Enhanced Public Sector Efficiency Technical Assistance Loan Region. LATIN AMERICA AND CARIBBEAN Country. TECHNICAL ASSISTANCE LOAN Project ID

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: Enhanced Public Sector Efficiency Technical Assistance Loan Region LATIN AMERICA AND CARIBBEAN Country REPUBLIC OF PANAMA Sector Central government administration (100%) Lending Instrument TECHNICAL ASSISTANCE LOAN Project ID P Parent Project ID - Borrower(s) REPUBLIC OF PANAMA Implementing Agency MINISTRY OF FINANCE Environmental Screening { }A { }B {}C { }FI Category Date PID Prepared February 14, 2011 Estimated Date of Appraisal January 26, 2011 Completion Estimated Date of Board March 3, 2011 Approval Decision Project authorized to proceed to negotiations upon agreement on any pending conditions and/or assessments. Other Decision - I. Country Context 1. Panama is an upper-middle income country with a dollarized economy and a per capita gross national income of US$6,740. The country has about 3.5 million people; nearly three-quarters of them live in urban areas, mostly around the Panama Canal. About 10 percent of the population is of indigenous origin and primarily reside in remote rural areas. Panama has an open economy traditionally centered on the Canal, trade and financial services. 2. Over the last 50 years, Panama s real Gross Domestic Product (GDP) growth has averaged about 5 percent, which has ranked it among the faster growing economies in Latin America. With an ethnically diverse population, a world famous canal, and a modern financial and trade sector, Panama has been a prime benefactor of the increasingly globalized world economy. In the four years prior to the global economic crisis in 2008, Panama saw growth averaging 8.5 percent per year and the unemployment rate falling from 13.8 percent to 5.6 percent. Growth was fueled not only by the buoyant global economy, but also by strengthened domestic policies that improved fiscal balances, reduced financial sector vulnerabilities, and enhanced productive investment. In addition, through a historic national referendum in 2006, Panama approved a US$5.25 billion expansion of its canal. These factors contributed to strengthened investor confidence, lower interest rates, and greater stability, which allowed the economy to weather the global crisis better than most countries.

2 3. Despite the global crisis, Panama has continued to see growth, albeit modest. Compared to a regional average output contraction of 2.5 percent in 2009, Panama did relatively well with growth of about 2.4 percent in The direct effects from the global crisis were modest and the financial system remained stable. However, the economy was indirectly affected through declines in credit growth, reduced trade financing, and a halt in new real estate construction, which, in turn, was felt in sectors such as agriculture, transport, trade and construction. Growth is expected to accelerate to over 6 percent in The Government s investment plan for the period amounts to US$13.6 billion, which is significantly higher than during the prior administrations. About US$7.3 billion will be invested in the social sectors, of which US$2.9 billion will be for training and social assistance. Most of the investment will be in the regions outside Panama City (about US$4.2 billion) but the single most important investment project will be the metro transport system for the City of Panama (about US$1.8 billion). Expected investments outside urban areas include irrigation projects, roads to enhance logistical advantages and interconnection with ports, and rural electrification. The investment program represents an increase of about 1 percent of GDP in capital expenditures per year. 5. Tax reform approved by the National Assembly is expected to increase tax collections. The first of the two phases of the tax reform was implemented before the end of 2009 and included an increase in taxes for casinos and taxes on income of companies operating in the Colon Free Trade Zone. The total increase in tax collection for the Central Government for this phase is estimated about 1 percent of GDP per year. The second phase of the reform was approved by the National Assembly on March 15, 2010 and includes higher taxes on consumption and lower taxes on personal and corporate income. The Government is expected to collect an additional 1 percent of GDP per year from this most recent reform. The combined additional revenues of about 2 percent of GDP will be sufficient to finance the additional capital expenditures required by the new investment plan. The tax reform was planned to be neutral in terms of equity, but the value added tax increase may have a very modest impact on the poor. 6. A combination of a gradual rise in revenue and a containment of current expenditure should allow the authorities to expand public investment while keeping public debt sustainable in coming years. 1 The fiscal adjustment since 2005 and higher GDP growth resulted in a fall of the consolidated public debt-to-gdp ratio from 62.3 percent in 2004 to 38.8 percent in But in 2009 the debt stock increased to about 39.4 percent of GDP owing to slower growth and lower revenues. The Government expects to maintain the deficit within the bounds of the Fiscal Sustainability Law, which implies a deficit of less than 2.0 percent of GDP in 2010 and a stock of the public debt stock that rises slightly to around 40 percent of GDP over the next three years and thereafter begins to decline, which is fiscally sustainable. In particular, the increase in investment will be financed by the additional revenues collected by the new tax reform, while at the same time current expenditures are contained. 7. In March 2010, during the aftermath of the crisis, Panama achieved investment grade status from Fitch, Standard & Poor s and Moody s credit rating agencies. Panama s credit rating upgrade reflects a sustained improvement in public finances, underpinned by recent tax reforms, and the economy's resilience to the global financial crisis and associated recession. 1 Current expenditures are expected to remain constant as a share of GDP.

