Guatemala s CGAC Experience

Guatemala s CGAC Experience Challenges, Achievements and Opportunities October 28, 2010 Guatemala Country Office Latin America and Caribbean Region The World Bank

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ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities AECID Spanish Agency for International Development Cooperation (Agencia Española de Cooperación Internacional para el Desarrollo) ALAC Advocacy and Legal Advice Centre, Transparency International BANGUAT Guatemala Central Bank (Banco de Guatemala) CAS Country Assistance Strategy CCT Conditional Cash Transfer CD Certificate of Deposit CFAA Country Financial Accountability Assessment CGAC Country Governance and Anti-Corruption CGC Supreme Audit Institution (Contraloria General de Cuentas) CICIG International Commission Against Impunity (Comisión Internacional Contra la Impunidad en Guatemala) CIDA Canadian International Development Agency COPRE Presidential Commission for Reform, Modernization and Strengthening of the State and its Decentralized Entities (Comisión Presidencial para la Reforma, Modernización y Fortalecimiento del Estado y sus entidades Descentralizadas) CoST Construction Sector Transparency Initiative CPAR Country Procurement Assessment Report CPS Country Partnership Strategy DANIDA Danish International Development Agency DfID UK Department for International Development DNCAE Dirección Normativa de Contrataciones y Adquisiciones del Estado DPL Development Policy Loan EDI Electronic Data Interchange EU European Union FM Financial Management FSAP Financial Sector Assessment Program GAC Governance and Anti-Corruption GDP Gross Domestic Product GNI Gross National Income GTZ German Technical Cooperation Guatecompras Contracting and Procurement Information System IADB Inter-American Development Bank LCR Latin America and Caribbean Region MP Attorney General's Office (Ministerio Público) NCB National Competitive Bidding NEDA Netherlands Development Assistance NGO Non Governmental Organization NORAD Norwegian Development Agency OAS Organization of American States OECD-DAC The Development Assistance Committee for the Organization for Economic Co-operation and Development ONSEC National Civil Service Office (Oficina Nacional de Servicio Civil) PFM Public Financial Management PEFA Public Expenditure and Financial Accountability PIU Project Implementation Unit PRONACOM National Program for Competitiveness (Programa Nacional de Competitividad) SAG Government Audit System (Sistema de Auditoría Gubernamental) SAP Systems, Applications and Products in Data Processing SAT Superintendency of Tax Administration (Superintendecia de Adminitracion Tributaria) SEPA Procurement Plan Execution System (Sistema de Ejecución de Planes de Adquisiciones) SIAF Integrated Public Finance Management System (Sistema Integrado de Administración Financiera y Control) SIAFMUNI Public Financial Management System at the Municipal Level SIDA Swedish International Development Cooperation Agency SME Small and Medium Enterprise StAR Stolen Asset Recovery Initiative TI Transparency International TSE Supreme Electoral Tribunal (Tribunal Supremo Electoral) UN United Nations UNDP United Nations Development Programme USAID United States Agency for International Development VAT Value Added Tax WB World Bank WBI World Bank Institute

TABLE OF CONTENTS Guatemala CGAC Experience A. GUATEMALA GENERAL ENVIRONMENT... 1 B. GOVERNANCE IN GUATEMALA... 2 C. STATUS AND REFORM PROGRESS OF THE INSTITUTIONAL FRAMEWORK... 4 D. WORLD BANK GROUP CONTRIBUTIONS TO GOVERNANCE REFORM... 10 E. GAC IN FY09-12: ACHIEVEMENTS AND OPPORTUNITIES... 16 TABLES AND BOXES TABLE 1. STATUS OF THE INSTITUTIONAL FRAMEWORK AND PROGRESS SINCE 2004 ACCORDING TO A RECENT WORLD BANK ASSESSMENT... 5 TABLE 2. OVERVIEW OF GOVERNANCE REFORMS INITIATED DURING THE COLOM ADMINISTRATION... 10 TABLE 3. DONOR REFORM AGENDA IN SUPPORT OF GOVERNMENT S TRANSPARENCY PLAN... 11 TABLE 4. WB SUPPORT TO GOVERNANCE REFORM IN GUATEMALA SINCE 2004... 16 BOX 1. DPL GOVERNANCE REFORM: TRANSPARENCY AND PUBLIC SECTOR MANAGEMENT... 12 BOX 2. DPL GOVERNANCE REFORM: FINANCIAL SECTOR... 12 BOX 3. DPL GOVERNANCE REFORM: PUBLIC SPENDING CAPACITY AND TAXATION... 13 BOX 4. GAC IN PROJECTS: TRANSPARENCY IN GUATEMALA S COMPETITIVENESS PROJECT... 14 BOX 5. 2008 CGAC ACHIEVEMENTS... 15 BOX 6. 2009 CGAC-FUNDED ACTIVITIES... 18 ANNEXES ANNEX A. BIBLIOGRAPHY... 21 ANNEX B. 2006 CGAC CONSULTATIONS... 24 ANNEX C. DONOR INVOLVEMENT IN GOVERNANCE DIMENSIONS... 25

