Document of The World Bank Report No: ICR00001909 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-75900) ON LOANS IN THE AMOUNTS OF 1. US$200 MILLION (September 17, 2008) 2. US$350 MILLION (June 24, 2009) TO THE REPUBLIC OF GUATEMALA FOR THE FIRST AND SECOND PROGRAMMATIC FISCAL AND INSTITUTIONAL DEVELOPMENT POLICY LOANS June 30, 2010 Central America Country Management Unit Poverty Reduction and Economic Management Latin America and Caribbean Region CURRENCY EQUIVALENTS (Exchange Rate Effective December 31, 2010) US$1.00 = QZ 8.016 (Quetzales) FISCAL YEAR January 1st – December 31st ABBREVIATIONS AND ACRONYMS CCT Conditional Cash Transfer CPS Country Partnership Strategy DPL Development Policy Loan Guatecompras Government procurement system IEATAAP Temporary tax on business income (Impuesto Extraordinario de Apoyo a los Acuerdos de Paz) ISO Transitional “Solidarity tax� on business income (Impuesto de Solidaridad) MoF Ministry of Finance SAQB’E Customs Management System SIAF Integrated Financial Management System SIB Banking Superintendency SME Small and Medium Enterprises Vice President: Pamela Cox Country Director: C. Felipe Jaramillo Sector Manager: Rodrigo A. Chaves Task Team Leader: David M. Gould ICR Team Leader: Elizabeth Ruppert Bulmer GUATEMALA FIRST AND SECOND PROGRAMMATIC FISCAL AND INSTITUTIONAL DEVELOPMENT POLICY LOANS IMPLEMENTATION AND COMPLETION RESULTS REPORT CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring 1. Program Context, Development Objectives and Design ............................................ 1 2. Key Factors Affecting Implementation and Outcomes .............................................. 5 3. Assessment of Outcomes .......................................................................................... 12 4. Assessment of Risk to Development Outcome ......................................................... 17 5. Assessment of Bank and Borrower Performance ..................................................... 18 6. Lessons Learned........................................................................................................ 21 Annex 1 Bank Lending and Implementation Support/Supervision Processes.............. 23 Annex 2. Beneficiary Survey Results ........................................................................... 25 Annex 3. Stakeholder Workshop Report and Results ................................................... 26 Annex 4. Summary of Borrower's Comments on Draft ICR ........................................ 27 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 29 Annex 6. List of Supporting Documents ...................................................................... 30 MAP   A. Basic Information Program 1 GT Fiscal and Country Guatemala Program Name Institutional DPL Program ID P112312 L/C/TF Number(s) IBRD-75900 ICR Date 06/30/2011 ICR Type Core ICR REPUBLIC OF Lending Instrument DPL Borrower GUATEMALA Original Total USD 200.00M Disbursed Amount USD 200.00M Commitment Implementing Agencies Ministry of Public Finance Cofinanciers and Other External Partners Program 2 Second Fiscal and Country Guatemala Program Name Institutional Development Policy Program ID P114373 L/C/TF Number(s) IBRD-77360 ICR Date 06/30/2011 ICR Type Core ICR REPUBLIC OF Lending Instrument DPL Borrower GUATEMALA Original Total USD 350.00M Disbursed Amount USD 350.00M Commitment Implementing Agencies Ministry of Public Finance Cofinanciers and Other External Partners B. Key Dates GT Fiscal and Institutional DPL - P112312 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 07/30/2008 Effectiveness: 03/17/2009 03/17/2009 Appraisal: 09/12/2008 Restructuring(s): Approval: 10/21/2008 Mid-term Review: Closing: 12/31/2009 12/31/2009 i Second Fiscal and Institutional Development Policy - P114373 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 05/11/2009 Effectiveness: 03/07/2010 12/17/2009 Appraisal: 06/10/2009 Restructuring(s): Approval: 07/28/2009 Mid-term Review: Closing: 12/31/2010 12/31/2010 C. Ratings Summary C.1 Performance Rating by ICR Overall Program Rating Outcomes Moderately Satisfactory Risk to Development Outcome Substantial Bank Performance Satisfactory Borrower Performance Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Overall Program Rating Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Not Applicable Implementing Quality of Supervision: Satisfactory Not Applicable Agency/Agencies: Overall Bank Overall Borrower Satisfactory Moderately Satisfactory Performance Performance C.3 Quality at Entry and Implementation Performance Indicators GT Fiscal and Institutional DPL - P112312 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at any Quality of No None time (Yes/No): Supervision (QSA) DO rating before Moderately Closing/Inactive status Satisfactory ii Second Fiscal and Institutional Development Policy - P114373 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at any Quality of No None time (Yes/No): Supervision (QSA) DO rating before Satisfactory Closing/Inactive status D. Sector and Theme Codes GT Fiscal and Institutional DPL - P112312 Original Actual Sector Code (as % of total Bank financing) Central government administration 60 60 General finance sector 20 20 Other social services 20 20 Theme Code (as % of total Bank financing) Other accountability/anti-corruption 14 14 Public expenditure, financial management and 14 14 procurement Regulation and competition policy 29 29 Social safety nets 14 14 Tax policy and administration 29 29 Second Fiscal and Institutional Development Policy - P114373 Original Actual Sector Code (as % of total Bank financing) Central government administration 35 35 General finance sector 20 20 General public administration sector 20 20 Other social services 25 25 Theme Code (as % of total Bank financing) Macroeconomic management 20 20 Other financial and private sector development 20 20 Other human development 20 20 iii Public expenditure, financial management and 20 20 procurement Tax policy and administration 20 20 E. Bank Staff GT Fiscal and Institutional DPL - P112312 