Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-42250)

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No: ICR574 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-42250) ON A LOAN IN THE AMOUNT OF US$28.0 MILLION EQUIVALENT TO THE REPUBLIC OF GUATEMALA FOR A TAX ADMINISTRATION TECHNICAL ASSISTANCE LOAN November 2, 2007 Poverty Reduction and Economic Management Central America Country Management Unit Latin America and the Caribbean Region

2 CURRENCY EQUIVALENTS (Exchange Rate Effective July 26, 2007) Currency Unit = Guatemalan Quetzal (Q$) US$1 = Q$ Q$1 = US$ FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS AECI BTO CAE CAS CBSA CEM CIAT CMU DPL FY GDP IDB IEMA IETAAP IMF IRS ISR ISRs ITC IUSI M&E MINUGUA NGO NIT OED OTA PCU PDO Spanish International Cooperation Agency (Agencia Internacional de Cooperación Española Back-to-Office Report Country Assistance Evaluation Country Assistance Strategy Canada s Border Services Agency Country Economic Memorandum Inter-American Center of Tax Agencies (Centro Interamericano de Administraciones Tributarias) Country Management Unit Development Policy Loan Fiscal Year Gross domestic product Inter-American Development Bank Tax on Commercial and Agro Businesses (Impuesto a Empresas Mercantiles y Agrícolas) Extraordinary Tax in Support of the Peace Accords (Impuesto Extraordinario y Temporal de Apoyo a los Acuerdos de Paz ) International Monetary Fund U.S. Department of Internal Revenues Income Tax Implementation Status Results and Reports Information and Communication Technology Single Property Tax (Impuesto Único sobre Bienes Inmuebles) Monitoring and Evaluation United Nations Mission in Guatemala Non-Governmental Organization Tax Identification Number (Número de Identificación Tributaria) Operations Evaluation Department U.S. Treasury Department s Office of Technical Assistance Project Coordination Unit Project Development Objective

3 PEI PROSIS PSR QAG QSA SAQB E SAT SIAF SIAG TAL UN UNDP UNOPS URNG USAID US-CAFTA USTDA VAT VSA WCO Institutional Strategic Plan (Plan Estratégico Institucional) Integrated Management Information System Project Status Report Quality Assurance Group Quality Supervision Assessment Integrated Customs Management System Superintendency of Tax Administration (Superintendencia de Adrninistración Tributaria) Integrated Financial Administration System (Sistema Integrado de Administración Financiera) Integrated Customs System Technical Assistance Loan United Nations United Nations Development Program United Nations Office of Project Services Unidad Revolucionaria Nacional Guatemalteca United States Agency for Intemational Development Central America-United States Free Trade Agreement U.S. Trade and Development Agency Value-Added Tax (Impuesto al Valor Agregado) Voice Stress Analysis World Customs Organization Vice President: Pamela Cox Country Director: Jane Armitage Country Manager: Neeta G. Sirur Sector Manager: Nick Manning Project Team Leader: Mario Sangines ICR Team Leader: Enrique Fanta

4 GUATEMALA TAX ADMINISTRATION TECHNICAL ASSISTANCE LOAN CONTENTS A. Basic Information... i B. Key Dates... i C. Ratings Summary... i D. Sector and Theme Codes... ii E. Bank Staff...ii F. Results Framework Analysis... ii G. Ratings of Project Performance in ISRs... v H. Restructuring (if any)... v 1. Project Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Project Costs and Financing Annex 2. Outputs by Component Annex 3. Economic and Financial Analysis Annex 4. Bank Lending and Implementation Support/Supervision Processes Annex 5. Beneficiary Survey Results Annex 6. Stakeholder Workshop Report and Results Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 8. Comments of Co-financiers and Other Partners/Stakeholders Annex 9. List of Supporting Documents MAP IBRD

5 A. Basic Information Country: Guatemala Project Name: GT TAX ADMIN. TAL Project ID: P L/C/TF Number(s): IBRD ICR Date: 06/15/2007 ICR Type: Core ICR Lending Instrument: TAL Borrower: Republic of Guatemala Original Total Commitment: USD 28.2M Disbursed Amount: USD 19.3M Environmental Category: C Implementing Agencies: Superintendencia de Administración Tributaria (SAT) Cofinanciers and Other External Partners: B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 10/26/1996 Effectiveness: 12/1/ /11/1998 Appraisal: 07/07/1997 Restructuring(s): Approval: 08/28/1997 Mid-term Review: n.a. 08/12/2002 Closing: 03/31/ /31/2007 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Moderately Satisfactory Moderate Satisfactory Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Moderately Satisfactory Quality of Implementing Satisfactory Supervision: Agency/Agencies: Satisfactory Overall Bank Overall Borrower Moderately Satisfactory Performance: Performance: Satisfactory i

