Document of The World Bank FOR OFFICIAL USE ONLY EMERGENCY PROJECT PAPER ON A PROPOSED LOAN IN THE AMOUNT OF US$100 MILLION TO

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY EMERGENCY PROJECT PAPER ON A PROPOSED LOAN IN THE AMOUNT OF US$100 MILLION TO THE REPUBLIC OF GUATEMALA FOR AN EMERGENCY SUPPORT TO SOCIAL SERVICES PROJECT Central America Country Management Unit Poverty Reduction and Economic Management Latin America and Caribbean Region November 18, 2010 Report No: GT This document is has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective November 16, 2010) Currency Unit = Quetzal (QZ) QZ 8.01 = US$1 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS CAPRA Central America Probabilistic Risk Assessment CAT-DDO Catastrophe Deferred Draw Down Option CCT Condicional Cash Transfer CEPAL Comisión Económico para América Latina (Economic Commission for Latin America) CEPREDENAC Central American Coordination Center for Natural Disaster Prevention CFAA/CPAR Country Fiduciary Accountability Assessment/Country Procurement Assessment Report C-GAC Country-Governance and Anti-Corruption CGR Contraloría General de Cuentas (Comptroller s General Office) CONRED National Coordinator for Disaster Reduction CoST Construction Sector Transparency Initiative CPS Country Partnership Strategy CPS-PR Country Partnership Strategy Progress Report CTR Controller s Unit DA Designated Account DCP Dirección de Crédito Público (Public Credit Office) DIPLAN Dirección de Planificación Ejecutiva (Executive Planning Office) DPL Development Policy Loan DR-CAFTA Dominican Republic - Central American Free Trade Agreement EMF Environmental Management Framework ERL Emergency Recovery Loan EUR Euro FM Financial Management FMS Financial Management Specialist GDP Gross Domestic Product GFDRR Global Facility for Disaster Risk Reduction GoG Government of Guatemala HFA Hyogo Framework for Action IADB Inter-American Development Bank IBRD International Bank for Reconstruction and Development IDA International Development Association IEG Independent Evaluation Group IFR Interim Unaudited Financial Reports ILO International Labor Organization IMF International Monetary Fund IPP Indigenous People s Plan MINEDUC Ministry of Education MINFIN Ministry of Finance MSPAS Ministry of Health

3 MTSA M&E LCSFM LOP OAS ORAF PFM PIU PNPMD SDR SEPREM SIAF SIAM SICOIN SOE ToRs TTL UDAF UN UN/ISDR VAT WB WMO US$ Treasury Account System Monitoring and Evaluation System Latin American and the Caribbean Financial Management Sector Ley Orgánica de Presupuesto (Organic Budget Law) Organization of American States Operational Risk Assessment Framework Public Financial Management Project Implementation Unit National Program for Disaster Prevention and Reduction Special Drawing Rights Secretaría Presidencial de la Mujer (Presidential Secretariat for Women) Sistema Integrado de Administración Financiera (Financial Administration Integrated System) Mesoamerican Environmental Information System Sistema de Contabilidad Integrada (Integrated Accounting System) Statement of Expenses Terms of Reference Task Team Leader Unidad de Administración Financiera (Finance Administration Unit) United Nations United Nations International Strategy for Disaster Reduction Value Added Tax The World Bank World Meteorological Organization United States Dollar Vice President: Pamela Cox Acting Country Director: Sector Director: Laura Frigenti Marcelo Giugale Sector Manager: Country Manager: Sector Leader: Rodrigo A. Chaves Anabela Abreu J. Humberto López Task Team Leaders: David M. Gould and Rashmi Shankar

4 GUATEMALA EMERGENCY SUPPORT FOR SOCIAL SERVICES TABLE OF CONTENTS A. Introduction... 1 B. Emergency Challenge: Country Context and Recovery Strategy Country Context The Government s Recovery Plan... 5 C. Donor and IBRD Response and Rationale for the Proposed Emergency Project Donor and IBRD response Rationale for the Proposed Operation... 7 D. The Proposed Project Project Components, Objectives, and Expected Outcomes Eligibility for Processing under OP Consistency with the Country Partnership Strategy... 9 E. Appraisal of Project Activities Appraisal of Project Activities Lessons Learned from Previous Operations Exceptions and Safeguards Policies F. Implementation Arrangements and Financing Plan G. Key Risks and Mitigating Measures H. Terms and Conditions for Project Financing Annex 1: Results Framework and Monitoring Annex 2: Summary of Estimated Project Costs Annex 3: Operational Risk Assessment Framework (ORAF) Annex 4: Financial Management and Disbursement Arrangements Annex 5: Procurement Arrangements Annex 6: Implementation and Monitoring Annex 7: Project Preparation and Appraisal Team Members Annex 8: Environmental and Social Safeguards Plans Annex 9: Economic and Financial Analysis Annex 10: Statement of Loans and Credits Annex 11: Country at a Glance Annex 12: Major Development Partner Support Provided or Pledged For Government Plan Annex 13: Guatemalan Municipalities in Extreme Poverty Annex 14: Map (IBRD #33413R1) LIST OF TABLES Table 1: Population affected by Natural Disasters between May and September Table 2: Consolidated Losses Due to the Natural Disasters... 3 Table A4.1: Disbursement Table by Expenditure Category Table A4.2: Schedule of Audit and Financial Reports Table A9.1: Guatemala Key Economic Indicators Table A9.2: Public Debt - Baseline Medium-Term Projections i

