IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-80480) ON A LOAN IN THE AMOUNT OF US$ 100 MILLION TO TO THE THE REPUBLIC OF EL SALVADOR FOR A

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No: ICR2743 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-80480) ON A LOAN IN THE AMOUNT OF US$ 100 MILLION TO TO THE THE REPUBLIC OF EL SALVADOR FOR A PUBLIC FINANCE AND SOCIAL PROGRESS DEVELOPMENT POLICY LOAN June 13, 2013 Poverty Reduction and Economic Management Central America Country Management Unit Latin America and Caribbean Region

REPUBLIC OF EL SALVADOR - GOVERNMENT FISCAL YEAR January 1 December 31 CURRENCY EQUIVALENTS The US Dollar is the currency in El Salvador WEIGHTS AND MEASURES Metric System SELECTED ABBREVIATIONS AND ACRONYMS ARENA CPS COMPRASAL DGA DGII DGT DPL FDI FMLN FISDL GDP IBRD ICR IDA IADB IMF LAC NFPS P@GOES PDO PER PFM PFSS SSGER National Republic Alliance Party Country Partnership Strategy Government e-procurement System Customs Agency Tax administration office Treasury office Development Policy Loan Foreign Direct Investment Farabundo Marti National Liberation Front Party Social Investment Fund Gross Domestic Product International Bank for Reconstruction and Development Implementation Completion and Results Report International Development Association Inter-American Development Bank International Monetary Fund Latin America and the Caribbean Non-Financial Public Sector Platform for electronic payments Program Development Objective Public Expenditure Review Public Financial Management Public Finance and Social Sector Sustaining Social Gains for Economic Recovery Program Vice President: Country Director: Sector Manager: Lead Economist & Sector Leader: Task Team Leader: ICR Team Leader: ICR Primary Author: Hasan A. Tuluy Carlos Felipe Jaramillo Auguste Tano Kouame Oscar Calvo-Gonzalez Bárbara Cunha Luc Razafimandimby Ana Lucia Armijos

REPUBLIC OF EL SALVADOR Implementation Completion and Results Report for the Public Finance and Social Progress Development Policy Loan CONTENTS Data Sheet 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 Program Performance in ISRs... vi H. Restructuring (if any)... vi Contents 1. Program Context, Development Objectives and Design... 1 1.1 Country Context at Appraisal... 1 1.2 Country context during implementation... 3 1.3 Original Program Development Objectives (PDO) and Key Indicators (as approved)... 5 1.4 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification... 7 1.5 Original Policy Areas Supported by the Program... 7 1.6 Revised Policy Areas (if applicable)... 8 1.7 Other significant changes... 8 2. Key Factors Affecting Implementation and Outcomes... 8 2.1 Program Performance... 8 2.2 Major Factors Affecting Implementation:... 10 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization:. 11 2.4 Expected Next Phase/Follow-up Operation (if any):... 12 3. Assessment of Outcomes... 12 3.1 Relevance of Objectives, Design and Implementation... 12 3.2 Achievement of Program Development Objectives... 12 3.3 Justification of Overall Outcome Rating... 15 3.4 Overarching Themes, Other Outcomes and Impacts... 15 3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops... 16 4. Assessment of Risk to Development Outcome... 16

5. Assessment of Bank and Borrower Performance... 17 5.1 Bank Performance... 17 5.2 Borrower Performance... 18 6. Lessons Learned... 19 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners... 20 Annex 1: Public Finance and Social Progress DPL - Policy Matrix... 21 Annex 2 Bank Lending and Implementation Support/Supervision Processes... 24 Annex 3. Summary of Borrower's ICR and/or Comments on Draft ICR... 25 Annex 4. List of Supporting Documents... 27 Annex 5. Map of El Salvador... 28

A. Basic Information DATA SHEET Country: El Salvador Program Name: PUBLIC FINANCE AND SOCIAL PROGRESS DPL Program ID: P122699 L/C/TF Number(s): IBRD-80480 ICR Date: 05/20/2013 ICR Type: Core ICR Lending Instrument: DPL Borrower: REPUBLIC OF EL SALVADOR Original Total Commitment: USD 100.00M Disbursed Amount: USD 100.00M Revised Amount: USD 100.00M Implementing Agencies: Ministry of Finance Co-financiers and Other External Partners: B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 12/16/2010 Effectiveness: 09/22/2011 09/07/2011 Appraisal: 04/13/2011 Restructuring(s): Approval: 06/02/2011 Mid-term Review: 03/05/2012 04/09/2012 Closing: 12/31/2012 12/31/2012 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 Supervision: Satisfactory Implementing Agency/Agencies: Moderately Satisfactory Overall Bank Performance: Satisfactory Overall Borrower Performance: Moderately Satisfactory i

C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Program at any time (Yes/No): Problem Program at any time (Yes/No): DO rating before Closing/Inactive status: No No Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating: D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration 70 70 Other social services 30 30 Theme Code (as % of total Bank financing) Gender 20 20 Other accountability/anti-corruption 5 5 Public expenditure, financial management and procurement 25 25 Social risk mitigation 10 10 Tax policy and administration 40 40 E. Bank Staff Positions At ICR At Approval Vice President: Hasan A. Tuluy Pamela Cox Country Director: Carlos Felipe Jaramillo Carlos Felipe Jaramillo Sector Manager: Auguste Tano Kouame Rodrigo A. Chaves Program Team Leader: Bárbara Cunha Bárbara Cunha ICR Team Leader: Luc Razafimandimby ICR Primary Author: Ana Lucia Armijos F. Results Framework Analysis Program Development Objectives (from Project Appraisal Document) The operation's Development Objective is to assist the Government in promoting social development and inclusion, while maintaining a sustainable medium term fiscal framework. In particular, the operation supports the Government's efforts aimed at: (i) ii

Creating fiscal space for needed social expenditure by supporting actions to increase tax revenues and to improve efficiency and transparency in the allocation of public resources; and (ii) Protecting and including vulnerable segments of the population by allocating additional public resources towards social programs targeting vulnerable groups such as the elderly, women, and children. Revised Program Development Objectives (if any, as approved by original approving authority) (a) PDO Indicator(s) Original Target Formally Actual Value Indicator Baseline Value Values (from Revised Achieved at approval Target Completion or documents) Values Target Years Indicator 1 : The number of income tax returns filed by DGII decreased 50 percent by the first quarter of 2013 Value (quantitative or 446,005 223,002 374,004 Qualitative) Date achieved 12/31/2009 12/31/2012 03/31/2013 Comments (incl. % achievement) Indicator 2 : Partially Achieved. The number of tax returned filled decreased 17% percent, with respected to baseline, but remained above the target. The share of payments to the Government made through the electronic payments platform (P@GOES) increased from 5.25 percent in 2008 to 9.5 percent in 2012 Value (quantitative or 5.25 percent 9.5 percent 30.1 percent Qualitative) Date achieved 12/31/2008 12/31/2012 12/31/2012 Comments (incl. % achievement) Achieved Tax revenues as percent of GDP have increased 40 basis points by 2012 as a Indicator 3 : result of tax administration measures. Value (quantitative or Qualitative) 13.3 percent, average 40 basis points 2006-2008 period iii The net tax revenue increased by 1.2 percentage points Date achieved 06/02/2011 12/31/2012 12/31/2012 Comments (incl. % achievement) Achieved Indicator 4 : Total tax revenues have increased from an average of 13.3 percent of GDP in 2006-2008 to 14.8 percent in 2012. Value The average for 2006-14.8 percent of 14.4 percent of (quantitative or 2008 was 13.3 percent GDP GDP