Positions At ICR At Approval Vice President: Pamela Cox Pamela Cox Country Director: Carlos Felipe Jaramillo Laura Frigenti Sector Manager: Rodrigo A. Chaves Rodrigo A. Chaves David Michael Gould Task Team Leader: David Michael Gould Waleska Garcia-Corzo ICR Team Leader: Elizabeth N. Ruppert Bulmer ICR Primary Author: Elizabeth N. Ruppert Bulmer Second Fiscal and Institutional Development Policy - P114373 Positions At ICR At Approval Vice President: Pamela Cox Pamela Cox Country Director: Carlos Felipe Jaramillo Laura Frigenti Sector Manager: Oscar Calvo-Gonzalez Rodrigo A. Chaves David Michael Gould Task Team Leader: David Michael Gould Rashmi Shankar ICR Team Leader: Elizabeth N. Ruppert Bulmer ICR Primary Author: Elizabeth N. Ruppert Bulmer F. Results Framework Analysis Program Development Objectives (from Program Document) Program Development Objectives: I. Promote macroeconomic stability and financial sector deepening and maintain fiscal space for priority spending. II. Improve governance and transparency of public financial management and expenditures. III. Strengthen the effectiveness of the Mi Familia Progresa Conditional Cash Transfer Program through improved execution and targeting. IV. Promote sustainable growth and productivity. Revised Program Development Objectives (as approved by original approving authority) N/A iv (a) PDO Indicator(s) GT Fiscal and Institutional DPL - P112312 Original Target Formally Actual Value Baseline Values (from Revised Achieved at Indicator Value approval Target Completion or documents) Values Target Years Central Government fiscal deficit does not rise above 2.2 percent of GDP on Indicator 1 : average for 2009-2011, as priority social spending increases. Value 2.2 percent of 2.1 percent of GDP in 2.8 percent of 3.3 percent of GDP (quantitative or GDP average for 2007 GDP in 2010 in 2010 Qualitative) 2009-2011 Date achieved 12/31/2007 12/31/2010 12/31/2010 12/31/2010 Comments Fiscal reforms and tax modernization measures insufficient to offset higher (incl. % spending and lower revenues during economic downturn. achievement) Fiscal reform implementation contributes to additional revenues so that tax Indicator 2 : collection as a share of GDP rises to 12.7 percent of GDP in 2011. minimum Value 12.7 percent in threshold of 10.5 percent of (quantitative or 12.3 percent in 2007 2011 10.4 percent in GDP Qualitative) 2010 Date achieved 12/31/2007 12/31/2010 12/31/2010 12/31/2010 Comments (incl. % Target achieved. achievement) Consolidated supervision has been completed in at least half of the financial Indicator 3 : groups by assets and regular supervision completed for the majority of risk profiles under the new risk manual. Consolidated Consolidated Value supervision in at supervision in 9 out (quantitative or 0 in 2007 least half of of 11 financial Qualitative) financial groups groups by assets. Date achieved 12/31/2007 12/31/2010 12/31/2010 Comments (incl. % Target exceeded. achievement) v Second Fiscal and Institutional Development Policy - P114373 Original Target Formally Actual Value Baseline Values (from Revised Achieved at Indicator Value approval Target Completion or documents) Values Target Years Central Government fiscal deficit does not rise above 2.8 percent of GDP in Indicator 1 : 2010, as priority social spending increases, in the context of the global crisis and growth slow-down. Value 1.7 percent of GDP in 2.8 percent of 3.3 percent of GDP (quantitative or 2008 GDP in 2010 in 2010 Qualitative) Date achieved 12/31/2008 12/31/2010 12/31/2010 Comments Fiscal reforms and tax modernization measures insufficient to offset higher (incl. % spending and lower revenues during economic downturn. achievement) Fiscal reform measures mitigate the impact of the crisis so that Central Indicator 2 : Government tax collections do not fall below 10.4 percent of GDP in 2010. Central Value government tax 10.5 percent of (quantitative or 11.3 percent in 2008 collections do not GDP Qualitative) fall below 10.4 percent of GDP Date achieved 12/31/2008 12/31/2010 12/31/2010 Comments (incl. % Target achieved. achievement) Consolidated supervision has been completed in at least half of the financial Indicator 3 : groups by assets and regular supervision completed for all four risk profiles under the new risk manual. Consolidated Consolidated Value supervision in at supervision in 9 out (quantitative or 0 percent in 2007 least half of of 11 financial Qualitative) financial groups groups by assets. Date achieved 12/31/2008 12/31/2010 12/31/2010 Comments (incl. % Target exceeded. achievement) Indicator 4 : Regular debt issuance by MoF starting the second half of 2008. Value Only irregular and Ongoing regular Ongoing twice a (quantitative or sporadic issuance by issuance of debt by week issuance of Qualitative) MoF in 2007. the MoF. debt by the MoF. Date achieved 12/31/2007 12/31/2010 12/31/2010 Comments (incl. % Target achieved. achievement) vi Three percent financing volume increase generated with the use of garantías Indicator 5 : mobiliarias. Three percent The use of movable financing volume Value asset guarantees led increase generated (quantitative or 0 percent in 2008 to a 4 percent with the use of Qualitative) increase in total garantías credit mobiliarias. Date achieved 12/31/2008 12/31/2010 12/31/2010 Comments (incl. % Target achieved. achievement) Ministry of Finance and General Auditor's Office using annual audits and Indicator 6 : monthly financial and execution reports from at least ninety percent of the public trust funds to improve oversight and management. At least ninety 2009 audits Value percent of the completed for 31 (quantitative or 0 in 2008 public trust funds out of 56 trust Qualitative) audited. funds Date achieved 12/31/2008 12/31/2010 12/31/2010 Comments Target partially achieved, although the audits represent the largest trust funds (incl. % and thus capture the majority of spending. 