5 GUATEMALA EMERGENCY SUPPORT TO SOCIAL SERVICES PROJECT PAPER LATIN AMERICA AND CARIBBEAN Basic Information Date: November 18, 2010 Team Leaders: David Gould and Rashmi Shankar Country Director: Laura Frigenti Sectors: Other social services (100%) Sector Manager: Rodrigo A. Chaves Themes: Other economic management (100%) Project ID: P Environmental category: C Lending Instrument: Emergency Joint IFC: No Recovery Loan Joint Level: N/A Project Financing Data [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m): Proposed terms: The Government of Guatemala selected an IBRD flexible loan with fixed spread denominated in US dollars. The repayment schedule will be linked to commitment with a final maturity of 26.5 years (including 8.5 years of grace period) and level repayments of principal. Financing Plan (US$m) Source Local Foreign Total Borrower International Bank for Reconstruction and Development Total: Borrower: The Republic of Guatemala Responsible Agency: Ministry of Finance and Economy 8va Avenida 20-87, Zona 1 Edificio Finanzas Publicas Guatemala Tel: (502) Fax: (502) Director of Public Credit, Mayra Palencia Prado (mpalencia@minfin.gob.gt) Estimated disbursements (Bank FY/ US$m) FY FY11 FY12 Annual US$90 m US$10 m Cumulative US$90 m US$100 m Project implementation period: Start: January 3, 2011 End: January 31, 2012 Expected effectiveness date: January 3, 2011 Expected closing date: June 30, 2012 ii

6 Does the project require any exceptions from Bank policies? [ ]Yes [ X]No Does the project include any critical risks rated substantial or high? [ ]Yes [ X]No Project Development Objective and Description Project development objective: The objective of the Project is to preserve health and education services following severe flooding and other natural disasters that took place in Guatemala between May and September Project description: The Emergency Recovery Loan (ERL) includes three components: (a) Component 1 (US$70 million): Preserving Basic Education Services for Vulnerable Children; (b) Component 2 (US$29.65 million): Preserving Coverage of Health Care Services for Vulnerable Groups; and (c) Component 3 (US$100,000): Project Management and Monitoring. Safeguard policies triggered: Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waterways (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60) [x ]Yes [ ] No [ ]Yes [x ] No [ ]Yes [x ] No [ ]Yes [x ] No [ ]Yes [x ] No [x ]Yes [ ] No [ ]Yes [x ] No [ ]Yes [x ] No [ ]Yes [x ] No [ ]Yes [x ] No Does the project require any exceptions from Bank policies? Have these been approved by Bank management? Conditions and Legal Covenants: Loan Agreement Reference Description of Condition/Covenant Article IV, Section 4.01 The Borrower has issued the Operational Manual. Section IV.B.1 of Schedule 2 Section I.D.1(a) of Schedule 2 No withdrawal shall be made for payments made prior to the date of this Agreement, except that withdrawals up to an aggregate amount not to exceed $40,000,000 equivalent may be made for payments made prior to this date but on or after May 27, 2010 (but in no case more than one year prior to the date of this Agreement), for Eligible Expenditures under Categories (1) and (2). The Borrower shall include specific activities in the [ ]Yes [x ] No [ ]Yes [ ] No Date Due Prior to effectiveness (condition of effectiveness) After effectiveness December 31, 2010 iii

7 Section I.D.1(b) of Schedule 2 Operational Manual ensuring that indigenous peoples will have access to health and education services in a culturally appropriate manner. The Borrower shall adapt the EMF, in a manner satisfactory to the Bank, including, inter alia: (i) the mechanisms to strengthen compliance with national standards for health care waste management; (ii) the development of action plans to ensure compliance with the Borrower s regulations; and (iii) measures to address the gaps in implementation or quality of implementation of the EMF. December 31, 2010 iv