Qualitative) of GDP Date achieved 06/02/2011 12/31/2012 12/31/2012 Comments Partially Achieved (incl. % achievement) In 2012 tax revenue/gdp was 14.4%, an improvement compared to the average of 13.3% for 2006-2008, but not sufficient to meet the target Indicator 5 : The Government balances monitored by DGT's system increased from US$91.9 million in 2009 to US$175 million in 2012. Value (quantitative or US$91.9 million US$175 million US$122.54 Qualitative) Date achieved 12/31/2009 12/31/2012 12/31/2012 Comments (incl. % achievement) Not Achieved Indicator 6 : Ten percent of common used goods and services purchased though Framework Agreements in 2012 10 percent of The framework Value (quantitative or Qualitative) A agreement does not exist goods and services framework must be purchased through framework agreements iv agreements were left out of the final version of the Procurement Law approve by the National Assembly. Date achieved 12/31/2009 12/31/2012 12/31/2012 Comments Not Achieved (incl. % achievement) Note: This indicator was going to be substituted during the preparation of the second DPL which was not concluded. Indicator 7 : No payments to awarded contracts has been made in 2012 unless the business opportunity and results were published in COMPRASAL in due time Value (quantitative or Qualitative) 100 percent of Public business public business opportunities were not opportunities published online should be published online 100 percent of the Government business opportunities and results are published online Date achieved 06/02/2011 12/31/2012 12/31/2012 Comments (incl. % achievement) Achieved Each region of the country has at least one functioning consulting committee Indicator 8 : for monitoring progress on gender equity in the public sector and a functioning window for information on women's rights by January 2013. Each region has at 14 consulting There were no least one committees Value functioning consulting functioning monitoring progress (quantitative or committees nor committee for in gender equality Qualitative) windows for monitoring gender are functioning; and information equity progress 11 country regions

and a functioning had at least one window for window on women women's rights rights information. information by January 2013. Date achieved 10/31/2009 12/31/2012 12/31/2012 Comments (incl. % achievement) Achieved At least 80 percent of the target elderly individuals in the 52 poorest rural Indicator 9 : municipalities and 2 urban municipalities receive cash transfers by January 2013 There are 75 rural municipalities where at least 80% of eligible elders Value (quantitative or Qualitative) No targeted elderly At least 80 percent individuals received of targeted elderly cash transfers as of receive CTs October 2009 receive cash transfers. The CT was not extended to urban municipalities. Date achieved 06/02/2011 12/31/2012 01/31/2013 Comments (incl. % achievement) Indicator 10 : Value (quantitative or Qualitative) Achieved At least 2000 students of primary and secondary education are studying under the full-school day period modality by January 2013. 10,356 students are studying under the extended-day modality; No student studied At least 2000 approximately16,96 under full-school day students 8 students are period in October 2009 studying under indirect modality, in 53 education centers Date achieved 06/02/2011 12/31/2012 01/31/2013 Comments (incl. % achievement) Achieved (b) Intermediate Outcome Indicator(s) Indicator Baseline Value Original Target Actual Value Formally Values (from Achieved at Revised approval Completion or Target Values documents) Target Years v

G. Ratings of Program Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 09/11/2011 Satisfactory Satisfactory 0.00 2 04/30/2012 Satisfactory Satisfactory 99.75 3 01/09/2013 Moderately Satisfactory Moderately Satisfactory 99.75 H. Restructuring (if any) Not Applicable vi

Implementation Completion and Results Report for a Public Finance and Social Progress Development Policy Loan to the Republic of El Salvador 1. Program Context, Development Objectives and Design This Implementation Completion and Results Report (ICR) describe the results of the Public Finance and Social Progress Development Policy Loan (DPL) to the Republic of El Salvador. The single tranche loan of US$100 million was approved by the World Bank Board of Executive Directors on June 2, 2011 and disbursed upon loan effectiveness on September 7, 2011. The operation supported strategic areas addressed by two previous DPLs: the Public Finance and Social Sector (PFSS) approved on January 2, 2009 that focused on strengthening the medium-term fiscal sustainability and supporting transparency in the use of public resources and the Sustained Social Gains for Economic Recovery Program (SSGER) approved on November 24, 2009 that supported the process of economic recovery through the design of initiatives and institutional strengthening in the social sectors. The operation supported the Government objective of promoting social development and inclusion, while maintaining a sustainable medium term fiscal framework. In particular, the operation supported the Government's efforts aimed at: (i) Creating fiscal space for needed social expenditure by reinforcing actions to improve tax collection, expand the tax base, increase tax revenues and improve efficiency and transparency in the allocation of public resources; and, (ii) Protecting and including vulnerable segments of the population by allocating additional public resources towards social programs targeting vulnerable groups such as the elderly and children in poor areas. This operation was designed as the first of a series of two development policy loans, but the second operation in the series was not completed. The actions supported by this operation, as well as results indicators and targets were conceived as part of a broader program, including follow up reforms supported by a second loan. However, changes in the economic and political context led the Bank team to delay the preparation of the second operation. As a result, the DPL series lapsed and this loan became a stand-alone operation. On the economic side, weak external and low GDP growth contributed to a slower pace of fiscal consolidation and the interruption of the IMF program in the country. On the political side, a mid-term election changed the political composition in Congress affecting the Government s support and its ability to approve loans and reforms. Despite the difficult context, El Salvador s Government remained committed with the objectives of the program. The country implemented most of the reforms contemplated as indicative triggers for the second operation and achieved most targets envisaged for the complete DPL series, despite the absence of the second loan. 1.1 Country Context at Appraisal Appraisal took place approximately two years after president Mauricio Funes came to power. The national political stage is dominated by two main political parties the National Republic Alliance Party (ARENA) and the Farabundo Marti National Liberation 1

Front Party (FMLN). ARENA held the executive branch of the Government from 1991 until March 2009, when the FMLN candidate, Mauricio Funes, won the presidential election. The FMLN s victory, after 20 years in the opposition, and the smooth handover of political power were milestones in the country s political history. Nevertheless, the political environment remained polarized. Economic developments prior to appraisal El Salvador s economic performance was relatively strong in the 2000s until the country was hit by the global crisis. Over the period 2005-2007, economic growth improved steadily from 3.6 percent to 3.8 percent following an improvement in the external environment. Growth was driven mainly by rising remittances, which accounted on average for 18.2 percent of GDP and became a major source of financing for consumption and investment. The mid-2000s were also characterized by improvements on the fiscal front. Revenue increased by 1.1 percent of GDP between 2005 and 2007, while spending was maintained at 19.3 percent of GDP in the same period. As a result, the non- financial public sector deficit narrowed from 3.0 percent of GDP in 2005 to 2.0 percent in 2007. Growth also contributed to improvements in the social indicators. By 2007, about 35 percent of Salvadoran households were poor, including about 11 percent extremely poor (versus 60 percent and 28 percent, respectively, in 1991). In addition, access to basic services such as safe water and sanitation increased by more than 15 percentage points during that period. The global financial crisis severely affected El Salvador. The crisis, and in particular the U.S. recession, impacted the economy, which contracted by 3.1 percent in 2009. The contraction was driven by a sharp fall in remittances (which decreased by about 10%), the collapse in consumption and investment (that fell by 8.6 and 14.8 % respectively), and reduced foreign demand (exports fell by 15%). The slowdown in economic activity led to an increasingly tight fiscal situation. Tax revenues dropped from 13.5 percent of GDP in 2008 to 12.6 percent in 2009, while expenditures remained broadly stable. As a result, the overall fiscal deficit increased from 3.2 percent of GDP in 2008 to 5.7 percent in 2009 while the debt-to-gdp ratio rose from 41 to 50 percent. Social indicators also deteriorate. The poverty rate increase to 40 percent in 2008 and remained relatively high at 37.8 percent in 2009. At the time of appraisal, the Salvadoran economy was starting to recover, but the speed of the recovery was uncertain. The economy grew 0.7 percent in 2010, below expectations. The pace of recovery in El Salvador depended on the dynamics of the U.S. economy and other potential external shock such as a significant increase in commodity prices. El Salvador s fiscal balance also improved in 2010. Public spending increased 3.3 percent reaching 21.8 percent of the GDP, while tax revenues increased almost 10.4 percent in the same period reaching 13.3 percent of GDP. The overall fiscal public sector deficit ended 2010 at 4.2 percent of GDP, well below projections. The debt sustainability analysis (DSA) indicated that the medium-term public debt position was sustainable, but sensitive to an economic slowdown and to lack of fiscal consolidation. 2