2010 audits not yet available. achievement) Specialized offices to facilitate access to public information have been Indicator 7 : established in at least 30 percent of Central Government agencies. At least 30 percent Public information of Central offices have been Value Government established in 85 (quantitative or 0 in 2008 agencies have percent of Central Qualitative) public information Government offices. entities. Date achieved 12/31/2008 12/31/2010 12/31/2010 Comments (incl. % Target exceeded. achievement) Results indicators have been developed for fifty percent of Central Indicator 8 : Government's expenditures in order to introduce the results informed budget framework. Results indicators Results indicators have been Value developed for 97 developed for fifty (quantitative or 22 percent in 2008 percent of Central percent of Central Qualitative) Government Government's expenditures expenditures. Date achieved 12/31/2008 12/31/2010 12/31/2010 Comments (incl. % Target exceeded. achievement) vii Co-responsibilities verified for 50 percent of the CCT beneficiaries, half of Indicator 9 : which are extreme poor, based on a framework for monitoring and evaluation. Co-responsibilities Co-responsibilities verified for 100 verified for 50 Value percent of the CCT percent of the CCT (quantitative or 0 in August 2008 beneficiaries; beneficiaries, half Qualitative) cannot calculate of which are share of extreme extreme poor. poor. Date achieved 12/31/2008 12/31/2008 12/31/2010 Comments Target achieved. In terms of extreme poor, share of beneficiaries in this group (incl. % is likely to be high due to geographical targeting and proxy means test. achievement) Tax declarations submitted through the internet have increased by 3 percentage Indicator 10 : points. 37 percent of tax 42 percent of tax Value declarations declarations (quantitative or 34 percent in 2007 submitted through submitted through Qualitative) the internet. internet. Date achieved 12/31/2008 12/31/2010 12/31/2010 Comments (incl. % Target exceeded. achievement) Customs times for clearance and release of exported/imported goods has Indicator 11 : declined by 5 percent. Time to export 19 days, Value Time to export 18 Time to export 17 time to import 18 days (quantitative or days, time to days, time to import in 2007; Doing Qualitative) import 17 days. 17 days. Business Report, 2008. Date achieved 12/31/2007 12/31/2010 12/31/2010 Comments (incl. % Target achieved. achievement) (b) Intermediate Outcome Indicator(s) viii GT Fiscal and Institutional DPL - P112312 Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Completion of enhanced or regular supervision of 3 out of 4 risk Indicator 1 : profiles under the risk-based consolidated supervision manual in all financial groups in the system Value (quantitative or Qualitative) Date achieved Comments (incl. % achievement) Second Fiscal and Institutional Development Policy - P114373 Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Completion of enhanced or regular supervision of 3 out of 4 risk Indicator 1 : profiles under the risk-based consolidated supervision manual in all financial groups in the system Value (quantitative or Qualitative) Date achieved Comments (incl. % achievement) G. Ratings of Program Performance in ISRs GT Fiscal and Institutional DPL - P112312 Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 12/30/2008 Moderately Satisfactory Moderately Satisfactory 0.00 Second Fiscal and Institutional Development Policy - P114373 Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 09/25/2009 Satisfactory Satisfactory 0.00 2 02/27/2011 Moderately Satisfactory Satisfactory 349.13 ix   1. Program Context, Development Objectives and Design Guatemala has the largest economy in Central America but is plagued by very high rates of poverty and inequality. Compared to other middle-income countries, social indicators in Guatemala are low, particularly among the geographically and economically marginalized rural indigenous population. The institutional environment was hampered by decades of civil war, which contributed to weak governance and transparency and constrained the economic participation of large segments of the population. Crafting and implementing sound public policies proved difficult in this restive environment, in turn inhibiting broad-based and sustained economic and social development. 1.1 Context at Appraisal Since the signing of the 1996 Peace Accords, the country has begun to make headway, focusing on social needs and building democratic institutions. The peaceful transition to a new government in January 2008 is a clear illustration of progress to-date. Nevertheless, serious challenges remain. The series of Programmatic Fiscal and Institutional Development Policy Loans was initiated in 2008 during this period of political transition, but also at a time of great economic uncertainty with the emergence of the global financial crisis and subsequent growth slow-down. At appraisal, Guatemala’s economy was growing at a robust 6.3 percent (2007), following several years of steady growth rates of 3-5 percent. This sustained economic performance – despite consecutive negative shocks in terms of natural disasters, commodity price fluctuations and a domestic banking crisis and bail-out – reflects a prudent macro policy stance. Guatemala’s modest fiscal deficits (2-3 percent of GDP), relatively stable current account deficit (historically around 5 percent of GDP) and low levels of external debt (less than 25 percent of GDP) helped the economy to weather these shocks (see Table 1 below). In the period leading up to appraisal, Guatemala focused its trade policy on increased regional and global integration, with the signing of DR-CAFTA (which came into effect in 2006). These efforts were complemented by some improvement in the investment climate, although corruption and crime remain significant obstacles. Nevertheless, Guatemalan competitiveness seems to have improved, reflected by a large inflow of FDI during this period. Government accountability and transparency have also improved due to ongoing efforts to consolidate public financial management reforms through the integrated financial management system (SIAF) and