increase – in prices. Privatization pursued the dual objective of obtaining private resources to finance infrastructure and services and enabling the government to exit from productive activities. However, there was some debate as to whether the government should have granted concessioned rather than privatized the companies112.

In conclusion, with regard to the legal framework and institutional developments it seems important to note some key issues:

(i) the need to rationalize the existing overlaps between AyA, the MINAE and the MIDEPLAN, attempting also to outline a clear and homogenous sector policy at national level; and

(ii) the urgency of harmonizing and regulating the duties and rights of the different actors, especially those in the private sector, with the aim of establishing a clearer and more reliable legal and business environment to foster private participation in the management and construction of water and sanitation services.

4.3. POLICY OPTIONS AND IMPLICATIONS The analysis has shown that, despite good indicators regarding water and sanitation coverage in Costa Rica, the sector presents several deficiencies related mostly to service quality and the technical efficiency of the main providers. Service provision is precarious; in fact, most access to sewerage services in rural areas is achieved through septic tanks, as network connections are practically non-existent in such areas. The level of treated sewerage is very low, especially in urban areas, and leads to environmental and health problems, in spite of some improvements in recent years. Moreover, performance with regard to technical efficiency is very poor, especially in relation to high distribution losses, high invoicing losses and low labor productivity.

Moreover, the sector is largely managed by the state, or by regional service providers through municipalities, giving rise to some recognized issues concerning inefficiency. In fact, efficiency 112 For more detail, see Fischer and Serra (2003), “Efectos de la Privatización de Servicios Públicos en Chile: Caso

Sanitario, Electricidad y Telecomunicaciones”, Serie Estudios Económicos y Sociales, IDB.


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indicators are extremely low in the case of management by municipalities. Private participation is obviously very limited, as is community participation in the management systems.

Finally, the high investment flows occurring over the last decade in this sector have induced it to become more and more fiscally dependent. The high fiscal dependence of the sector has been due both to the low level of private participation and to the low surplus generation of main providers, specifically linked to tariff levels which are insufficient to cover costs. From these considerations it is also evident that, given the existing fiscal constraints, it would be impossible to guarantee the investments necessary to increase coverage or to guarantee adequate service quality.

It is therefore worth mentioning some key actions that should be undertaken in this sector, which may be divided into two broad areas:

(i) macro and institutional:

- defining a regulatory structure for this sector, redefining the functions of several actors, and the enactment of a specific law for this sector,

- increasing private sector participation and decentralizing provision of services (by users’ associations and so on), and

- qualifying cities for the provision or regulation and surveillance of services.

(ii) micro and suppliers:

- increasing maintenance investments in order to reduce losses of invoiced revenues,

- reviewing the credit restrictions of service providers, and

- fixing realistic tariffs to enable the recovery of operational, investment and maintenance costs.

4.4. PRIORITIES FOR FUTURE REFORMS

During the last decade, the water and sanitation sector has improved substantially, and high levels of coverage have been achieved both in urban and rural areas. However, the current system still presents serious problems related to the quality level for drinkable water services and sanitation connection and treatment systems, especially in metropolitan and urban areas. The current investment level and the system of financial provision are not sufficient to guarantee greater efficiency, as illustrated in the previous analysis, and more direct involvement of private capital is clearly desirable in order to reduce the sector’s fiscal dependence .

Costa Rica shows an inadequate indicator regarding sewage treatment and consequently runs the risk of increasing environmental hazards. It is worth noting, however, that since the mid 1980s the country has been a leader in the planning and implementation of good practice in relation to environmental issues (such as defining the “debt-for nature” swaps and establishing structures and responsibilities for environmental management). This approach has gradually become a “comparative advantage”, allowing the country to become a leader in the eco-tourism and eco-industry fields. It is crucial to maintain this advantage and attention should be paid to overcome the existing fiscal and financial difficulties in order to preserve it, also encouraging the mobilization of private investments in the search for innovative and effective solutions. In summary, the main priorities for the water and sanitation sector are as follows.

(i) Rationalization of the legal and institutional framework in order to simplify the roles and responsibilities of the different institutional actors. This could also be achieved by establishing an agency with the financial autonomy and personnel capable of guaranteeing its functionality and ongoing development;


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(ii) Revision of the current financial and management systems of service providers, especially by increasing their internal resource generation capabilities or the possibility of acquiring external resources (e.g. loans). In this respect, it would be important to:

- define tariffs sufficient to cover costs;

- change the credit restriction rules;

- improve efficiency through innovative management techniques; and

- stimulate processes for maximizing human resources, particularly in the financial management area.

(iii) Improvements in transparency and decentralization in service management, which would allow greater community involvement in service provision and follow up; and

(iv) Greater involvement of the private sector in investments, also through the rationalization of tariffs to increase profitability.


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5. TELECOMMUNICATIONS

5.1. OVERVIEW Until 1963 the telecommunications services market in Costa Rica was dominated by electricity companies, owned by “The Electric Bond and Share” company, with monopoly powers in local, national and international telecommunications markets. In 1963, a new law transferred monopoly power to the aforementioned Instituto Costarricense de Electricidad (ICE), which is currently the monopolistic provider of basic telecommunication services. From 1997, the ARESEP was able to regulate the behavior of ICE, monitoring overall quality and the tariff setting system. Currently ICE, through its subsidiary Radiográfica Costarricense (RACSA), provides most telecommunications services (telex, telegraph, video conferencing and data transmission), as well as Internet access, data and value-added services. In addition, the ICE group also acts as a regional data network for neighboring countries without packet switching networks (El Salvador, Honduras and Nicaragua).

In this context, it is clear that private participation is not extensive, especially in more “traditional” services. Currently only four private companies, also in association with RACSA, provide cable TV; while in the Internet sector private presence is more significant, with 14 companies involved. It is to be noted that the Costa Rican government attempted, unsuccessfully, to liberalize the telecommunications market several times, the last time in 2000. However, efforts at liberalization failed in March 2000, due to massive demonstrations and road blocks against a perceived attempt at privatizing the company. Subsequently, a commission which had been appointed to define an alternative plan failed to agree on any issues.

The main features of the telecommunications sector in Costa Rica can be summarized as follows:

(i) high level of telephone services coverage, although important differences remain between urban and rural areas;

(ii) inadequate quality in the provision of services;

(iii) highest levels of connectivity and Internet service diffusion among Latin American countries; however, there is risk of a digital divide marginalizing low-income families and those living in rural areas;

(iv) doubts regarding the sustainability of the existing low cost of communications services, due to the cross-subsidies given to most users, which should disappear with the implementation of CAFTA.

Moreover, a major priority and challenge for Costa Rica is the liberalization of its telecommunications sector in the near future. It has become more crucial since CAFTA was finally signed in May 2004, as under this agreement Costa Rica has agreed to open up its infrastructure sectors to private participation, both domestic and foreign.

TELECOMMUNICATIONS

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5.2.1. ANALYSIS OF THE TECHNICAL DIMENSIONS OF THE SECTOR To assess the technical dimension of the telecommunications sector, the first important factor to analyze is overall access throughout the country. As shown in Figure 5.1, during the period 1998-2002 service coverage in Costa Rica increased continuously, reaching in 2002 an overall rate of 36.15 telephone subscribers per 100 inhabitants, including both fixed and cellular subscribers113. The increase within that period was notable: the growth rate of “telephone subscribers per 100 inhabitants” was almost 63%, an annual rate of 13%. This figure, however, appears quite modest compared with the overall coverage shown in the other countries in the region or among the higher middle-income countries. In fact, in 2002 Costa Rica’s coverage was in line with the regional average but below the benchmark group, which showed rates of 36.51 and 39.57 respectively.