Table 1. El Salvador Key Economic Indicators 2005-2011 (percentage of GDP, unless otherwise indicated) 2005 2006 2007 2008 2009 2010 2011 Income and Prices GDP growth (% change) 3.6 3.9 3.8 1.3-3.1 1.4 2.0 GDP per capita (% change) 2.9 3.2 3.1 0.6-3.8 0.7 1.4 Inflation (cpi end of period % change) 4.3 4.9 4.9 5.5-0.2 2.1 5.1 Investment and savings Gross domestic investment 16.1 16.8 16.3 15.2 13.4 13.3 14.4 Gross domestic savings 12.4 12.7 10.3 8.1 11.9 10.6 9.8 Non Financial Public Sector Total revenues and grants 16.3 17.2 17.3 17.4 16.5 17.7 18.3 Total tax revenues 12.5 13.4 13.6 13.5 12.6 13.4 13.8 Total expenditure 19.3 20.2 19.3 20.6 22.1 22.0 22.2 Current expenditure 16.5 17.1 16.5 17.5 19.0 18.9 19.3 Capital expenditure 2.8 3.1 2.8 3.1 3.1 3.2 2.9 Primary balance -0.8-0.5 0.6-0.8-3.1-1.9-1.7 Overall balance -3.0-2.9-2.0-3.2-5.7-4.3-3.9 Public debt Total debt 40.8 41.0 39.3 41.0 50.0 51.4 51.7 O/w External 27.0 29.1 26.3 25.3 30.2 30.7 29.1 Balance of payments Current account balance -3.6-4.1-6.1-7.1-1.5-2.7-4.6 Trade balance -17.8-19.6-21.7-21.8-15.0-16.5-18.4 Exports (including maquila) 20.3 20.4 20.2 21.9 19.0 21.4 23.4 Imports (including maquila) 38.0 40.0 42.0 43.8 34.1 38.2 42.5 Foreign direct investment 2.3 1.4 7.2 3.8 1.8 0.5 1.7 Remittances 17.7 18.7 18.4 17.5 16.4 16.0 15.8 Memorandum item: Nominal GDP (billions of US dollars) 17.1 18.6 20.1 21.4 20.7 21.4 23.1 Source: Ministry of Finance, Central Bank and IMF and World Bank staff estimates. 1.2 Country context during implementation Structural reforms and external loans were successfully approved by the National Assembly despite the political polarization, but the results of the March 2012 midterm election affected this trend. Although the Government s party did not hold a majority in Congress, it was able to reach agreement on a series of important reforms and loans such as the 2011 tax reforms, procurement Law reform, the approval of the access to information Law, and a US$650 million debt rollover in 2011. However, the results of the March 2012 mid-term elections changed the composition of Congress and increased the number of seats held by the opposition party, allowing the opposition to block the approval of multilateral loans, as the Government lost the two-third majority. The country continued recovering from the crisis but at a slow pace. The recovery has been subject to a weak external environment and other exogenous shocks. El 3

Salvador s GDP grew by 1.4 percent in 2010, and approximately 2.0 percent in 2011. In 2012, the heavy rains and the repercussion of the Euro debt crisis led to a reduction in growth to 1.6 percent. As the economy resumed growth in 2010-2011, imports recovered and the current account deficit increased from 2.7 percent of GDP in 2010 to 4.6 percent in 2011 and to 5.3 percent of GDP in 2012 due to a decrease in exports. Social outcomes improved modestly in line with the economic recovery, but remained below pre-crisis levels. The poverty rate reached 36.5 percent in 2010, increased in 2011 to over 40 percent, but decreased in 2012 to 34.5 percent, due in part to successful government programs targeting the most vulnerable groups of the population. The fiscal consolidation continued, but at a slower pace. The overall fiscal deficit decreased from 4.3 percent of GDP in 2010 to 3.9 percent of GDP in 2011 and 2012. Tax measures by the central administration led to an increase in tax revenues from 12.6 of GDP in 2009 to 13.8 and 14.4 percent in 2011 and 2012, surpassing the pre-crisis level due to a more effective tax administration. The potential benefits of the increase in tax revenues had been partially compensated by expenditures which edged up to 22.2 and 22.4 percent of GDP in 2011 and 2012, respectively, following spending pressures from the impact of the tropical depression, subsidies, and security. The debt-to-gdp ratio rose to 51.7 percent of GDP in 2011 and to 53.7 percent in 2012. Looking forward, prospects for economic growth are still uncertain. Recovery in El Salvador continues to be tied to the dynamics of the U.S. economy. Current projections foresee growth of 1.6 percent in 2013 and 2014. Inflation is expected to remain under control in the medium term. Following a drop in commodity prices, inflation slowed down to about 0.8 percent in 2012 and would remain close to 2.5 percent for the period 2013-2014. Despite the challenging fiscal situation, projections suggest a sustainable mediumterm fiscal outlook. El Salvador s Development Plan proposed a sustainable medium term fiscal framework and authorities remain committed to fiscal sustainability. The Government designed a fiscal reform program for 2013, including measures to further reduce expenditures and increase revenue collection with the objective of reducing the fiscal deficit. Fiscal projections assume that the Government will continue to implement the intended measures, suggesting a low but continued increase in tax revenues, linked with the implementation of tax reforms, reaching 15.3 percent in 2013 and 15.5 percent of GDP in 2014. This would bring the overall fiscal deficit down slightly to 3.8 percent of GDP in 2014. 4

Income and Prices Table 2 Medium Term Macroeconomic Outlook (Percent of GDP, unless otherwise indicated) 2012 2013 2014 2015 GDP growth (% change) 2.0 1.6 1.6 1.6 Inflation (cpi end of period % change) 5.1 0.8 2.3 2.6 Investment and savings Gross domestic investment 14.4 14.6 14.6 14.6 Gross domestic savings 9.8 9.3 9.5 9.5 Non Financial Public Sector Total Expenditures 22.2 22.4 21.9 22.0 Total tax revenues 13.8 14.4 15.3 15.5 Primary balance -1.7-1.6-1.4-1.3 Overall balance -3.9-3.9-3.9-3.8 Public debt Total debt 51.7 53.7 55.8 57.5 External public debt service (% of exports of goods and services) 18.4 9.4 8.1 7.9 Balance of Payments Current account balance -4.6-5.3-5.0-4.8 Trade balance -18.4-18.7-19.1-19.1 Exports of goods (f.o.b) 23.4 23.0 23.0 23.1 Imports of goods (f.o.b.) 42.5 41.7 42.1 42.3 Foreign direct investment 1.7 2.2 1.0 1.1 Transfers (net) 16.6 16.8 17.0 17.1 Nominal GDP (billions of US dollars) 23.1 23.8 24.6 25.6 Source: IMF estimates. Note: The Government definition of some variables differs from the IMF s definitions. 1.3 Original Program Development Objectives (PDO) and Key Indicators (as approved) The operation s Development Objective was to assist the Government in promoting social development and inclusion, while maintaining a sustainable medium term fiscal framework. 5

In particular, the operation supported the Government s efforts aimed at: (i) Creating fiscal space for needed social expenditure by supporting actions to increase tax revenues and to improve efficiency and transparency in the allocation of public resources. (ii) Protecting and including vulnerable segments of the population by allocating additional public resources towards social programs targeting vulnerable groups such as the elderly, women, and children in poor areas. The Key Economic Indicators, expected to be achieved by December 2012, under the two policy areas mentioned above, were the following: I. Improving efficiency in tax collection and expanding the tax base Decrease by 50 percent the number of income tax returns filed by DGII by the first quarter of 2013 from a baseline of 446,005 tax returns in 2009 Increase of the share of payments to the Government made through P@GOES from 5.25 percent in 2008 to 9.5 percent in 2012. II. Increasing tax revenues through tax administration actions and fiscal reforms Increase of 40 basis points of tax revenues as percent of GDP by 2012 as a result of tax administration measures from a baseline of 13.3 percent which was the average for the period 2006-2008. Increase of total tax revenues from 13.3 percent of GDP to 14.8 percent in 2012. III. Increasing efficiency, transparency and accountability in the allocation of public resources Increase in the Government cash balances monitored by DGT s system from US$ 91.9 million in 2009 to US$ 175 million in 2012. 10 percent of commonly used goods and services are purchased though Framework Agreements in 2012 from a 2009 baseline where no framework agreement was used. By 2012, no payments to awarded contracts has been made, unless the business opportunity and results were published in COMPRASAL in due time IV. Protecting vulnerable groups Each region of the country has at least one functioning consulting committee for monitoring progress with respect to gender equity in the public sector; and a functioning window for information on women s rights by January 2013. As of October 2009 there were no functioning consulting committees, nor windows for information. 6