a new public procurement system (GUATECOMPRAS). But perceptions of corruption and weak rule of law continue to plague day-to-day decision making and transactions. Prior to appraisal, financial sector soundness saw concrete improvement, but supervision continued to fall short in some areas. Legal and regulatory reforms in 2002 contributed to improve banking sector solvency and resilience to market volatility. These reforms also contributed to designing an effective bank resolution framework, which led to the successful resolution of two significant banks (Bancafé and Banco del Comercio) in 2006-2007. However, as noted in the 2006 FSAP update, further strengthening of 1 financial supervision was needed, in particular on the supervision of financial conglomerates which accounted for over 80 percent of total regulated financial system assets. With regard to access to finance, although domestic credit to private sector firms increased from around 20 percent of GDP in 2000 to 30 percent in 2007, this figure was low compared to the Central American average of 47 percent. Access to finance was particularly troublesome for small firms which had lower or no collateral and were serviced by non bank and mostly non regulated entities. Table 1: Selected Economic Indicators 2004 2005 2006 2007 2008 2009 2010 Income and Prices GDP growth (% change) 3.2 3.3 5.4 6.3 3.3 0.5 2.6 GDP per capita (% change) 0.6 0.7 2.8 3.7 0.8 -1.9 -0.1 Inflation (CPI end of period % change) 9.2 8.6 5.8 8.7 9.4 -0.3 5.4 Nominal exchange rate (average Quetzales/US$) 7.9 7.6 7.6 7.7 7.6 8.2 8.1 Central Government Finance (% of GDP) Total revenues and grants 12.3 12.0 12.7 12.8 12.0 11.1 11.3 Total tax revenues 11.5 11.2 11.9 12.1 11.3 10.3 10.5 Total expenditure 13.4 13.7 14.7 14.3 13.6 14.2 14.6 Central Government primary balance 0.3 -0.3 -0.6 0.0 -0.3 -1.7 -1.8 Central Government overall balance -1.1 -1.7 -1.9 -1.4 -1.6 -3.1 -3.3 Non Financial Public Sector total debt 22.2 21.1 21.9 21.6 20.1 23.0 24.6 o/w External 15.5 13.2 13.1 12.4 11.2 13.1 13.5 Balance of Payments (% of GDP) Current account balance -4.9 -4.6 -5.0 -5.2 -4.3 0.0 -2.1 Trade balance -15.2 -15.4 -16.1 -16.1 -14.2 -8.9 -10.4 Exports (f.o.b) 21.3 20.1 20.1 20.5 20.0 19.4 20.8 Imports (f.o.b) -36.5 -35.5 -36.2 -36.6 -34.3 -28.2 -31.3 Foreign direct investment 1.2 1.9 2.0 2.2 1.9 1.6 1.7 Remittances 10.8 11.1 12.1 12.3 11.3 10.5 10.1 Domestic Credit 21.4 24.3 28.4 31.1 29.1 29.1 30.0 o/w Credit to Private Sector 20.9 23.2 27.1 30.0 29.5 28.7 28.1 Memorandum item: Nominal GDP (billions of US$) 24.0 27.2 30.2 34.1 39.1 37.7 41.2 Source: Ministry of Finance, Central Bank, IMF, and World Bank staff estimates. Despite considerable progress across the policy spectrum and positive real per capita growth rates, institutional and development outcomes in Guatemala continue to signal the need for further reform. The Colom administration, which came to power in January 2 2008, committed to a program addressing poverty and inequality through increasing growth, creating fiscal space through fiscal reform and better monitoring and evaluation to target needy sectors while maintaining macroeconomic stability, and improving governance and transparency at the central and local levels to raise accountability and improve service delivery. The Bank has much to offer in these technical areas, and the Government requested both financial and technical support from the Bank through the Programmatic DPL series in order to help them address this development agenda. The Bank team preparing the DPL series judged the macroeconomic policy framework to be prudent and the outlook for sustainable growth positive. The resulting DPLs were designed to complement the broad objectives identified in the Country Partnership Strategy. 1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) The overall Program Development Objectives for both loans and the associated key performance indicators (outcomes expected for end-2010) are as follows: I. Promote macroeconomic stability and financial sector deepening and maintain fiscal space for priority spending i. Central Government fiscal deficit does not exceed 2.8 percent of GDP in 2010 as priority social spending increases ii. fiscal reforms mitigate the crisis impact so that Central Government tax collections do not fall below 10.4 percent of GDP in 2010 iii. consolidated supervision completed in at least half of financial groups by assets and regular supervision completed for all 4 risk profiles under the new risk manual iv. regular debt issuance by MoF starting in the second half of 2008 v. three percent increase in financing volume generated by use of garantías mobiliarias II. Improve governance and transparency of public financial management and expenditures vi. MoF and Auditor General’s Office use the annual audits and monthly financial reports of at least 90 percent of public trust funds to improve their oversight, management and efficiency vii. specialized offices to facilitate access to public information established in at least 30 percent of Central Government agencies viii. results indicators developed for at least 50 percent of Central Government expenditures to introduce a results-informed budget framework III. Strengthen the effectiveness of the Mi Familia Progresa Conditional Cash Transfer Program through improved execution and targeting ix. co-responsibilities verified for at least 50 percent of CCT beneficiaries, half of which are extreme poor, based on a monitoring and evaluation framework IV. Promote sustainable growth and productivity x. tax declarations submitted via the internet have increased by 3 percent relative to 2007 baseline 3 xi. customs clearance times for exports and imports have declined by 5 percent compared to 2007 V. The first DPL had an intermediate objective to meet the fiscal and financial needs during a period of economic slowdown (namely 2008-9). 