Figure 5.1 – Telephone Service Coverage

0

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35

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1998 1999 2000 2001 2002

Tel s

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Costa Rica Regional average Higher middle-income average

Source: World Telecommunication Indicators 2004 - ITU

This performance, however, is due to the combined analysis of both fixed and mobile service coverage, which in fact showed highly dissimilar trends. Access to fixed telecom services is very high in Costa Rica, among the highest in Central and Latin America; however, mobile service access still lags behind fixed-wire telecommunications, both in the country as well as in the comparison groups. Both services are provided by the same operator.

On the one hand, according to ITU estimates in 2002, the number of main telephone lines per 100 inhabitants was nearly 25, a growth rate of 30% from 1998. This figure is above both the regional average and that of the countries with similar levels of development, which demonstrated values of 16.5 and nearly 21 respectively114.

On the other hand, although mobile diffusion has shown rapid growth in the same period, progressing from fewer than 3 subscribers per 100 inhabitants in 1998 to nearly 11 in 2002 - a

113 Source: ITU, The World Telecommunication Indicators 2004. 114 Note that ARESEP estimates are quite higher than ones presented by ITU. Fixed density reached 27% by end of

2002, while mobile density reached 18% by 2003. By 2004, moreover, quoted telephone access was 27.8% and 24.4% for mobile telephone.


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threefold increase - it remains lower than the positive increasing trend indicated by the benchmark groups for the entire period considered, as shown in Figure 5.2. In fact, the number of cellular subscribers had reached nearly 18.6 per 100 inhabitants in 2002 in the higher middle-income countries, and more than 20 in the regional group, an increase from 1998 of more than three and four times respectively115.

Figure 5.2 – Fixed and Mobile Diffusion

0

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1998 1999 2000 2001 2002

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However, in spite of Costa Rica’s fast growth from 2001, mobile telephone coverage has not yet overtaken or even equaled fixed coverage, as has occurred in other Latin American countries or in those with similar levels of development. This gap is especially evident when considering mobile density in the group of lower-income countries, where it is generally higher than fixed density: for example, in Jamaica mobile diffusion reaches nearly half of all inhabitants116.

It should be noted that coverage of both fixed and mobile lines is quite high throughout Costa Rica, although important differences remain between urban and rural areas. According to ARESEP, in 2002 76% of urban households and 42% of rural households had fixed access; these levels are generally higher than those of most other countries in the region. However, 28% of fixed lines and 24% of mobile lines are clustered in rural towns, suggesting that there is still a large portion of the population (around 23%117) without access to telephone services, either fixed or mobile.

This consideration is confirmed by the analysis of unmet demand, which has been quite high in recent years, in spite of a decreasing trend from 1998 to 2002. According to an ITU analysis, unmet demand118 peaked in 1998 with more than 5% and then gradually decreased to 2.04% in 2001 and to 1.5% in 2002, remaining slightly above the average of the higher middle-income countries for the 1998-2001 period119, which in 2001 was a little less than 1.3% (see Figure 5.3).

115 Note that governmental data sources (ARESEP, ICE) quoted mobile density as 18% for 2003. 116 Source: ITU (World Telecommunication Indicators 2004). 117 Estimated considering that 58% of population in rural areas has no access and that nearly 40% of the population

lived in those areas in 2002. 118 Calculated as ratio of “Waiting list from main lines” and the value “Waiting list for main lines” + “Main telephone

lines in operation”. 119 Note that ARESEP estimations differ significantly from those presented so far, as indicated in the Statistical

Annex.

TELECOMMUNICATIONS

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Figure 5.3 – Unmet Demand Evolution

0%

1%

2%

3%

4%

5%

6%

1998 1999 2000 2001 2002

Costa Rica Higher middle-income average

Source: Ernst & Young Italy and Cohen&Co. elaborations on ITU data (World Telecommunication Indicators 2004)

* Data for 2002 for higher-middle income countries not available

This figure reveals an important need to improve access coverage, especially in fixed telephony, to face growing demand. This aspect, moreover, is clearly stated in the ICE strategic plan for 2004120, which has as one of its objectives the installation of more than 134,000 new fixed lines and 22 new telephone centrals, mostly digitized, by the end of 2004. In fact, when considering the diffusion of public phone points throughout the country, the following factors need to be stressed:

(i) there are more than 15,000 public pay phones scattered throughout Costa Rica, suitable for local and international calls; most of them are operated using prepaid phone cards; and

(ii) there is a low density of public telephony in Costa Rica, equal to 5.8 public lines per 1,000 inhabitants.

Because of low performance levels, ICE decided in 2004 to install 33 mainlines per 100 inhabitants, and more than 21,000 new public phones across the country121.

Finally, paging services are thriving in Costa Rica, mainly due to the excess demand for cellular services. In fact, there are currently 10 paging companies in Costa Rica, the largest of which are Tele Mensajes, Radiomensajes, Ticopager, and Skytel122.

However, anecdotal evidence suggests that mobile services lag behind significantly, especially in relation to GSM technology; this situation will probably worsen over time given the existing difficulties in carrying out proposed investment decisions, as will be explained below.

Regarding Internet access (as well as broadband diffusion), Costa Rica seems to be at the forefront of Central American countries. In fact, according to ITU figures, the number of Internet users per 100 inhabitants consistently increased during the period between 1998 and

120 Source: “Sector Telecomunicaciones”, in “Memoria institucional 2004”, ICE group. 121 Ibidem. 122 Note that this segment is liberalized.


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2002, reaching nearly 19.3, a growth rate of more than 100% in the last year123. Thus Internet diffusion in Costa Rica is appreciably higher than in other countries with similar levels of development and in the regional group; the indicators for those groups reached, respectively, 12.15 and 11.04 in the same year. Furthermore, as suggested in Figure 5.4, Internet diffusion has also shown a growth rate superior to that of the two comparison groups from 1998 to 2002.

Figure 5.4 – Internet Users Per 100 Inhabitants

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1998 1999 2000 2001 2002

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Costa Rica Higher middle-income Regional average


In addition, according to ICE data, more than 2,000 km of optical fiber cables have been installed across the national territory to date, which should streamline and improve the information technology infrastructure and thus contribute to increasing the competitiveness of the business environment in the country124.

At this respect, it is also important to mention the opportunity represented by the initiative of constituting the “Red Regional de Fibra Optica”. This initiative involves the construction of the necessary infrastructure (for data transmission, computer services, telephony) to connect the Central American countries and the southern and south-eastern Mexico with each other and the rest of the world. This network should connect the capitals of the Central American countries, extending over about 4.000 kilometres. This interconnection initiative, which forms part of the aforementioned Plan Puebla-Panamá, will allow the transfer of information at a speed of 2.5 gigabytes per second, becoming a fundamental means of breaching the digital divide in these countries and of providing basic services for human development in the digital age.

All these observations on future trends seem to be supported by the levels of ownership of personal computers among the Costa Rican population. In 2002, in fact, the number of personal computers peaked at 197 per 1,000 inhabitants in the country, more than double the figure for 1998125. This value, moreover, is also higher than that achieved in countries with similar levels

123 Note that ARESEP and ICE estimations differ significantly from those presented. According to ARESEP figures,

for instance, in 2000 Costa Rica had 8.1 Internet users per 100 inhabitants while the average in Central America was 4.4, whereas according to ITU figures these values were 5.67 and 3.75 in the same year.