A. GUATEMALA GENERAL ENVIRONMENT 1. The administration of Alvaro Colom took office in January 2008 committing to increase growth and address high poverty and inequality. The vehicle for the administration s program is an ambitious plan that calls for inclusive broad-based growth through improving productivity and investment and greater social spending for the poorest. 1 2. With a multiethnic population of about 14 million and a per-capita GNI (Gross National Income) of US$2,670, Guatemala is the largest economy in Central America. Economic growth has been relatively stable compared to the rest of Latin America. Much of Guatemala s relative stability can be attributed to prudent macroeconomic policies that have kept inflation and public debt manageable. 3. Guatemala has made considerable development progress since the signing of the Peace Accords in 1996. Particularly, improvements have been made in consolidating peace and building democratic institutions: civilian rule has been consolidated and military power sharply curtailed. 4. Despite progress on democratic consolidation, poverty and inequality remain high and social indicators (health, nutrition, education) are low compared to countries of similar income levels. Poverty declined from 56 to 51 percent between 2000 and 2006, but extreme poverty remained roughly unchanged at about 15 percent. With a Gini coefficient of 0.45, Guatemala ranks among the 15 most unequal countries in the world; the richest 10 percent of Guatemalans claim 48.2 times the income of the poorest 10 percent. 2 Inequality is closely related to ethnic exclusion. 56 percent of the poor are indigenous, in contrast to 44 percent of the non-indigenous population. The gap in health is even more pronounced: 69.5 percent of indigenous children suffer from malnutrition compared to 35.7 percent for non-indigenous children. 5. Guatemala continues to be one of the most violent countries in Latin America. Its overall rate of 48 homicides per 100,000 is well above the regional average of 27.5/100,000 and the global average of 8.8/100,000. A rise in homicides by over 50 percent since 2004 has brought the number of homicides to a post civil war record of 6,451 in 2009. 3 This rise is closely correlated with an increase in gang activity and narco-trafficking. 125,000 gang members are estimated to operate in Guatemala today compared to a police force of 20,000 4 ; a 47 percent hike in cocaine trafficking since 2006 has brought the value of cocaine trade through Guatemala up to an estimated $2.4bn. Cartels today dominate up to 40 percent of Guatemalan territory. 5 As a result, almost two-thirds of Guatemalans consider insecurity to be the principal problem in the country. 6 6. Besides economic inequality, ethnic exclusion and organized crime, stakeholder consultations repeatedly point to institutional weakness as key driver for weak governance and anti-corruption efforts. The remainder of this text will discuss these issues further and give an account of the achievements until today as well as challenges and opportunities for the future. 1 World Bank (2008) Country Partnership Strategy for the Republic of Guatemala. 2 UNDP (2008) 2007/2008 Human Development Report. 3 Freedom House (2010) Freedom in The World 2010: Guatemala. 4 USAID (2009) Guatemala Democracy and Governance. 5 ICG (2009) Guatemala at a Crossroads. 6 LAPOP (2008) Cultura política de la democracia en Guatemala, 2008, El impacto de la gobernabilidad. 1

B. GOVERNANCE IN GUATEMALA 7. The current conditions for Governance and Anti-Corruption (GAC) in Guatemala are challenging. Of the six World Bank Institute (WBI) Governance Indicators, Guatemala has only improved in political stability since 1998. However, since a regression in 2003, there have been slight improvements in voice and accountability as well as regulatory quality. The country ranks below the regional average in all six indicators. In three of the indicators political stability, control of corruption and rule of law Guatemala attains less than half the average regional percentile rank. Less than a third of Guatemalans is satisfied with the way democracy works in the country. 7 Source: World Bank Institute (2009) 7 Latinobarometro (2009) Informe 2009. 2

Source: World Bank Institute (2009) 8. Institutional weaknesses appear reflected in the low trust that citizens place in their government. On aggregate, only 28 percent of Guatemalans trust their government well below the regional average of 44 percent. Similarly, comparisons with other institutions within Guatemala suggest that public entities fare particularly poorly in terms of citizens perceptions. Less than 15 percent of Guatemalans think that institutions such as the Congress, the police force or the political parties are honest compared to almost 80 percent for the Catholic Church and over 60 percent for international development cooperation agencies. Citizen s Trust in Government Citizens Trust in Institutions Sources: World Bank Institute (2005) & Latinobarometro (2008) 3