6 C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: Yes Yes Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): Rating None Yes D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration Theme Code (Primary/Secondary) Administrative and civil service reform Primary Primary Law reform Primary Primary Tax policy and administration Primary Primary E. Bank Staff Positions At ICR At Approval Vice President: Pamela Cox Shahid J. Burki Country Director: Jane Armitage Donna Dowsett-Coirolo Sector Manager: Nicholas P. Manning Geoffrey Shepherd Project Team Leader: Mario Francisco Sangines Ronald E. Myers ICR Team Leader: Enrique Fanta ICR Primary Author: Maria Cecilia Zanetta F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The project's development objectives were to: (i) improve the effectiveness and efficiency of tax and customs administration; and (ii) increase tax revenues. Revised Project Development Objectives (as approved by original approving authority) N.A. ii

7 (a) PDO Indicator(s) Indicator Indicator 1 : Value quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Reduction in percentage of taxpayers not submitting tax returns on time 20% in VAT, 45% in Income Tax (ISR) 10% in VAT, 20% in ISR Actual Value Achieved at Completion or Target Years % of late VAT filers reduced from 5.5 to 0.9% for large taxpayers; from 9.5 to 0.2 %for medium taxpayers between 12/04 and 6/07. % of late ISR filers reduced from 2.2 to 0.7% for large taxpayers; from 9.6 to 1.8% for medium taxpayers between 12/04 and 6/07. Date achieved 12/31/ /30/ /30/2007 Comments (incl. % achievement) Achieved: This indicator was fully achieved for large and medium taxpayers, which account for roughly 75% of all tax revenues. No data is available as of yet for regular taxpayers, as the corresponding databases still need to be depurated. Indicator 2 : Increase tax revenues (Increase of 1 percent of GDP above 1996 level) Value quantitative or Qualitative) 8.8 % of GDP (GDP 1958) 9.8% of GDP from 2000 onward n.a. Tax burden greater than 9.8% of GDP from 2001 onward; 10.3% of GDP in 2006 Date achieved 12/31/ /30/ /31/2006 Achieved: The SAT succeeded in increasing the tax burden by 1.5% of GDP over the life of the project, despite numerous factors beyond its control which negatively Comments affected tax collections (unfavorable court rulings, free trade agreements, etc.). (incl. % However, target was designed for original closing date in 2002; stronger gains could achievement) have been expected by More fiscal space is still needed to support the implementation of the Peace Accords. (b) Intermediate Outcome Indicator(s) Indicator Indicator 1 : Value (quantitative or Qualitative) Original Target Values (from Baseline Value approval documents) Creation of autonomous tax agency Two tax agencies (Internal Revenue and Customs Services) that were ineffective and corrupt Creation of a new autonomous tax agency, with meritbased personnel Formally Revised Target Values Actual Value Achieved at Completion or Target Years SAT was created on Jan. 12, 1998 as an autonomous tax agency. Merit-based iii

8 Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years (particularly customs) practices hiring and promotion practices are in place, despite setbacks in 2002 and Date achieved 12/31/ /30/ /30/2007 Comments (incl. % achievement) Achieved: The creation of an autonomous tax agency required a 2/3 majority in Congress. SAT is endowed with 2% of its revenues (financial autonomy) and has self-determination regarding salaries, personnel practices, and other functional aspects. Tax evasion for the Value-Added Tax (VAT) Indicator 2 : Value No specific target (quantitative 39.7% 31.6% defined or Qualitative) Date achieved 12/31/ /30/ /31/2006 Achieved: At 31.6%, VAT tax evasion is Guatemala compares favorably to Mexico Comments (45.7%), Argentina (40.4%), and Bolivia (39.4%). There is room for improvement to (incl. % achieve a performance similar to Colombia (28%) and Chile (19.7%), including achievement) eliminating persisting legal loopholes. Indicator 3 : Development of an electronic tax payment system 92% of all tax Value Development of an All payments are nonelectronic by SAT are revenues collected (quantitative electronic tax or Qualitative) payment system electronic. Date achieved 12/31/ /30/ /31/2006 Comments (incl. % achievement) Indicator 4 : Value (quantitative or Qualitative) Achieved: Since Jan. 1999, tax forms and payments are processed through local banks. As of Dec. 2006, the BANCASAT system channels 92% of all tax revenues (equivalent to 30% of all transactions) electronically. Reduce customs clearance times for imports and exports Air cargo: 12 hrs Air cargo: 1 hrs No specific target Courier: 24hrs Courier: 1hrs defined Seaports: 8 days Seaports: 22 hrs Date achieved 12/31/04 03/30/ /31/2006 Comments (incl. % achievement) Indicator 5 : Value (quantitative or Qualitative) Achieved: Processing times in Customs have been reduced as the result of ongoing reforms, incl. the implementation of electronic customs manifests in all ports and airports. Business closures due to VAT violations 0 10 requests in requests in actual closures Date achieved 12/31/ /30/ /31/2006 Comments (incl. % achievement) Achieved: The number of business closures due to VAT violations has been steadily increasing, from 9 actual closures in 1999 to 590 in 2006 (i.e., requests that were effectively granted). Indicator 6 : Reduce administration costs (SAT current expenditures as % of total tax revenues) Value 3.1% No specific target 1.9% iv