124 Source: “Sector Telecomunicaciones”, in “Memoria institucional 2004”, ICE group. 125 Source: World Development Indicators 2004 – The World Bank.

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of development (nearly 109 per 1,000 inhabitants); and it is also more than double the regional average (approximately 75 per 1,000 inhabitants) in 2002.

Furthermore, it is important to highlight that, according to RACSA, there are currently almost 500 firms and more than 65,000 residents with Internet access; in addition, more than 600,000 people have access from their place of study or work. This coverage, especially from the educational side, differs consistently by according to zone of residence (rural or urban)126, thus increasing the digital divide as often observed in most developed countries.

Although Costa Rica has one of the best positions among Latin American countries in relation to connectivity and Internet services, as recognized by some significant international agencies127, there is a significant risk of a digital divide to the detriment of rural or low-income families who do not own a computer, as will be analyzed further.

As for affordability in the sector, it is important to highlight that in Costa Rica the costs of almost every type of communications service are low. For example, in 2002:

(i) the monthly fixed line fee was below US$ 5128;

(ii) the cost of a local phone call was US$ 0.03 per 3 minutes, almost in line with the figure reported for the benchmark group and lower than the regional average (0.03 and 0.05, respectively)129; it is also among the lowest rates in the world;

(iii) the cost of a cellular local call was below US$ 0.20 per 3 off-peak minutes, lower than the rates of the higher middle-income countries group and the regional group, which were US$0.31 and 0.36130, respectively; and

(iv) rates for Internet dial-up connections were US$ 15 for flat services, while schools and government entities paid US$ 10 a month due to cross-subsidies131.

With regard to Internet connection, by the end of 2004 ICE was not yet able to provide broadband Internet over ADSL, although it has planned to introduce it for US$ 21 a month.

It is important to highlight that this tariff structure is based on the existence of cross-subsidies for almost all users, both commercial and residential. This will become an important and sensitive issue in the near future as privatization of the sector is due to take place with the implementation of CAFTA. In fact, previous attempts at privatizing the sector and at eliminating social subsidies completely failed due to a large social demonstration affecting the entire country in March and April 2000.

In this respect, however, it should be noted that the low level of penetration of telephone services in poorer income households (below 10%132) is mostly due to technical difficulties rather than issues of affordability, according to ICE’s analysis. However, there is no clear reference to these key technical issues in ICE’s “Telecommunication Strategic Plan 2003-2005”, which documents several projects aiming to promote and develop advanced services throughout

126 See: Esquivel, Ronald y Ramos, Pilar: “Educación y Conocimiento en Costa Rica: desafíos para avanzar hacia

una política de Estado”, 2002. 127 ITU places Costa Rica second regarding connectivity and Internet penetration in the Latin American region; while

UNCTAD puts Costa Rica in the 49th place in relation to the Network Readiness Index (NRI) and in fifth position in Latin America.

128 Source: ITU 2004, original data in thousands of colones. 129 Source: World Development Indicators 2004 – The World Bank; average quoted is calculated with a limited

sample; it could be misestimated. 130 Source: ITU yearbook of Statistics 2003 and World Development Indicators 2004; see Statistical Annex for

details. – The World Bank; average quoted is calculated with a limited sample; it could be misestimated. 131 Source: Data taken from a direct interview with officers from the Costa Rica regulatory body. 132 Source: ICE.


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the country, especially in the city of San José and in areas characterized by high levels of tourism and high business density.133.

In spite of the positive performance assessed so far, the quality of telephone services in Costa Rica is not very high. Quality indicators, in fact, are rather low in spite of improvements in recent years. In particular, the number of faults per 100 mainlines have decreased slightly (around -7%) from 1998 to 2002134, but this figure remains higher than the average calculated for countries with similar levels of development in the region. In fact, in 2002 there was an average of 3.18 faults per 100 mainlines in the higher middle-income countries135. It seems clear that there is room for continuous improvement given the increasing demand for services and the overall level of development of the country.

However, it should be noted that Costa Rica’s regulatory framework currently lacks a defined set of meaningful quality indicators to be fulfilled by telecom providers. ARESEP is currently working on this issue, which will put additional stress on investment and financing requirements.

In conclusion, the Costa Rican telecommunications system demonstrates some discordant characteristics which are nonetheless interconnected and that could affect its future development. These include:

(i) high coverage of telephone services, although there are still major differences between urban and rural areas;

(ii) inadequate service quality;

(iii) highest levels of connectivity and Internet service diffusion among Latin American countries; but concomitant risk of digital divide, to the detriment of low-income groups and those living in rural areas; and

(iv) unlikely sustainability of the existing low costs of communications services, due to cross-subsidies for almost all users, which should disappear with the implementation of CAFTA.

133 In particular, as regards projects such as “San José Ciudad Optica”,“Zonas de Empresas de Alta Tecnología”,

“Soluciones Turísiticas”. 134 Source: ARESEP; while average is calculated with data from WDI. 135 Averages calculated with limited sample, see Statistical Annex for details.

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5.2.2. ECONOMIC EFFICIENCY AND PRIVATE SECTOR FINANCING ICE, as mentioned previously, is the largest company in the country and the only provider of telecommunications services. In addition, in September 2003, it was one of the 31 largest companies in Central America; its total assets136 amount to about US$ 4 billion, of which telecommunications services represent more than 30%. Moreover, ICE telecom sales represented around 2.3% of Costa Rican GDP in 2002, a value indicative of the huge importance the company has in the overall national economic structure.

Given the predominance of ICE, an analysis of its operational margin evolution is equivalent to considering the overall ICT sector revenue and financial performance.

As suggested in Figure 5.5, the company has shown a variable trend due to the different paths of evolution of revenues and expenses. In fact, revenues increased in 2000 and 2001 (by 70% and 12% respectively), then decreased in 2002 (-18%); expenses, on the contrary, decreased in 2000, rose in 2001, and then decreased again in 2002.

Figure 5.5 – Evolution of ICE Revenues and Expenses

020406080

100120140160180200

1997 1998 1999 2000 2001 2002

Mili

ons o

f Col

ons

Revenues Expenses


In addition, considering average worker productivity as another efficiency indicator, it seems high regarding the number of fixed lines per employee set ; it increased by more than 35% in the period 1998-2002, peaking in 2002 at 217.3 fixed lines per employee (see Table 5.1).

Table 5.1 – Evolution of Worker Productivity – ICE

1998 1999 2000 2001 2002

Fixed lines per employee 160.5 172.7 184.5 205.4 217.3


136 Including electricity and telecom assets.


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As analyzed so far, ICE and its subsidiary RACSA are responsible for most large investment decisions in the sector. During 1997 and 2001, for instance, overall telecom investments stabilized at about 1% of GDP, as shown in Figure 5.6, reaching nearly US$152 million in 2001, after a slight decrease in 2000 when dipped to 0.85% of GDP.

Figure 5.6 – Investments in Telecommunications (% of GDP)

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1997 1998 1999 2000 2001

Perc

enta

ge o

f GD

P

Source: Central Bank of Costa Rica

More recently, between 2001 and 2003, ICE carried out a number of projects regarding the expansion of fixed telephony, mobile telephony and Internet services, thus significantly increasing the total amount of investments. In particular, in relation to mobile telephony, ICE decided to acquire new GSM technology and to enlarge the existing equipment working on TDMA technology. These decisions, however, have led to political controversy regarding appropriateness and related corruption issues.