3 By achieving investment grade, the country hopes to lower the cost of borrowing and increase access to additional financing from institutions and investors that are restricted to high-grade investments. 8. Despite Panama s status as an upper-middle income nation, its economic development has been characterized by a high degree of inequality and persisting poverty. The country has one of the highest indexes of inequality in the region and the world (0.47 Gini coefficient), with the richest 20 percent of the population responsible for half of the country s total consumption. Poverty is concentrated in rural and indigenous areas and poverty data from the recent 2008 Living Standards Measurement Study (LSMS) shows that 32.7 percent of the population still lives in poverty, while 14.4 percent of the population lives in extreme poverty. 9. Public Expenditures have been growing hand in hand with the increase of the GDP in the country. However, Panama needs to focus on the quality and efficiency of those expenditures. The Government of Panama (GoP) investment plan for the period amounts to US$13.6 billion, more than doubling the public investment of the prior 5 years. Panama spends around 17 percent of GDP in the social sectors, which is higher than the 14 percent average of the region, but there is low efficiency and insufficient targeting of those expenditures, and social outcomes are not in line with the level of public spending. Despite robust growth and investment, this means that meeting a number of key social targets remains a challenge. Life expectancy has increased significantly over the years; however, malnutrition remains a major challenge, particularly in indigenous areas where 62 percent of children under five are chronically malnourished; in contrast to 11 percent in urban areas. Malnutrition rates in indigenous areas have increased since 2003, when 57 percent of children were chronically malnourished. Average years of schooling among adults have increased significantly; yet, there are major socioeconomic and ethnic differences in school enrollment, especially in secondary education. 10. Today, one of Panama s main bottlenecks for improving the effectiveness and efficiency of public programs is still the low institutional capacity. The public sector in Panama is not perceived as having mastered operational efficiency or being able to effectively deliver the services that citizens expect. In 2008, inefficient Government bureaucracy and corruption were the top two cited problematic factors for doing business in Panama 2. The public sector quality in terms of accountability, effectiveness and efficiency in service delivery, as well as transparency in budget formulation and execution, remains low. The capacities of the Central Government to monitor and manage for results are also weak. In order to tackle these significant challenges, the proposed operation intends to support strengthening of the institutional capacities to strategically plan, manage and execute strongly designed public programs. II. Sectoral and Institutional Context 11. The 2009 presidential election was won with over 60 percent of the vote with a campaign that highlighted economic growth based on strategic economic sectors, an ambitious investment agenda and a battle against insecurity and corruption. Since taking office, the President has strongly reinforced that reducing corruption, achieving more efficient public expenditures and more transparent bureaucratic structures are part of his core political 2 In the World Economic Forum s (WEF) 2008 firm surveys.