9 Indicator Baseline Value Original Target Values (from approval documents) defined Formally Revised Target Values Actual Value Achieved at Completion or Target Years (quantitative or Qualitative) Date achieved 12/31/01 03/30/ /31/2006 Comments Achieved: SAT has substantially increased its operational efficiency as is likewise (incl. % demonstrated in tax revenues per employee, which increased from Q$8.4 million in achievement) 2003 to Q$9.6 million in G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 06/19/1998 Satisfactory Satisfactory /29/1998 Satisfactory Satisfactory /18/1999 Satisfactory Satisfactory /24/1999 Unsatisfactory Unsatisfactory /15/2000 Unsatisfactory Unsatisfactory /21/2000 Satisfactory Satisfactory /20/2000 Satisfactory Satisfactory /22/2001 Satisfactory Satisfactory /20/2001 Satisfactory Satisfactory /28/2002 Satisfactory Satisfactory /06/2002 Satisfactory Satisfactory /20/2002 Satisfactory Satisfactory /21/2003 Satisfactory Satisfactory /12/2003 Satisfactory Unsatisfactory /16/2003 Satisfactory Satisfactory /02/2004 Satisfactory Satisfactory /06/2004 Satisfactory Satisfactory /06/2005 Satisfactory Satisfactory /19/2005 Satisfactory Satisfactory /29/2005 Satisfactory Satisfactory /10/2006 Satisfactory Satisfactory /01/2006 Satisfactory Satisfactory /27/2006 Satisfactory Satisfactory H. Restructuring (if any) Not Applicable v

10 I. Disbursement Profile vi

11 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal With one of the lowest tax revenue ratios in Latin America (i.e., 8.8 percent of GDP in 1996) Guatemala s historically weak revenue performance had been a crucial factor undermining the country s macroeconomic performance, as well as its overall development prospects. Specifically, wide annual variations in tax collection threatened public account balances and subjected public investment to disruptive cycles of stop-go spending. In addition, low tax revenues severely constrained public investment and social sector spending, thus limiting poverty alleviation efforts. They also hindered the implementation of the December 1996 Peace Accords, which put an end to 36 years of armed internal conflict and set the foundations for an ambitious agenda for reconciliation and reincorporation of excluded groups, human development, sustainable economic development, and modernization of the state and improved governance. Notably, reaching a tax revenue target ratio of 12 percent of GDP was one of the specific targets agreed under the Peace Accords a necessary step for raising the resources allocated to poverty alleviation and development policies. Guatemala s low tax revenues reflected the structure of the tax system, deficiencies in tax administration, as well as pockets of corruption within the tax agencies. Specifically, Guatemala s tax code exhibited one of the lowest VAT rates in Latin America (i.e., 10 percent). In addition, there were high thresholds for tax liability, deductions for VAT payments, exclusion of annual bonuses and pensions, limited withholding for wage earners, and no withholding or periodic payments during the tax year by professionals and the self-employed. Likewise, the tax code provided weak penalties for non-compliance, which, together with lengthy business liquidation procedures for tax evasion, resulted in endemic tax evasion. Long-standing deficiencies in tax administration, including poor identification of non-filers, weak auditing and inspection procedures, and the lack of modern management tools were compounded by the lack of coordination between the Departments of Internal Revenues (Dirección General de Impuestos Internos) and Customs (Dirección General de Aduanas). Morale in these two agencies was low as a result of the lack of a career-path for employees, low pay, and lax personnel policies. The Customs Service, in particular, suffered from profound institutional weaknesses related to poor management, weak human resources, lack of adequate systems of financial and physical control, unduly bureaucratic processes with excessive scope for discretional decisions by individual staff, deteriorating physical infrastructure, lack of transparency in the collection of import duties, and resistance to change. A major corruption scandal led the Government to intervene in the Department of Customs in The strengthening of the country s tax performance was undertaken as part of an ambitious program of public-sector reform that included the reform of the civil service, the restructuring of key ministries, the reform of the administration of justice, the modernization of public financial management, and an increase in the role of the private sector in the provision of infrastructure services. Reform of tax administration was a key element in the Government s strategy for increasing tax revenue, as well as reducing economic distortions and promoting the transparency of tax and customs collections. As mentioned above, under the terms of the Peace Accords signed in 1996, the Government agreed to raise tax revenues to 10 percent of GDP in 1998 and to 11.4 percent in Following years of marginally successful efforts to strengthen the existing tax administration regime, the Government decided to create an autonomous Superintendency of Tax Administration (Superintendencia de Administración Tributaria - SAT) with a new organizational structure and functional relationships. The Government requested Bank support for the creation of the new tax agency, including its organizational design, the implementation of 1

