Program information document (pid) appraisal stage
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| PROGRAM INFORMATION DOCUMENT (PID)
APPRAISAL STAGE Report No: AB2830
Country and Sector Background Although Costa Rica continues to be regarded as a development success story, recent years have seen the emergence of significant challenges for sustained economic growth and poverty reduction. Costa Rica still combines a long tradition of political stability with indicators that outstrip regional averages in terms of economic growth, governance and social development. Since 1980, growth in per capita income has averaged 1.2 percent (compared to 0.8 percent for Latin America as a whole), and economic volatility has been about 20 percent lower than for the rest of the region.1 However, since 2001, GDP growth has averaged 4 percent, compared to 5.3 percent in the 1990s, and household income growth has also slowed. Most importantly, patterns of growth have tended to favor the non-poor, resulting in a stagnating poverty rate at around 23 percent over the last decade (1994-2004) and a rise in income inequality measured by the Gini from 0.44 to 0.48 from 1989-2004.2 Aggregate indicators of well-being hide significant regional disparities and show that the Province of Limon is comparatively underdeveloped. The poverty headcount in 2004 for the Atlantic region was 26.8 percent, which was above the national average of 23.9 percent. In addition 6.9 percent of the region’s population was extremely poor, also slightly above the national average of 6.6 percent.3 The recent Poverty Assessment for Costa Rica points the need to define regionally differentiated investment strategies that respond to regional differences in patters of poverty. Income growth has been faster in the wealthier counties and there has been a shift in how the benefits of growth have accrued over time: income growth has been significantly lower for the poor than for the non-poor. The Port of Limon4, is one of the central bottlenecks to Costa Rica’s trade and competitiveness; its reform is fundamental to optimize the growth impact resulting from trade liberalization. The port of Limon handled in 2006 nearly 15 percent of all containerized cargo from Central American countries5, making it the busiest port in the region after Panama. It is the primary port in Costa Rica for import and exports, handling nearly 76 percent of the country’s freight. However, Costa Rica ranks well below the standard set by its level of income in the area of liner connectivity due to infrastructure constraints. In the World Economic Forum’s Global Competitiveness Report, Costa Rica was tied with Guatemala for the lowest ranking in terms of port infrastructure quality.6 The lack of reform and inefficiency of Costa Rica’s ports is estimated to divert over 15 percent of container cargo through Panama, absorbing an estimated US$ 70-100 million in additional road haulage costs per year.7 The strategic importance of the port of Limon is compounded by the GoCR’s strategy to further trade liberalization and establish new international trade agreements. Costa Rica’s capacity to reap maximum benefits from lower trade barriers will depend critically on the successful implementation of a complimentary policy agenda to modernize its infrastructure (ports, railways and roads), but also institutional and regulatory reforms and a comprehensive social strategy to make these reforms feasible. Given the singular importance of the Port of Limon for the competitiveness of the country’s trade, the Province’s social indicators, and the multiple and unique challenges that the City of Limon faces, the GoCR has developed a comprehensive strategy for the development of the Province of Limon (Regional Development Strategy). The current administration developed such strategy based on three main pillars: The Plan for Social Action for the Province of Limon (Plan de Acción Social para la Provincia de Limón), which aims to addressing the immediate social problems which the province faces, while at the same time working towards a reduction of the risk-factors behind the inter-generational transmission of poverty in the medium and long term. To achieve this, an inter-institutionally coordinated action plan is under implementation, which brings together public institutions at the national and local levels, as well as private ones. The action plan relies on close collaboration between the Coordinator for the Social Sectors and Poverty Reduction (currently the Minister of Housing and Human Settlements) and the Minister of Inter-Institutional Coordination for the leadership, follow-up and evaluation of the activities which comprise the Plan. The GoCR’s total investment under the Plan totaled almost US$ 160 million in 2007, the majority (56 percent) of which went to healthcare and housing (see Annex 1 for a breakdown between sectors). The spending priorities under the Action Plan are complementary to the investments proposed under the City-Port project, since the Plan focuses on the province as a whole and excludes drainage and sewage works in the City of Limon. Furthermore, the Plan focuses on human development