4 priorities. To this end the Government has adopted long term national development agreements, and the Presidential Agenda has specified goals with tangible public targets. Additionally the Fiscal Responsibility Act (Ley 34) is being implemented, requiring the budget to be formulated within the parameters of fiscal responsibility and efficiency, and in direct relationship to the national development agreements, and to include a set of performance indicators. Many of the initiatives mentioned below point to the Government s commitment to these goals. 12. A new Strategic Plan to guide the major reforms includes, as a top priority, increasing effectiveness of public expenditures as well as revenue management. In January 2010, the GoP made public the Government s Strategic Plan for , which articulated, among other priorities, the goal to increase the efficiency, transparency and distribution of public expenditures and improve tax administration. To achieve this goal, the GoP, under the leadership of the Ministry of Economy and Finance (Ministerio de Economia y Finanzas, MEF), has adopted priority reforms, discussed below, to: Strengthen and modernize planning and budgeting. Strengthen the financial management system and the financial control framework. Continue comprehensive procurement reform. Develop a national monitoring and evaluation system in addition to the gradual introduction of performance-informed budgeting and a more efficient public investment system. Improve statistical data production and dissemination. 13. The reform priorities identified by the Government are consistent with findings of diagnostics undertaken in recent years. The 2006 Public Expenditure Review identified a number of features of the Panama s public finances as reducing the impact and efficiency of public spending across sectors, including (i) absence of proper sector planning and budgeting; (ii) imbalance between maintenance and investment expenditures, and blurred distinction between both in sector budget classifications:; (iii) lack of systematic monitoring and evaluation of programs and projects and (iv) inadequate targeting and allocation of resources. Recommendations from the 2006 Country Financial Accountability and Procurement Assessment Report (CFAA/CPAR, Report No PA) have informed the procurement and financial management reforms to date, and the design of current reforms, which are discussed below. Additionally, following the Government s request the World Bank in collaboration with the Inter-American Development Bank (IADB) is producing the 2010 Public Expenditure and Financial Accountability (PEFA) report. 14. Although much progress has been made in improving budgetary and public financial management in recent years, substantial challenges lie ahead in increasing effectiveness during budget preparation and efficiency during budgeting execution. Panama s financial management and budgetary systems have made some progress towards comprehensiveness and transparency, in part drawing on the recommendations of the PER and the CFAA Budget monitoring and execution are now more timely and transparent and extensive financial performance information is made public. Moreover, there are few off-budget expenditures. However there is ample room for improving the strategic allocation of resources and increasing operational efficiency in expenditures, including through (i) the formulation of a medium-term expenditure framework, (ii) the development of the bottom-up budgeting process incorporating sector strategic business plans, (iii) the compliance with public investment programming procedures during budget preparation, (iv) the adequate execution of procurement