At least 80 percent of the targeted elderly individuals in the 52 poorest rural municipalities and 2 poor urban municipalities receive cash transfers by January 2013. As of October 2009 no targeted elderly individuals received cash transfers. At least 2000 students of primary and secondary education are studying under a full-school day period modality by January 2013. As of October 2009, no student studied under full-school day period modality. 1.4 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification There were no revisions to the program development objectives or the core outcome indicators. 1.5 Original Policy Areas Supported by the Program (as approved) The DPL series is designed around two pillars covering four policy areas connected to key priorities in the Government s development plan (see Annex 1). The first pillar, creating fiscal space for needed social spending comprises three main policy areas: (i) improving efficiency in tax collection and expanding the tax base; (ii) increasing tax revenues; and (iii) promoting efficiency, transparency and accountability in the allocation of public resources. The first pillar is directly linked with the Government s five-year development plan to increase taxes, increase transparency and efficiency in the allocation of public resources and reduce public debt. The second pillar, protecting and socially including vulnerable groups, is linked to the policy area of protecting vulnerable groups, such as woman, elderly individuals and children in poor regions. This policy area is linked with the Government s five-year development plan objective to reverse the rise in poverty and expand basic social services to vulnerable segments of the population. Pillar I: Creating Fiscal Space for Needed Social Spending This pillar supported the Government efforts to improve efficiency in tax collection and expanding the tax base; to increase tax revenues through tax administration actions and fiscal reform; and to increase the efficiency, transparency and accountability in the allocation of public resources. The program set seven outcome indicators under this pillar (Annex 1). Tax revenues in El Salvador are among the lowest in LAC and they are not sufficient to finance needed social spending. The global crisis and the slowdown in economic activity further worsened the situation as revenues fell by 0.7 percent of GDP and spending need increased. In its efforts expand revenue collection, the Government defined a strategy involving a combination of tax administration and tax policy reforms that would include several actions under the DPL. In particular, the operation supported the strengthening, modernization, and coordination between three tax agencies: Internal Revenue Agency (DGII), the Customs Agency (DGA), and the Ministry of Finance s Treasury Office (DGT). In parallel, the Government promoted actions to improve the efficiency in spending allocation by shifting resources from non-priority spending areas; to improve resource management and planning; to increase accountability. Actions included the 7

centralized monitoring and management of public sector account, and the approval of a comprehensive Access to Information and Transparency Law/ Pillar II: Protecting and Including Vulnerable Segments of the Population. This pillar was aimed to support the Government efforts to reduce social exclusion and poverty incidence among specific vulnerable groups such as women, elderly and children. As shown in Annex 1, there are three outcome indicators under this pillar. Despite the progress achieved during the last decade, poverty and social exclusion are still relatively high compared to pre-crisis levels. Poverty incidence is even higher among specific vulnerable groups (women, elderly and children) which are also among the most affected by external shocks and economic downturns. The Government strategy to protect vulnerable households has been focused on expanding effective and well-targeted safety net programs such as the Cash Transfer Program (Comunidades Solidarias) that supports the consumption of poor rural households and increases their children s access to basic health, nutrition and education services. This DPL continued supporting policies and programs targeting vulnerable segments of the populations. Taking advantage of the targeting mechanisms developed for Comunidades Solidarias, the Government implemented a new program of monetary transfers to poor elderly individuals, which was supported by the operation. This component also supported the Government efforts to promote gender equality by improving the protection of women, and approving the Law on Equality, Equity and Eradication of Discrimination against Women (2011) that aims at fighting discrimination against women and promoting gender equality; and to publish the Special Integral Law for a Life Free of Violence for Women (2011) aimed at protecting women from violence. 1.6 Revised Policy Areas (if applicable) N/A 1.7 Other significant changes N/A 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance Upon the completion of all prior actions, the Public Finance and Social Progress DPL was approved by the Board on June 2, 2011 and signed on July 27, 2011. The single tranche operation became effective on September 7, 2011 and was closed on December 31, 2012. This DPL was the first in a proposed series of two single-tranche programmatic Development Policy Loans (DPLs), but the processing of the second operation was delayed and the series lapsed. It is important to highlight that the government implemented the program actions contemplated as trigger for the second DPL, even though the operation was not completed. (Annex 1) 8

Table 3. Policy Areas, Prior Actions and Status Policy Areas Prior Actions for Board Approval of the first DPL Status Pillar I: Creating fiscal space for needed social spending Improving efficiency in The Borrower, through the Treasury Office (DGT), entered into Met tax collection and separate agreements with Ministry of Health and Social expanding the tax base Assistance, Ministry of Agriculture, and the Housing Social on December 16, 21 and 23, 2009, respectively, whereby the ministries and agencies may use the P@GOES to collect electronic payments, in order to improve the efficiency in tax collection. Increasing tax revenues through tax administration actions and fiscal reform Increasing efficiency, transparency and accountability in the allocation of public resources The Borrower, through Decree 233 of December 16, 2009, published in the Official Gazette (No. 239 of Dec. 21, 2009), has strengthened DGT s tax recovery instruments by (i) extending the period for processing administrative claims of late tax payments from 10 days to up to 100 days; and (ii) allowing DGT to withhold a certain percentage of income of wage earners and borrower s service providers, which have tax payments arrears, as established in Art. 273-A of the Tax Code The Customs Agency (DGA) and the Tax Administration Office (DGII) have confirmed that the Directorates have strengthened their respective capacity to fight tax evasion through the implementation of systems that will enable them to select and manage the cases to be audited by the Borrower s tax authorities, through the following: (i) official letter issued by the head of its Risk Management Unit, dated June 1, 2010; (ii) the approval by its General Director of the technical procedure described in the document entitled Operability of the Risk Management Unit, dated October 19, 2010; (iii) the approval by an internal committee of the MH of the Reception Deed of the Programs of Migration/Replication in the Production Environment, dated September 16, 2009, and (iv) the adoption by the head of the Case Selection Unit of the Case Selection Management System, dated August 18, 2010. The DGII has confirmed that in 2010 it started the implementation of new internal processes to monitor and penalize non tax filers and stop tax filers through: (i) an official letter issued by the head of its Tax Omissions Control Section, dated March 31, 2011; and (ii) adoption of technical manuals entitled Detection, Verification and Control of Late Declaration dated July 29, 2010, and Detection, Verification and Control of Tax Omissions and Differences, dated September 6, 2010. The Borrower, through DGT: (i) has adopted a system that enables it to carry out the daily financial monitoring and control of all Agencies bank accounts in the Borrower s territory, as evidenced by authorization No. 001/2010 of DGT, dated June 23, 2010; and (ii) as a result of the implementation of the above mentioned system, the Borrower has, as of March 31, 2011, attained 100 percent daily financial monitoring and control coverage of the bank accounts 9 Met Met

Policy Areas Prior Actions for Board Approval of the first DPL Status mentioned in (i), as evidenced by the letters issued by the Bank Accounts Control Department of DGT, dated April 1 and April 11, 2011 respectively.. The Borrower s Assembly, through Decree No. 534 dated December 10, 2010, has approved the Law on Access to Public Information, which aims at improving transparency and access to public information. Pillar II. Protection and including vulnerable segments of the population Protecting vulnerable The Borrower s Assembly, through Decree No. 645 dated groups March 7, 2011, approved the Law on Equality, Equity and Eradication of Discrimination against Women, which aims at fighting discrimination against women and promoting gender equality. Met The Borrower s Assembly, through Decree No. 520 dated November 25, 2010, approved the Special Integral Law for a Life Free of Violence for Women, duly published in the Official Gazette, Tome No. 390 of January 4, 2011, which aims at protecting women from violence. Source: Policy Matrix The Borrower, through the Social Protection System Inter-sector Committee, has implemented a cash transfer system for eligible individuals aged 70 years or older in the 32 poorest municipalities located within the Borrower s territory, in accordance with the Universal Basic Pension for Elderly People Operative Guide, dated November 2009, duly approved by the Borrower's Comité Intersectorial del Sistema de Protección Social Universal on January 29, 2010, as evidenced by the certification issued by the Technical Secretariat of the Presidency of the Republic, on April 15, 2011. 2.2 Major Factors Affecting Implementation: The following factors have affected the implementation of the program: Political Context: The results of the March 2012 mid-term elections and change in the composition of Congress affected implementation. The result of the election intensified the political polarization in the country. Prior to elections, the Government had been able to approve important structural reforms contemplated as an indicative trigger for the second operation, such as comprehensive tax reform, prior to the election. However, after the mid-term election, it was difficult to make progress in issues such as further targeting of subsidies and social programs. This situation contributed to a slower pace of fiscal consolidation. In addition, the increase in the number of seats held by the opposition party allowed the opposition to block loan approvals. Economic context: During implementation of the operation the Salvadoran economy was affected by internal and external shocks. In October 2011, the country was affected by heavy rains that led to important losses on infrastructure and production. The country 10