and social assistance activities, which the City-Port project intends to complement with local development and employment generation activities. The City-Port of Limon Project, which aims at tackling a series of complex and interrelated challenges linked to the decay of the city’s façade and cultural heritage, the lack of capacity at the local government level, deficiencies in urban management, a deficit in the provision of basic services in one of the city’s poorest areas, and a lack of new employment opportunities and the persistence of a weak entrepreneurial spirit. Modernization of the port of Limon, which is to be achieved through a concession process to operate and expand the capacity in the Moin port terminal, outside the City of Limón. The process will be complemented with a reform of the sectoral institutional framework, in order to adapt national institutions (MOPT and JAPDEVA) to their new roles as regulators. It is important to highlight the strong linkages that exist between the three pillars of the Regional Development Strategy to tackle the vicious relationship within City and Port. On one hand, the Port of Limon is the engine for the city’s economic development, but its efficiency is hampered by the lack of capacity and accessibility problems given by its entrenchment within the urban setting. On the other hand, quality of life in the city is seriously affected by the proximity of the port: heavy traffic circulates toward port facilities generating congestion and the container terminal which dominates the city’s waterfront makes it hard to attract cruise ship tourists to generate diversified sources of income for the city. Furthermore, an institutional setting in which JAPDEVA, --with its dual role as port authority and development agency for the province-- plays a dominant role in detriment of the Municipality, only worsens the situation (see Box 1) below. The close linkages between the pillars outline the need of close coordination in the implementation of the proposed reforms. The Arias Administration has entrusted the leadership of the three tiered strategy to the Minister of Interinstitutional Coordination, who works closely with the Ministry of Housing –in charge of the Social Programs pillar–, the Ministry of Public Works and the Concessions Unit –responsible for port reform–, and finally with the World Bank for implementation of the City-Port Project.
Context and timing are opportune to implement the Regional Development Strategy for Limon, achieve a comprehensive modernization of the port, and restore a dynamic relationship between the city and the port. President Arias has declared the development of the Province of Limon and the modernization of the port a priority for his administration (the Province of Limon was one of the key constituencies behind his election victory). A Regional Development Council (Consejo Regional de Desarrollo or COREDE) was established to facilitate inter-institutional cooperation necessary to implement the strategy. At the municipal level in Limon, important changes have taken place. The mayor, who used to be appointed by the Municipal Council, is now democratically elected, which opened space to reform the city’s institutional framework8, undertake steps to strengthen local governance and fill the vacuum left behind by JAPDEVA. In addition, Limon has established itself as a cruise-ship port attracting thousands of tourists every year, which has created a potential market for micro and small businesses capitalizing on the city’s cultural diversity and patrimony. 1.2 The City of Limon Limon’s recent development has been characterized by a lack of planning and inadequate conservation and management of its cultural and natural assets, resulting in urban decay and a gradual erosion of its unique Caribbean identity. The city’s recent growth has been very scattered in nature, negatively affecting density and raising the cost of urbanization.9 The bulk of this growth is occurring on cheap plots which are prone to regular flooding and lack basic services, thereby putting the population at risk of sanitary and health problems resulting from septic tanks and open sewers. In some cases, such as in Limocito, this growth is leading to the occupation of environmentally protected wetlands and 22 percent of houses are in bad condition.10 The city’s patrimonial stock is disappearing rapidly. A study carried out during project preparation estimated that 65 percent of Limon’s architectural icons have already disappeared. The historic core also lacks the basic amenities of a modern city such as leisure facilities which could make it attractive to its citizens and visitors. This lack of contextualized urban planning is reflected in an ever growing disconnect between the city and the port. Despite being of vital importance to the city, the port does not have a friendly city-port interface. Additionally, it comprises large, partly unused spaces (around 8 ha) which have great potential for Limonenses’ recreation and tourism development. Limon’s historic core, which consists of around 60 blocks laid out in a well-defined grid dating from the late 19th century, has traditionally