Also in the past decade, however, given the budgetary and fiscal restraints of the Costa Rican government, ICE’s investment plans had to be adjusted downwards by the Ministry of Finance or delayed over time in order to attain fiscal targets. In fact, one of the greater concerns in Costa Rica is its continuous fiscal deficit, which stands at around 5% of GDP since 1999. As a result, government debt has shown a continuous increasing trend reaching 54.5% of GDP in 2003, putting serious pressure to decrease overall government expenditures.

Reforms and developments in this field could have a serious impact on the performance of ICE in future years, as an important percentage of the national budget has been allocated for investment in the telecommunications sector in recent years.

This is also relevant considering the aforementioned country development program (PND). This plan, in fact, would allocate nearly US$ 1,716 million to the telecommunication sector, a little less than 30% of the total financial resources provided (nearly US$ 6,036 million). In addition, this plan still lacks a clear and direct provision for the involvement of the private sector.

The data analyzed thus far confirm the full fiscal dependence of the sector, given ICE’s monopoly over services and the very limited role of private investors in the sector, especially in more “traditional” services.

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Currently, in fact, only four private companies, also associated with RACSA, provide cable TV, while in the Internet sector private participation is more significant, with 14 companies involved.

In conclusion, in order to guarantee constant or possibly greater efficiency in the sector, it is necessary to stress the importance of defining a liberalization plan that would be sustainable and shared by public opinion in the near future.

5.2.3. REGULATORY FRAMEWORK AND INSTITUTIONAL DEVELOPMENT In Costa Rica, a telecommunications law does not exist; instead, the sector is governed by a number of laws and regulations. Law 3226/1963 assigned to ICE (the state-owned electricity company) additional responsibilities for the operation, improvement and extension of telephonic, telegraphic, radiographic and radiotelephonic communications in Costa Rica. With this objective, ICE was endowed with the currently existing fixed telephonic system, formerly in private possession. As such, telecommunications services were subject to regulation by SEN, which became ARESEP in 1997 by Law 7593, as detailed previously.

ARESEP controls, supervises and verifies the use of all services authorized by Law, such as all the telecommunications services provided by ICE (see Law 3226/1963, Article 8). According to ARESEP, the essential element of tariff regulation is service cost (of a model firm when applicable, otherwise considering the specific company situation). Prices should only take into consideration the necessary costs for providing the service, including competitive retribution allowing for expansion of the activity to satisfy present and future user needs.

Regarding the treatment of investments, prices are adjusted according to an estimation of the value of investments for the following year for which prices are set. ARESEP sets price caps for international telecommunications, giving ICE the possibility of responding to irregular competition faced from call-back companies, by-pass, etc. Finally, ARESEP has the right to close companies and remove equipment that provide services without authorization.

It should be noted that the Costa Rican government attempted, unsuccessfully, to liberalize the telecom market several times; its last attempt was in 2000. In late 1999, the Legislative Assembly approved the outline of a law that would have liberalized Costa Rica’s telecommunications industry, dividing ICE into two separate companies selling services (ICE tel) and power (ICE lec).

The second stage of the process would have been the liberalization of Costa Rica’s local and long-distance phone markets. However, these efforts failed in March 2000, due to massive demonstrations and road blocks against a perceived attempt at privatizing the company. Moreover, in April 2000 the Constitutional Chamber of Costa Rica’s Supreme Court ruled the initiative unconstitutional, thus putting an end to the process. A commission was subsequently appointed to define an alternative plan but was unable to agree on any issues within the time allowed.

Thus, ICE continues to operate as a monopolist in relation to all telecommunications services, with few exceptions; partial competition exists in CATV and paging. For the latter, as mentioned before, there are 10 paging companies currently operating in Costa Rica, the largest of which are Tele Mensajes, Radiomensajes, Ticopager, and Skytel.

Moreover, decisions on access and interconnections remain at the discretion of ICE, although they are ultimately regulated by ARESEP. The company also sets tariffs, with the authorization of ARESEP.


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It is important to note that, contrary to the international wave of deregulation and privatization of the telecommunications sector throughout Latin America (e.g. in Argentina, Brazil and Chile), the sector remains regulated and without formal competition in Costa Rica.

A pioneer in such reforms in Latin America was Chile, which initiated reforms in the 1970s and 1980s, by creating a regulatory agency (in 1977), a regulatory framework (in 1982, defining objective and non-discriminatory access, continuity and quality criteria to grant concessions) and privatizing the fixed-link and long-distance companies (CTC and Entel, respectively, between 1985 and 1988). The regulatory framework defined regulated charges for fixed telephony and access (the latter since 1994).

The evolution of the sector involved the entry of mobile telephony operators, multi-carriers and cable TV companies in telephony and broadband. Currently, Chile is facing some challenges with respect to the regulation model (specifically, the “empresa modelo” is based on a real enterprise and there is a lack of sanctions for failure to deliver relevant information), problems also exist regarding the allocation of common charges and asymmetries in access charges137.

137 For more detail, see Arellano (2004), Evolución de los Servicios Públicos en Chile”.

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5.3. POLICY OPTIONS AND IMPLICATIONS The monopoly of the telecommunications sector and the fiscal difficulties faced by the Costa Rican government raise key questions about the need to expand the services over time. In fact, some basic characteristics of the sector must be noted:

(i) the telephone service (fixed, mobile and advanced) coverage is high, although important differences still remain between urban and rural areas, and there could be room for future improvements in the mobile sector; and

(ii) prices are low, thanks to the existence of cross-subsidies, but the counterpart is that the service quality level is too low, considering the development and growing demand in the country.

All these features show that important investments are needed in the sector, but current fiscal constraints are limiting future public intervention possibilities.

Additionally, within the framework of the CAFTA negotiations with the U.S. in the second half of 2004, Costa Rica formulated specific commitments to gradually open its telecommunications market in three key areas: wireless services, long distance and data transmission markets. Costa Rica has also committed itself to the establishment of a regulatory framework to promote effective access to the market.

Another main issue to stress is the lack of transparency in the sector. During recent years, ICE investments have been tarnished by various cases of corruption in the telecommunications market, regarding acquisitions of mobile-service equipment from a large telecom company. In this context, there is a important need for greater transparency, indispensable also to encourage the opening up of the sector.

Given the low level of prices for services, however, there are serious concerns that incoming operators will have to increase prices in order to improve service quality and coverage. This could have serious implications for affordability in the sector, especially considering the existing low levels of telephone service penetration in low income households and the limited Internet diffusion outside large cities or in rural areas. In particular, this latter issue could become very serious, given the real risk of a significant digital divide to the detriment of low-income families and those living in rural areas. This risk could also lead an increase of the gaps in the infrastructure necessary for developing the information society in the near future.