9. A difficult governance and anti-corruption environment has made poverty reduction more difficult and placed constraints on investment and economic growth. Enterprise Surveys, Doing Business and Total Factor Productivity Analysis all report red tape, corruption, crime and violence as the most important constraints on growth and investment. 8 The 2008 World Bank Group Investment Climate Assessment 9 finds that Guatemalan firms lose 4 percent of their annual sales in security expenses or theft. Similarly, paying bribes is common business practice. More than 15 percent of entrepreneurs, for instance, report frequent payment of bribes to entities such as the national police, courts, customs or ports. Small and micro-enterprises (SMEs) are the most prejudiced by corruption. According to the WBI Survey Diagnostic 10, small enterprises spend more than 4 percent of their sales in bribes to access public services compared to less than 1 percent in the case of mid-sized or large firms. Red tape and in-transparent regulation act to the detriment of not only firms but also their employees; they feature among the main causes for informality with its concomitant lack of contractual protection and social security for workers. With over 70 percent of its workforce employed in the informal sector, Guatemala has the least formalized labor market in all of Central America. C. STATUS AND REFORM PROGRESS OF THE INSTITUTIONAL FRAMEWORK 10. While the overall governance framework in Guatemala remains in need of improvement, progress has been made in strengthening key elements of the framework in recent years. Put more generally, an unfavorable aggregate governance assessment is paralleled by moderate ratings for Guatemala s institutional framework, particularly in the Executive branch, along a limited set of governance dimensions. Following the Latin America and Caribbean Region (LCR) GAC Approach Paper, GAC can be disaggregated into 12 dimensions. Table 1 summarizes the World Bank assessment of Guatemala s institutional framework against these 12 dimensions based on both its own work 11 and on studies by the United States Agency for International Development (USAID) 12, Transparency International (TI) 13 and Freedom House 14. Within the 12 dimensions, Guatemala s governance environment is found to be weak regarding checks and balance institutions (oversight bodies, justice system and parliament) media and citizen oversight, competitive markets as well as civil service and income declaration of public officials. On the other hand, core aspects of the Executive financial management systems, the budget process, tax administration and procurement systems as well as banking supervision attain moderate to robust ratings. Related, progress has been most substantial in the Executive with improvements in financial management, procurement, tax administration and budgeting in addition to banking supervision and freedom of information. The remainder of this section shall review the current status of each of the governance dimensions as well as recent progress made. 8 Business Anti-Corruption Portal (2009) Guatemala Country Profile. 9 Based on survey data from January to June 2007. 10 World Bank Institute (2005) Diagnostico de Transparencia, Corrupción y Gobernabilidad. 11 See, for instance, World Bank (2007) Guatemala Country Financial Accountability and Procurement Assessment, and World Bank (2008b) Guatemala Investment Climate Assessment. 12 See, for instance, USAID (2007) Evaluación de Avances y Elaboración de Recomendaciones en Materia de Transparencia, Medidas Anti-Corrupción y Rendición de Cuentas. 13 As, for instance, by the local Transparency International Chapter: Acción Ciudadana (2006) Estudio Sobre el Sistema Nacional de Integridad de Guatemala. 14 See, for instance, Freedom House (2006) Countries at the Crossroads: Guatemala. 4

Table 1. Status of the Institutional Framework and Progress since 2004 according to a recent World Bank Assessment Efficiency and Effectiveness of Executive Efficiency and Effectiveness of Checks and Balance Institutions Effectiveness of Media and Citizen Oversight Efficient and Wellregulated Markets Governance Dimension 5 Status of Institutional Framework Progress since 2004 Clean and efficient tax administration agencies Transparent, comprehensive and open budgets Integrated financial management systems for central and sub-national governments Transparent and competitive procurement systems Asset and Income declaration for public officials Professionalized civil service and efficient and transparent delivery of services Independent and effective oversight bodies Independent, efficient, accessible justice systems Transparency in campaign financing and legislative voting records Adoption and implementation of freedom of information laws, social monitoring and independent media Competitive markets and effective regulatory frameworks to regulate public services and monopolies Prudential regulation and supervision of banking sector Ratings: limited / weak moderate significant / robust 11. Guatemala s Tax Administration Authority (Superintendencia de Administracion Tributaria, SAT) has undergone comprehensive reform. To reduce business costs, reduce customs processing times and increase compliance with tax and customs regulations, the Government is simplifying rules and enhancing information systems. To ease compliance, an information system for electronic filing of Value Added Tax (VAT), an Integrated Tax Current Account system for the 300 largest taxpayers and an internet-based portal for SMEs have been established. Related, an Anti-Tax Evasion Law has been passed in 2006 and the tax base has been gradually widened. These and other reforms have contributed to an increase in the tax collection rate of around 1 percent of Gross Domestic Product (GDP) from 2005 to 2007. Nonetheless, political opposition and unfavorable constitutional court rulings on taxes have kept Guatemala s tax revenue from rising to more than slightly over 12 percent of GDP over the same period below the 13.2 percent of GDP stipulated in the 1996 peace accords and far below the 18 percent Latin American average. 15 The onset of the global financial crisis in mid-2009 reversed at least temporarily the limited gains made in fiscal revenue, with tax collection rates declining to 10.4 percent of GDP in 2009. 16 At the same time, inefficiencies in part of the tax administration process persist. Every second entrepreneur reports that the SAT is the institution with the most time-consuming bureaucratic requirements. Nonetheless, roughly half of all entrepreneurs and households also report that the SAT delivers good quality service compared to, for instance, approximately 40 percent for courts and 20 15 World Bank (2008) Country Partnership Strategy for the Republic of Guatemala. 16 Ministerio de Finanzas Publicas Guatemala (2010) Indicadores del Sector Fiscal.

