The World Bank Guatemala DRM Development Policy Loan with CAT DDO II (P159710) Program Information Document (PID) Appraisal Stage | Date Prepared/Updated: 23-Feb-2019 | Report No: PIDA25821 Page 1 of 7 The World Bank Guatemala DRM Development Policy Loan with CAT DDO II (P159710) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Project Name Parent Project ID (if any) Guatemala DRM Guatemala P159710 Development Policy Loan with CAT DDO II (P159710) Region Estimated Board Date Practice Area (Lead) Financing Instrument LATIN AMERICA AND Social, Urban, Rural and Development Policy 30-Apr-2019 CARIBBEAN Resilience Global Practice Financing Borrower(s) Implementing Agency Guatemala (through its Ministry of Public Finance Ministry of Public Finance) Proposed Development Objective(s) The PDO is to help strengthen Guatemala’s legal, institutional and financial framework to manage the impact of adverse natural events and climate risk. Financing (in US$, Millions) FIN_SUMM_PUB_TBL SUMMARY Total Financing 200.00 DETAILS -NewFin3 Total World Bank Group Financing 200.00 World Bank Lending 200.00 Decision The review did authorize the team to appraise and negotiate Page 2 of 7 The World Bank Guatemala DRM Development Policy Loan with CAT DDO II (P159710) B. Introduction and Context Country Context Guatemala is among the countries most affected by climate events and geophysical hazards. Located on the Ring of Fire between the Atlantic and Pacific Oceans, the country is frequently affected by earthquakes, landslides, and volcanic eruptions. The 1976 earthquake created the greatest human and economic losses to date, killing over 23,000 people; and the June 2018 eruption of El Fuego volcano killed at least 178 people, incurred losses and damages of more than US$200 million. Guatemala ranks 22nd worldwide since 1900 in terms of its human impact incurred by a volcanic eruption.1 Guatemala also ranks 11th in the world among the countries most affected by climate-related events2 such as floods, hurricanes, and extreme weather. There are recurrent droughts related to El Niño in the Dry Corridor,3 that endanger crops, livestock, and food security. Rapid urbanization and climate change further increase disaster risk in the country. As a result, vulnerable households may only be one disaster away from falling below the poverty line or sliding further back into poverty.4 Considering the high impact of natural adverse events on Guatemala’s social welfare and economic growth, the Government is shifting towards a more robust and comprehensive approach to manage disaster and climate risks. The Government of Guatemala (GoG) has identified natural hazards and climate risks as a contingent liability that affects the country’s fiscal sustainability, thereby undermining its development path. Financial constraints and shortage of liquidity in the aftermath of natural disasters lead to reduced coverage and provision of public services and disproportionally affect the poor. In this context, the GoG has initiated a series of policy reforms intended to strengthen the legal framework for disaster risk management (DRM) and climate change adaptation (CCA). The proposed operation provides a platform to advance key policy reforms as well as to provide post-disaster financing. Guatemala’s overall macroeconomic policy framework is deemed adequate for the purpose of this operation. Guatemala’s debt-to-GDP ratio is among the lowest in Latin America, inflation is low and within the target range, the fiscal deficit is contained, and the balance of payment financing needs are within the government’s control. As a result, the economy is stable and shows little macroeconomic volatility. However, one of the greatest challenges in Guatemala is low tax revenue, which highlights the urgency to adopt measures that generate greater resilience of the public finances. Relationship to CPF The proposed operation is fully consistent with the Country Partnership Framework (CPF) in which DRM and climate change are key priorities. The CPF (2016)5 is anchored in the Government’s strategy reflecting Guatemala’s commitment to preventive urban planning and disaster risk reduction, providing an opportunity to expand the World Bank’s engagement in this area. The Fostering Inclusion and Resilience Pillar of the CPF identifies vulnerability to natural hazards as one of the key development constraints for Guatemala and essential for promoting inclusion and economic growth. 1 Ranking based on the Catholic University of Louvain’s Emergency Events Database (www.emdat.be, last accessed Nov. 28, 2018). 2 Global Climate Risk Index 2018, Germanwatch. The index ranks countries affected by extreme weather events between 1997 and 2016 in terms of number of events, death toll, deaths per 100,000 inhabitants, total losses in US$ (millions), and losses per unit gross domestic product (GDP) (percent). 3 The Dry Corridor includes areas of the Departments of Quiche, Baja Verapaz, Chiquimula, Zacapa, El Progreso, Jutiapa, and Jalapa. 4 In 2010, for instance, poverty rates rose by 5.5 percentage points in areas flooded by tropical storm Agatha. This meant that nearly 80,000 additional families fell below the poverty line (Javier E. Báez, Alan Fuchs, and Carlos Rodríguez Castelán. 2017. Overview: Shaking Up Economic Progress: Aggregate Shocks in Latin America and the Caribbean. Washington, DC: World Bank). 5 World Bank. 2016. Guatemala - Country partnership framework for the period FY17-20. Page 3 of 7 The World Bank Guatemala DRM Development Policy Loan with CAT DDO II (P159710) To address this challenge, building capacity to respond to disasters and climate change is a core CPF objective. The Crecer Sano: Guatemala Nutrition and Health Project (P159213)6 is expected to build synergies with the proposed CAT-DDO. In addition, the World Bank is providing technical support to the GoG in the design of policies and strengthening institutional capacity through the Strengthen DRM and Resilience in Central American Cities Project (P157269), the Central America Disaster Risk Financing Engagement (P148729), and the Volcan de Fuego Resilient Recovery Project (P167980). C. Proposed Development Objective(s) The PDO is to help strengthen Guatemala’s legal, institutional and financial framework to manage the impact of adverse natural events and climate risk. Key Results This proposed DPL with CAT-DDO aims to strengthen the legal and institutional DRM framework to increase Guatemala’s resilience to natural hazards. The proposed operation is designed to support the efforts of the GoG to strengthen the DRM and CCA legal and institutional framework, and to quickly mobilize resources in the aftermath of disasters in