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9 GUATEMALA: EMERGENCY SUPPORT TO SOCIAL SERVICES PROJECT A. Introduction 1. This project document seeks the approval of the Executive Directors to extend an Emergency Recovery Loan of US$100 million to the Republic of Guatemala. The proposed loan would provide emergency assistance to preserve social expenditures in education and health as Guatemala devotes significant fiscal resources to recovery and reconstruction after severe flooding and other natural disasters suffered between May and September The proposed loan would be a reallocation of financing from within the existing country lending envelope, taking funds from a previously planned third phase DPL that would have supported continued progress on governance, transparency, and fiscal reform. 2. Guatemala was hit by a series of natural disasters between May and September 2010 that caused severe humanitarian and economic costs. On May 27, 2010, Guatemala's Pacaya Volcano erupted forcing over 2,000 people to evacuate and causing the closing of the main international airport. Two days later, Hurricane Agatha struck bringing torrential rain and widespread floods and landslides across Guatemala affecting over 500,000 people and causing over 200 fatalities and many unaccounted victims. During the four months since the initial impact of Agatha, unusually strong tropical storms buffeted Guatemala reducing the ability to initiate reconstruction efforts, compounding flooding, and complicating already difficult humanitarian efforts. A recently published evaluation of the economic cost and humanitarian extent of the disasters was undertaken by CEPAL in collaboration with the Government of Guatemala, the World Bank, the IMF, the UN, and the IADB using globally accepted methodology. The initial conservative estimates of the financial cost of the damage alone are about 4 percent of GDP (approximately US$1.6 billion). Given the severity of the situation, President Colom launched a formal appeal to the international community for support on Monday, October 11, These natural disasters have further aggravated a fiscal situation already rendered precarious by the global crisis of Tax revenues as a share of GDP in Guatemala, already the lowest in the region, were severely affected by the global economic downturn, and fell from over 12 percent in 2007 to around 10 percent in The seriousness of the fiscal situation is highlighted by the doubling of the fiscal deficit between 2008 and 2010 to 3.1 percent of GDP. This excludes the costs of the Government's reconstruction plans, which are conservatively estimated at US$1 billion over the next three years, and which are expected to be covered through a reallocation of current expenditure, spending cuts, donor funds, and additional deficit financing (adding about 0.3 percent of GDP to the fiscal deficit per year). 4. In recent months increased humanitarian needs after relentless flooding have led to large unanticipated gaps in the provision of social services. Two years of slow growth during the global economic crisis increased the need for social assistance as jobs and remittances declined sharply. The urgency of the current fiscal crisis has put such social spending at risk and has obliged the Government to seek additional financing and donor support. In particular, available funding to cover education and health services is dangerously low. 1

10 5. As part of Guatemala's appeal to the international community for support, the Government has requested World Bank assistance to preserve social spending in health and education. Without sufficient resources to respond to the urgent needs caused by the disaster, critical social spending may be cut. The proposed project's development objective is therefore to preserve health and education services following severe flooding and other natural disasters that took place in Guatemala between May and September The Bank is also proposing to restructure an existing World Bank financed Rural Development Project to provide US$15 million for reconstruction of bridges in addition to an approved World Bank financed project, Expanding Opportunities for Vulnerable Groups. Other bilateral and multilateral donors are providing emergency humanitarian assistance as well as funds for infrastructure, rural development, climate change risk mitigation, and disaster risk management. B. Emergency Challenge: Country Context and Recovery Strategy 1. Country Context 6. On May 27, 2010 the eruption of Guatemala s Pacaya volcano started one of the most damaging periods of natural disasters ever seen in Guatemala. Guatemala is the fifth most vulnerable country to natural disasters in the world and is located in one of the regions of the world most severely affected by climate change. 1 The latest series of disasters was unusually harsh and ranks as the third most severe out of 62 disasters over the past three decades. Pacaya s eruption, located 25 km southwest of Guatemala City, sent ash raining down on the most populated metropolitan areas in the country. Around 2,000 people were forced to evacuate their homes and the international airport was closed for several days. Hurricane Agatha struck just two days after Pacaya s eruption, on May 29, 2010, causing torrential rains, floods and landslides. After the loss of life and damages mounted, the authorities were forced to declare a state of national emergency. Compounding the impact of Hurricane Agatha and the eruption of Pacaya, were unusually strong rains and storms in the following months, including Hurricane Earl in August and two additional tropical storms in September that generated large rainfalls across most the country. 7. The effects of the incidents that occurred between May and September were substantial in terms of economic and human losses. There were 235 deaths and it is estimated that thousands of people have been forced to evacuate and have lost their homes (Table 1). In terms of economic losses, the largest damages in the social sector were to housing and education, estimated to be about 0.6 percent of GDP (Table 2). In the productive sector, agriculture was the most affected as rains and flooding either destroyed crops, or prevented their harvesting and delivery to markets. Infrastructure, particularly transport and water and sanitation, suffered the largest damages of over 2 percent of GDP. In total, damages and economic losses amount to nearly 4 percent of GDP. 1 Evaluation of Sectoral Damage and Loss and Estimation of Needs due to Natural Disasters in Guatemala between May and September, 2010, Report prepared by the Government of Guatemala with support of the International Community, September 13,

11 Table 1: Population affected by Natural Disasters between May and September 2010 Population TOTAL Affected 559,923 Evacuated 207,845 In temporary shelters 142,775 Missing 42 Wounded 223 Dead 235 Percent of total population affected 3.9% Source: National Coordinator for the Reduction of Natural Disasters Table 2: Consolidated Losses Due to the Natural Disasters Sub-Sector Cumulative impact of disasters between May and September 2010 (millions of Quetzales) Damages Losses (income) TOTAL Public Private SOCIAL 1, , ,001.6 Housing Health Education PRODUCTIVE SECTOR , , ,303.2 Agriculture and Fisheries Industry Commerce Tourism INFRASTRUCTURE 5, , , Transport 5, , , Energy Water and Sanitation OTHER PRIORITY SECTORS , , , Environment , , , Impact on Women Risk Management Total Quetzales (million) 8, , , , ,101.2 Total US$ (million) 1, , , Source: Joint Assessment by CEPAL-World Bank- UN-IADB, September 2010, based on official figures. 8. The impact on indigenous groups and women is expected to be severe. Tropical storm Agatha and subsequent storms devastated the whole country, although a relatively larger economic and social impact was seen in the indigenous communities. The indigenous populations suffered disproportionately high damages given their dependency on agriculture and subsistence farming. According to estimates of CEPAL, most indigenous people lost infrastructure and livestock. The departments that suffered the greatest losses to life and productive capacity are home to more than 70 percent of the indigenous population. After 3