percent for the national police (this data is drawn from World Bank Institute (2005); citizens perception might have improved in response to SAT reforms since then). Parallel, Guatemala has prioritized actions to ease the customs burden, among others through a Customs Management System in major customs entry points. 12. Incremental reform has enhanced transparency in the Guatemalan budgeting process. A specialized office in the Ministry of Finance has been created to facilitate access to fiscal information and guarantee transparent use of public resources; the Comptroller General s Office has been strengthened institutionally and the processing of citizen claims and allegations on misuse of public funds and fraud cases facilitated; a Single Treasury Account for Multilateral Credit execution has been established; the use of the integrated public financial management system (Sistema Integrado de Administración Financiera y Control, SIAF) for budget and payment processes has been enhanced; lastly, a regulatory framework and Directorate in the Ministry of Finance to better control and enhance the transparency of trust funds (fideicomisos) has been created and the Government has issued regulations to include, for the first time in 2009, expenditures under special public trust funds in the budget. In addition, the Comptroller General now includes trust funds in its annual audit of public accounts. Related, the Government has strengthened controls and monitoring capacities to improve transparent and adequate management of public trust funds. These are important milestones; Guatemala s budget is marked by the use of fideicomisos. They amounted to 9.4 percent of the total government budget in 2009. 17 Originally established to speed up the disbursement of funds for high-priority expenditures, fideicomisos have complicated transparency in public spending execution thus contributing to limited public expenditure efficiency in certain domains. 13. Guatemala s SIAF is considered good practice in the region. It incorporates automated processes and systems in the areas of budgeting, treasury, accounting, as well as substantial improvements in other areas such as human resources management. The system is operational in all central government agencies and in most of the decentralized entities, and covers approximately 300 executing-level agencies. It is linked to transparency web portals that allow the public to access and consult budget-related information for most public sector institutions. Furthermore, a citizen-oriented portal Consulta Ciudadana was recently created with user-friendly applications to facilitate access and interpretation of complex financial management reports. Moreover, new financial management procedures and systems were successfully implemented in all municipalities. A new framework for municipal financial management (SIAFMUNI) has allowed for a more efficient and transparent model. Lastly, an automatic and fully integrated payroll system is being implemented throughout all central government agencies, including the health and education sectors. Nearly all central government employees are now paid through the banking system and an updated database of public sector employees has been developed and integrated with the SIAF system. Although these are significant achievements, challenges do remain on the demand side and with regard to the usage of the system; users and stakeholders continue to complain and express discomfort with the accessibility of fiscal information. 14. Accounting for 3 percent of GDP, public procurement is a central lever for good governance in Guatemala. In this context, the country s e-procurement system Guatecompras has been a key reform driver by significantly increasing compliance and transparency. It publishes information about all steps of a procurement process for each acquisition above 30,000 quetzales (approximately $4,000). Several decrees since the initial legislation in 2004 have enhanced the coverage of Guatecompras; it is now operating and registering all central government agencies procurement transactions and is gradually being expanded to decentralized entities and municipalities. Although the application has yet to support online transactions (such as electronic receipt of bids or electronic purchasing), the system has successfully promoted higher degrees of transparency in the public 17 Ministerio de Finanzas Públicas Guatemala (2010a) Transparentando los Fideicomisos Públicos. 6

procurement practices as evidenced by improvements in users perceptions and a recent award granted by the private sector association in Guatemala. The Ministry of Finance has recently expanded the e- procurement system with a new module, Guatecompras Express, which makes detailed information on executed government contracts for large-quantity regularly purchased goods publicly available. Yet, parallel systems, wide-ranging exceptions and opacity in the tender process continue to exist in some areas there is thus still further scope to strengthen and extend the coverage of Guatecompras along with the offline processes. 15. A 2005 law to regulate the integrity of the responsibility of public officials has strengthened transparency in the use of funds by public officials. Judicial declarations by public officials can now be analyzed and challenged in cases of illicit enrichment, for instance. In 2009, a postulation law followed which, among others, requires banks to analyze and report financial activities of public officials and their family members. Similarly, most forms of favoritism, for instance the public recruitment of family members of public officials, have now been made illegal. Yet, other areas of possible misconduct remain unregulated. Certain conflicts of interest, for example, do not fall under any regulatory framework. 16. Civil service reform in Guatemala is primarily the responsibility of the Presidential Commission for Reform, Modernization and Strengthening of the State and its Decentralized Entities (Comisión Presidencial para la Reforma, Modernización y Fortalecimiento del Estado y sus entidades Decentralizadas, COPRE), established in 2004 to promote the modernization of the Guatemalan State. Yet, Congress rejected a subsequent civil service reform law in 2006. According to a 2007 USAID study 18, the Guatemalan civil service, under the auspices of the National Civil Service Office (Oficina Nacional de Servicio Civil, ONSEC), remains plagued by a lack of meritocracy and politicized recruitment, promotion and continuation of employment. 17. Horizontal checks on the Executive most of all parliamentary control are still in need of strengthening. The Legislative and other enforcement institutions are not accompanying the executive governance reform efforts at the same pace. A study by the local TI chapter 19, for instance, suggests that the Congress does not yet make adequate use of its powers to summon the executive and create investigative commissions. Insufficient technical capacity of parliamentarians and their staff as well as internal party divisions all contribute to limited effectiveness of legislative oversight. On a positive note, an automated workflow system to support the Comptroller General s Office audit processes has been developed and is under implementation. Although not completely operational and subject to further evaluations, the Government Audit System (Sistema de Auditoria Gubernamental, SAG) is supporting the core business processes of the Comptroller s Office. 18. Guatemala has seen a variety of initiatives to enhance the efficiency and independence of its justice system. In 2004, for instance, the Commission to Investigate Illegal Groups and Clandestine Security Apparatuses was established by the UN and the Guatemalan government. In 2007, the International Commission Against Impunity in Guatemala (Comisión Internacional Contra la Impunidad en Guatemala, CICIG) followed. It is tasked with investigating complicated, high-profile crime cases as well as corruption and crime within public institutions, political parties and civil society. Parallel, there have been progressive reform attempts of the security forces. In 2008, the Colom administration removed 1700 police officials for corruption, including the deputy director of the national police. In 2009, drugrelated removals of the general director, deputy director and director of operations of the national police followed. Despite these reform efforts, however, Guatemala s justice system still reportedly suffers from cases of corruption, impunity, intimidation and inefficiency. Most conspicuously, the country is plagued by exceptionally high levels of impunity; in 2009, only 4 percent of all homicide cases resulted in 18 USAID (2007) Evaluación de Avances y Elaboración de Recomendaciones en Materia de Transparencia, Medidas Anti- Corrupción y Rendición de Cuentas. 19 Acción Ciudadana (2006) Estudio Sobre el Sistema Nacional de Integridad de Guatemala. 7

