Nicaragua-Pension and Financial Market Reform Technical Assistance Credit

Transcription

1 Project Name Region Sector Project ID Borrower(s) Implementing Agency Environment Category Report No. PID8081 Nicaragua-Pension and Financial Market Reform Technical Assistance Credit Latin America and Caribbean Region Other Finance NIPE56087 REPUBLIC OF NICARAGUA Date PID Prepared April 13, 2000 Projected Appraisal Date July 28, 1999 Projected Board Date May 11, 2000 Address TECHNICAL SECRETARIAT OF THE PRESIDENCY/INSS Secretaria Tecnica de la Presidencia Contact Person: Luis Duran Secretario Tecnico de la Presidencia Tel: Fax: C 1. Country and Sector Background The Government's first step towards a more sustainable pension system includes a parametric reform of the current PAYG program designed to increase contribution rates, raise the retirement age, standardize eligibility requirements, reduce replacement rates, increase collection efficiency and tighten eligibility for disability benefits. However, these measures are only short-term fixes and will require ongoing increases in contributions and cuts in benefits to keep the system balanced. To make Nicaragua's pension system sustainable in the long run, the Government has legislated the introduction of a mandatory, funded, defined contribution pension system of privately managed individual accounts. As the returns on savings contributed by workers who are among the lifetime poor could not be sufficient to provide them with adequate income in their old age, the Government's reform includes guaranteeing a minimum level of pension benefits to these workers upon retirement. The Government is committed to implementing a reform that is fair and can be justified for its distributional impact, both upon current and future workers, and across and within generations of Nicaraguan workers. The minimum pension guarantee will therefore be low enough, the contribution rate high and vesting period long enough to avoid a large unfunded future liability, strategic evasion, or significant leakage of old-age income transfers to the non-poor. Increasing coverage among evading formal sector employees and making the pension system open and attractive to informal and own-account workers by providing incentives and the opportunity for all workers to enroll in the pension plan are key goals in the Government's pension reform strategy. Nicaragua's financial sector is still in the very nascent stages of development and the options for long-term investment in productive and relatively secure income-bearing assets are

2 extremely limited. Since 1991, the GON has made significant progress in eliminating or downsizing state-owned financial sector institutions, and introducing and strengthening banking sector supervision and regulation. Many weaknesses in the legal and institutional framework for financial sector activities remain, however. Through the Pension and Financial MarketReform TA, the Government intends to facilitate the development of new capital and insurance institutions and instruments, and rules for private sector provision of pension products, which are essential to the sustainability of a funded pension system and are likely to encourage savings and growth in the economy as a whole. A strong banking sector is of particular importance during the early years of the pension reform becaquse a large portion of the financial resources will be channeled through the banking system. To ensure the safety of these funds the project will support the strengthening of banking supervision and inspections. The project will also assist Government efforts to carry out complementary reforms to ensure the sustainability of the pension system and strengthen the financial sector. 2. Objectives The objective of the Pension and Financial Market Reform Technical Assistance Project is to support the Government's plan to create a more equitable and sustainable system of old-age income security for Nicaraguan workers. Specifically, the Pension and Financial Market Reform TA will design and implement: i) parametric changes to the pay-as-you-go (PAYG) pension system; ii) a mandatory, funded, defined contribution pension system of privately managed individual pension accounts; iii) a financing plan for the recognition of acquired rights under the PAYG; and iv) a small, targeted public pension guarantee for lifetime poor contributors. The Pension and Financial Market Reform TA will also develop the institutional capacity to effectively regulate and supervise the new system; carry out a public information campaign; and develop insurance and capital market instruments, strengthen financial market institutions and rules for private sector provision of pension products. 3. Rationale for Bank's Involvement In the Latin America Region, the World Bank Group has developed strong internal capacity in helping borrower countries to design and implement structural pension system reforms; the World Bank Group has been a major source of financial and technical assistance for the reform programs adopted in six countries over the last decade. The Nicaragua Pension and Financial Markets Reform TA brings this experience to bear with team members from across the institution, including DEC, FPSI and HD. 4. Description The Pension System Reform component will include the following activities: i) new parameters for PAYG system; ii) calculation of acquired rights; iii) implement funded pillar; iv) develop and update financing plan; v) launch public awareness campaign and consultation process; vi) build institutional capacity of INSS. Pension System Supervision: i) define organizational structure; -2-