12 Hurricane Agatha in June 2010, a survey was conducted by the Presidential Secretariat for Women (SEPREM) on how the storm affected various economic groups, by age, sex, and ethnicity. While the results are informative, they likely underestimate the total costs of the disasters as the survey was conducted prior to the flooding in August and September Although a little over half of the initially estimated 626,531 persons suffering losses were women, this number is expected to rise. Given that most of these women are dependent on household productive activities, particularly agriculture, and that agriculture was severely hit by the disasters, the poverty index is expected to rise. The number of vulnerable women below the poverty line is also expected to increase. After Hurricane Agatha, women s employment and income outside the home fell, more or less across all sectors. Furthermore, the survey found that the average time women spent in domestic activities after the storm increased from 13.6 hours to 16.3 hours. Meaning that, on average, women worked two additional hours a day devoting unpaid time to reconstruction and recovery activities. The largest damages and losses were in agriculture and livestock, accounting for over half of all damages and losses. Clothing and loss of other household items also were quite costly. 9. The impact of the disasters has been particularly severe on Guatemala given high levels of poverty and inequality and an already precarious economic situation coming out of the global financial crisis. About 51 percent of Guatemala s population of 13.5 million lives in poverty. 2 Important impediments to gains in reducing poverty and inequality are the lack of consistent and broad-based growth as well as programs and spending that specifically target the poor. While Guatemala had started showing weak recovery from the global crisis of , the series of natural disasters that struck between end-may and September has set this recovery back significantly. Growth, which had fallen to 0.6 percent in 2009 from 3.3 percent in 2008, reflected a decline in export performance, tightening domestic credit markets (and lower domestic investment) and falling remittances. The decline in remittances especially affected poorer households, which are the main beneficiaries. 3 While growth is expected to be about 2.1 percent in 2010, this improvement depends on recovery in both internal and external demand, tourism, and remittances. In particular, recovery will depend on the domestic recovery and growth in Guatemala s most significant commercial partners, particularly the US and other Central American countries, (See Annex 9 for a more detailed discussion of the macroeconomic and debt situation). 10. Given the weak economic context, mitigating the impact of the recent disasters on the poor will require urgent resource mobilization. Public finances were already strained by the economic slow-down, and low tax collections. To mitigate the difficult choice that needs to be made between reconstruction and other essential spending, particularly the provision of social services, support from multilaterals and donors will be essential. Preservation of ongoing health and education services is perhaps one of the most important functions of Government and needs to be supported. For instance, recent studies have shown that lack of adequate education and health services at critical junctures in child developmental has life-long adverse impacts. 4 2 This figure is based on the overall poverty headcount according to the 2008 Guatemala Poverty Assessment. 3 See Remittances and Development: Lessons from Latin America, edited by Fajnzylber and Lopez, The World Bank See, for example, Health and Growth Thematic Paper. The Commission on Growth and Development. World Bank, ( 4

13 11. Despite a history of fiscal prudence and low debt ratios, fiscal space is especially tight in Guatemala, as highlighted by the doubling of the fiscal deficit between 2008 and 2010 to 3.1 percent of GDP (Annex 9, Table 1). This reduction in fiscal space implied fewer resources for pro-poor spending even before the natural disasters struck and reflects a sharp fall in tax revenues as a share of GDP already the lowest in the region which fell from over 12 percent in 2007 to around 10 percent in Guatemala has attempted to implement a tax reform several times, but has been impeded by economic slowdown, the natural disasters, and political deadlock. In the aftermath of the disasters, managing public policy formulation and implementation have become more difficult. Nonetheless the Government has committed to pushing forward on fiscal reform in order to support the sustainability of much needed development spending. Indeed, in requesting donor assistance with the recovery and reconstruction efforts, the Government has integrated fiscal reform as a necessary part of its recovery plan. 2. The Government s Recovery Plan 12. The Government's Recovery Plan is designed to support recovery and reconstruction in a manner that will allow the country to continue to pursue its mediumterm development objectives. The Plan has four pillars: (1) humanitarian assistance and rehabilitation; (2) recovery of means of living and of the economy; (3) adaptation to and mitigation of climate change; and (4) institutional strengthening. The plan is to be implemented with the support of the international community and is fully consistent with the medium and longer term objectives of achieving security, reliable livelihoods for households, improved growth and productivity, and capabilities for mitigation of risks posed by natural disasters. 13. The four components of the Government's Plan for Recovery and Reconstruction with Transformation, will cost approximately US$1.92 billion to implement. 5 Pillar I, on humanitarian assistance and rehabilitation, will focus on creating basic and humanitarian conditions for families affected by the disasters, providing them with temporary access to food and potable water, and providing families with adequate temporary housing. This component, which includes the reconstruction of basic infrastructure, is estimated to cost a total of US$538 million of which US$85 million has already been financed by the CAT-DDO (Project no. P112544, Loan no GT) approved by the World Bank for Guatemala on April 14, Pillar II, which supports economic recovery, will guarantee access to food and essential public services water, sanitation, housing, education and public health to all affected, while creating necessary conditions to reactivate economic growth. This component will focus on investment in public services and infrastructure and is estimated to cost US$947 million. The proposed ERL would support activities under this pillar. Pillar III, on mitigation of, and adaptation to, climate change, aims to promote more efficient responses to climate-change induced natural disasters through improved capacity to adapt to climate changes focused on territorial planning. This component is estimated at US$340 million. Pillar IV, on strengthening institutions, will focus on 5 The cost of the Plan for Recovery and Reconstruction with Transformation exceeds the aforementioned estimate of damages and losses caused by the disasters by approximately US$370m. This discrepancy stems primarily from the Plan s inclusion of climate change adaptation and mitigation measures as well as the excess of replacement costs over asset values for infrastructure in use. 5