convictions. 20 Related, and according to a 2008 study, the majority of victims have ceased reporting crimes. 21 Judges and prosecutors are vulnerable to intimidation, particularly when investigating individuals with ties to drug trafficking and organized crime. The U.S. State Department listed 129 cases of threats against judicial sector workers in 2008. In addition, the justice system is overburdened, facing a backlog of cases. The lack of courtrooms and personnel is exacerbated by judicial complexity as well as non-transparent hiring practices. As a result of these shortcomings, 68 percent of Guatemalans consider that no trust at all can be placed in the judiciary while over 80 percent believe that the judicial system is manipulated by economic and parallel power structures. 22 19. A 2004 electoral and political party law regulates private funding of political parties. Yet, as a 2007 USAID study notes 23, the Supreme Electoral Tribunal (Tribunal Supremo Electoral, TSE) lacks the capacity to analyze and verify the accounts published by Guatemala s political parties. As a result, 53.5 percent of surveyed Guatemalans as well as a variety of independent observers agree that campaign financing for political parties is directly related to corruption and narco-trafficking. 24 20. As a major achievement of the Colom Administration, the Congress passed the law for Free Access to Public Information in September 2008. It grants citizens access to public information, including information about budgets and salaries, and promotes government transparency. The law matches international best practice and fulfills standards in terms of both scope of information to be disclosed and monitoring capacities for the law to be enforced. In line with the passage of this law, the Government has taken steps towards creating an institutional framework for transparency, including the creation of a Vice Ministry of Fiscal Transparency and Evaluation in the Ministry of Finance, the establishment of a participatory commission including specialized NGOs and donors to provide support to the governance reform agenda, and a Public Information Unit responsible for handling requests for public records. Despite access to information, media and civil society have only limited leeway to assume their watchdog function. Newspaper and television ownership is concentrated, curtailing media freedom. In addition, journalists continue to face intimidation, assaults and harassment, particularly when covering stories related to corruption, drug trafficking and organized crime. 25 21. Despite progress, competitive markets and effective regulation are still in need of substantial improvement. As of 2006, Guatemala removed all price controls and is gradually eliminating subsidies on various economic activities and products; there are no public monopolies in goods markets and no major legal or institutional barriers to land ownership. As part of the group of more dynamic reform countries, Guatemala s Doing Business rank improved from 118 in 2007 to 110 in 2010. The most notable improvement has been the establishment of the Ventanilla Agil system, an electronic registry launched in 2006 that coordinates all business registration processes and drastically reduced the number of days needed to register property. Further reform steps include the establishment of an Electronic Data Interchange (EDI) system for customs declarations, the introduction of electronic signatures for registrars and the simplification of procedures to obtain licenses and inspections. However, Guatemala s overall Doing Business rank is still significantly worse than the regional average not the least because contract enforcement is still deficient in the country; congested court systems and extended appeals processes contribute to average enforcement durations of four years. 22. Guatemala has made important progress towards prudential regulation and supervision of the banking sector. Supervision of financial groups was improved, among others through the supervision 20 CICIG (2010) Tribunal de Conciencia contra la Violencia Sexual hacia las Mujeres. 21 ICG (2010) Guatemala: Squeezed between Crime and Impunity. 22 World Bank Institute (2005) Diagnostico de Transparencia, Corrupción y Gobernabilidad. 23 USAID (2007) Evaluación de Avances y Elaboración de Recomendaciones en Materia de Transparencia, Medidas Anti- Corrupción y Rendición de Cuentas. 24 In July 2009, the TSE presented a funding request to strengthen its audit capacity which received favorable responses by donors. Reform progress in campaign financing might thus be forthcoming in the near term. 25 Freedom House (2009) Freedom in The World 2009: Guatemala. 8