had an important relationship with the port and the sea. The Uvita Island and a nearby beach are not in use, despite having important recreational and tourism potential. The area east of the port, which currently closes the sea off from the city, has great aesthetic value which makes it ideal for the population leisure and tourism development (such as the installation of a marina, which does not exist on Costa Rica’s Caribbean coast). The sense of urban decay also manifests itself in an acute perception of urban insecurity. The province of Limon has Costa Rica’s highest homicide rate at 13 per 100,000, and the second highest incidence of reported assaults/ aggressions.11 Drug trafficking is also a concern and there is a perception that these activities take place primarily in the northern stretch of the city which has considerable tourism potential, including the city’s only 3 beaches which are in use. There is considerable scope for situational crime prevention in Limon through urban design.12 Limon’s labor market is characterized by unemployment and rigidity. Limon has the second highest rate of urban unemployment nationwide. Traditionally, its employment structure has depended largely on salaried public employment.13 It is estimated that the public sector employs over 30 percent of the economically active population (EAP) in Limon, compared to a national average of 17.5 percent. JAPDEVA itself employs 1,125 people (6 percent of the EAP). Overall, public sector employees benefit from better working conditions and are less prone to poverty than private-sector employees. The reliance on the public sector as a source of employment has arguably inhibited the development of an entrepreneurial culture in Limon. The distribution of employment across sectors has remained fairly constant over the last three decades. This rigidity may explain low employment rates in Limon, despite above-average education levels. A sustainable solution to the problem of unemployment must diversify the local economy, attracting investments, expanding the port businesses, generating small business and strengthening the private sector as a local employment generator. The city is known for its complex social fabric and a tradition of social unrest. Limon’s 70,000 inhabitants constitute a complex ethnic mix, including Chinese and Afro-descendants (the latter make up 46 percent of the city’s population). This ethnic diversity underlies the cultural and historic richness of Limon. Historically, the city has suffered from racial friction and recurring social unrest, motivated by inequalities in relation to the rest of the country, conflicts between trade unions and the banana and port businesses, and a perception of neglect by national authorities. This has manifested itself in periodic demonstrations of discontent and strikes, which have paralyzed the city and consequently the national economy due to the importance of the port and the national oil refinery (RECOPE). Institutional capacity at the local level is limited. JAPDEVA’s strong leadership role in Limon, combined with low levels of decentralization overall, has inhibited the growth of Limon’s municipality as a relevant actor for local development. Although this weakness persists, JAPDEVA has been devolving some of its functions to the municipality, which presents an opportunity for it to assume a more active role. Limon’s municipality continues to face a number of challenges, including (i) lack of basic systems for urban development planning, financial management and service provision; (ii) deficient equipment and administrative infrastructure; (iii) low levels of revenue due to inadequate information systems and tax collection mechanisms; (iv) a capital account deficit of 7.4 percent in 2004; (v) low credibility due to allegations of financial mismanagement and corruption; and (vi) low levels of transparency, downstream accountability and civic participation due to the lack of a communication strategy and participatory mechanisms. 1.3 The Port Sector and the Port of Limon The Port of Limon is Costa Rica’s Atlantic gateway port for containerized cargoes and the country’s leading port in container volume. The port services markets to the US gulf and east coast as well as to Europe, primarily for textiles, bananas, and coffee. The port also services as a cruisehip port of call (136 calls in 2006 and 195,538 passengers), catering to ecotourism related activity for passengers. The port is located about 115 km from San Jose, and handled 766,000 TEUs in 2006. The port is essentially a public monopoly, though there is competition for vessel stevedoring (ship-to-shore movements of cargo) from several private sector stevedoring companies. It is governed by the Port Authority, JAPDEVA, while port tariffs are set by the Public Services Regulatory Agency, ARESEP. Limon is the primary port of the country in terms of both imports and exports. Even though the port used to turn out financial surpluses, the situation has dramatically reversed in recent years. Currently, the overall performance of the Port of Limon can be characterized by: Conflicting management policy objectives. JAPDEVA has the