14 building technical and scientific capacity to develop effective responses to climate disasters and will cost US$79 million. In addition, US$16 million will fund monitoring and evaluation, transparency and communication of the Plan. C. Donor and IBRD Response and Rationale for the Proposed Emergency Project 1. Donor and IBRD response 14. The Guatemalan Government is coordinating with a range of development partners, including the IBRD, in its response to the natural disasters. Over thirty donors with the UN system and the U.S. Government taking the lead supported initial humanitarian assistance efforts; approximately US$14 million were made available for emergency relief goods, food assistance, shelters, satellite images, air logistics, and disease control, among others. The Guatemalan Government s efforts were complemented by donor emergency efforts via, for instance, rapid evacuations, shelters and key social and productive infrastructure rehabilitation financed, in part, by the IBRD s US$85 million Catastrophe Draw-Down Option (CAT-DDO). Parallel to initial humanitarian assistance, IBRD joined other donors on missions in June and September to assist the GoG in undertaking an assessment of the damages, losses and needs generated by the natural disasters. An informed and immediate Government response was thereby facilitated by the joint needs assessment, initiated within two weeks of the storm and financed by a GFDRR grant, as well as previous strengthening of the country s general disaster risk management capacity via, for example, support to the National Program for Risk Reduction, municipal planning to reduce disaster risks and the Central America Probabilistic Risk Assessment (CAPRA) platform. This was followed-up by the International Cooperation Conference for Reconstruction with Transformation organized by the Government in Guatemala City in October Delegates of 106 donors, including IBRD, pledged US$788 million in support of the Government s reconstruction plan, thus covering approximately 52 percent of the US$1.49 billion financing gap for the plan. Of this amount, US$674m was committed in loans and grants, US$64m in technical assistance and US$40m in restructurings. 15. Much of the assistance pledged to date has focused on areas of climate change as well as infrastructure and food security. In this regard, the Inter-American Development Bank (IADB) is preparing a US$250 million climate change operation, while Spain pledged US$45 million in financing for water and climate change activities; the Central American Bank for Economic Integration announced a total of US$265 million for bridge infrastructure rehabilitation and productive activities, among others, while Japan is preparing a US$120 million loan for road infrastructure; to strengthen food security, the European Union will provide a total of US$53m in loans and grants, while Sweden will support recovery of livelihoods with US$25 million. As illustrated in Annex 12, these pledges were complemented by a number of smaller or more general loans and grants, including US$45 million in grants by UN organizations and US$28 million in financing from Italy for the plan as a whole. 16. To support the Government s longer-term Reconstruction with Transformation Plan, IBRD is also adapting its integrated approach to rural development in the country to respond to the post-disaster needs. The Rural Economic Development Project (Project no. P094321; Loan no GT) is currently undergoing a proposed restructuring to provide US$15 million in financing for the reconstruction of 98 bridges damaged or destroyed by the natural disasters. In addition, the country s Rural and Main Roads (Project no. P055085; Loan 6