5 plans, and (v) the inclusion of budget ceilings as part of the formulation process and the control of in-year budget modifications to assure predictability of funds. 15. The functions of monitoring and evaluation of public programs require substantial improvement. The monitoring and evaluation systems are very weak. An effective, comprehensive monitoring and evaluation system is required to inform planning and budgetary decisions, strengthen accountability and support results-based management, and so increase the efficiency and effectiveness of the public sector. 16. Key financial management functions related to accounting, recording and reporting are carried out by the Ministry of Finance and the Comptroller s Office with robustness but the system is due for an upgrade both in terms of technology and roles and responsibilities. Several advances have been made in the consolidation of the single treasury account in terms of the timeliness, scope and publication of quarterly budgets, fiscal balances, debt and payroll reports, and annual financial statements. Despite this, there is a need to improve their quality and disaggregation, and to modernize standards, disclosures, and consolidation as identified in the 2006 CFAA. In addition, it is necessary to move towards the separation of external audit functions from other incompatible tasks, such as ex-ante audits, endorsements, payments, and consolidation of financial statements. This implies that some functions might have to migrate from the Comptroller s Office to the MEF. 17. The GoP has identified the continued strengthening of the national procurement system as a tool to transform the national budget into a process that connects public resources to results that improve the lives of Panamanian citizens and as a powerful transparency device. The Bank assessment in pointed to inadequate procurement practices in the Central Government and rigid internal controls that restricted the capacity to generate savings in budget implementation. However, efforts led by the DGCP such as PanamaCompra which reduce payment times to suppliers of goods and services, and PanamaTramita and PanamaEmprende, which simplify business processes, are strong steps in the right direction. The Government of Panama has strengthened the public procurement system not only by increasing its transparency through the use of the e-procurement platform PanamaCompra but has also significantly increased its efficiency through the introduction of framework agreements for common use goods. 4 Further reforms will focus on i) linking procurement, budgeting and planning; ii) continuing the improvement of the public procurement legal framework, and standardized procedures: iii) strengthening the procurement monitoring and evaluation systems; and iv) developing the mechanism and tools required to professionalize procurement staff, and to tune up saving strategies. 18. Increasing accountability and transparency in the public sector relies on a stronger legal framework and making progress towards its full implementation. Implementation of the strengthened legal framework and improved expenditure management will strengthen accountability and service delivery, and build trust in Government. The GoP has made great strides in its willingness and commitment to improve transparency and fight corruption by approving the Fiscal Responsibility Law (Law no. 34, 2008) and the changes introduced to the procurement law (Law no. 22, 2006), and the Law of Access to Information and Habeas data 3 Part of the Country Financial Accountability and Procurement Assessment Report (CFAA/CPAR), World Bank (2006). 4 From April 2007 to January 2010 the Government has procured over US$154 million through these framework agreements, which have created a more transparent and competitive market. In 2009 the Government saved just over US$20 million in the procurement of fuel.

6 (Law no. 16, 2002). The full implementation of these initiatives, in combination with quick gains in service delivery, could help curb the fairly high levels of perceived corruption in the country within a feasible political timescale. Improving trust in Government will be essential to decrease tax evasion and improve compliance with rules and regulations. In addition, public perceptions of Government effectiveness could be greatly improved by gains in sectors which are most relevant for Panamanians, including basic infrastructure and education, which are strongly correlated to citizens trust in Government across the region. Increased trust in Government could be then transformed into political support for further reforms. If the Government aims at tackling tough public sector issues mirroring many Organization for Economic Co-operation and Development (OECD) countries (such as civil service reform) it will need a fair amount of political capital and higher levels of trust. III. Project Description 19. The proposed operation has been conceived partly as a continuation of the technical assistance loan closed in May that supported reforms in the area of procurement, financial management and production of relevant data and information for better policy-making. The current operation will continue with support for some of these reforms and include further areas of support including improved, introduction of performance-based budget management and strengthened evaluation and strategic planning functions. 20. The project will be implemented over a five-year period, one year beyond the current administration to leave room for transition with the new administration. The project will comprise the following four components: 21. Component/Part 1: Strengthening Performance-Based Budget Management and Evaluation (US$9 million). The provision of support to MEF, including, goods, IT equipment, operating costs, training and technical assistance for the carrying out of activities aimed at: a. improving the institutional and technical capacities of MEF for performance-based strategic planning and budgeting in order to create conditions for enhancing the quality of public spending, including, inter alia: (i) strengthening and harmonizing institutional planning and budgeting frameworks; (ii) organizational strengthening and re-designing of MEF and other sector planning and budgeting responsible units within the Borrower s Central Government structure; (iii) introducing annual and multi-annual budget planning and programming tools; (iv) defining and institutionalizing methodologies for strategic planning and budgeting; and (v) developing technical, managerial and organizational capacities for result-based planning and budgeting; and b. supporting the development and institutionalization of monitoring and evaluation functions and systems at the national level and in pilot sectors, including, inter alia: (i) designing and implementing a national monitoring and evaluation system under MEF coordination and leadership; (ii) designing and implementing pilot monitoring and evaluation systems in Pilot Ministries; (iii) enhancing the production, quality, utilization and availability of performance information; (iv) developing technical, managerial and organizational capacities for the institutionalization of monitoring and evaluation functions and systems; and (v) producing and disseminating methodologies for the institutionalization of 5 See Public Policy Reform Technical Assistance Loan (P055844) and Public Policy Reform Technical Assistance Loan Additional Financing (P105526).