1.3 Revised PDO and Key Indicators The series of programmatic DPLs was originally designed to comprise 3 operations to span fiscal years 2009-2011, but the onset of a severe economic crisis during appraisal of the second operation led the Bank management to revise the series to two operations, shorten the timeline by 12 months, and enlarge the total DPL lending package to US$550 million to address evolving economic situation (an increase from the originally allocated US$500 million over three operations). The rationale for this change stemmed from the dire impact of the global crisis on tax revenues. The Government adjusted its reform program to reflect accelerated actions in some areas, namely to increase private sector access to finance and address financial sector stability, and ensure that social expenditures were protected and that recent reductions in poverty rates were not reversed. Other actions relating to tax reform were deferred to the post-crisis period and thus fell outside the scope of the DPLs. No changes in the development objectives resulted, however, and the key indicator values in the 2nd DPL were defined to reflect weaker fiscal performance during 2009 (i.e., a less ambitious target for the fiscal deficit) and the shortened time-frame for expected outcomes which advanced from end-2011 to end-2010. 1.4 Original Policy Areas Supported by the Program (as approved) The original policy areas supported by the first and second DPLs were: I. Promote macroeconomic stability and financial sector deepening and maintain fiscal space for priority spending Specific measures designed to promote macroeconomic stability are centered on fiscal reforms and modernizing tax administration methods in order to increase tax revenues above their very low base level. This in turn helps to create the fiscal space necessary for priority spending in social sectors. Measures to deepen the financial sector include extending banking supervision by risk category to capture financial conglomerates, extending prudential regulations to off-shore banks, and creating a moveable assets registry to facilitate credit access for firms lacking fixed capital. Additional measures relate to standardizing the Central Bank’s short-term debt issuance. II. Improve governance and transparency of public financial management and expenditures Policy measures to increase transparency include the strengthening and/or creation of institutional structures to promote public accountability and reduce corruption, and the passage and implementation of an Access to Public Information law. New measures aim at increasing scrutiny and control over public trust funds, as well as strengthening the 4 public financial management and procurement systems for central and local government entities. III. Strengthen the effectiveness of the Mi Familia Progresa Conditional Cash Transfer Program through improved execution and targeting The Government’s main program for expanding opportunities for vulnerable groups is Mi Familia Progresa, and measures to improve its effectiveness focus on better targeting and execution as the program is rolled out across the country. IV. Promote sustainable growth and productivity Measures for promoting growth and productivity have some overlap with the preceding thematic areas, given the correlation between economic growth and macroeconomic stability and labor productivity, inter alia. Additional complementary measures focus on the business environment by accelerating customs clearance and reducing tax reporting requirements through more efficient electronic processes. The broad range of policies supported by the DPLs stems from the goal to support the Country Partnership Strategy pillars. The DPLs were in effect the primary Bank instrument for dialogue with the Government. 2. Key Factors Affecting Implementation and Outcomes In light of the country context and developments since the design of the 1st and 2nd DPLs, the project has proved to be a flexible instrument that helped the Government implement its reform program and achieve or make substantial progress toward other policy objectives, albeit with varying degrees of success. The policy actions were designed to align with the Government’s program within a timeframe that was judged to maximize the potential for success. This timeframe could not anticipate important exogenous shocks to the political and economic environments, however. The World Bank Board approved the two DPL operations on time (October 2008 and July 2009). Effectiveness delays of 5 months resulted from delays in Congressional approval, but with no negative impact on implementation. Both operations were single- tranche, such that prior actions triggered disbursement. Appropriate sequencing of prior actions allowed for measurable progress in implementation. All prior actions were met. Two main adjustments were made to the original structure of the DPL series during implementation. As mentioned above, the series was originally designed to comprise three operations, but this was truncated to two operations in the context of the economic crisis, and outcome indicators were adjusted accordingly to accommodate the shorter time-frame (i.e., the third operation would have closed later in the CPS cycle rather than the December 2010 closing date of the 2nd and final DPL). Secondly, the economic slowdown in the second half of 2008 and beginning of 2009 and the associated credit 5 crunch signaled the need to stimulate credit availability; as a result, measures were added to the policy matrix to ease credit access for micro- and SMEs. The following section provides a summary of prior actions and a brief description of the policy measures supported by the two DPLs. 2.1 Program Performance First Development Policy Loan Prior Actions Status 1. Government drafted and submitted for Congressional approval 1st phase of fiscal reform Met including modernization of indirect tax and customs systems and direct tax on business income to offset the expired IETAAP 2. Banking Superintendency completed enhanced supervision of 2 risk profiles using new Met risk-based consolidated supervision manual in 3 large financial groups, and extended prudential rules to off-shore