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5.4. PRIORITIES FOR FUTURE REFORMS The major concern facing the Costa Rican telecommunication sector is that it is still a state-owned monopoly and, moreover, that recent investment decisions have put pressure on the structure of the sector. Thus, the main priority option for future policy seems clearly to be the liberalization of the sector. Opening up to competition, in fact, can contribute to improving the quality of the services provided and their efficiency through a revision of the tariff setting system. Although this option would imply a short-term increase in prices, this side-effect would be mitigated and controlled by the competition mechanism in the medium term. This would have several important consequences:

(i) The definition of a clear legal framework for the sector specifying types of services, the responsibilities of the participants and other regulatory criteria, improving also the regulatory governance rules of ARESEP. The modernization of the sector, in fact, must entail leveling the playing field for all operators and services and defining universal service obligations;

(ii) Monitoring and control of ICE’s tariff structure and definition through ARESEP supervision in order to reduce the negative side-effects of current budgetary restraints. Fiscal pressures, in fact, could restrict telecom investments and reduce the speed of penetration of the sector; ICE could respond by increasing prices for services in order to maintain margins and self-finance future investments. Such decisions could directly effect the overall affordability of the sector;

(iii) Introduction of economic signals for spectrum use and provision of a competitive mechanism for spectrum allocation; ICE is not currently required to pay for spectrum use;

(iv) Definition of quality indicators by the regulatory agency, in order to increase pressure for improvements in service, defining appropriate incentives to be fulfilled by the operator; and

(v) Continuous monitoring of the real capacity to meet growing domestic demand, especially in the mobile market; in particular, the existing backlog in mobile services and the time required to respond to customers need to be monitored in order to guarantee adequate levels of efficiency in the telecom sector as a whole.

Considering these priorities, along with the requirements for the future implementation of CAFTA, it is important to stress that a policy to attract private investment must be designed and implemented to avoid the erosion of Costa Rica’s comparative advantage in ICT infrastructure due to a shortage of investment.

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6. REGULATION: THE WAY FORWARD Costa Rica faces some important challenges with regard to overall infrastructure quality provision, which will require attention in the coming years. Public companies, which are responsible for maintaining service quality and for investing in new projects, have faced (and are still facing) tight financial constraints, and are consequently incapable of improving coverage in areas such as water and sanitation, ports and telecommunications. Maintenance and service quality have therefore deteriorated. There is an urgent need to improve the financial situation of service providers and to attract private investments in all infrastructure areas so as to improve coverage and service quality, which have not kept pace with growing needs.

Privatizations were blocked in the past due to unfavorable political circumstances; therefore, efforts are necessary to increase support for stronger private sector participation through contracts and concessions in order to improve investment in infrastructure. The uncertainty surrounding the regulation of private sector participation has reduced incentives for private investment. This issue requires immediate attention to enable the raising of funds for roads, ports, airports, electricity, water and sanitation and telecommunications projects. Moreover, the CAFTA agreement signed by Costa Rica is a positive sign that the authorities are willing to open up to private participation and to create a stronger competitive environment.

Some specific reforms are necessary at the sector level in order to complement the aforementioned cross-sector challenges.

In the case of the road system, one of the main concerns relates to the legal framework for concessions (also including the discussions on the new Concession Law). The rules for awarding contracts, in fact, are wide-ranging, and seek to pursue several goals at the same time (present value of revenues for concession, tariffs, duration of the contract, amount of the subsidies required to the government, payments offered to the state by the company, minimum revenues for the state, etc.). A simplification of the selection system would help to encourage more efficient investments. Other Latin American countries, such as Argentina and Chile, have also faced problems in road concessions, as well as in other infrastructure areas (e.g. water). These experiences should serve as a basis for the development of improved new contracts, fostering efficiency, allocating market and regulatory risks appropriately, avoiding the renegotiation of concession contracts and so on. Engel, Fischer and Galetovic’s paper (1997), for instance, provides several examples of contractual problems and renegotiations in European and Latin American countries.138

The existing fragmentation of responsibilities between national and local authorities in the network as a whole should be decreased. The options of “decreased fragmentation or coordinated decentralization” should be left open.

In the port sector, one of the main issues in the regulatory framework is the lack of uniformity in the tariff system applied to port services, specifically with respect to the tariff schedule, and the currency and services covered and paid. Therefore, clear and uniform rules must be defined in order to foster efficient service provision.

In railway transportation, it is important to note that restarting railway activity could provide Costa Rica with an excellent alternative transportation service, avoiding the pollution generated by automobiles and the problems associated with the rapid deterioration of roads.

138 Engel, E., R. Fischer and A. Galetovic (1997), “Revenue-Based Auctions and Unbundling Infrastructure

Franchises”, Document IFM-112, Inter-American Development Bank.


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In conclusion, greater efforts are needed to generate support for stronger private participation, especially in the infrastructure of roads, airports and ports through concessions for public works and services.

With regard to the energy sector, the main priorities relate to the electricity sub-sector, which presents several regulatory issues:

(i) the conditions are partially set for the development of a fully fledged electricity market, as there is partial unbundling in generation and distribution; however, a system operator coordinating the market is still lacking;

(ii) in association with the previous point, ICE is vertically integrated, fully or partially covering all stages; hence, the vertical unbundling of the company may help to create a more competitive environment;

(iii) energy supply is too focused on hydro power, mainly due to the lack of domestic hydrocarbons; however, Costa Rica imports fuels which can be used to generate electricity, so fostering investments in fuel-fired plants may increase the stability of the supply base (which is currently about 30%); and

(iv) the mode of contracts should be revised, moving toward the development of a contract market rather than utilizing PPA contracts139.

The latter point is most important, as ICE currently screens for generation projects, which may bias the selection according to its own objectives rather than issues of efficiency. Transferring the selection of projects to the regulatory agency may eliminate this problem.

In the water and sanitation sector, the modernization of the system could constitute the key factor in improving variables such as coverage, quality and environmental sustainability. One critical issue in this respect is the development of clear regulations on private participation for the provision of drinkable water. Currently, one of the minimum requirements for private provision is the concession authorizing provision; this is not being fulfilled due to the lack of norms specifying who is competent to provide the service and under which circumstances. There is a lack of clarity regarding who grants concessions, the rights and obligations of concessionaires, whether societies of users can render the service or not, and so on. Complementing legal harmonization, the rate-setting mechanism must also be revised to foster private sector investment: the current mechanism is based on rate-of-return and does not provide incentives for productive efficiency. This is important as the concession constitutes the provider’s commitment with the state, and identifies the provider’s rights and responsibilities.

In this sector, AyA has a very broad legal mandate combining provision, regulation and policymaking; this gives it the difficult twin role of regulating and providing service. Moreover, there is some overlap with ARESEP (regarding norms related to service provision) and MINAE (planning and administration of water throughout the territory); revision and unification of the regulatory roles may therefore be required. Furthermore, there are several agencies with incumbency in the sector, giving rise to a need for a broad revision and unification of regulatory tasks. Currently, a provider is subject to the Department of Water (regarding the use of water), ARESEP (regarding tariffs and supervision of the service), the Ministry of Health (regarding water for human consumption) and AyA (regarding technical controls).

In the telecommunications sector, Costa Rica must decide either to continue with its current regulated system or to open it up to competition. In the first case, the main issues are associated with the capacity of ARESEP to deal with the problems in the sector (given that it is a multi-sector regulatory agency), control of the telecommunication system (irregular competition) and 139 In this respect, it is necessary to recall the experience of East Asian countries during the crisis. PPA contracts were

terminated, renegotiated or continued, and the government faced costs both for fulfilling the conditions of the contracts and for breaching them.

REGULATION: THE WAY FORWARD

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the radioelectric spectrum. In the second case, given that the sector is governed by several laws and regulations (as in the case of water and sanitation), a regulatory framework must be defined to foster competition in telecommunications, taking into account the possibility of interconnection, investments in technological progress and the possibility of universal service coverage. However, as analyzed in the previous sections, the second option would seem to be the inevitable choice since the signing of CAFTA in May 2004. With this agreement, Costa Rica accepted to gradually open up this key sector to private participation, both domestic and foreign.