was also affected by strong fluctuations in commodity prices and the deterioration in the external economic environment following the European debt crisis. These factors impaired growth prospects and imposed fiscal pressures through additional spending, which also contributed to a slowdown in the pace of fiscal consolidation. The fiscal deficit fell to 4 percent in 2011 and to 3.9 percent in 2012, instead of the 3.5 percent and 2.7 percent expected initially. This result against the backdrop of a complicated political context and difficulty implementing stronger consolidation measures led the IMF program to lapse. Despite factors affecting implementation of the operation, the program benefited from: Previous Legal Reforms: The Assembly, through Decree No. 534 dated December 10, 2010 approved the Law on Access to Public Information to improve transparency and access to public information; through Decree No. 645 dated March 7, 2011 approved the Law on Equality, Equity and Eradication of Discrimination against Women, to fight discrimination against women and promoting gender equality; and through Decree No. 520 dated November 25, 2010, approved the Special Integral Law for a Life Free of Violence for Women, to protect women from violence. Implementation also benefited from reforms approved in preparation for the second DPL, such as the 2011 tax reform, the enactment and implementation of a reform to the Tax Law, and the Customs Simplification Law. Consultation with other donors: The DPL was prepared with extensive consultation with the IMF and IADB. The purpose of these consultations was three-fold. First, the meetings intended to promote knowledge sharing and inform participants about the latest analytical work developed by each institution, especially in the areas of tax management, tax policy and public expenditure. Second, the meetings provided an opportunity for coordinating efforts and avoiding overlaps in actions support by the different institutions. Finally, the meetings helped to tune messages and recommendations provided by the different institutions. Government consultations: Finally, the Government has consulted closely with other political and civil society actors during the preparation of the DPL. Taking into account El Salvador s political context and the potential risk associated with the approval of reform, the Government had promoted consultation on key policies supported by the operation. The Bank continued assisting the Government in the consultation process helping mitigate the risks associated with the approval of the operation in Congress. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: Design, implementation and utilization: Outcome indicators, baseline values, and targets were assigned to each of the four policy areas defined under the DPL program. The design focused on output and outcome indicators that were easy to calculate and that were expected to be achieved by December 2012, closing date of the operation. The M&E sought to align output indicators to indicators and targets frequently monitored by the Government, such as the number of income tax returns filed by DGII, the share of 11

payments to the Government made through P@GOES, the tax revenues as percent of GDP and the Government balances monitored by the DGT s system. The Ministry of Finance was responsible for the implementation of the program supported by the DPL as well as for coordinating actions among the concerned line agencies, including, in particular, the Central Bank, the Technical Secretariat of the Presidency (for aspects concerning the implementation of social programs), the Ministry of Education (for aspects concerning the education sector) and the Ministry of Health (for aspects concerning the health sector). Together with the Ministry of Finance, these institutions collected the necessary data to assess and report on implementation progress, taking into account both process advances and service statistics, survey and other data that has been used to assess the achievement of the outcome indicators. 2.4 Expected Next Phase/Follow-up Operation (if any): Even though the second DPL was not completed, activities carried out during the preparation helped sustain engagement and supported program implementation. The second DPL in the series developed until appraisal. The analytical and technical work developed during preparation helped inform policy discussion in different areas, such as subsidy targeting, distribution impacts of tax reform, and fiscal rules. This work contributed to the implementation of most indicative triggers for the second operation and continuation of the program beyond the approval of the second loan. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The policy areas of support under this DPL remain relevant. The DPL was prepared while El Salvador was starting to recover from the impact of the global crisis. Preparation took place shortly after the release of the Government Development Plan and was directly linked to its objectives (see Section 1.5). The program supported by the operation remained relevant and helped the Government through a complicated political and economic environment. In fact, the program continued being implemented despite the lack of a second DPL. 3.2 Achievement of Program Development Objectives Overall, El Salvador has made significant progress toward meeting the target outcomes, but the program was not fully successful in achieving all development objectives. The PDOs were to assist the Government in promoting social development and inclusion by creating fiscal space for social expenditure, while maintaining a sustainable medium-term fiscal framework. The PDO focused on ten outcome indicators under four policy areas, for which the program could be held accountable given the scope of the operation. The DPL fully met six out of ten outcome indicators, and partially met two indicators. Annex 1 details the status of the outcomes as of the closing of the 12

operation. The outcomes and current status of each indicator under each pillar are also discussed below. Policy Area I.1: Improving efficiency in tax collection and expanding the tax base Outcome Indicator 1:The number of income tax returns filed by DGII was expected to decrease by 50 percent from a baseline of 445.005 tax returns in 2009 (equivalent to 84 percent of total tax files), to 223.002 by the first quarter of 2013. This indicator should track the impact of a reform, implemented in 2012, based on the adjustment of the table of tax retentions for wage earners and tax exception of small non labor income. As of April 2013 the number of income tax returns filed by DGII was 374,004, a decrease of 35 percent compared to April 2012 (575,819). The tax reform did not reduce the number of income tax returns filed by the DGII by 50 percent with respect to the baseline, due to delays in the implementation of tax system reforms, but made progress towards the proposed decrease. (Not achieved) Outcome Indicator 2: The share of payments to the Government made through P@GOES was expected to increase from 5.25 percent in 2008 to 9.5 percent in 2012. This DPL supported actions for improving efficiency in tax collection and expanding the tax base included in the El Salvador electronic payment platform (P@GOES), thus reducing tax collection costs and helping improve coordination. As of December 2012 the payments made to the Government through the platform for electronic payments P@GOES was 30.1 percent. This result surpassed the target in terms of percentage of total payments to the government (Achieved) Policy Area I.2: Increasing tax revenues through tax administration actions and fiscal reform Outcome Indicator 1: Tax revenues as percent of GDP have increased 40 basis points by 2012 as a result of tax administration measures from a baseline of 13.3 percent for the period 2006-2008, prior to the economic crisis. As of December 2012 the tax revenue as percent of GDP increased by 1.1 percentage points, with respect to the baseline average of 13.3 percent for 2006-2008, mainly as a result of tax administration measures and custom revenue efforts and not due to tax rate increases (Achieved) Outcome Indicator 2: Total tax revenues have increased from an average of 13.3 percent of GDP in 2006-2008 to 14.8 percent in 2012. In 2012 net tax revenues to GDP were 14.4 percent, an improvement compared to the average of 13.3 percent of GDP for 2006-2008, but not sufficient to meet the target of 14.8 percent due to external and internal conditions that lowered economic activity. (Partially achieved) Policy Area I.3: Increasing efficiency, transparency and accountability in the allocation of public resources Outcome Indicator 1: The Government balances monitored by DGT s system increased from US$91.9 million in 2009 to US$175 million in 2012. As of December 13