of risk profiles under a new manual and functional area at the Superintendency of Banks, and through the mandatory reporting of financial terms of trading operations related to CDs and Government bonds to the Central Bank (Banco de Guatemala, BANGUAT). The payment system was strengthened, for instance through the implementation of a fully operational electronic clearing system for banks. Banguat s debt instruments and regular issuances were standardized to help develop an interest rate yield curve. Several laws, including the Movable Property Guarantees Law, were passed to unlock access to credit, especially for SMEs). The investigation of illegal activities was intensified: the country was taken off the list of Non-Cooperative Countries of the Financial Action Task Force and a Special Investigation Unit in the Superintendency of Banks was established. Financial sector reform has helped increase domestic credit to the private sector from 20 percent of GDP in 2000 to 27.2 percent in 2008. 26 While these figures represent important progress, they remain low compared to the Central American average of 47 percent. Moreover and as the 2006-2007 failures of Banco del Café and Banco de Comercio illustrate triggered in part by offshore operations and connected lending which had escaped effective supervision there are still areas for improvement in banking supervision. 23. In sum, substantial governance reform progress has until recently been limited primarily to aspects of core public sector management in the executive, most of all procurement and financial management systems and, to a lesser extent, budgeting, tax administration and illicit enrichment by public officials. 24. Since 2008, the Colom administration has been committed to broadening the governance agenda. Governance and Anti-Corruption are part of the Government s main priorities, led by the Vice President along with the Minister of Finance, who is leading efforts on fiscal transparency. Milestones include the extension of the CICIG (which was established in September 2007), the creation of a Vice Ministry for Transparency, the enactment of stricter regulations to monitor fideicomisos, the strengthening of the Comptroller General s Office, the expansion of the coverage of SIAF and Guatecompras, the modernization of financial sector regulation and payment systems, and the passage of key high-profile legislation such as the Access to Information Law. Table 2 summarizes the multitude of governance reforms initiated by the Colom administration. The commitment of the current administration to expand the governance agenda offers a solid window of opportunity to strengthen the World Bank engagement on governance reform in the country. Prior to discussing potential entry points for such enhanced engagement in section E., the next section shall review recent Bank contributions to GAC progress in Guatemala. 26 World Bank (2010) Data - Domestic credit to private sector (% of GDP). 9

Table 2. Overview of Governance Reforms Initiated During the Colom Administration Governance Dimension Efficiency and Effectiveness of Executive Efficiency and Effectiveness of Checks and Balances Effectiveness of Media and Citizen Oversight Efficient and Wellregulated Markets Governance Reform Law For Solidarity Tax (Ley del Impuesto de Solidaridad) Other Fiscal Reform Initiatives Creation of a Vice-Ministry of Fiscal Transparency and Evaluation within the Ministry of Finance Approval Dec. 2008 Still pending August 2008 Framework Law on Security (Ley Marco de Seguridad) March 2008 Law against Gender Violence and Femicide (Ley Contra El Femicidio Y Otras Formas De Violencia Contra La Mujer) Law Against Sexual Violence, Exploitation and Human Trafficking (Ley Contra la Violencia Sexual, Explotación y Trata de Personas) Law for Arms and Ammunition (Ley de Armas y Municiones) Establishment of CICIG Extension of CICIG mandate until September 2011. Law To Strengthen Criminal Prosecution (Ley del Fortalecimiento de la Persecución Penal) Law for Nomination Commissions (Ley de Comisiones de Postulación) Law for Free Access to Public Information (Ley de Libre Acceso a la Información Pública) Financial Sector FIRST initiative: Guatemala is the first country in Central America demonstrating political commitment to participate May 2008 Feb. 2009 March 2009 Sep. 2007 April 2009 April 2009 May 2009 Sep. 2008 June 2009 D. WORLD BANK GROUP CONTRIBUTIONS TO GOVERNANCE REFORM 25. The World Bank s GAC engagement in Guatemala is based on four strategic considerations: i) the country s political and institutional reality, ii) country demands, iii) GAC activities of other donors and iv) the Bank s own comparative advantage. This approach closely mirrors the LCR GAC strategy in that it focuses on pragmatism and responsiveness to clients concerns on governance. In this context, the Bank organizes continuous consultations with different stakeholders to discuss priorities, for one example see annex B. 26. To harmonize its governance and transparency initiatives, the World Bank takes part in a Transparency Coordination Table, together with 11 other bi- and multilateral donors (see Annex C). The World Bank recognizes the leadership of other partners in supporting key elements of the governance reform agenda. The Bank will, for instance, refrain from engaging in issues related to security where bilateral partners and the UN System are active and where the Bank lacks comparative advantage. Building on this division of labor, the Transparency Coordination Table has developed a common agenda that is part of the dialogue with the Government. It has for example coordinated sometimes jointly with civil society institutions such as Acción Ciudadana and Coalición por la Transparencia support to the Presidential Transparency Plan during the Berger administration, to Guatemala s SAG and Contraloria General de Cuentas, CGC (Comptroller General) and to the 12 th TI Anti Corruption Conference in Guatemala, and it has assessed the governance environment prior to the 2007 elections. With the incoming Colom administration, it has also developed a governance agenda in support of the Government 10

Transparency Plan (Table 3). The Bank works with and coordinates its GAC contributions within this broader governance agenda. Table 3. Donor Reform Agenda in Support of Government s Transparency Plan Governance Dimension Government Plan Donor Agenda General transparency policies Efficiency and Effectiveness of Executive Efficiency and Effectiveness of Checks and Balances Effectiveness of Media and Citizen Oversight Integrated FM systems for central and sub-national governments Transparent and competitive procurement systems Professionalized civil service and efficient and transparent delivery of services Independent and effective oversight bodies Transparency in campaign financing and legislative voting records Freedom of information laws, social monitoring and independent media Public Integrity and Ethics Strengthen SIAF, proposes social investment model Strengthen Guatecompras Ethics Code, Civil Service Reform and Capacity Building Law; services included in activities to ensure monitoring Strengthen CGC, extension to MP Strengthen TSE Access to Information Law National Anti-Corruption and Institutional Strengthening Policy Coincide with Government plan Coincides with Government plan Civil Service Reform and other measures; services included in general transparency policy Coincides with Government plan Coincides with Government plan Coincides with Government plan 27. The Bank has maintained a substantive policy dialogue with successive administrations over the past decade, recognizing political constraints, building on past successes and progressively engaging in new areas to support the Government s governance priorities. The Berger administration 2004-2007 sharpened its focus on governance, particularly related to transparency of public expenditure and the identification and punishment of corrupt practices, as evidenced by the weight given to governance issues in the Development Policy Loan (DPL) series (see Boxes 1-3). 11