In an assessment of the Costa Rican regulatory and legal framework, ARESEP deserves a separate analysis. The multi-sector regulatory practice has generally been set aside in both developed and developing countries. Covering a wide and disperse range of sectors may be a challenging task, especially if the economy is in the process of moving toward a more competitive environment, as envisaged by the signing of CAFTA. As priority was given to the telecommunications area with respect to liberalization, ARESEP’s role (basically consisting of tariff review) needs to be revised and reinvigorated. The creation of another regulatory entity specific to the sector is another possibility, given the more complex environment implied by the liberalization of competition. An assessment of economies with a multi-sector agency as opposed to a specialized agency could be useful in this respect.

Furthermore, the sector urgently needs a new design for legislation, regulation and operation, compatible with the new model. This is especially important with regard to the role of the Instituto Costarricense de Electricidad (ICE), the public company in charge of (nearly) all the electricity and telecommunications services in the country.

Table 6.1 summarizes the main challenges regarding regulation in Costa Rica. Short-term and medium-term perspectives are presented so as to help identify the issues to be tackled in short-term future development programs (within the next two years) and those which require a longer-term perspective (up to five years).


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Table 6.1 – Regulation: The Way Forward

SECTOR WAY FORWARD

Sub-sector Short Term (0-2 years) Medium Term (up to 5 years)

Roads * Simplify rules for granting road concessions. -

Ports * Define clear and uniform regulations to

foster efficiency in port service provision, especially regarding the tariffs system.

-

Airports * Generate support for private participation. -

TRANSPORT

Railways * Restart railway activity. * Generate support for private participation. -

Oil - - Natural Gas - -

ENERGY Electricity

* Continue with the development of a fully fledged electricity market through: - unbundling in generation and

transmission, maybe through vertical unbundling of ICE;

- creation of an independent system operator.

* Give responsibility of screening process of generation projects to regulatory agency, currently in the hands of the ICE.

* Take measures to diversify power supply (foster investment in fuel power plants as an alternative to hydro power).

* Redefine role of ICE, through design of new legislation.

WATER & SANITATION

* Clarify regulations on private participation in provision of drinkable water.

* Revise the rate setting mechanism in the concession- granting process for drinkable water provision.

* Revise regulatory tasks of the different agencies involved in the sector, in order to minimize the overlapping of functions and to unify activities under one agency.

* Elaborate a plan for modernization of the water and sanitation service.

TELECOMMUNICATIONS

* Make an assessment of the desirability of following a regulated system as opposed to opening up the sector to competition, subject to CAFTA.

* Revise ARESEP’s role on the sector, or create a new separate agency to attend to sector-specific issues to be faced in the process of liberalization.

* Redefine role of ICE, through design of new legislation

ESTIMATES OF INVESTMENT NEEDS

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7. ESTIMATES OF INVESTMENT NEEDS The aim of this section is to provide some indicative estimates of infrastructure investment needs in Costa Rica for the time period 2003-2010. We rely on a fairly simple procedure. First, we estimate the underlying relationship between infrastructural investment and a set of socio-economic variables for a sample of 40 countries. Second, we use these estimates to assess Costa Rica’s infrastructural gap in 2002. Third, we project the country’s investment needs over the full projection period, from 2003 and 2010. For this latter step, we rely also on projected values of the determinants of infrastructures over the 2003-2010 period. Finally, we convert projected physical investment needs into money terms.

We consider four different types of infrastructures: electricity generating capacity, roads, railroads and telephone mainlines. In Table 7.1, we list the sources of all those variables as well as those of the socio-economic variables, which are assumed to determine the demand for infrastructure stock.

Table 7.1 – Description of Variables

Variable Notation Source

Electricity generating capacity (000s of Kw) Energy Calderon and Servén (2004)

Main telephone lines in operation Tcom Calderon and Servén (2004)

Paved Road Length (in km) Road Calderon and Servén (2004)

Railroad route length (in km) Rail Calderon and Servén (2004)

Agriculture, value added (% of the GDP) Agr WDI

Manufacturing, value added (% of the GDP) Man WDI

Population density (people/sq. Km) PopDen WDI

Urban Population (% total) Urb WDI

GDP per capita in constant 1995 US$ GDP WDI

The first step is the estimation of a statistical relation linking infrastructure with the explanatory variables listed in Table 7.1. Table 7.2 reports the econometric estimates. We rely throughout on of GMM-IV procedure. Our sample spans from 1960 to 2001 and covers 40 countries, including East-Asian, industrialized and less-developed countries. The choice of the GMM estimator was dictated by the need to control for possible endogeneity problems. Dependent variables are defined as the ratio between a given considered infrastructure stock and total population, in order to avoid problems of non-stationarity in time series.


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Table 7.2 – Estimated Models for Infrastructure Predictions

Dep. Var.: RAIL ROAD ENERGY TCOM

Constant 0.000571 (12,619)***

0.018174 (16,007) ***

-0.000282 (-5,144)***

-3.038919 (-6,140) ***

Lagged dep. Var. 0.000312 (8,657) **

GDPCAP -8.86E-09 (-3,693)***

9.38E-07 (4,035) ***

1.80E-07 (11,647)***

2.82E-05 (27,264) ***

MAN 5.70E-06 (7.177) ***

3.11E-06 (4,505) ***

1.47E-06 (0,152) ***

-0.00236 (-7,820) ***

AGR 1.00E-06 (1,357)

-8.54E-07 (-1,236)

5.16E-06 (4,569) ***

-0.000423 (-1,352)

POPDEN 2.16E-06 (9,082)*** -0.000246

(-3,163) ***

POPURB -6.37 (-11,639) ***

2.38E-06 (3,197) ***

9.70E-06 (14,802) ***

0.001499 (4,535) ***

TIME 0.001509 (5,854) ***

R2 0.985 0.976 0.983 0.976 N. of obs. 1037 1031 1018 1064

Notes: Estimates are obtained with GMM-IV procedure with fixed effect, for which instruments are all lagged variables.

*** significant at 99%; ** significant at 95%; * significant at 90%

To forecast infrastructural investment needs for the period 2003-2010, we must project the values of the regressors in Table 7.2. Fay and Yepes (2003) rely on UN projections for population and on the Global Economic Prospects by the World Bank for the other variables. Unfortunately, those figures are only available at regional level. We therefore follow Loayza et al. (2004) and rely on the dynamic simulation of simple stochastic processes (ARMA). Results are summarized in Table 7.3.

Table 7.3 – Projected Values

GDP Population Density Man Agr Urb

2003 3,926.80 78.86 22.87 9.76 60.62 2004 3,978.85 80.48 22.88 9.26 61.24 2005 4,030.98 82.12 22.89 8.76 61.86 2006 4,083.20 83.78 22.90 8.25 62.48 2007 4,135.49 85.46 22.92 7.75 63.10 2008 4,187.86 87.15 22.93 7.24 63.72 2009 4,24.,30 88.87 22.94 6.74 64.35 2010 4,292.81 90.60 22.95 6.23 64.97

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For the percentage of agricultural value added, we simply assume a constant value over the projection period.