banks 3. Government created the Vice Ministry for Fiscal Transparency and Evaluation at the Met MoF, and incorporated regular monthly financial reporting on public trust funds in the 2009 budget 4. MoF expanded e-procurement to make detailed information on large Government Met contracts (including unit prices on regular purchases) publicly available and open to electronic competitive bidding 5. Government designed and began pilot implementation of a transparent monitoring and Met evaluation mechanism for CCT program Mi Familia Progresa including proxy means test 6. The Tax Administration Office developed and distributed software for electronic Met accounting and submission of income tax withholding for firms Second Development Policy Loan Prior Actions Status 1. Government implemented a direct tax on business income, mandated electronic Met submission of income tax withholding declarations, and performs cross-checks between VAT declarations and income tax submissions 2. Banking Superintendency completed supervision of at least 3 risk profiles in financial Met groups holding at least half of total bank assets of the domestic financial system 3. Central Bank standardized its debt instruments and established regular debt issuance Met through weekly auctions coordinated with the MoF and the electronic issuance of 7-day securities 4. Congress approved the Movable Assets Law (Decree 51-2007) and related reforms Met (Decree 46-2008) to provide micro- and SMEs with the possibility of using movable assets as collateral 5. Government implemented monthly financial reporting of the main public trust funds to Met MoF and Auditor General and annual external auditing of public trust funds 6. Congress approved an Access to Public Information Law and the MoF implemented it Met 7. MoF issued and is implementing Executive Decree 394-2008 for MoF internal Met reorganization to absorb, operate and upgrade SIAF and Guatecompras, and included provisions and technical indicators in 2010 budget guidelines to start implementing results-informed budgeting in the Central Government 8. Government is implementing a transparent M&E system for verifying eligibility of CCT Met beneficiaries, and received external evaluations of risks related to design, instruments, conditionality, information flows, beneficiary feedback and coordination with other institutions 9. The Tax Administration Office implemented in at least 3 major ports a customs Met management system (SAQB’E) on imports and exports, accounting for at least 30 percent of Guatemala’s total customs traffic 6 Policy Measures Supported by the 1st and 2nd DPLs: Fiscal reform and tax administration comprise the first main policy areas supported by the DPLs. Guatemala has long suffered from low revenue collection rates as a share of GDP, greatly restraining the Government’s capacity to deliver effective services. A two- pronged strategy was adopted to remedy this weakness. The first focused on modernizing tax administration by streamlining and digitizing tax declarations and fostering their use through user-friendly software and training. Government began to require electronic submissions of income tax withholding for firms, and upgraded its administrative systems to perform electronic cross-checks between VAT declarations and income tax submissions to reduce tax evasion. Reforms were also undertaken in the area of customs administration with the introduction of a new Customs Management System (SAQB’E) to modernize and digitize customs clearance processes in line with international practices. The second part of the strategy targeted tax reform, namely by introducing a new gross revenue tax (ISO) on businesses to replace the expired IETAAP, a temporary tax. The new ISO would be transitional by covering the revenue gap until passage of a new tax law revising both business profit tax rates and taxes on distribution of profits as well as measures to broaden the tax base and simplify the personal income tax regime (phase two of the proposed fiscal reform). In terms of financial market stabilization and deepening, the DPLs supported Government efforts to extend prudential rules to offshore banks, and helped strengthen supervision of financial conglomerates by moving to risk-based and consolidated supervision, a multi-year strategy that the Bank has supported through the Financial Sector Adjustment Loan (closed in March 2007) and the subsequent Financial Sector Technical Assistance Loan (closed in June 2009). The 2nd DPL also supported the elaboration and adoption of the Movable Assets Law (garantías mobiliarias) and establishment of the registry as an instrument to increase access to finance by micro, small and medium size companies which often lack real estate collateral to obtain financing. In addition, the DPLs supported Central Bank standardization of debt instruments and regular issuance through weekly auctions coordinated with the Ministry of Finance in order to foster the development of an interest rate yield curve as a step towards secondary debt market development. The Government’s program places strong emphasis on improving governance and increasing transparency, the third main policy area supported by the DPLs. The policy actions to achieve these goals include monthly financial reporting and annual external audits of public trust funds for use by the MoF and the Auditor General, and the passage and implementation of an Access to Public Information law. Measures to strengthen public financial management have been ongoing for several years; the 1st and 2nd DPLs specifically supported a system to make all Government procurement information publicly available, and establish an e-procurement system for electronic competitive bidding on large Government contracts. The MoF committed to finance, operate and upgrade the financial management (SIAF) and procurement (Guatecompras) systems. The DPLs also supported the implementation of results-informed budgeting in Central Government entities. 