Box 1. DPL Governance Reform: Transparency and Public Sector Management First Development Policy Loan: o SIAF operational in 34 central government entities (including Congress) 20 decentralized agencies and 46 municipalities; fiscal transparency portal launched to enhance access to budget data. o Transparent, web-based procurement system (Guatecompras) in use in 76 public sector agencies and 185 municipalities. Second Development Policy Loan: o Increased operational coverage of SIAF (to 7 additional agencies and about 64 additional municipalities) and Guatecompras (80 additional municipalities). o Use of Guatecompras made legally mandatory for all public purchases over 30,000 quetzal and interface with SAP implemented. Third Development Policy Loan: o Increased operational coverage of SIAF (to 8 additional central government and decentralized agencies and 70 additional municipalities) o Change in focus towards strengthening of the bidding documents as well as creation/strengthening of the regulatory body (DNCAE) by developing appropriate tools for procurement management (i.e., procedural manual, standard institutional procurement units in government entities) and training in the implementation of these tools. o Guatecompras in use in at least 370 public agencies in 280 municipalities. Box 2. DPL Governance Reform: Financial Sector First Development Policy Loan: o Guatemala taken off the list of Non-cooperative Countries of the Financial Action Task Force (July 2004) Second Development Policy Loan: o Further strengthening of the financial system through improved supervision of financial groups as evidenced by: (i) organizational restructuring of Superintendency of Banks to enhance implementation of risk-based supervision; and, (ii) satisfactory progress in mapping of financial conglomerates in line with Financial Sector Assessment Program (FSAP) recommendations. o Implemented strengthened Payment System, including making fully operational the electronic clearing system for banks and new settlement in real time. Third Development Policy Loan: o Further improvements in supervision of financial groups as evidenced by (i) application of risk-based consolidated supervision procedures on a pilot basis to selected financial institutions; (ii) mapping of interrelationships between all financial groups and their subsidiaries and related parties; (iii) classification of information derived from such mapping as the basis for designing new analytical tools, as required for the assessments of the impacts that the incorporation or withdrawal of related entities may have on the solvency of financial groups; (iv) quantitative and qualitative improvement of the data on large corporate debtors reported by institutions to the Superintendency of Banks, as required for the assessment of corporate portfolio of said debtors, based on their capacity to pay. o Suspended the operations and initiated irrevocable resolution of two failed banks (Bancafe and Banco de Comercio.) o Establishment and operation of Special Investigation unit in the Superintendency of Banks, responsible for the investigation of illegal activities. 12

Box 3. DPL Governance Reform: Public Spending Capacity and Taxation First Development Policy Loan: o Recovered revenues lost as a result of Constitutional Court rulings through: (i) passage of 2004 fiscal package by Congress; (ii) passage in 2005 of law on petroleum and petroleum derivative taxes, and (iii) better tax enforcement as evidenced by improved collections of at least 0.5 percent of GDP Second Development Policy Loan: o Reduction in customs processing times and costs through (i) implementation of electronic customs manifest in all ports and airports; (ii) establishment of a 24/7 air express office in Aurora Airport and one-stop offices for documentation analysis at Puerto Quetzal; (iii) implementation of a single customs declaration (harmonized with other Central American countries) in place of two; and (iv) reduction in discretion and number of customs inspections (red light) by implementation of risk assessment and selectivity system based on SAT database and information. o Passage of the Legal Provisions for the Strengthening of the Tax Administration. o Satisfactory progress in the implementation of the Government s strategic (106 point) plan for strengthening tax administration, as evidenced by: (i) required electronic filing of VAT tax reports by 300 large taxpayers; (ii) implementation of a control program for the 3,000 largest tax payers based on systematic cross-checks; and (iii) establishment of an up-dated, unified tax register for the 3,000 largest taxpayers. o Improvements in property tax collections by municipalities through revisions to the Municipal Tax Code and/or approval of new municipal appraisal accounting system manual Third Development Policy Loan: o Implementation of the Legal Provisions for the Strengthening of Tax Administration and further progress in implementation of the strategic plan, including i) required electronic filing by 3,000 largest taxpayers; (ii) extending control program of cross-checks to these 3,000 taxpayers; and (iii) further expansion of the unified tax register. 28. The use of DPLs for governance reform has been complemented by Analytical and Advisory Activities (AAA) services to support the reform processes. Through the AAA provided under SIAF, for instance, the World Bank has assisted the development of Guatecompras. The national procurement was strengthened, among others, by the preparation of a Country Financial Accountability Assessment (CFAA)/Country Procurement Assessment Report (CPAR) in 2005 and subsequent revision and publication in 2007. The study assessed the country s procurement systems and provided a set of recommendations, most of which have either already been implemented or are currently under implementation. The Government s control framework is further reinforced by Bank supervision in the Bank s portfolio. Each project establishes specific measures (such as standardization of processes, contracting of skilled personnel, implementation of systems such as Execution System for Procurement Plans (Sistema de Ejecución de Planes de Adquisiciones, SEPA)) and action plans to help prevent corruption and misuse of funds. Moreover, specific supervision plans, pre- and post-reviews and financial audits are carried out systematically in order to address the country s systemic weaknesses and complement the national control framework. In 2009, the Government initiated an evaluation of its procurement systems with Bank and Inter-American Development Bank (IADB) support, following the OECD-DAC methodology. The evaluation is scheduled to be completed by mid-2010, making available a new set of recommendations. Concurrently and jointly with the IADB, the Bank supports a government initiative to develop standardized documents for its public procurement. Since 2009, the Bank also supports a Public Expenditure and Financial Accountability (PEFA) review in the country and the results are expected to be presented in mid-2010. 29. Within the overall Bank portfolio, significant achievements include: (i) the establishment of a Single Treasury Account to execute Multilateral Loans; (ii) the implementation of a SIAF module to monitor Infrastructure contracts (through the SIAF project); (iii) the implementation of SEPA which increases transparency; (iv) the improvement and increased use of Guatecompras in projects; and (v) the 13