2012, Government balances supervised by the DGT system rose from $91.9 million in 2008 to $122.54 million in 2012 (Not Achieved) Outcome Indicator 2: Ten percent of common used goods and services were expected to be purchased through framework Agreements in 2012 from a baseline in 2009 where no framework agreement was used. The National Assembly did not approve Art 4 of the reform proposed by the Executive containing the Framework Agreements. For this reason, during the preparation of the second operation the Bank was considering a revision to this indicator (Not Achieved). Outcome Indicator 3: No payments to awarded contracts has been made in 2012 unless the business opportunity and results were published in COMPRASAL in due time. By linking the publication of procurement opportunities with payments, the Government would ensure that 100 percent of bidding opportunities are published online. As of December 2012 transparency over public resources management has been significantly improved with the publication of the results and conditions for all public contracts. Additionally, the government implemented in 2012 a mechanism that ensures that no contract can be paid unless results are published in the portal. (Achieved) Policy Area II Protecting vulnerable groups Outcome Indicator 1: Each region of the country has at least one functioning consulting committee for monitoring progress with respect to gender equity in the public sector and a functioning window for information on women s rights by January 2013. As of October 2009 there were no functioning consulting committees or windows for information. As of December 2012, there were 14 functioning consulting committees monitoring progress in gender equality in the public sector, and 11 regions of the country had at least one functioning information window on women rights. Additionally, there were 570 mobile operational information windows at the country level. (Achieved) Outcome Indicator 2: At least 80 percent of the target elderly individuals in the 52 poorest rural municipalities and 2 urban municipalities receive cash transfers by January 2013. As of October 2009, no targeted elderly individuals received cash transfers. Cash transfer programs for elderly individuals cover more than the number of municipalities targeted at project inception, including the poorest departments in the country. In fact, as of January 2013, 80 percent of the elderly individuals in 75 municipalities receive cash transfers, which include the 52 poorest of the rural area. The CT program was not extended to urban municipalities. (Achieved) Outcome Indicator 3: At least 2000 students of primary and secondary education are studying under the full-school day period modality by January 2013. (Baseline: No student studied under full-school day period in October 2009. By January 2013, approximately 10,356 students are studying under the extended-day modality and an approximate of 16,968 students are studying under indirect modality, in 53 full-day inclusive schools. (Achieved) 14

3.3 Justification of Overall Outcome Rating Rating: Moderately Satisfactory The program supported by the DPL series was almost fully implemented, even though the second DPL did not materialize. This contributed to further progress towards the PDO and improvements in almost all results indicators. Progress under pillar one was partial. Most targets related to improving efficiency in tax collection and increasing efficiency and transparency in the allocation of public resources were fully achieved. By December 2012, the payments made to the Government through P@GOES reached 30.1 percent and transparency over public resources management significantly improved with the publication of the results and conditions for all public contracts. Results related to revenues collection were also strong, although below target. The number of income tax returns filed by DGII decrease 17 percent (instead of 50 percent); tax revenues increase to 14.4 percent of GDP (instead of 14.8 percent) in large due to tax administration measure. It was not possible to increase significantly the amount of Government balances monitored by the DGT, or get the approval from the National Assembly to implement framework agreements for the purchases of goods and services. Pillar two was successfully implemented. Important progress was made in protecting vulnerable groups by: implementing 14 functioning consulting committees monitoring progress in gender equality in the public sector and creating in 11 regions of the country at least one functioning information window on women rights; expanding the cash transfer to 80 percent of the target elderly individuals in 75 municipalities, including the 52 poorest rural municipalities; and increasing to 10,356 the number of students under the extended-day modality and to approximately 16,968 the students studying under indirect modality, in 53 full-day inclusive schools. 3.4 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development The actions for strengthening the country s fiscal position supported by this DPL were expected to have a positive overall distributional impact. The latest PER indicated that high public debt has adversely impacted the poor by reducing fiscal space for priority social spending and investment programs. The gains in poverty reduction achieved during the previous decade were partially reversed by the crisis. The poverty rate reached 40 percent at the end of 2008 and remained relatively high at 37.8 percent in 2009. The operation supported Government efforts to protect the poor and vulnerable groups and included legislative actions aimed at improving gender equality. In the wake of the Government efforts, and despite a challenging external and economic environment, poverty and extreme poverty rates were reduced to 34.5 and 8.9 percent of GDP respectively. There has also been significant progress made in protecting vulnerable 15

groups in rural areas by increasing the coverage of the CT program to 80 percent of the eligible elders in 75 rural municipalities. (b) Institutional Change/Strengthening The DPL helped promoting institutional changes by supporting actions: to improve efficiency in tax collection by strengthening DGII s institutional capacity; to increase tax revenues through tax and custom administration actions; and to increase efficiency and transparency in the allocation of public resources given the low levels of tax revenues, increasing pressures from public services delivery, and the adverse effects of external shocks that have limited the financing needed for needed social investments. These actions are fully consistent with the objective of strengthening fundamentals for economic recovery by addressing macro and institutional vulnerabilities. Finally, this operation supported actions towards the protection of vulnerable groups such as designing and implementing a cash transfer system to elderly individuals in the poorest municipalities. Moreover, institutional strengthening continued as the government proceeded with the implementation of prior actions for the second DPL (c) Other Unintended Outcomes and Impacts (positive or negative, if any) N/A 3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops N/A 4. Assessment of Risk to Development Outcome Rating: Moderate Rating: Moderate Political risks: The polarized political climate in El Salvador continues to be a potential obstacle to approve reforms and loans. In addition, the upcoming presidential elections (March 2014) further increase tensions and might impose spending pressures, slowing fiscal consolidation. The difficult political context may affect the ability to continue making progress towards the PDO, but the Government commitment remains, and it is unlikely that the results achieved so far would be reverted. Macroeconomic risks: The prolonged global deceleration and higher volatility continue to impose risks to the El Salvador economy. The potential impacts on the country are similar to the ones associated with the 2008 financial crisis, including low growth, fiscal, social and financial pressures. In some fronts, El Salvador is now better prepared to mitigate the impact of a crisis. Since 2008 the Government has expanded social protection programs and safety nets. In addition, the Government has strengthened the financial sector monitoring and crisis preparedness. In other fronts El Salvador s position is more vulnerable. Economic growth remains low and, despite fiscal consolidation efforts, the public debt and fiscal accounts are still higher than its pre-2008 levels. 16

Natural disasters risks. El Salvador is highly vulnerable to multiple natural disasters risks floods, hurricanes and earthquakes. A major climatic or seismic disaster poses a significant threat to economic growth and fiscal stability and can delay the Government s program. In fact, the latest prolonged tropical storms had significant economic impacts (up to US$850 million). The Government efforts to strengthening disaster management systems help prevent fatalities, but after the full disbursement of the CAT-DDO (US$50 million), the Government counts with fewer instruments for immediate emergency responses. The occurrence of a major natural disaster could imply a reassessment of the country s development priorities (at least temporarily) and delays progress towards the medium term development objectives. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory The design of the DPL was appropriate, timely, and relevant for addressing the challenges faced by the country given external and internal developments, including the risks associated with the polarized political climate. The DPL was designed in close collaboration with the Government to ensure that actions supported by the operation were fully consistent with the country s long term development goals, in particular, creating fiscal space needed for sustainable social spending, enhancing the social gains achieved during the last decade and protecting vulnerable segments of the population. Moreover, the design of the Public Finance and Social Progress DPL benefited from the findings and recommendations of previous analytical pieces such as the Public Expenditure Review (2010) and the Public Financial Management Performance Measurement Framework (FY09), which explain the link between the analytical findings and the policy actions supported by this DPL. (b) Quality of Supervision Rating: Satisfactory Supervision was carried formally through three supervision missions that followed the Ministry of Finance and the Bank agreement settled during project preparation. These reviews are summarized in three Implementation Status and Results (ISR). The first supervision mission took place on August 2011 with the purpose of monitoring the government's progress towards targeted outcomes. During this first mission the Bank documented improvements on most outcome indicators, with the exception of the fiscal pact. The fiscal reform prepared by the Ministry of Finance had not been presented to the Social and Economic Council for consultations at that time. The second and third supervision missions took place in April and December 2012. The Program Performance was considered satisfactory by the first two ISRs, however during the third supervision mission the progress towards achievement of PDO was rated as moderately satisfactory due to the slowdown in fiscal consolidation (fiscal deficit fell to 3.9 percent instead of the 17