15 no GT), Maternal and Infant Health (Project no. P077756; Loan no GT), and Education Quality (Project no. P089898; Loan no GT) projects are rehabilitating roads, constructing health centers and enhancing secondary education access, respectively, in areas affected by the natural disasters. In addition, a US$114.5 million Expanding Opportunities for Vulnerable Groups Project (Project no. P107416; Loan no GT), which currently awaits Congress approval, will benefit the poor in areas affected by the natural disasters by supporting the country s CCT program. The execution of the Government s Reconstruction with Transformation Plan will also benefit from enhanced efficiency and transparency provided by the Integrated Financial Management Project which has provided key support to the country s financial management and e-procurement systems as well as the support to the country s Auditor General and the Construction Sector Transparency Initiative (CoST) pilot in the country which will focus its activities in part on reconstruction projects. 17. Going forward, Guatemala has strong political commitment to disaster risk management and has built up its institutions to support the needed coordination in this context, as evidenced by the strong response immediately after the disasters. The institutional setup for disaster risk management in Guatemala is organized around the National Coordinator for Disaster Reduction (CONRED). Learning from recent disasters, Guatemala has made progress towards a more proactive disaster risk management system with a firm legal basis. The National Program for Disaster Prevention and Reduction (PNPMD) is a coordination mechanism aimed at addressing disaster risk reduction in a comprehensive manner. The current Government has placed disaster risk management firmly among its development priorities. The Plan de la Esperanza , the policy program of the administration, focuses on increasing growth and reducing poverty and inequality. It articulates disaster risk management as a selfstanding policy issue in this context. 2. Rationale for the Proposed Operation 18. The proposed Project was prepared under OP/BP 8.0. It provides rapid response in support of preserving essential services (BP c). The focus of much of the support to date has centered on climate change mitigation, infrastructure and food security in the reconstruction and recovery process, which puts a premium on this IBRD emergency operation to ensure preservation of health and education in the poorest 130 municipalities. As the global financial crisis significantly reduced economic activity, cut jobs, and curtailed the flow of wage remittances, the risk of a greater number of people falling into poverty has increased and propoor policy actions have become even more critical. Nonetheless, given the emergency situation, slow growth, and weak tax collections, the Government is faced with the difficult financial decision of whether to fully fund the recovery and reconstruction at the cost of reducing key social services or to push back reconstruction into the future to maintain services in the near term. The Government s current strategy is to devote over 1 percentage point of GDP of the Central Government's budget for reconstruction and recovery related spending. This increased need for resources is expected to be spread between 2010 and 2012 and, in the absence of multilateral and donor support, may lead to deep cuts in spending that may affect the provision of much needed social services in health and education. The Government has committed to medium to long run financing of basic education and health services, but has requested the ERL to support the provision of social services in the near-term as reconstruction begins and fiscal resources are severely stretched. 7

16 D. The Proposed Project 1. Project Components, Objectives, and Expected Outcomes 19. The project s development objective is to preserve health and education services following severe flooding and other natural disasters that took place in Guatemala between May and September Given the emergency situation, slow growth, and weak tax collections, the Government is faced with the difficult financial decision of whether to fully fund the recovery and reconstruction at the cost of reducing key social services or to push back reconstruction into the future to maintain services in the near term. The project's contribution will be to assist the Republic of Guatemala in maintaining priority health and education social services in the wake of its severe natural disasters as the Government implements its emergency recovery and reconstruction program. 20. The operation includes three components: (a) Preserving Basic Education services for Vulnerable Children; (b) Preserving Coverage of Health Care Services for Vulnerable Groups; and (c) Project Management and Monitoring. These components fall under Pillar II of the Government s Recovery Plan, namely Recovery of Means of Living and of the Economy. An important objective of Pillar II of the Recovery Plan is to preserve the provision of basic services so that all groups, particularly the most vulnerable, remain covered during the recovery. The three components described below serve the same purpose by supporting the Government s plan to preserve basic social services in education and health. This support will finance teachers and health workers salaries in the poorest municipalities of Guatemala. The Bank will closely coordinate its engagement in support of the Reconstruction with Transformation Plan with the Government and other development partners through its participation in the high-level donor harmonization Dialogue Group as well as the technical-level sector coordination groups, including the education group, which it chairs. a) Component 1 Preserving Basic Education services for Vulnerable Children (US$70 million): Supporting the Recovery Plan by preserving Basic Education services for vulnerable children living in selected municipalities, through the financing of salaries of teachers and facilitators. This component would assist the Government in providing ongoing public school services by funding qualified teachers salaries in the poorest 130 municipalities, where approximately 2.8 million vulnerable children receive basic education (See Annex 13 for list) and salaries of Telesecundaria facilitators in rural and isolated areas. Basic education is defined as grades one through nine. This proposed component of the Emergency Support for Social Services Project would allow the Ministry of Education to sustain education coverage as other budgetary resources are devoted to infrastructure rebuilding after the natural disasters of b) Component 2 Preserving Coverage of Health Care Services for Vulnerable Groups (US$29.65 million): Supporting the Recovery Plan by preserving the three levels of health care and emergency services (primary, secondary and tertiary) in selected municipalities, through the financing of salaries of health care workers. This component would assist the Government in preserving ongoing health care and emergency services in the poorest 130 municipalities of the country by funding salaries of qualified health workers. Preserving adequate resources to keep health facilities open supports health care services, particularly maternal-infant health care for the most vulnerable groups. 8