7 monitoring and evaluation functions and systems. 22. Component/Part 2: New Financial Management Model: Strengthening Budget Execution, Treasury, Accounting and Control (US$30.5 million). The provision of support to MEF (only with respect to Part (a) below) and CGR, including goods, operating costs, training and technical assistance, for the modernization of the Borrower s current financial management system, through the carrying out of activities aimed at: a. consolidating and integrating all core public financial management processes within the Borrower s Central Government, focusing on interoperability and integration among selected MEF areas such as budgeting, accounting, treasury, payroll, public procurement, public investment and planning, including, inter alia: (i) conceptual and functional designing of a new financial management system to be used by all public sector agencies; (ii) defining an applicable technological framework (software requirements, IT security policies, software architecture design, server levels agreements for software, hardware and selected services); (iii) analyzing alternatives for implementing the new financial management model; (iv) customizing/constructing information technology systems compatible with the alternative selected under (iii) above; (v) reviewing and updating the normative framework supporting the new financial management model; and (vi) supporting the implementation of the new financial management model in all public sector agencies, including the provision of the relevant training to personnel working on such agencies; b. modernizing control systems performed by CGR, through the strengthening of: (i) the Borrower s financial management control framework; (ii) the internal control framework and internal audit functions in the public sector; (iii) CGR s institutional support functions, including human resources, IT, and learning management; (iv) the promotion of public participation in the public financial management oversight, including the strengthening of the existing claims and allegations center concerning public financial mismanagement; and (v) the public accounting standards in coordination with MEF.; and c. supporting the Borrower s statistical capacity, through: (i) the provision of technical assistance for the improvement of national accounts and survey data; (ii) the provision of training to enhance the capacities of the Instituto Nacional de Estadisticas y Censo (INEC s; and (iii) the acquisition of the necessary software and hardware to upgrade INEC s systems and capacity to produce, analyze and disseminate statistics. 23. Component/Part 3: Strengthening public procurement and contracting capacity (US$15 million). The provision of support to DGCP, including goods and IT equipment, training and technical assistance, for the reform of the Borrower s public procurement process, through the carrying out of activities aimed at: a. supporting the institutional strengthening of DGCP, as well as building the capacity of public procurement officials, including, inter alia: (i) the development of a curriculum to support the professional development of procurement officials in line with the business needs of the different Government procurement organizations in partnership with the National Human Development Institute (INADEH); (ii) the development and implementation of an educational campaign for suppliers and civil society; (iii) the development of a business continuity model including all aspects related to the security and integrity of the system, along with a document management system; (iv) the creation of a supplier registry and the required management tools to ensure its efficient operation and