12 initiatives to strengthen tax administration, and a wide-scale education effort aimed at raising public awareness as to the importance of a sound tax administration and securing the Congressional votes necessary for the creation of the SAT. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) The Tax Administration Technical Assistance Loan Project (SAT TAL) sought to assist Guatemala in raising its revenue performance above its historically low rates by: i) improving the effectiveness and efficiency of tax and customs administration through strengthened collection, audit, and enforcement procedures; and ii) increasing tax revenues. This, in turn, would help achieve stronger revenue performance to support increased social spending, the provision of basic infrastructure and the implementation of the 1996 Peace Accords. The three key indicators corresponding to the project s two Project Development Objectives (PDOs) were: PDO 1: Increase tax returns 1.1 Increase tax revenues by 2000 by 1 percent of GDP above the 8.5 percent of GDP reached in PDO 2: Improve the effectiveness and efficiency of tax and customs administration 2.1 Percentage of late filers reduced from 20 to 10 percent for the value-added tax (VAT) and from 45 to 20 percent for the income tax by Tax arrears due in June 1997 reduced by 50 percent by December Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification The PDOs remained unchanged during the life of the loan. 1.4 Main Beneficiaries The project s target beneficiaries were the tax administration agency and taxpayers in general. Specifically, the operation was expected to bring about: i) qualitative improvements in tax administration in terms of effectiveness, transparency, and assistance to taxpayers; ii) measurable improvement in monitoring and control (financial and physical) of imports; and iii) increased tax revenues. 1.5 Original Components (as approved) The project was comprised of the following components: Component 1 - Creation of a Superintendency of Tax Administration (Superintendencia de Administración Tributaria - SAT) (17 percent of project costs - US$6.5 million total, of which U$4.9 million corresponded to Bank financing). This component supported the design and development of a new operationally and financially independent institution responsible for the collection of internal and customs revenues, including the new organizational structure and management systems, training, and professional development needs. Component 2 - Facilitating Taxpayers Compliance (31 percent of project costs - US$11.7 million total, of which US$6.9 million corresponded to Bank financing). This component was aimed at identifying and implementing measures to improve voluntary taxpayer compliance through the review and simplification of procedures, the modernization of information 2

13 technology, including channeling tax collection through the banking system, the creation of a Special Taxpayers Unit, and the establishment of a network of taxpayer services offices. Component 3 - Strengthening Enforcement Mechanisms (27 percent of project costs - US$10.4 million total, of which US$7.2 million corresponded to Bank financing). This component supported the review of the legal and regulatory framework applicable to tax administration and the institutional structures to improve tax collection enforcement, including the establishment of a new Audit Department. Component 4 - Social Communications (13 percent of project costs US$4.8 million total, of which US$3.3 million corresponded to Bank financing). This component aimed to promote widescale public understanding of the tax administration by financing a social communication campaign to inform and educate the public about the benefits of; an independent and professionalized tax collection authority; changes in the tax law; compliance and enforcement mechanisms; and taxpayer services and rights. This component was also intended to provide the Government feedback on tax administration issues, as well as to promote internal change within the SAT, and to meet the goals of increased transparency and accountability. Component 5 - Project Coordination (12 percent of project costs - US$4.6 million total, of which US$3.7million corresponded to Bank financing). This component financed the overall management and coordination of the project through the Project Coordination Unit (PCU) which was to be established within the SAT. 1.6 Revised Components No additional components were added during the life of the loan. 1.7 Other significant changes The loan agreement was amended in early 2002 to include the category of civil works to finance the construction, the rehabilitation and/or remodeling of SAT s offices. A total of US$6.7 million were allocated to the civil works category, and an additional US$2 million were assigned to the category of goods. These increases were offset by an equivalent reduction in the amounts originally allocated to consultants and other costs that were previously unallocated. The project s original closing date (March 31, 2002) was extended three times (to March 31, 2003; March 31, 2005; and March 31, 2007), resulting in an overall project life span of almost ten years between appraisal and closing. Although the Government explored the possibility of a fourth extension to continue project support throughout the tenure of the present administration, this request was denied by the Bank given the age of the project. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry The ICR finds the quality at entry to be Satisfactory, as it did a panel of reviewers as part of a Quality of Supervision Assessment (QSA) conducted in August The loan objectives were consistent with those of the Bank as articulated in the 1995 CAS (Report No GU; May 30, 1995), which emphasized the need to increase public savings, improve the public sector s extremely limited service delivery capability, and strengthen its historically weak institutional capacity. The project also reflected the Government s own priorities, which called for a far- 3