3.5 percent initially projected), and positive but slower progress in some of the result indicators. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory The operation supported relevant development objectives, and helped build consensus around those issues. Supported issues, such as fiscal sustainability and efficiency and protection and inclusion of vulnerable segments of the population, remain relevant despite the adverse shocks that affected the Salvadoran economy during the implementation period. Many aspects of Bank performance contributed to this outcome. First, the continued engagement through analytical work and policy dialog helped the implementation of the program supported by the DPL series. Second, the Bank coordinated closely with other donors. Third, the operation correctly identified a number of risks for program sustainability and helped mitigate them. Finally, the monitoring and evaluation system in place allowed both the Government and the Bank to periodically track progress toward the target outcomes. 5.2 Borrower Performance (a) Government Performance Rating: Moderately Satisfactory Throughout the preparation and supervision process of the operation, the Ministry of Finance coordinated with the different ministries and line agencies involved in the operation including, DGA, DGII and DGT. The coordination was instrumental in shaping the actions of each institution and ensuring the timely implementation of the multiple prior actions under the program (Table 3). However, changes in the economic and political context led the Bank team to delay the preparation of the second operation; the DPL series lapsed and this loan became a stand-alone operation. On the economic side, weak external and low GDP growth contributed to a slower pace of fiscal consolidation and the interruption of the IMF program in the country. On the political side, mid-term election changed the political composition in Congress affecting the Government s support and its ability to approved loans and sensitive reforms, further slowing fiscal consolidation. Despite the difficult context, El Salvador s Government remained committed with the objectives of the program. (b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory The Ministry of Finance was the principal executing agency, responsible for the implementation and overall coordination of the operation as agreed at the inception of the program. The Ministry of Finance was responsible for the implementation as well as for coordinating actions among the concerned line agencies, including, in particular, the Central Bank, the Technical Secretariat of the Presidency (for social programs) and the Ministry of Education (for the education sector).together with the Ministry of Finance, these institutions collected the data, sometimes with delays or incomplete, to assess 18

implementation progress and report it to the Bank, taking into account both process advances and service statistics, survey and other data used to assess the achievement of the outcomes. Despite the difficult political and economic context, the Government continued implementing the program supported by the operation and completed almost all indicative triggers supported by the second operation. (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory The borrower s engagement during the preparation, implementation and supervision was overall satisfactory. As described above, substantial progress was made in implementation of the program. However, the slowdown in fiscal consolidation, driven by political and economic challenges, affected the achievement of at three of the outcome indicators and interfered with the completion of the DPL series. 6. Lessons Learned Sustaining the dialogue on macroeconomic performance and the program of reforms were critical for the outcome of a Development Policy Loan. This operation was supposed to be the first of a series of two DPLs but ended up as a standalone operation because of the complicate political and economic environment in the country. The Bank continued engagement providing technical support and helping inform the policy debate. Even though these efforts were not sufficient for the completion of the second operation, they contribute to the implementation of the program of reforms and to the fiscal consolidation debate in the country. Sustained engagement developed knowledge and helped the Bank to respond with flexibility to a changing country context. Despite the difficulties encountered in obtaining approval of foreign borrowing in the Assembly, the Bank remained fully engaged, contributing via analytical work, consensus building activities and strategy/program development. The analytical work helped to identify gaps in specific sectors and shortcomings that contributed to cope with the severe effects of the 2009 economic crisis, and was also critical for informing stakeholders and building consensus around important development issues such as the targeting of subsidies, tax reform, and the need for fiscal consolidation In particular, the two previous DPLs, the Public Finance and Social Sector (2009) that focused in strengthening the medium-term fiscal sustainability and supporting transparency in the use of public resources; the Sustained Social Gains for Economic Recovery Program (2009) that supported the design of initiatives and institutional strengthening in the social sectors; and the PER (2010) that provided great support to the DPL series. This DPL was one of the first DPLs to successfully support a gender reform agenda. The National Development identified gender equity as an important challenge for El Salvador. Taking advantage of this favorable context, the Bank team supported the Government in the preparation and approval of two important laws, the Gender Equity Law and Women s Protection against Violence Law. Gender was introduced to the DPL 19

storyline within a strategy to protect vulnerable segments of the population, and it was appreciated internally at the Bank and by the counterparts in the country. The political climate in El Salvador can impede the approval of reforms. Political risks materialized during implementation which made it difficult to achieve expenditure and revenue targets. The most recent mid-term elections changed the composition of Congress, allowing the opposition to block the two-third majority required by El Salvador s constitution to approve new legislation and loans. Although the Government tried to mitigate this risk by intensifying consultation on policy reforms and by explaining the content of the reform to the different stakeholders involved in the political process, they were not able to fully obtain the results. The political situation became even more complicated in the lead up to the Presidential election. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies The comments provided by the borrower to the implementation completion report on the Public Finance and Social Progress Development Policy Loan are included in Annex 3. (b) Co-financiers N/A (c) Other partners and stakeholders N/A 20

Annex 1: Public Finance and Social Progress DPL - Policy Matrix Objectives and Prior Actions for Board Approval Indicative Triggers for the Second Policy Areas DPL Pillar I. Creating Fiscal Space for Needed Social Spending I (a) Improving efficiency in tax collection and expanding the tax base I (b) Increasing tax revenues through tax administration actions and fiscal reform The Borrower, through DGT, entered into separate agreements with Ministerio de Salud Pública y Asistencia Social; Ministerio de Agricultura y Ganadería; and Fondo Social para la Vivienda, respectively on December 16, 21 and 23, 2009, whereby said ministries and agencies may use the P@GOES to collect electronic payments, in order to achieve an improved efficiency in tax collection. The Borrower, through Decree No. 233 of December 16, 2009, published in the Diario Oficial of December 21, 2009, has strengthened DGT s tax recovery instruments by (i) extending the period for processing administrative claims of late tax payments from 10 days to up to 100 days; and (ii) allowing DGT to withhold a certain percentage of the earnings of wage earners and the Borrower s service providers which are in arrears on its tax payments, as established in the reformed Article 273-A of the Tax Code. DGA and DGII have confirmed that the Directorates have strengthened their respective capacity to fight tax evasion through the implementation of systems that will enable them to select and manage the cases to be audited by the Borrower s tax authorities, through the following: (i) an official letter issued by the head of Risk Management Unit, dated June 1, 2010; (ii) the approval by its General Director of the technical procedure described in the document Operability of the Risk Management Unit dated October 19, 2010; (iii) the approval by an internal committee of the MH of the Reception Deed of the Programs of Migration/ Replication in the Production Environment, dated September 16, 2009, and(iv) the adoption by the head of the Case Selection Unit of the Case Selection Management System, dated August 18, 2010. An executive decree aimed at creating a new, simplified schedule for income tax payments from wage earners and a new legislation implementing a single-tax regime for small and micro enterprises have been enacted. Status: The simplified income schedule was implemented. The tax regime for small and micro enterprises was presented to Congress and is under discussion. The Government has strengthened tax payers monitoring by completely integrating DGA and DGII tax payer s registry and information system. Status: Implemented. A new fiscal reform, formulated in consultation with the key stakeholders of El Salvador society, has been enacted and is under implementation. Status: Implemented. The DGII has confirmed that in 2010 it started the implementation of new internal processes to monitor and penalize non tax filers and stop tax filers through: (i) an official letter issued by the head of its Tax Omissions Control Section, dated March 31, 2011; (ii) the adoption of technical manuals entitled Detection, Verification and Control of Late Declaration dated July 29, 2010, and Detection, Verification and Control of Tax Omissions and Differences, dated September 6, 2010. 21 Outcome Indicators (December 2012) 1. The number of income tax returns filed by DGII decreased 50 percent by the first quarter of 2013 (Baseline: 446,005 tax returns in 2009). 2. The share of payments to the Government made through P@GOES increased from 5.25 percent in 2008 to 9.5 percent in 2012 3. Tax revenues as percent of GDP have increased 40 basis points by 2012 as a result of tax administration measures. (Baseline: 13.3 percent, average 2006-2008, period prior to the economic crisis). 4. Total tax revenues have increased from an average of 13.3 percent of GDP in 2006-2008 to 14.8 percent in 2012.. Status by December 2012 Not Achieved The number of income tax returns filed by DGII in April 2013 was 374,004, a decrease of 35% compared to April 2012 (575,819). The tax returns in April 2013 have reduced 16 percent with respect to the baseline. Achieved As of December 2012 the payments made to the Government through P@GOES was 30.1%. This result surpassed the target. Achieved The tax revenue as percent of GDP, increased by 1.2 percentage points in 2012, with respect to the baseline average of 13.3% for 2006-2008. Partially achieved In 2012 tax revenues to GDP was 14.4%, an improvement compared to the average of 13.3% of GDP for 2006-2008, but not sufficient to meet the target.