8 connection with existing Government systems within the Borrower s Central Government; and (v) the development of a demand-driven approach to carry out specific efficiency analysis to identify opportunities for savings and efficiency gains; b. supporting the ongoing legal and regulatory reforms to pursue the modernization of the Borrower s public procurement system and processes, including inter alia: (i) the drafting of a new procurement law, the necessary regulations and manuals; (ii) the development of training and educational materials on the application of the new legal framework as well as the necessary training to build the capacity of legal and compliance teams throughout the public service; and (iii) the development of standard bidding documents. c. supporting the ongoing development of the Borrower s e-procurement platform Panama Compra version2, including inter alia: (i) the development of modules to replace the existing electronic catalogs; (ii) the interface with the financial management system and other public sector management systems; (iii) the modernization of office and management systems, including the review and update of the security system, as well as the implementation of new measures to strengthen the integrity of the system; and (iv) the development and implementation of a complaints management system for DGCP, together with the implementation of quality standards such as ISO and the Capability Maturity Model Integration (CMMI). d. developing a research center in the Borrower s Procurement Administrative Tribunal, including, inter alia: (i) the provision of the necessary hardware and software for the set up of a virtual library that would compile best practices in public procurement, as well as relevant doctrine and jurisprudence; and (ii) the carrying out of capacity building activities for public officials, lawyers and civil society stakeholders involved in procurement processes. 24. Component/Part 4: Creation and Support of Project Management Capacities (US$0.5 million). The provision of support to MEF, CGR and DGCP including, inter alia, goods and IT equipment, training and technical assistance for the carrying out of adequate management, monitoring, reporting, auditing and evaluation of Project implementation activities, as well as the Borrower s public sector efficiency reform agenda. IV. Financing Source: IBRD Borrower/ Recipient IDA Others (specify) Total ($m55.00) ($m05.13) (m$60.13) V. Implementation 25. The current implementation arrangement model has been developed in conjunction with the Government, taking into account the scope and depth of the reforms proposed as well as the strengths and weaknesses of current Central Government and MEF s institutional architectures. It also considers previous experience and thus, replicates features that did work well in past loan operations while developing and strengthening others that offered opportunities for improvement, namely (i) coordination mechanisms among key actors, (ii) clear responsibilities for project implementation within the MEF, (iii) adequate capacity of MEF key

9 technical units, and (iv) introduction of a performance-based service provision agreement among actors. 26. The implementation arrangements have been designed to balance autonomy versus coordination needs, to separate administrative from technical functions and to provide highest political support. The implementation arrangements model contains three main features: (i) inter-institutional arrangements, (ii) MEF intra-institutional arrangements, and (iii) a mechanism to provide the reform with high political engagement and technical support. 27. Inter-institutional arrangements. There are three main executing agencies: MEF, CGR and DGCP. The model proposes a decentralized approach very much in line with the arrangements used in the previous project. However, the MEF would serve as the main World Bank counterpart and undertake some general coordination functions to provide project cohesion. The relationship MEF-CGR and MEF-DGCP would be governed by an explicit interinstitutional agreement. 28. MEF intra-institutional arrangements. The previous project had one major unit, the Public Policy unit (Dirección de Políticas Públicas, DPP) as counterpart in the MEF. This new project is broader in its content and has direct involvement with four key units or Direcciones: National Public Investment Office (Dirección de Programación de Inversiones, DPI), Budget Office (Dirección de Presupuesto de la Nación, DIPRENA), National Public Accounting Office (Dirección Nacional de Contabilidad, DNC) and Public Policy Office (Dirección de Políticas Públicas, DPP). A team in the DPI would provide administrative support to the technical focal points in each of the Direcciones. The team would work under a service provision model and the unit s performance would be assessed on an annual basis by all the four directors. 29. High political engagement and technical support. The current project, while focused on finance functions, is supporting a much broader long term Government agenda that aims at creating a much more efficient, effective, transparent and accountable Public Administration. As such, the Project should be understood as a critical part of a bigger Government reform program. Therefore, the Government proposes the creation of a lean Reform Steering Committee involving the key units in MEF, DGCP and CGR to steer the Project as part of the reform. VI. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OP/BP 4.10) Forests (OP/BP 4.36) Safety of Dams (OP/BP 4.37)

10 Projects in Disputed Areas (OP/BP 7.60) * Projects on International Waterways (OP/BP 7.50) VII. Contact point at World Bank and Borrower World Bank Contact: Pedro Arizti Title: Public Sector Specialist Tel: (202) arizti@worldbank.org Borrower/Client/Recipient Contact: Félix Adames Title: Director de Inversión Pública, Ministerio de Economía y Finanzas Tel: (507) fadamesn@mef.gob.pa Implementing Agencies Contact: Félix Adames Title: Director de Inversión Pública, Ministerio de Economía y Finanzas Tel: (507) fadamesn@mef.gob.pa VIII. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas

11