We can now project future investment needs in physical terms. To assess the required amount of spending, we use the following unit costs (Fay and Yepes, 2003):

(i) $1,900 per kilowatt of generating capacity, including associated network cost;

(ii) $410,000 per kilometre of paved road;

(iii) $900,000 per kilometre of rail; and

(iv) $400 per telephone mainline.

Table 7.4 – Infrastructure Investment Needs (% of GDP)

Costa Rica

Average (2004-2010) To fill the gap (2003) LAC median EAP median

Energy 0.56 0.48 0.98 1.24

Rail 0.01 0.11 0.06 0.06

Road 0.48 0.48 0.89 0.50

Tcom 0.41 0.43 0.41 0.85

Total 1.46 1.50 2.42 3.33

In Table 7.4 we distinguish between the initial level of investment, needed to bring Costa Rica’s infrastructure stock in line with its socio-economic characteristics, and subsequent investment spending, required to keep the pace with the changes in GDP and the other determinants of infrastructural needs. According to our estimates, Costa Rica should invest about 1.5% of its GDP in 2003 simply to bring the country’s infrastructural stock in line with our estimated benchmark. Alternatively, we could have assumed that the large initial investment should be spread over the full projection period. From 2004 onward, further investment in infrastructure is mainly driven by the demand factors in regressions in Table 7.3 and is therefore designed so as to keep the infrastructure supply and demand in equilibrium. However, our results differ from the current path of investment in the telecommunications sector (see Figure 5.6), though this difference may be due to the fact that data reported in Chapter 5 consider a number of projects carried out by ICE to expand mobile phone lines and Internet services which are not considered in our dependent variable TCOM (see Table 7.1),

In addition, results in Table 7.4 indicate that Costa Rica is pursuing a virtuous path of infrastructure investment as the average estimate and the investment needed to fill the gap are almost equal.


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8. CONCLUDING REMARKS Costa Rica is a higher middle-income country, neither very large nor populous, but certainly one of the most stable democracies in Latin America. Over the last two decades the macroeconomic performance of the country has been significantly high, and some important results have been achieved in the Millennium Development Goals’ strategic route, especially in relation to education, health and quality of life. However, recent macroeconomic evolution at the international level and current fiscal restraints in the domestic context have forced the central government to reduce investment flows, especially in some infrastructure sectors, which could affect the competitiveness of the country.

Analysis carried out so far has aimed to provide a snapshot of the current situation in the key infrastructure sectors in Costa Rica, revealing main strengths and weaknesses, and focusing on threats and opportunities for future developments.

From this perspective, it should be initially noted that Costa Rica has a generally high level of infrastructure endowment compared with other countries in the region. However, like most other Central and Latin American countries, Costa Rica also presents some bottlenecks of a cross-sector nature:

(i) strong dependence upon the state in all infrastructure sectors, which generates several problems relating to the stability and sustainability of investment resources to efficient management in all sectors; and

(ii) low level of overall infrastructure quality: public companies, which are responsible for maintaining service quality and for investing in new projects, have faced the aforementioned financial constraints, and are thus incapable of improving coverage in areas such as water and sanitation, ports and telecommunications.

It is therefore evident that there is an urgent need to improve the financial situation of service providers and to attract private investment in all infrastructure areas in order to improve coverage and service quality, which have not kept pace with growing needs.

However, the uncertainty surrounding the regulation of private sector participation has reduced incentives for private investment in infrastructure over recent years. Thus, in order to attract private sector involvement, one of the main priorities is the modernization and rationalization of the institutional framework. This entails more effective implementation of the existing Concessions Law and the definition and reorganization of the regulatory institutions (in particular, ICE) and the autonomous agency (ARESEP) in charge of contracting, planning and tariff-setting, together with sector agencies.

The Central American Free Trade Agreement (CAFTA) signed by Costa Rica, moreover, may be considered a positive sign of the willingness of national authorities to open up to private participation and to create a more competitive environment.

Alongside these cross-sector challenges, some specific comments should be made regarding the individual sectors.

First, in relation to transport infrastructure, analysis shows that Costa Rica has a large transport system and that there is also increasing potential demand, especially in the airport and ports sectors given the strong export-led and high-tech-oriented macroeconomic configuration of the country. However, extra effort should be made to improve the quality of the existing infrastructure and to increase private participation in its management. In addition, the inadequacy of regulatory and supervision institutions, together with the absence of coordinated action between the different sectors, imply the lack of real integration between different modes of transportation.

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As regards road development, the encouragement of private sector participation in road maintenance and management is crucial to guarantee an adequate level of quality and to improve efficiency. This goal may be reached either through the selection of financially sustainable and feasible projects for private actors (utilizing tolls and contracting out some maintenance and recovery services), or through the more effective allocation of resources from the Transport System Fund. Another main concern is linked to the legal framework for concessions: it has become necessary to simplify the selection system regarding the implementation of the new Concession Law, which would in turn help to encourage more efficient investment.

Costa Rica currently lacks a railway system, due to natural events and political decisions; immediate action is called for to reactivate rail transport. This could provide Costa Rica with an excellent alternative transportation service, one which avoids both the pollution generated by automobiles and the problems of rapid road deterioration. This goal could be achieved by temporarily promoting rail-based freight traffic toward the main ports of Costa Rica. Moreover, it is important to emphasize the need to make the sector attractive to private actors so as to overcome the shortage of public investments.

In the port system, there are two important ports (Puerto Limón-Moìn and Puerto Caldera; the first is one of the largest in Central America). Traffic flows are increasing, especially in relation to the development of tourism. One of the main concerns is therefore the imbalance in the infrastructure, in terms of the lack of uniformity in productivity, service quality and tariffs among the existing ports in the country. The ports on the Pacific Coast, excluding Puerto Caldera, are characterized by low productivity and limited capacity by the standards of other countries in the region. In order to maintain the existing infrastructure and to improve efficiency in the port system as a whole, policies should be focus on rationalizing freight traffic flows and improving the ports on the Pacific Coast. In addition, clear and uniform rules are needed to encourage efficient service provision.

In the airport sector, given that only four out of more than 100 airports in the country are judged adequate according to international standards and that there has been a considerable increase in traffic flows, one of the main priorities for policy action is the improvement of the existing infrastructure and the development of an integrated network. This should include the privatization or concession of two of the main airports, Limón and Daniel Oduber, which may help to improve performance in the existing airport network, by linking them to that of Juan Santamaria airport.

Concerning the energy sector, despite the success of the model based on investment by public companies (namely ICE), Costa Rica has to face important challenges. First, the national model already shows significant signs of stress, due mainly to the fiscal constraints faced by public companies. Moreover, according to the estimates of national public companies, demand will grow at an annual rate of nearly 6% until 2020, requiring important investments in supply and in the streamlining and rationalization of consumption.

However, given the persistent fiscal and budgetary restraints, it is highly unlikely that Costa Rica will be able preserve its past achievements in the infrastructure sectors, let alone improve upon them, if public companies are able to meet investment needs and if private projects remain marginal. This aspect is strictly related to the tariff-setting system, which is currently regulated by ARESEP and which should be more consistent with the fundamental economic efficiency principle of covering costs and investments in project financing. However, although electricity is relatively affordable to households in Costa Rica, tariff increases have to be well balanced, in order not to exclude parts of the population from receiving the service.

Aside from problems in the tariff system, the energy sector is affected by several regulatory issues. First, although there has been partial unbundling in generation and distribution, a system operator to coordinate the market is still lacking. To this end, the vertical unbundling of the ICE


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group may help to create a competitive environment. This would address one of the most problematic factors: the potential selection-bias effect on generation projects, as ICE screens them itself, in accordance with its own objectives rather than with a view to improving efficiency. Hence, moving the selection of projects to the regulatory agency may eliminate this problem.