14 reaching modernization of the public sector. Moreover, by supporting the creation of an independent tax agency and the overall overhaul of the tax administration, the operation contributed to the strengthening of Guatemala s revenue performance, which was critical not only to meet the revenue targets set under the umbrella of the Peace Accords but, more generally, to support sustainable public investment and social sector expenditures. The Bank s team correctly identified a rare window of opportunity to address a major weakness in Guatemala s public sector, capitalizing on the presence of a reform-minded administration. Project preparation benefited from strong ownership on the part of the Borrower and the Bank s ample expertise in publicsector modernization in general and tax administration in particular. The appraisal team correctly identified a set of core actions that needed to be taken as part of the creation of the SAT and included them in this operation. Accordingly, the project s four substantive components focused on well-defined areas of intervention, addressing the immediate issues of designing and implementing the organizational and operational structure of the newly created tax agency, improving tax and customs collection procedures, strengthening enforcement mechanisms, and communicating/educating the public and Congress as to the importance of a sound tax administration. These components were straightforward and provided a comprehensible navigation chart that included clearly defined outcomes and a corresponding timetable. Drawing from an in-depth analysis of the lessons learned from previous tax administration operations and best practices from the Bank's global experience, the appraisal team clearly identified the key determinants of the project s success and incorporated them into the reform strategy, including: promoting dialogue among a broad base of constituencies including Congressional leaders, the civil society and key staff, to build consensus on the tax administration reform; emphasizing the review and strengthening of the legal and regulatory framework; and avoiding overemphasizing aspects related to information technology at the expense of other key institutional aspects such as organization, business processes, and human resources. Likewise, the team carefully gauged the various risks threatening project implementation, including the challenge of obtaining the required 2/3 majority in Congress to approve the creation of an autonomous SAT, and took appropriate measures to mitigate these risks through adequate project design, such as implementing an intensive communication campaign and developing a highly detailed project implementation plan. The project was part of a larger public-sector modernization program supported by the Bank in Guatemala that included a series of three Integrated Financial Management Projects (IFM-I, II and III). In all, these loans supported a well-defined program aimed at improving efficiency and increasing transparency within the public sector, focusing on both the revenue and expenditure sides. This, in turn, has had the secondary impact of improving the management and efficiency of the entire lending portfolio. 2.2 Implementation Despite its overall accomplishments, the project encountered significant obstacles during its implementation. The project was off to a slow start, as heated debates surrounded the passage of legislation calling for the creation of the SAT, making it difficult to obtain the needed 2/3 majority in Congress. While the legislation enabling the creation of the SAT was finally approved in early 1998, there were additional delays in obtaining Congress s approval of the project. As a result, the operation was not declared effective until December 11, 1998, a year later than anticipated at appraisal. Implementation continued to be slow, in part reflecting delays in contracting an international consultant firm to help define the longer term reform strategy. The firm was hired and ultimately began work in mid The project came to almost a complete 4

15 halt in 2002 due to a highly hostile political climate. From 2004 onward, the pace of implementation regained renewed momentum, as the newly appointed SAT management strongly supported its modernization process. The operation finally closed on March 31, 2007 five years after its original closing date. Of the original US$28.2 million loan amount, roughlyus$9 million was cancelled, as project disbursements were severely affected by the delays experienced during implementation. Several factors, both within and outside the Government s control, affected project implementation, including frequent changes in SAT management, delays and obstacles in execution, and, most notably, lack of commitment toward the modernization process. Factors Generally Subject to Government Control: Uneven political support: The project had the full support of the Arzú administration ( ), which sponsored the creation of the SAT within the framework of an ambitious set of public sector reforms undertaken to support the 1996 Peace Accords. Conversely, there was an apparent lack of support on the part of the Portillo administration ( ), which as the opposition party, not only did not support the SAT TAL project, but also attempted to undermine SAT s autonomy. Thereafter, the SAT and the corresponding TAL project has received the full support of the Berger administration ( ). Lack of continuity in SAT s top management: Project implementation was clearly damaged by the frequent changes in management. There have being six different SAT superintendents during the life of the project, with three different superintendents serving during the Portillo administration. The frequent changes in SAT s top management had a detrimental effect on project implementation, as each administration revised the activities being financed under the project according to its own priorities. In some cases, adjustments were only minor, with SAT s overall modernization agenda remaining on course. In other cases, such as under the leadership of the third superintendent who was assigned to the post after the unjustified removal of his predecessor, modernization efforts were abandoned and a large proportion of key managerial staff was removed. Fortunately, the current superintendent has remained in her post from 2005 onward, bringing much needed stability to the agency. Lack of adequate budgetary allocations: As evidenced in the SAT TAL project, Guatemala s tight fiscal controls over external borrowing can slow down project implementation. Specifically, the amount of a project to be implemented in any given year, as well as the corresponding counterpart funds are determined as part of the annual budget approved by Congress. Thus, despite the SAT s financial autonomy (i.e., it is endowed with 2 percent of tax revenues), the pace of implementation of the SAT-TAL project was subject to Congressional approval, not only at the time of the project s approval but every year during its life. This severely affected the pace of implementation as only minimum levels of funding were approved in 2002 and For example, in 2002 no resources were allocated to the project until November. Not surprisingly, the lack of resources severely hindered implementation, putting the project at risk. The lack of funding was largely the result of political infighting and not valid fiscal constraints. Reduction in tax revenues as a result of changes in the tax code and free-trade agreements: As further discussed below, it is impossible to distinguish between the impact of improvements in tax policy per se which were the focus of the operation and changes in tax policy on tax collections. In this context, it is important to note that some of the improvements in tax policy may have been overshadowed by negative changes in tax policy. Specifically, powerful vested interests have consistently opposed tax initiatives in Congress or, in some instances, launched successful court challenges to achieve the strike down of taxes approved by the legislature. For 5