17 c) Component 3 Project Management and Monitoring (US$100,000): Supporting the Government in the coordination of the administrative and financial management aspects of the project, through the financing of consultants services, including the financing of project audits. The project will have a component to support the Ministry of Finance in the coordination of the administrative and financial management aspects of implementation, through the financing of consultants for the management, monitoring and review of the execution of the project. 21. The project envisages two main expected outcomes. The outcomes measure the progress on achieving the development objective of the proposed ERL as captured by the Government s ability to preserve basic social services in the education and health sectors, especially for the poorest segments of Guatemalan society: To help preserve basic education services in the poorer municipalities, as measured by the number of teachers and Telesecundaria facilitators providing education services. To help preserve primary health services in the poorer municipalities, as measured by the number of health care workers providing medical services. 2. Eligibility for Processing under OP The proposed Project is being processed under OP/BP 8.0 because it provides rapid response in support of preserving essential services (BP c). The project represents the Bank s rapid response to the emergency caused by a series of natural disasters that hit Guatemala between end-may and September The objective of the proposed Emergency Support to Social Services Project is to support the preservation of basic services in health and education in the poorest 130 municipalities of Guatemala. This operation supports Pillar II of the Government s Recovery Plan. An important objective of Pillar II of the Recovery Plan is to help facilitate the provision of basic services to all groups, particularly the most vulnerable, in spite of the emergency. 3. Consistency with the Country Partnership Strategy 23. The proposed ERL is consistent with the objectives identified in the IBRD's FY09-12 Country Partnership Strategy (CPS) for Guatemala (Report No GT) discussed by the Executive Directors on September 23, 2008, as well as the Country Partnership Strategy Progress Report (Report No GT) dated July 28, These objectives emphasize the expansion of opportunities for vulnerable and at-risk groups. Supporting the Government response to the food, fuel and global economic crises, IBRD has, over the CPS period, shifted resources from investment to development policy operations. The objective of the DPLs has been to protect social expenditures and prevent a reversal of social gains made in recent years, while supporting reforms aimed at improved economic management, governance, and transparency. While the Government remains committed to good economic management and other goals as evidenced, for instance, by the progress in the CoST Initiative it has refocused attention on the more urgent social and reconstruction needs in the aftermath of the natural 9

18 disasters. This contingency was foreseen in the July 2010 CPS Progress Report, which noted a potential necessity of adjustments to the FY11-12 program in view of the still uncertain impact of Hurricane Agatha. Shifting from an anticipated Governance and Transparency DPL to the proposed US$100 million Emergency Recovery Project would address more urgent near-term social needs and foster the sustainability of previous operations aimed at safeguarding the progress made on social indicators. 1. Appraisal of Project Activities E. Appraisal of Project Activities 24. In order to preserve critical social services in education and health in the context of the weak economic recovery, low fiscal space, and the Government's natural disaster recovery efforts, the proposed operation will support key social sector programs. The project will support ongoing provision of health and education services, by financing the salaries of teachers, facilitators, and health care workers, for the poorest 130 municipalities in Guatemala as the Government devotes resources toward natural disaster recovery. The operation includes three components: 25. Component 1 Preserving Basic Education services for Vulnerable Children (US$70 million): Supporting the Recovery Plan by preserving Basic Education services for vulnerable children living in selected municipalities, through the financing of salaries of teachers and facilitators. This component would help the Government to provide ongoing public basic education services by funding salaries of approximately 38,000 teachers and facilitators attending to an increasing number of vulnerable children (approximately 2.8 million children) in the poorest municipalities. From 2000 to 2009, Guatemala drastically increased the net primary school enrollment rate from 85.4 percent in 2000 to 98.6 in The presence of qualified teachers and reliable uninterrupted educational services is critical for the ongoing success of the program, particularly in poorest and most isolated regions of the country. These regions are, to large extent, populated by indigenous populations with a subsistence economy based on agriculture which was particularly affected by Hurricane Agatha and subsequent hurricanes, making the indigenous populations predominantly vulnerable. Indigenous children are therefore acutely dependent on uninterrupted primary school services. Without uninterrupted quality education at public schools, it is unlikely students will have success in later years. Moreover, the possibility of reaching the millennium development goal of universal primary school for all by 2015 would be at risk. Supporting teachers services is not the only factor that is required for successful educational outcomes, but it is a key component This component would finance payment of teacher salaries serving public schools from the 130 poorest municipalities in the country for about 3 months. In addition to primary school teachers, the component will also finance Telesecundaria facilitators in poor and isolated rural areas. Telesecundaria utilizes alternative resources to reach students in isolated areas with audio visual aids, TVs, educational DVDs and sometimes computer technology, combined with teaching facilitators to provide access to a wide range of lower secondary 6 See, for example, Health and Growth Thematic Paper. The Commission on Growth and Development. World Bank, ( 10