dual role of being the port authority on one hand, thus controlling port operations, and the agency in charge of promoting social welfare and economic development in the Atlantic Region on the other (with both functions being financed through port tariffs). This does not allow the institution to concentrate its efforts on improving the performance of the port. As an example, members from the Board of Directors of JAPDEVA are usually chosen among political and social leaders within Limon, who usually do not have the know-how needed for effective port management (in general, they are elected based on their role in the development function of JAPDEVA). Finally, and in terms of JAPDEVA’s development function, it is interesting to note that in Limon there is a widespread belief that the port should be an employment generator, and respond to the needs of the inhabitants of the city. Any restructuring of JAPDEVA would need to address this issue. Highly congested port. The congestion problem in the Port of Limon is caused mainly from lack of sufficient number of berths, yard storage for container handling, and equipment. Insufficient investments. The port requires urgent short-term investments in both infrastructure and equipment. Even though figures could be subject to debate, depending on the sources the combined backlog ranges between US$70 and US$200 million. Financial sustainability threatened by internal inefficiencies, increasingly regional competition, and external environment. Currently JAPDEVA uses around 85 percent of its revenues to pay for operation costs, and allocates around 15 percent of its budget for investment and maintenance. This trend needs to be reversed. As explained before there is an urgent need for investments. Furthermore, the port is also facing an increasing regional competition, primarily from Panama and Honduras/Guatemala, to which it lost container cargo between 1999 and 2006 (23.6 percent in 1999 vs. 16.0 percent in 200614). Poor user’s perception regarding the quality of the port. A recent survey15 gave Costa Rica low marks in the quality of its transport infrastructure. In ports, Costa Rica was tied with Guatemala for the lowest ranking in Latin America (with an overall qualification of 2.5 over 7.0 – the average for the region was 3.6 over 7.0). This criticism targeted, among other things, access roads, equipment, container berths and pier depth. Need to undertake a port reform to respond to the problems the port is facing. The situation calls for a fundamental change in the model Costa Rica once chose for developing its port sector. For the case of Port of Caldera (on the Pacific Coast), the decision was already taken. A PPP structure was created, and the new operator began managing the port on the second semester of 2006. Regarding the situation in the Atlantic, the current administration has been very clear that the objective is to bring the private sector on board, in order not only to have access to financial resources, but also to profit from its experience in managing this kind of business. The Government is carrying out some preliminary analysis aimed at defining which kind of strategy is best suited to the specifics of the port of Limon. Regardless of the strategy to be chosen, there is a commitment from the government that such a strategy would not negatively affect the prospect of greater cruise ship business. This is fundamental for the project, because of the linkages that it would leverage in that regard. Based on the information available, it is expected that the private sector will focus its participation in the expansion of a new container terminal in Moin. The inefficiencies described above are translated to consumers and inhabitants of Costa Rica. Depending on the source consulted, inefficiencies amount between US$50 and 80 million per year, representing an important non-tariff barrier for trade that negatively affects the competitiveness of the country and its potential for growth. 2. Rationale for Bank involvement The GoCR has requested the Bank’s support in implementing its Regional Development Strategy for the Province of Limon. As stated before, the second pillar of this strategy -the City-Port of Limon Project- has been designed to revitalize the city of Limon and contributes to the social and political viability of port reform. The project will complement the port modernization agenda by providing technical assistance to the implementation of the port reform agenda16 and by improving the railway access to the Moin terminal Overall, the Bank’s value added to the proposed project comes from several contributions to its design and implementation, of which the most relevant are: A multi-sectoral approach to better articulate inter-institutional cooperation. The Bank brings a multi-sectoral approach to the elaboration of a strategic vision for the City-Port of Limon. The project’s multisectoral nature offers a unique opportunity to better articulate inter-institutional cooperation at the national level for the implementation of the regional development strategy. The project will contribute to unlocking a complex institutional set-up, while at the same time