16 example, the 2003 Supreme Court ruling that a presumptive income tax (Impuesto a Empresas Mercantiles y Agrícolas - IEMA) was un-constitutional caused a decline in revenues of 2 percent of GDP in Other factors, such as the opening of the economy and the signing of free trade agreements, have also contributed to lower tax revenues (e.g., the share of customs taxes (impuestos arancelarios) decreased from 1.88 percent to 0.98 percent of GDP between 1995 and 2006 and are expected to continue to decrease as the various trade agreements signed by Guatemala enter into effect). Additional project activities: Additional activities were included during project implementation, including: i) activities in the area of customs reforms that were initially financed under an IDB project; and ii) civil works to finance the upgrading of SAT s infrastructure. a. IDB-financed activities in the area of customs: In November 2001, the SAT requested that the Bank finance and expand efforts initiated by an IDB operation in the area of customs following its closure in The Bank supported the integration of activities focusing on customs reform into the SAT TAL operation, since they were complementary in nature and the two institutions had collaborated closely in the area of customs from the onset of the project. Overall, these activities contributed to the substantive and organizational reforms that were being pursued under the IBRD sponsored operation and constituted a positive addition to the project. b. Civil works: In 2002, the project was amended to include the financing of civil works to finance the upgrading of the SAT s infrastructure. The amendment was the result of strong pressure from Congress, due to the lack of understanding of the nature of technical assistance projects on the part of its leadership and a strong bias against projects that financed mainly consultant activities rather that tangible physical infrastructure, and, more importantly, the existence of the SAT itself as an autonomous entity. After several attempts to curtail project implementation, the leadership in Congress agreed to continue with loan implementation under the condition that civil works were added to the project. While the need to improve the SAT s physical infrastructure was real particularly within customs this addition was not a natural fit for the project as it did not match the project s objective and the PCU as well as the SAT in general lacked the expertise to implement civil works. Consequently, performance in this area fell well below expectations, with no construction being carried out only designs were financed under the project as the bidding process for the actual construction was unsuccessful. This activity is now being pursued with SAT s financing under a project with the United Nations Office for Project Services (UNOPS). Overall, the inclusion of civil works had a negative impact on the operation, as it distracted attention and efforts from the project s core activities without yielding any positive outcomes. Factors Generally Subject to Implementing Agency Control: Uneven level of governance: The agency s governance was seriously weakened during the period between 2000 and 2003, due to the lack of political commitment under the Portillo administration and growing corruption at the higher levels of SAT management toward the end of its administration in The project could do little to offset the hostile political climate, and was at serious risk during this period. The aggressive anti-corruption stand adopted by the Berger administration, which lead to a number of high-profile arrests and indictments of senior officials including the former SAT superintendent and the appointment of a well-regarded ex- 1 BID Operation RTC Strengthening of the Customs System, Project No.GU0082, total cost of US$1.650 million, approved on Nov. 9, 1994; completed on Feb.7,