19 subjects. Thanks to the Telesecundaria modality, net lower secondary school enrollment has increased from 24.6 percent in 2000 to 40.2 percent in Under the Education Quality and Secondary Education Project (Project no. P089898; Loan No 74300, approved in 2007), the Bank supported the initial financing of Telesecundaria facilitators, but was programmed to phase out its financing over several years (1720 facilitators in 2010, 1010 in 2011 and only 300 in 2012). This proposed component of the Emergency Support to Social Services Project would allow the Ministry of Education to sustain basic education defined as grades one through nine coverage as other budgetary resources are devoted to infrastructure rebuilding after the natural disasters of The operation could retroactively finance up to 40 percent of teachers and Telesecundaria facilitators salaries since May 27, 2010 (the start of the natural disasters). 27. Component 2 Preserving Coverage of Health Care Services for Vulnerable Groups (US$29.65 million): Supporting the Recovery Plan by preserving the three levels of health care and emergency services (primary, secondary and tertiary) in selected poor municipalities, through the financing of salaries of health care workers. This component would help the Government to provide ongoing health care and emergency services in the poorest health districts of the country by funding in the wage bill for approximately 1,900 health care workers in the 130 poorest municipalities for about 15 months. Preserving adequate resources to keep health facilities open would help maintain health care services, particularly maternal-infant health care, immunizations and nutrition services in 130 of the poorest municipalities in the country. Unavailability of health service procedures would imply that monthly more than one million primary health services would not be provided including maternal and neonatal services, critical epidemiologic treatments, and access to medicines to treat an increasing number of illnesses as a result of the constant occurrence of floods and other natural disasters. This possibility would have a devastating impact on the health situation of the poor, particularly poor children who are the most vulnerable, as well as the indigenous populations. Moreover, the possibility of reducing the gap to reach the millennium development goals on child mortality and maternal health by 2015 would be less likely. Under the Maternal-Infant Health and Nutrition Project (Project No. P077756; Loan no GT, approved in 2005), the Bank is already financing health services but only in a limited number of targeted municipalities. 28. This proposed component of the Emergency Support to Social Services Project would allow the Ministry of Health to sustain this important health coverage as other budgetary resources are devoted to infrastructure rebuilding after the natural disasters of The operation could retroactively finance up to 40 percent of medical staff wages since May 27, 2010 (the start of the natural disasters). The objective is to preserve health and education services following severe flooding and other natural disasters that took place in Guatemala between May and September As is the case with the provision of teachers services, while supporting the provision of healthcare professional services is not the only factor that determines successful health outcomes, it is a key component. 29. Component 3 Project Management and Monitoring (US$100,000): Supporting the Government in the coordination of the administrative and financial management aspects of the project, through the financing of consultants services, including the financing of project audits. The project will have a component to support the Ministry of Finance in the coordination of the administrative and financial management aspects of implementation, through the financing of consultants for the management, monitoring and review of the execution of the project. 11

20 2. Lessons Learned from Previous Operations 30. Strengthening coordination of multi-sector interventions is key to successful outcomes. In multi-sector interventions there are several risks that may delay implementation, including: (i) poor coordination across sectors; (ii) excessive centralization of investment decisions; and (iii) unnecessary layers for approving allocation and disbursement of funds. In Guatemala, recent portfolio performance indicates that capacity to implement projects is limited. While issues of coordination pose risks to this Emergency Support to Social Services Project, they should be manageable due to the simple and straight-forward nature of this operation (i.e., payment of teacher and health care worker salaries and procurement of consultant services and audits for project management). Moreover, to facilitate project coordination, all relevant agencies the Ministry of Finance, the Ministry of Health and the Ministry Education participated in the preparation of this project. To facilitate implementation, the Public Credit Directorate (Dirección de Crédito Publico DCP) in the Ministry of Finance will be the implementing and coordinating agency. A full capacity assessment of DCP was carried out while preparing the Expanding Opportunities for Vulnerable Groups Project and, given the limited number of procurement processes to be executed under this project, the DCP s installed capacity is more than sufficient. 31. The design of this operation has taken into account the lessons learned from previous disasters in the country, and lessons from many years of Bank operations and programs in response to disasters. The World Bank Independent Evaluation Group (IEG) report, "Hazards of Nature, Risks to Development: An Evaluation of World Bank Assistance for Natural Disasters" (2005), recommends that the Bank assist its clients most vulnerable to natural disasters to shift from focusing entirely on disaster response to implementing programs and policies for comprehensively managing disaster risk. While this Emergency Support to Social Services Project is solely a project that responds to a natural disaster and does not address managing disaster risk, it is part of a broader country program that includes disaster risk management. Guatemala has acknowledged that hazard risk is a manifestation of development that is not adequately adapted to the environment, and that managing disaster risk is good practice to achieve sustainable development. It has consequently included disaster risk management in its national development program and long-term development vision. This comprehensive risk management strategy is supported both by the Guatemala CAT-DDO (2009) and ongoing technical assistance for the assessment of damages caused by recent disasters (2010), projects to which this proposed operation is complementary. 32. The Bank also maintains an ongoing dialogue with various agencies dealing with disaster risk management in Central America in order to facilitate coordination of strategic advice and support. These agencies include the Central American Coordination Center for Natural Disaster Prevention (CEPREDENAC), the Organization of American States (OAS), the United Nations International Strategy for Disaster Reduction (UN/ISDR) in Central America, the Inter-American Development Bank (IADB), the World Meteorological Organization (WMO), and the Prevention Consortium. Key initiatives supported through these collaborations include the Central America Probabilistic Risk Assessment (CAPRA) and the Mesoamerican Environmental Information System (SIAM). 33. Another key lesson learned from previous Bank experience is that donor coordination both in needs assessment and in financing is essential to mitigate the 12