empowering the Municipality of Limon to fulfill its leading role in the development of the city. The project will also contribute to clarify responsibilities and articulate cooperation between stakeholders to work towards a holistic approach for the development of Limon. Furthermore, the project is improving legal impediments for this type of cooperation to take place in the future. Visibility and leveraging other donor financing, including private sector participation. The Bank can contribute and leverage grant funds necessary for project preparation and implementation (as from the Japanese Government), and attracts other donors, either through co-financing arrangements, or through complementary projects. The Bank can also help leverage support from private investors. Ultimately, the Bank’s involvement will give the project high regional and international visibility, possibly leading to the replication of the proposed model to the development of other city-ports across the region and beyond. Aggregate institutional benefits. The Bank is well placed to facilitate and support the coordination of interventions of several key project partners convening power capable of improving coordination among several existing actions and programs operated by the central government in Limon. Operation Objectives The overarching purpose of the project is to revitalize the city of Limon in line with the Government Regional Development Strategy, and prepare the modernization of the port of Limon. More specifically, the project seeks to: (i) improve the protection and management of Limon’s cultural and natural heritage; (ii) increase access to the sewage system and reduce urban flooding in the area of Limoncito; (iii) create a more efficient, accountable and credible local government; (iv) create new employment opportunities through small and micro-enterprises; and (v) support the port modernization process and improve the railway access to the Moin port terminal. Rationale for Bank Involvement The GoCR has requested the Bank’s support in implementing its Regional Development Strategy for the Province of Limon. As stated before, the second pillar of this strategy -the City-Port of Limon Project- has been designed to revitalize the city of Limon and contributes to the social and political viability of port reform. The project will complement the port modernization agenda by providing technical assistance to the implementation of the port reform agenda17 and by improving the railway access to the Moin terminal Overall, the Bank’s value added to the proposed project comes from several contributions to its design and implementation, of which the most relevant are: A multi-sectoral approach to better articulate inter-institutional cooperation. The Bank brings a multi-sectoral approach to the elaboration of a strategic vision for the City-Port of Limon. The project’s multisectoral nature offers a unique opportunity to better articulate inter-institutional cooperation at the national level for the implementation of the regional development strategy. The project will contribute to unlocking a complex institutional set-up, while at the same time empowering the Municipality of Limon to fulfill its leading role in the development of the city. The project will also contribute to clarify responsibilities and articulate cooperation between stakeholders to work towards a holistic approach for the development of Limon. Furthermore, the project is improving legal impediments for this type of cooperation to take place in the future. Visibility and leveraging other donor financing, including private sector participation. The Bank can contribute and leverage grant funds necessary for project preparation and implementation (as from the Japanese Government), and attracts other donors, either through co-financing arrangements, or through complementary projects. The Bank can also help leverage support from private investors. Ultimately, the Bank’s involvement will give the project high regional and international visibility, possibly leading to the replication of the proposed model to the development of other city-ports across the region and beyond. Aggregate institutional benefits. The Bank is well placed to facilitate and support the coordination of interventions of several key project partners convening power capable of improving coordination among several existing actions and programs operated by the central government in Limon. Preliminary Description Component 1: Urban and Cultural Revitalization. Component 1 will invest in the urban upgrade, cultural heritage protection and revitalization and natural conservation of Limon, restoring its emblematic historical and cultural patrimony and providing basic services to one of its poorest neighborhoods. The aim is to rescue Limon’s unique cultural identity, while improving the city’s urban environment (livability) and attractiveness to visitors. This component comprises two sub-components: (i) Limon’s Cultural, Natural, and Architectonic Revitalization and (ii) Provision of Sewerage and Drainage Services. Component 1 will be implemented in close coordination with the activities foreseen in the other