the country. This operation also builds on the lessons learned from the first DPL with CAT DDO (P112544). D. Project Description The proposed operation is a stand-alone US$200 million CAT-DDO structured around two pillars with six prior actions: Pillar A - Strengthening the legal and institutional framework for DRM and CCA. Prior Action A.1: The Government has proposed the establishment of a national system for DRM and defined procedures and instruments to enhance risk knowledge and reduction, disaster preparedness and response, and resilient recovery. Prior Action A.2: The Government has adopted a DRM roadmap for volcanic resilience, which increases preparedness through updated contingency plans and information dissemination activities. Prior Action A.3: The Government has strengthened the DRM institutional framework in the environmental sector by creating the Department of Integral Environmental Risk Management in the Ministry of Environment and Natural Resources. Pillar B - Incorporating of disaster risk into the management of public finances for fiscal resilience. Prior Action B.1: The Government has approved and published a Disaster Risk Financing Strategy (DRFS) promoting the diversification of financial instruments to facilitate a timely disaster response and enhancing fiscal stability and revenue predictability against disasters. Prior Action B.2: The Government has institutionalized and strengthened the management of fiscal risks and transparency of public spending by (i) creating the position of Fiscal Transparency and Procurement Vice-Minister 6 Pending Congressional approval. Page 4 of 7 The World Bank Guatemala DRM Development Policy Loan with CAT DDO II (P159710) within MINFIN and regulated the functions and responsibilities of MINFIN, and (ii) integrating an analysis of disaster and climate risks in the annual General Budget report. Prior Action B.3: The Government has enhanced the efficiency of public spending, planning and budget allocation processes related to DRM and CCA activities by clarifying the responsibilities of the thematic budget classifiers’ governing bodies and updated the scope of said instruments throughout its budget cycle. E. Implementation Institutional and Implementation Arrangements The MoF will implement and monitor the progress of the proposed operation during the entire drawdown period. The World Bank will monitor both the macroeconomic environment and the implementation of the program supported by the proposed DPL with CAT DDO during the drawdown period. This will be done through frequent visits to the country and regular communications with the MoF and key sectors. The World Bank will monitor the status of the project implementation through biannual implementation support missions and by tracking the results indicators. F. Poverty and Social Impacts and Environmental Aspects Poverty and Social Impacts The prior actions included in this proposed DPL with CAT-DDO are expected to have overall positive effects on poverty over the medium and long term. A Poverty and Social Impact Analysis was conducted, which looked at the potential effects of the reforms supported under the operation and confirmed a positive indirect impact on poverty and social development indicators. The Poverty and Social Impact Analysis identified two findings of particular importance for Guatemala: (a) a large proportion of the population is vulnerable to the negative effects of natural hazards; and (b) the combination of high and rising poverty and the high probability of natural hazards render efforts to mitigate the impacts of disasters. The policies supported under this operation are expected to reduce Guatemala’s vulnerability to natural hazards by, ex ante, improving the DRM framework, land use and DRM planning at the municipal level, and upgrading education infrastructure while improving the country’s ability to cope with the effects of a shock ex post. The policies are not expected to reduce poverty directly but rather contribute to preventing increased poverty in the event of new extreme natural events and mitigating the long-term effects of disasters. Environmental Aspects Prior actions selected for the proposed operation are expected to have a positive impact on Guatemala’s environment and other natural resources. Through the proposed operation, the GoG addresses technical and financial barriers to enable the adoption of a risk-informed approach to development. Specifically Pillar A of this operation contains prior actions that are expected to directly contribute to enhancing natural resource and environmental management. Prior Action A.1 will strengthen the policy and institutional capacity for DRM and seeks to mainstream DRM and climate change adaptation policies and practices at the national level, contributing to environment-friendly planning of essential infrastructure and development projects. Under Prior Action A.3, the Government creates the Department of Integral Environmental Risk Management within Ministry of Environment and Natural Resources, which will seek to produce and disseminate 25 local environmental risk evaluations by 2021, thereby directly contributing to sound environmental management. Page 5 of 7 The World Bank Guatemala DRM Development Policy Loan with CAT DDO II (P159710) G. Risks and Mitigation The overall risk associated with this proposed operation is substantial. At the program level, the political and governance risk is high, due to low governmental capacity to implement reforms in recent years. The ability to reform laws has historically been challenging in Guatemala, and implementation is dependent on actions across various levels of government and agencies. This risk is expected to be mitigated to an extent given the fact that the DRM agenda has a strong support from the Congress, and public pressure for better disaster risk management is significant due to the high . frequency and intensity of natural disasters in Guatemala. CONTACT POINT World Bank Lizardo Narvaez Marulanda, Zoila Victoria Navarro Portocarrero Senior Disaster Risk Management Specialist Borrower/Client/Recipient Guatemala (through its Ministry of Public Finance) Rosa Maria Ortega De Ramanzini Director of Public Finance rortega@minfin.gob.gt Implementing Agencies Ministry of Public Finance Mayra Angelica Ramirez Escobar Subdirector Public Credit mramirez@minfin.gob.gt FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects Page 6 of 7 The World Bank Guatemala DRM Development Policy Loan with CAT DDO II (P159710) APPROVAL Task Team Leader(s): Lizardo Narvaez Marulanda, Zoila Victoria Navarro Portocarrero Approved By APPROVALTBL Country Director: Andrea C. Guedes 04-Feb-2019 Page 7 of 7