Important improvements have been made in the water and sanitation sector throughout the past decade, reaching high coverage in both urban and rural areas. However, despite high levels of coverage, there are still important deficiencies in the quality of drinkable water services and in the quality and safety of sanitation connection and treatment systems, especially in metropolitan and urban areas. Conditions are also precarious in rural areas: most access to sewerage services is through septic tanks, and network connections are practically non-existent. Costa Rica presents inadequate indicators regarding sewage treatment, potentially giving rise to important environmental risks. This threat could become serious and could undermine Costa Rica’s “comparative advantage” as a leader in the eco-tourism and eco-industry fields.

As with most sectors analyzed, water and sanitation is also state-owned, either by regional service providers or municipalities, and the management of the overall system is characterized by inefficiency. In order to overcome these critical obstacles, the future policy agenda should include, first, the rationalization of the legal and institutional framework, aimed at decentralizing and simplifying the roles and responsibilities of the different stakeholders. A possible way to achieve this goal could be through the creation of an independent agency, financially autonomous and with capable personnel to guarantee its functionality and ongoing development. Secondly, the current financial and management systems of the service providers should be revised, with the aim of increasing their internal resource generation capabilities or their capacity for acquiring external resources (e.g. loans). Currently, the rate-setting mechanism is based on a rate-of-return model and does not provide incentives for productive efficiency.

Finally, since the current investment level and financial provision system is not sufficient to guarantee greater efficiency, a more direct involvement of private capital is needed to reduce the fiscal dependence of the sector. Once again, it is crucial to develop clear regulations regarding private participation in the provision of drinkable water, in order to define the competencies, rights and obligations of concessionaires, and possible user involvement.

The last key sector examined is the telecommunications sector, which, like the other sectors assessed, has both positive and negative features. In Costa Rica, in fact, there is a high level of telephone service coverage (fixed, mobile and advanced), although important differences still remain between urban and rural areas, and there is still room for future improvements in the mobile segment. On the other hand, price levels are low, due to cross-subsidies; however, there is a correspondingly low level of service quality considering the development and growing demand of the country.

However, the major concern in the Costa Rican telecommunications sector is that it is still a state-owned monopoly and, moreover, recent investment decisions have put pressure on the overall structure of the sector . The main priority option for future policy seems clearly to be the liberalization of the sector. Opening up to competition, in fact, could contribute to improvements service quality and efficiency through a revision of the tariff-setting system. Although this option implies price increases in the short term, this side-effect would be mitigated and controlled by the competition mechanism in the medium term.

To this end, given the existence of too many laws and regulations governing the sector (as in the case of water and sanitation), a regulatory framework must be defined to encourage competition, taking into account the possibility of interconnection, investments in technological progress and the possibility of universal service coverage. This framework should specify the type of services, the responsibilities of the participants and other regulatory criteria, also

CONCLUDING REMARKS

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improving the regulatory governance rules of ARESEP. The modernization of the sector must entail the creation of a level playing field for all operators and services and the definition of universal service obligations.

In the short term, without full market liberalization, it is important to guarantee first the monitoring and control of ICE’s tariff structure and role through supervision by ARESEP, to reduce the negative side-effects of current budgetary restraints. Secondly, the regulatory agency needs to set quality indicators to enable improvements in services, also providing appropriate incentives to be fulfilled by the operator.

Given the current situation, together with the requirements of future CAFTA implementation, it is important to stress that a policy to attract private investment must be designed and implemented in order to avoid the erosion of Costa Rica’s comparative advantage in ICT infrastructure due to the shortage in investment in the near future.

With regard to the overall Costa Rican regulation and legal framework, given the priorities defined in CAFTA and in particular the liberalization of telecommunications, ARESEP’s role should be revised and reinvigorated. The creation of another regulatory entity dealing specifically with the ICT sector is one possibility, given the more complex environment implied by the liberalization of competition.

Furthermore, the sector urgently needs a new design for legislation, regulation and operation, compatible with the new model. This is especially important with regard to the role of the ICE group which, it should be emphasized, is in charge of (nearly) all the electricity and telecommunications services in the country.

Finally, the results emerging from the estimation of investment needs indicate that Costa Rica is expected to spend 1.46% of GDP in infrastructure over the period 2003-2010. The country presents almost the same needs across all sectors, ranging from 0.4% in the road and telecommunication sectors to 0.56% in energy. In addition, given its economic structure and the relative projected dynamics, Costa Rica’s estimated investments are lower than the LAC and East Asian medians of 2.42 percentage points of GDP and almost 3.33% respectively.


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MAIN REFERENCES Arellano (2004), Evolución de los Servicios Públicos en Chile.

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ARESEP (2004) Regulación de las Telecomunicaciones en Costa Rica: Evolución y Perspectivas; Abril 2004.

ARESEP (2004), “Sector de Agua Potable y Saneamiento”.

AyA (2002)- Análisis Sectorial Água Potable y Saneamiento de Costa Rica.

AyA (2003)- Plan Estrategico 2003-2020.

Björn Wellenius, Vivien Foster, and Christina Malmberg-Calvo, “Private Provision of Rural Infrastructure Services: Competing for Subsidies”; World Bank Policy Research Working Paper 3,365, 2004.

Calderon Cesar and Luis Serven (2004)- The Effects of Infrastructure Development on Growth and Income Distribution.

Central America Department Latin America and Caribbean Region (1997) - Costa Rica. Identifying the Social Needs of the Poor: An Update May 12, 1997 Report No.15,449-CR..

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Echeverría, Roger. Apertura en Telecomunicaciones en Costa Rica. Asociación Nacional de Fomento Económico Ediciones ANFE Nº 58, 2003.

Engel, E., R. Fischer and A. Galetovic (1997), “Revenue-Based Auctions and Unbundling Infrastructure Franchises”, Document IFM-112, Inter-American Development Bank.

Esquivel, Ronald y Ramos, Pilar (2002) - “Educación y Conocimiento en Costa Rica: desafíos para avanzar hacia una política de Estado”.

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Fay, Marianne and Tito Yepes (2003), Investing in Infrastructure. What Is Needed from 2000 to 2010?, World Bank Policy Research WP no. 3102.

Fischer and Serra (2003), “Efectos de la Privatización de Servicios Públicos en Chile: Caso Sanitario, Electricidad y Telecomunicaciones”, Serie Estudios Económicos y Sociales, IDB.

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Instituto Nacional de Estadística y Censos (INEC), Censo 2000 and Encuesta de Hogares de Propósitos Múltiples (2001, 2002, 2003).

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Ley 6,588/1981 (RECOPE).

Ley 7,200/1990 (private generation of electricity).

Ley 7,317/1992 (General de Vida Silvestre).

Ley 7,356/1993 (monopoly of Hydrocarbons).

Ley 7,787/1998 (Empresa de Servicios Públicos de Heredia).

Ley de Creación de la ARESEP, Nro 7,593/1996.

Ley General de Concesión de Obras Públicas, Nro 7,762/1998.

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Loría Miguel & Faustino Montes de Oca (2002) - Servicios de Telecomunicaciones en Costa Rica: La Experiencia de Empresas Multinacionales de Alta Tecnología. Fundación CAATEC. Costa Rica..

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