17 president of the Bank of Guatemala as the head of the SAT were important initial steps toward restoring the SAT s credibility and rebuilding its governance mechanisms. The process toward enhancing SAT s transparency and governance has continued under SAT s current management team, which has demonstrated great conviction and courage in the face of the threats and acts of violence including the assassination of a customs staff in 2006 that resulted from its aggressive anti-corruption campaign within customs. Staff continuity within the PCU: Despite the frequent changes in SAT superintendents, the permanence of the key management and technical team within the PCU helped to provide continuity to the operation. Moreover, the PCU acted as a retaining wall during the period, ensuring proper use of project funds during a period of very weak governance within SAT. Uneven support for the reform process: As clearly shown by the implementation of the operation as well as reform programs worldwide, strong support from powerful and capable champions is crucial to achieve in-depth institutional transformation. While the level of support for the reform process had been uneven until early 2004, the SAT has undoubtedly benefited from having strong champions from 2004 onward. Under the leadership of the two last superintendents, the SAT s modernization program has regained a renewed momentum, setting in motion a sustained wave of cultural and institutional transformation for over three years. Ownership of the modernization process: In 2004 there was a significant shift in the SAT modernization process. The agency s new management not only focused on overcoming the legacy of mismanagement of the previous administration, but also forged a strategic vision of the modernization process to be undertaken. The development of the institutional strategic plan (Plan Estratégico Institucional - PEI) was a crucial factor in the development of a unifying vision of the modernization process that had a strong ownership from all levels of the organization. A management committee was established to oversee the implementation of the plan and to ensure appropriate internal coordination. SAT s new strategic plan helped put the project back on track, as it was fully consistent with the objectives of the project. It also affected the role of the project itself, which until that point, had served as a navigation route for the reform process. From 2004 onward, the project became a strategic tool for the implementation of SAT s own strategic plan. Technical and financial support from the international community: Under the leadership of the current Superintendent, SAT has succeeded in assembling a broad base of technical support through cooperation agreements with many international and foreign agencies, including, most prominently, the International Monetary Fund (IMF), but also the World Customs Organization (WCO), the U.S. Treasury Department's Office of Technical Assistance (OTA), the U.S. Department of Internal Revenues (IRS), the U.S. Agency for International Development (USAID), the U.S. Trade and Development Agency (USTDA), Canada s Border Services Agency (CBSA), the Inter-American Center of Tax Agencies (Centro Interamericano de Administraciones Tributarias - CIAT), and the Spanish International Cooperation Agency (Agencia Internacional de Cooperación Española AECI). Dismal disbursement performance: Despite the project s substantial achievement, disbursements were historically low with total disbursements amounting to only 68 percent of the loan amount. The slow pace of disbursements was largely the result of delays in project implementation, which in turn, was caused largely by a hiatus in project implementation during the Portillo administration. Poor disbursement performance was further worsened by delays in the launching of the loan s civil works component and mistakes in procurement processes that forced SAT to finance over US$1 million in consultancies and civil works out of its own budget. It is important to underscore that in this case, project disbursements do not constitute a good indicator of the 7

18 project s performance. Moreover, as shown in Annex 1, the SAT offset lower disbursements under the project by committing over US$16 million of its own financial resources to ensure continued financing of the ongoing reforms under two UN projects. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization The project s M&E design was rated Moderately Satisfactory as part of the QSA07. In terms of the Key Project Indicators, the project s Result Framework distinguished between changes in tax revenues and improvements in tax administration performance, which was critical in separating the effect of external factors, such as macroeconomic performance and changes in tax policy from improvements in tax administration per se. Specifically, one project indicator (i.e., tax revenues as a percentage of GDP) with its corresponding end-of-project target was defined to measure progress toward the first PDO, focusing on increased tax revenues. While this indicator had high visibility beyond the project, as it coincided with one of the key measures identified under the umbrella of the Peace Accords, it was not helpful in measuring gains in tax collections arising from improvements in tax administration per se. Two additional indicators were identified for the second PDO (i.e., to improve tax administration). Unfortunately, one of them (i.e., tax arrears) had to be dropped, as all tax arrears were transferred to the Ministry of Finance by law, and the concept of tax arrears was eliminated, with tax payers being defined as either filers or non-filers. The second tax administration indicator (i.e., percentage of late filers) was first monitored at the end of 2001, focusing primarily on large taxpayers (the chaos in the former tax and customs agencies files and the generalized lack of information made it very difficult to estimate this indicator accurately, particularly at early stages of implementation). From 2004 onward, this indicator has been systematically tracked for medium taxpayers as well. 2 An extended set of output indicators were identified for each of the four core project components. Although some of these indicators were not very valuable in terms of measuring the impact of the activities being carried out under each component, they provided a detailed roadmap for the initial stages of the creation of the SAT, including critical activities to be completed and their expected timetables. Considering that the PDO1 was not well suited for a tax-administration project and that one of the two indicators selected for PDO2 could not be used, the original M&E was not strong enough to adequately assess the impact of the project. Fortunately, the project s M&E improved substantially over the life of the project, as the SAT developed its own performance indicators. The strategic planning unit has played a key role in enhancing the internal consistency and reliability of SAT statistics. Although it was established as part of the SAT s original structure in 1998, since 2004 this unit has assumed responsibility for establishing the M&E methodology for all SAT performance indicators and their computation. While individual divisions were initially resistant to share information with the strategic planning unit, the establishment of a performancebased salary bonus in 2005 that required the definition of specific performance indicators for each division and its sub-areas and a detailed tracking system contributed to the sharing of information. 2 To track progress for this indicator, the supervision team used data provided by SAT s operational areas (i.e., tax collections and management). The data being used in this ICR has been elaborated by the strategic planning unit, which is now responsible for all SAT statistics. 8