components particularly those related to the Strategic Plan of the City-Port of Limon and to Local Economic Development. Component 2: Local Economic Development. Component 2 will support the generation of new sources of employment, particularly among the young, through the development of micro and small businesses, training and technical assistance, seizing the opportunities presented by growing cruise tourism and the historical/ cultural richness of Limon. Specific activities include: (i) the provision of seed capital, scholarships and access to non-financial support services (such as incubators and business support centers) for the promotion of new cultural businesses and small and micro enterprises run by youth and women through the establishment of a competitive fund and a development market-place type of activities to select the most promising business plans, as a means of triggering community driven economic development; (ii) capacity building to SME Unit of the Ministry of Economy to improve the coordination of training and technical assistance to Limon’s small and micro-businesses; and (iii) specific training activities to help existing cultural businesses improve the quality of their products. The project envisions to hire a technically sound firm or NGO specialized in the provision of non-financial services for the implementation of this component under the technical supervision of the Ministry of Economy. Within the framework of the recently approved Development Bank Law, state banks will expand SME financing opportunities through a new range of financial products, including individual and portfolio guaranty facilities. Component 3: Local Governance and City-Port Strategic Planning. Component 3 will provide technical assistance for the Municipality of Limon to improve its capacity to deliver and manage quality services while empowering it to take an active role in the city’s development. Activities include: (i) formulation and implementation of pilot investments prioritized by the participatory strategic plan for the City-Port in coordination with other key government agencies, private sector actors, and citizens; (ii) strengthening of the municipality’s management capacity by administrative restructuring, supporting the creation of an office for urban planning and monitoring, and a tourism promotion center; (iii) strengthening of the municipality’s financial management capacity by integrating its information systems, and updating cadastre and revenue collection mechanisms; and (iv) physical improvements in its administrative building and provision of adequate equipments. Component 4: Support for Improving Port Environment. This component will support: (i) improvement of the railway access to the Moin port terminal, which includes the repair of the bridge over the river Chirripo, the rehabilitation of a warehouse in Leesville, and the construction of a short section of track for direct access of rolling stock to the dock of Moín; and (ii) technical assistance to the Transport Ministry to support the concessions process of the terminals of Moin and Limon, including complementary analysis such conducting an environmental assessment of the proposed intervention, fine-tuning the Port Master Plan, developing a business plan for the port, and carrying out more detailed institutional analyses. Financing
Institutional and Implementation Arrangements The institutional framework discussed with the GoCR leads to a project managed by a small Project Coordination Unit (PCU) located in the Ministry of Finance, and technical supervision arrangements governed by Cooperation Agreements signed between the Ministry of Finance and the technical agencies responsible for the implementation of works, technical assistance and the supervision of safeguards. Under this scheme, the Finance Ministry, where the PCU is located, will be the only agency managing project funds. The PCU will fulfill all financial management and procurement functions. Therefore, the PCU will be responsible for overall project administration, coordination of all activities financed by the project, financial management, contracting, and monitoring and evaluation. On the other hand, technical agencies will be responsible for implementing the components under their mandate: defining annual operative plans, preparing budget and TORs for feasibility or related studies as well as biding documents for works. In addition, technical agencies will undertake supervision of activities or works under their jurisdiction. Finally, and taking into account that coordination is crucial for the success of project implementation, the GoCR entrusted the Minister of Interinstitutional Coordination with, precisely, a coordination function. This is completely in line with this Ministry’s role as the champion for implementation of the government’s development strategy for the Province of Limón, and reinforces the existing synergies between its three pillars. The institutional arrangements for project implementation described above are illustrated in the figure below: Schematic representation of institutional framework 
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