Objectives and Policy Areas I. (c) Increasing efficiency, transparency and accountability in the allocation of public resources Prior Actions for Board Approval Indicative Triggers for the Second DPL The Borrower through the Treasury Office (DGT): (a) has adopted a system that enables it to carry out the daily financial monitoring and control of all Agencies bank accounts in the Borrower s territory, as evidenced by authorization No. 001/2010 of DGT, dated June 23, 2010; and The Government will continue efforts to improve planning and targeting of public spending by expanding the result-based budgeting RBB framework, to two additional Government agencies. Status: Implemented. (b) as a result of the implementation of the above mentioned system, has, as of March 31, 2011, attained 100 percent daily financial monitoring and control coverage of the bank accounts mentioned in (a), as evidenced by the letters issued by the Bank Accounts Control Department of the DGT, dated April 1 and April 11, 2011, respectively. The Borrower, through MOPTVDU, CEPA, FISDL and CNR has entered into a cooperation agreement with CASALCO and FUNDE, dated August 31, 2009, which created the Citizen Observatory of Public Works, for the purpose of, inter alia, preventing corruption by increasing the transparency in public management and increasing the collaboration amongst citizens, entrepreneurs and the Borrower. The Borrower s Assembly, through Decree No. 534 dated December 10, 2010, has approved the Law on Access to Public Information, which aims at improving transparency and access to public information. The Government passed and is implementing a regulation to enable framework agreements for use in public procurement process by all central Government agencies. Status: The implementation of framework agreements was part of the Public Procurement Law reform proposal submitted to Congress. However, this element was cut during congress discussions and was not part of the final reform approved. The Government has incorporated 100 percent of central Government business opportunities and results published in COMPRASAL. Status: Implemented. The Government has started implementing the Access to Public Information Law by: i) establishing an independent Transparency and Public Information oversight agency and ii) electing its governing board. Status: Partially Implemented. The governing body was created and budget has been assigned, but candidates from the first round of elections of the transparency agency governing body was vetoed by the President and new elections will take place. Nevertheless the country has prepared and released the relevant information by May 8,2012. (date of effectiveness of the Access to Public Information Law). 22 Outcome Indicators (December 2012) 5. The Government balances monitored by DGT s system increased from US$91.9 million in 2009 to US$175 million in 2012. 6. Ten percent of common used goods and services purchased though Framework Agreements in 2012 (Baseline: no framework agreement was used in 2009) 7. No payments to awarded contracts has been made in 2012 unless the business opportunity and results were published in COMPRASAL in due time. By linking the publication of procurement opportunities with payments, the Government will ensure that 100 percent of bidding opportunities are published online. Status by December 2012 Not achieved Government balances supervised by DGT system rose from $91.9 million in 2008 to $122.54 million in 2012. Not achieved The Assembly didn t approve Art 4 of the reform (framework agreements), therefore it was agreed that this indicator would be substituted during the preparation of DPL2, which was not concluded. Achieved As of December 2012 transparency over public resources management has been significantly improved with the publication of the results and conditions for all public contracts

Objectives and Policy Areas Prior Actions for Board Approval Indicative Triggers for the Second DPL Pillar II. Protecting and Including Vulnerable Segments of the Population. II. Protecting vulnerable groups The Borrower s Assembly, through Decree No. 645 dated March 7, 2011, has approved the Law on Equality, Equity and Eradication of Discrimination against Women, which aims at fighting discrimination against women and promoting gender equality. The Borrower s Assembly, through Decree No. 520 dated November 25, 2010, has approved the Special Integral Law for a Life Free of Violence for Women, duly published in the Official Gazette, Tome No. 390 of January 4, 2011, which aims at protecting women from violence. The Borrower, through the Social Protection System Inter-sector Committee, has implemented a cash transfer system for eligible individuals aged 70 years or older in the 32 poorest municipalities located within the Borrower s territory, in accordance with the Universal Basic Pension for Elderly People Operative Guide, dated November 2009, duly approved by the Borrower's Comité Intersectorial del Sistema de Protección Social Universal on January 29, 2010, as evidenced by the certification issued by the Technical Secretariat of the Presidency of the Republic, on April 15, 2011. The Government has advanced in the implementation of its gender equity agenda by piloting a methodology for gender perspective in the Budget formulation process in at least three Government programs. Status: Implemented. The social protection program Comunidades Solidarias Urbanas is operational in 5 poor urban municipalities and its beneficiaries have been incorporated to the single registry. Status: Implemented. The Government, through the Ministry of Education, has help protect young individuals at risk by piloting of a fullschool day period in 22 schools. Status: Implemented. 23 Outcome Indicators (December 2012) 8. Each region of the country has at least one functioning consulting committee for monitoring progress with respect to gender equity in the public sector and a functioning window for information on women s rights by January 2013. (Baseline: There were no functioning consulting committees nor windows for information in October 2009) 9. At least 80 percent of the target elderly individuals in the 52 poorest rural municipalities and 2 urban municipalities receive cash transfers by January 2013. (Baseline: No targeted elderly individuals received cash transfers in October 2009) 10. At least 2000 students of primary and secondary education are studying under the full-school day period modality by January 2013. (Baseline: No student studied under full-school day period in October 2009) Status by December 2012 Achieved As of December 2012, there were 14 functioning consulting committees monitoring progress in gender equality in the public sector; and 11 country regions had at least one functioning information window on women rights. Additionally, there are 570 mobile operational information windows at country level. Achieved As of January 2013 there are 75 rural municipalities where at least 80% of eligible elders receive cash transfers. The CT was not extended to urban municipalities. Achieved By January 2013, approximately 10,356 students are studying under the extended-day modality and an approximate of 16,968 students are studying under indirect modality, in 53 full-day inclusive schools.

Annex 2 Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Names Title Unit Responsibility/ Specialty Luc Razafimandimby Senior Economist LCSPE Task Team Leader Barbara Cunha Senior Country Economist LCSPE DPL Task Team Leader Alberto Leyton Oscar Calvo-Gonzalez Enrique Fanta Michael Drabble Senior Public Sector Specialist Lead Economist and Sector Leader Senior Public Sector Specialist Senior Education Specialist AFTP1 LCSPR LCSPS LCSHE Former Country Manager Lead Economist and Sector Leader Public Sector Specialist Education Specialist Jania Ibarra Operations Analyst LCCSV Operations Analyst Junior Professional Junior Professional Mateo Clavijo LCSPE Associate Associate Language Program Patricia Chacon Holt LCSPE Team Support Assistant (b) Staff time and cost Lending Supervision/ICR Total: Staff Time and Cost (Bank Budget Only) USD Thousands (including No. of staff weeks travel and consultant costs) 4.36 27,057.09 5.0 12,925.00 39,982.09 24

Annex 3. Summary of Borrower's ICR and/or Comments on Draft ICR On behalf of the Government of El Salvador, the Minister of Finance expressed its agreement with the content of the Implementation Completion Report (ICR) in a letter to the Resident Representative in El Salvador dated June 12, 2013. The letter includes comments and observations that are summarized below: The Government has reviewed the ICR and believes it reflects well the process of implementation and the results of the program. The financial resources of the operation have been of great relevance to assist the Government in creating fiscal space for needed social expenditure by supporting actions to increase tax revenues and to improve efficiency and transparency in the allocation of public resources; and in protecting and including vulnerable segments of the population by allocating additional public resources towards social programs targeting vulnerable groups such as the elderly, women, and children. In this regard, the technical and financial assistance of the World Bank continues to be critical to finance needed social spending for the most vulnerable groups of the population and to contribute to the social agenda of the current Administration. Based on the experience of this first Public Finance and Social Progress Development Policy Loan, the Government of El Salvador reaffirms the convenience of single-tranche operations due to its quick disbursement. With regard to the results of the operation, the Ministry of Finance believes that outcome indicators 1 and 5, related to the number of income tax returns filed by DGII and the Government balances monitored by DGT, have been partially achieved given the progress made. This advance is reflected in a decrease of 16.1 percent of income tax returns versus the target of 50 percent; and the increase of US$30.6 million of Government balances monitored by DGT, versus the targets of US$83.1 million. Finally, in relation to indicator 6, the lack of implementation of framework agreements for the purchases of goods and services was due to the non-approval of legal reforms submitted by the Executive to the National Assembly. Therefore the Government concludes that in future operations there should be a more pragmatic identification of outcome indicators to avoid non compliance 25

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