3 ii) build supervisory capacity. Financial Markets Development: i) develop financial market instruments for pension fund investment; ii) establish rules for private sector provision of pension insurance products; iii) strengthen financial sector institutions. Project Implementation Unit 5. Financing Total ( US$m) Government 2.6 IBRD IDA 8 Total Project Cost Implementation The project team has been working closely with the Pension Reform Technical Commission (CREPEN), the Social Security Institute (INSS), the Technical Secretariat of the Presidency, the Central Bank, the Ministry of Finance and the Superintendency of Banks and Other Financial Institutions (SBIF) on the preparation of the TA, with technical inputs from external consultants. The Technical Secretariat of the Presidency is in charge of the overall design and implementation of the pension reform, in coordination with the other agencies listed above, and will be the implementing agency of the TA. A small Project Coordinating Unit (PCU) has been created to implement the TA under the supervision of a Steering Committee, which will have two members: the Technical Secretary of the Presidency and the Executive President of INSS. The PCU would be responsible for overall project management, monitoring, and coordination and will be physically located in the INSS building; an Implementation Agreement will be signed between INSS and the Government prior to Credit effectiveness. In addition, an Implentation Agreement will be signed between the SBIF and the Technical Secretariat which outlines implementation responsibilities for the Financial Markets Development component. Detailed Terms of Reference and required qualifications for PCU personnel, including the Project Manager, Financial Manager/Accountant and Procurement Specialist, were finalized with the input of IDA's financial management and procurement specialists and are presented in Annex 11. The Pension Reform and Financial Markets TA Project Manager is directly accountable to the Steering Committee. The PCU will be responsible for conducting annual project reviews, including audited financial statements of the project, as well as preparing periodic reports on actual performance against agreed performance indicators, and institutional components of project implementation. To accelerate project implementation, the Borrower has identified the Project Manager, and the Procurement and Financial Management specialists of the PCU, who will be contracted prior to Credit effectiveness. To support implementation of the new pension law, the Borrower will also contract consultant services for technical work and public information before Credit signing. The Financial Management Assessment indicated that the PCU had yet to put in place the staff, internal controls, and administrative procedures for the management of the project. The Financial Management and Procurement Action - 3-

4 Plan presented in Annex 11 outlines the key activities and time frame for recruiting PCU staff and establishing a financial management system (FMS) that will provide effective financial, procurement and disbursement reporting and monitoring. Since the financial management and procurement assessments were made, PCU staff have been recruited and are carrying out the activities outlined in the financial management and procurement Action Plan. It has been agreed that when the PCU and the FMS are completely operational, the Financial Management Capacity Assessment will be conducted again to certify that the unit's system meets IDA requirements prior to project effectiveness. It is expected that the credit will start disbursing using traditional disbursement procedures and convert to quarterly Project Management Reports (PMRs) in accordance with the LACI at the end of the first year of project implementation. A Procurement Capacity Assessment established that there is very limited institutional capacity to manage procurement processes financed under the project, and the overall procurement risk assessment was rated as "high." TORs for the PCU personnel have been developed and are attached to the Financial Management and Procurement Action Plan presented in Annex 11, which establishes the time frame and qualifications for the Procurement Officer to be hired. The specific procurement capacity issues identified in the Assessment are outlined in Annex 6. Key activities and completion dates for the recruitment of the PCU staff and required international procurement specialist and preparation of the operations manual including the detailed procurement procedures are presented in Annex Sustainability The sustainability of the reforms to be prepared by the TA will depend in large part upon the political support for them among a broad spectrum of Government policy-makers, including members of the opposition political party and among the public in general. Wide dissemination of information on an on-going basis and continued consultation with key decision-makers will be required to obtain this support. Weak institutional capacity has constrained Nicaragua's development for a long time and will not be remedied in the short term. Regulatory agencies are breaking new ground in a country with little tradition of independent regulation. Strengthening pension system institutions will be required for the sustainability of the reform. Inadequate securities markets pose substantial constraints to the development of instruments for pension fund investment and will require careful planning and sequencing of appropriate reform measures. Macroeconomic issues are also of particular relevance for the sustainability of the reform. A speedier reform will certainly benefit the country but will require a substantial financing effort. 8. Lessons learned from past operations in the country/sector This TA project will assist the Government in designing a quality reform and strengthening internal capacity to implement the new system. TA design benefited from ESW that was undertaken to identify the main issues and options to address these issues. Recent IDA experience in Nicaragua and elsewhere underscores the need to build borrower capacity, ownership and institutional infrastructure in support of major structural reforms. Because passage of legislation alone will not develop an enabling environment for the reform, it is also necessary to focus a great deal of attention on strengthening the awareness of the public in regards to the reform via a public awareness campaign. The scope of the TA has also been limited to focus narrowly on pension and selected financial sector -4 -

5 reforms, rather than addressing technical and institutional financial market development issues more broadly, as was considered, to focus policy-makers on a set of well defined objectives and outcomes. Highly qualified external support has been engaged by the Government for preparation of the reform and help in defining its technical assistance needs, funded through a PHRD grant. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues No negative environmental impact expected. 11. Contact Point: Task Manager Hermann A. Von Gersdorff The World Bank 1818 H Street, NW Washington D.C For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. Processed by the InfoShop week ending April 14,