implementation of a procurement training scheme for all Project Implementation Units (PIU). Beyond these fiduciary improvements, other Bank-funded projects featured innovative transparency components to strengthen GAC (see Box 4 for an example). Box 4. GAC in Projects: Transparency in Guatemala s Competitiveness Project The $20.3mn Guatemala Competitiveness Project was designed to improve the ability of micro, small and medium sized enterprises to compete in international markets. The implementing agency, the National Program for Competitiveness (PRONACOM) an autonomous agency linked to the Ministry of Economy leveraged project resources by forming alliances with more than 40 ministries, private sector chambers and associations, think tanks, academic institutions, NGOs and civil society groups. To disseminate project results and engage project partners and donors, PRONACOM formed the Comité Ejecutivo Ampliado. This committee of 60 representatives received a monthly progress report, followed by an opportunity to inquire about project activities, the use of funds, the impact of the work, and proposed strategic and operational changes. In marked contrast to the previous, more secretive practice in the country, this open and inclusive approach to competitiveness improved efficiency by eliminating duplication, increased the participation and investment of private sector partners, and created space for all actors to share concerns, ideas and opportunities for synergies. 30. AAA on the supply side of transparency was accompanied by capacity building on the demand side. Journalists and civil society were trained in the use of the Government Financial Management (FM) system Guatetransparente (financed by the WB) and in investigative journalism in public finances (financed by USAID). As part of this initiative, citizens and journalists were granted easy access to the Government FM system SIAF. Other initiatives included, for instance, support to the implementation of an anti-corruption hot line at the CGC to collect allegations of fraud in the use of public resources (Centro de Incorformidades). This initiative created important synergies with the Advocacy and Legal Advice Center (ALAC), a TI initiative to provide legal assistance to citizens denouncing acts of corruption where Guatemala is the first country in LCR to participate. 31. Since 2008, CGAC seed funds have enabled the Bank to expand the scope of its GAC engagement in response to specific government transparency priorities. Initial CGAC activities were focused on enhancing sector-specific and budget transparency as well as on the coordination and monitoring of transparency and public management policies (see Box 5). 14

Box 5. 2008 CGAC Achievements Assessment of the use of extra-budgetary accounts o Trust funds were created to expedite processes for priority expenditures and investment but due to the lack of controls and transparency, its use has become a major source of corruption. The assessment has provided the Ministry of Finance with the basis to prepare and begin implementation of a new regulatory framework for Trust Funds. Assessment of the executive branch internal audit function o The current governance structures for the internal audit function are subject to conflict of interests which may undermine actions to address corruption and enhance transparency on the use of public funds. The assessment was delivered to the Vice Presidency and provided the Executive with international best practices as well as recommendations for GT. It was then used to initiate an open discussion on the opportunity to strengthen the internal audit function within the Executive through the creation of a superior coordinating entity within the Government. Implementation of SEPA o With the implementation of SEPA, the Bank is reinforcing the efforts of the Ministry of Finance to enhance transparency and efficiency on public expenditure related to Bank-financed expenditures. SEPA was modified to be implemented in several countries within Latin America and this implementation, as Guatemala's, is currently underway. Hands-on-training on how the system operates was delivered to all Project Implementation Units in Guatemala and it is expected that at least seven of them will be using SEPA for the approval of 2009 procurement plans. The IADB will implement it next. Development and implementation of a complaints mechanism for the Conditional Cash Transfer (CCT) program o The final report was delivered and its findings are contributing to the design of the full complaint mechanism. Basic complaints are already being collected, and a full system to manage the flow of complaints and advance social auditing is being developed. Support for the design and implementation of the CCT management information system o The final report was delivered and used by the program to increase transparency in the determination of the eligibility criteria and minimize corruption risk in the selection of beneficiaries. Risk mapping of CCT program o The final report was delivered and served as basis for improving the program, as well as the design of the supporting Bank project as a whole. It will also help improve the design of Monitoring and Evaluation for transparency and corruption. 32. In sum, the World Bank has made contributions to most GAC dimensions in Guatemala where substantial reform progress has been achieved. Table 4 summarizes the World Bank assessment of the importance of Bank support to governance reform along 12 different dimensions. Bank support has been strongest and most successful in the Executive, with significant support in the realms of financial management systems and procurement and moderate support to tax administration and budgeting reform. Outside the executive, the Bank has provided moderate to significant support in the areas of banking supervision and freedom of information. Bank support was limited in most of the governance dimensions in which overall progress made by the Government has also been minor. 15