19 This ICR has taken advantage of the SAT s stronger M&E system for its Results Framework Analysis. While some of the indicators particularly those relating to tax collections can be traced back to the project s origin in 1997, reliable data on the SAT s internal performance exists only from onward. However, the substantial gains they offer in terms of reliability and internal consistency offsets the disadvantage of the shorter time span. 2.4 Safeguard and Fiduciary Compliance The PCU had adequate financial management systems, software, and trained staff. No systemic problems were identified during implementation. Likewise, except for some occasional delays in the implementation of agreed procurement schedules and procedural mistakes in two procurement processes, there were no systemic problems with regard to the quality and reliability of the project s procurement administration. 2.5 Post-completion Operation/Next Phase The PCU has now been absorbed into SAT s permanent structure, to constitute a newly established Project Coordination Unit. This unit will be responsible for coordinating all projects with external financing, including the two ongoing projects with United Nations (UN) agencies. The two UN projects will continue to provide financing (i.e., US$16.6 million) to the actions supported under the SAT TAL operation. In particular, an ongoing operation with the United Nations Development Programme (UNDP) will continue to support SAT s modernization efforts, with a special emphasis on customs. Under a different operation, UNOPS will support the SAT in its efforts to improve its physical infrastructure, which as discussed earlier, was not successful under the SAT TAL operation. It is important to note that these two projects are financed by SAT s own financial resources, which denotes its commitment to the reform effort. At the SAT s request, the Bank team will continue to provide technical assistance during FY08 (the project was assigned full supervision resources for FY08, although the only activity pending is the ICR preparation). As in the case of its predecessors, the Third Development Policy Loan (DPL-III), which was recently approved by the Board (Loan No GU, August 2, 2007), includes targets in the areas of tax revenues, tax administration, and customs, ensuring that the SAT continues to have visibility within the Bank s portfolio. As mentioned earlier, the SAT has actively sought the support of an array of international agencies and institutions, which are providing valuable know-how and expertise in core areas. The continuous support of these agencies will help sustain the reform efforts and continue to improve SAT s institutional capacity. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The Bank successfully capitalized on a unique window of opportunity to support the peace process in Guatemala by financing an operation aimed to strengthen Guatemala s weak tax administration and, hence, to increase revenues. A decade after its preparation, the objectives of the SAT TAL continue to be highly relevant and consistent with the Bank s assistance strategy and the national priorities. Between 1995 and 2004, the Bank produced two country assistance strategies whose overarching objectives were to help: i) reduce poverty; ii) promote growth and 9

20 economic stability, and iii) improve the management and productivity of the public sector. 3 The SAT TAL directly supported the third objective (i.e., by strengthening tax administration) and indirectly supported the other two (i.e., by increasing tax revenues to, in turn, help fund social infrastructure investments and support macroeconomic stability). The 2005 CAS directly supported the program of the current administration. Specifically, the main foundations of the Berger administration s Vamos Guatemala program include: i) maintenance of macro stability including fiscal reforms to create further space for social investment; ii) security both personal and legal; and iii) improved governance and public sector management, including at sub-national level. As denoted by the strong political support it received from 2004 onward, the operation s objectives were highly consistent with the agenda of the Berger administration and the 2005 CAS, providing direct support to the objective of improving public sector management and indirectly supporting the objective of maintaining macroeconomic stability to, in turn, finance social investments. 2. Achievement of Project Development Objectives Despite the obstacles and challenges faced during its implementation, the operation made a substantial contribution toward improving Guatemala s revenue performance by supporting the creation of a new tax agency for internal revenue and customs with operational, financial, and human resources management autonomy. The operation also actively supported the strengthening of tax collection and auditing processes, the establishment of taxpayer assistance services, the elimination of loopholes in the law and simplification of norms and procedures, and the introduction of more rigorous enforcement mechanisms. The lack of progress in the area of physical infrastructure has not affected overall performance with respect to the PDOs, since it was a later project add-on that responded to political pressures rather than substantive arguments. The two PDOs have been met, as: i) tax revenues have increased in line with the end-of-project target; and ii) tax administration has been substantially enhanced. However, given the project s extended life, more substantial gains in tax revenues should have been achieved. The achievement of objectives can be summarized as follows: PDO 1 Increasing tax revenues: The operation has marginally satisfactorily met the objective of increasing tax revenues. Net tax revenues represented 10.3 percent of GDP in 2006, thus largely achieving (and exceeding from 2001 onward) the end-of-project target of a 1 percent increase with respect to 1996 levels from 2000 onward. 4 The historical evolution of Guatemala s tax burden over the past 40 years shows two clearly distinguishable periods. The first one, which spans between 1965 and 1995, is characterized by a stable tax burden, at levels below 8 percent of GDP. The second period, which begins with the signing of the Peace Accords in 1996, is characterized by increasing efforts to raise tax revenues. During this second period, tax burden as a percentage of GDP has increased from 8.8 percent in 1996 to 10.3 percent in However, 3 Each CAS also had a separate objective: human resource development (the 1995 CAS), and building social cohesion and strengthening participatory decision processes (the 1998 CAS). 4 Note that the actual tax revenues in 1996 were higher as a proportion of GDP than the preliminary estimates utilized at appraisal 8.8 and 8.5 percent of GDP, respectively. 5 Guatemala s Central Bank has recently recalculated GDP using 2001 as the base year. However, to ensure consistency with the original project documents and performance targets, this report refers to the GDP with 1958 as the base. Most reports from the Government and the IMF make reference to both GDPs to avoid confusion. 10