7 In 2008, the Government launched, on a pilot basis, a conditional cash transfer program called Mi Familia Progresa. Bank support – both through the 1st and 2nd DPLs and the Expanding Opportunities: CCT Institutional Establishment investment loan currently awaiting implementation – has assisted implementation of a transparent monitoring and evaluation system of the CCT program to allow verification of eligibility, i.e., verifying that beneficiaries have met the necessary health and education attendance conditions. External evaluations of the program’s design, risks, management, and effectiveness are part of the assistance provided to the Government to ensure that benefits reach the targeted population through efficient and financially sustainable execution as the program is extended throughout the country. 2.2 Major Factors Affecting Implementation Implementation of the 1st and 2nd DPLs was very much affected by the economic and political environment, with both positive and negative implications. The 2008 inauguration of President Colom represented a shift from prior administrations in that it was Guatemala’s first centre-left government in over fifty years, elected with the broad support of rural and indigenous populations. The new Government’s program focused on (i) reducing poverty and inequality, (ii) better fiscal management to meet priority social spending and investment, (iii) improved governance and transparency, and (iv) promoting sustainable growth and productivity. By aligning its policy support with the new Government’s pro-reform agenda, the Bank was able to help articulate and contribute positively to pro-poor, pro-development policies. And because the 1st DPL coincided with the beginning of President Colom’s term, the Bank – along with many pro-reform constituencies in Guatemala – linked its policy agenda to the campaign’s reformist platform that could be implemented with the election mandate. It was widely believed that by expending the necessary political capital early in his term, President Colom and his team could initiate significant and lasting reforms. The CCT program was successfully launched, but the ambitious fiscal reform package – which had been developed with broad consultation including private sector input and support – lost momentum. Numerous factors are to blame. There was a major shift in political party allegiances in Congress within months of the election which undermined the President’s legislative support. The global economic slowdown began to bite in Guatemala as growth rates fell sharply; the idea of paying higher taxes became increasingly unpopular among business owners. And in 2009 a political crisis erupted that attracted international attention to Guatemala’s weak institutions and fueled the perception that the Government was simply conducting business as usual rather than promoting real improvements in transparency. As support for the Government waned, the private sector withdrew its support for fiscal reform and the Government focused its energies on the rapid implementation of the CCT program. Although this was successful on many fronts, benefiting hundreds of thousands of families, it attracted criticism from some political opponents that the CCT program was increasingly being used as a vehicle to buy the rural vote. Whereas political factors undermined progress in certain policy areas, it facilitated the passage of a tide-changing Access to Public Information Law in part because of the new demand for increased transparency and public accountability. 8 The political challenges reflect a combination of exogenous and endogenous factors. On the one hand, the Government demonstrated a strong commitment to the agreed policy agenda and prior actions, in some areas reflecting a consensus approach with broad support from international financial institutions and civil society organizations. But as its domestic support base slipped, the Government retreated from more aggressive fiscal reform – in part because it would counteract the needed fiscal stimulus at the height of the economic crisis. Three types of risk were identified during preparation of the 1st and 2nd DPLs, all of which proved to be relevant during the 30-month life of the operations. Mitigation measures were only partly successful in addressing political risk, but were largely effective in addressing other risks.  Political risk is always significant in Guatemala, but particularly for President Colom’s ruling UNE party, which never secured a majority in Congress and in fact has lost congressional support.1 To mitigate the risks to its reform agenda, the Government pursued wide consultation with stakeholders on fiscal reforms. Whereas this strategy paid off for Phase 1 of the fiscal reform package, it was insufficient to overcome the growing opposition that was gaining momentum.  The impact of the global economic downturn was another risk to the Government’s program as Guatemala tried to climb out of economic crisis. Although growth started to recover in 2010, the external environment remained unstable as commodity price shocks and lower remittances threatened the fragile recovery. Fiscal revenues continued to suffer, but the international financial institutions helped to fill the financing gap, in addition to the regular issuance of and sustained demand for domestic debt. The Government did not need to access liquidity available under a precautionary Stand-By Arrangement with the IMF. The CCT program helped to mitigate the impact on the poor.  Guatemala is susceptible to natural disasters, and 2010 saw its share of external shocks: landslides, a volcanic eruption, Tropical Storm Agatha, and a large sink hole in the capital, resulting in loss of life and property. In April 2009, the Bank approved a Catastrophic Risk Deferred Draw-Down operation to provide contingent financing following a natural disaster, which it drew on after a series of natural disasters due to hurricanes and flooding. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization Nine out of the eleven outcome indicators defined in the policy matrix are easily measured indications of progress toward the Program Development Objectives. For some of these outcome indicators, however, factors other than the policy measures of the DPLs may have contributed, such that outcomes are not uniquely attributable to the two DPLs. For instance, tax reforms and tax administration improvements will affect the 1 UNE won 51 out of a total 158 congressional seats in the 2007 elections, but currently holds 40 seats. 9 fiscal deficit, which is easily measured and monitored due to readily available data. But other factors may also explain higher spending or lower revenues such as exogenous shocks that slowed economic activity, thus reducing VAT collections and import duties, inter alia. Despite these measurement difficulties, the fiscal deficit is nevertheless indicative of the impact of fiscal reforms. The DPL is confined to short-term measures due to its short time-horizon, but M&E arrangements are meant to assess achievement of long-term objectives. This timing inconsistency raises issues for selecting appropriate outcome indicators as measures of progress toward long-term development objectives. For instance, increasing transparency through a new Access to Public Information Law is an important step, but the real impact on transparency may take time to emerge. In the DPL time-frame, however, progress is monitored by measuring the number of Government agencies that have opened public information offices within 18 months. In another example, the customs administration reform was essential for updating Guatemala’s systems to international standards, and met its goals of facilitating and accelerating customs clearance procedures within 18 months. But the reform was also expected to reduce corruption. Focusing on digitizing systems does not address one of the fundamental drivers behind much corruption, namely the presence of customs officials and their personal interaction with traders. Without addressing the roles of customs personnel within the new context of electronic processing, the positive impact of reform – which includes reduced opportunities for corruption – will be limited until these underlying impediments are addressed. M&E utilization has been more positive in other components of the DPLs. With respect to results indicators in the budgeting process, although they are in the early stages, it appears that these monitoring indicators are indeed being used to develop the new results- informed budget framework. And in terms of the tax administration improvements, the Tax Administration Superintendency has calculated the additional revenue gained through modernization, controls and cross-checking measures and its contribution to overall revenue collections. One indicator that poses measurement difficulties relates to the oversight of public trust funds. The policy action requires monthly financial reports and annual external audits as tools to improve transparency, but the outcome indicator requires a measure of their use by the MoF and the Auditor General to improve trust fund management and efficiency, requiring a subjective assessment. The preparation of financial reports and audits are crucial and certainly helped shed light on the operations of these public trust funds, but it is unreasonable to assume that the availability of these reports will automatically result in limits on the discretionary use of trust funds. The other indicator that poses measurement problems relates to the targeting of the CCT program. Verifying co-responsibilities is inherent to the benefit disbursement procedures, and confirming this will become easier with electronic monitoring that is currently being implemented. But the data necessary to calculate the share of beneficiaries that are 10 extreme poor do not currently exist. This evaluation will be feasible only after the new living standards survey is completed (a new survey expected to be launched in the coming months). The data requirements for the defined outcome indicators were manageable (with the exceptions cited above) and M&E has been for the most part carried out, not only by the Bank in its supervision functions, but also by various partners. For example, the media has played a significant role in monitoring transparency by mining the publicly available data in Guatecompras; by calling attention to outliers such as large expenditures or examples of nepotism, the media draws attention to and thus fosters debate around government transparency and accountability issues. Civil society groups play a central role in monitoring the implementation of the Access to Public Information Law; in particular, Acción Ciudadana tracks the ways in which Central Government entities respond to requests for information, and publish an index ranking agencies’ performance with respect to transparency measures. In this way, the DPLs leveraged additional oversight by other entities. The real challenge – for the DPLs as for all Bank operations – lies in stimulating the effective use of monitoring data to inform decision-making and resource allocation. The example of Access to Public Information offices illustrates this difficulty. The development objective behind this policy action was to increase transparency as well as to create the demand for greater accountability and efficiency in public spending by service users. There is a high demand for transparency and accountability among the Guatemalan public, but weak political parties, tentative civil society networks and factions across various indigenous groups lead to a coordination failure. The remaining challenge is how to catalyze this broad-based demand for transparency in order to create change. 2.4 Expected Next Phase/Follow-up Operation There are no new DPLs planned within the current CPS. The Bank can continue to support the Government’s reform program through technical or analytical assistance, however, and the forthcoming Public Expenditure Review will be a useful tool to help the Government further deepen and institutionalize public financial management reform, tax reform, and the effectiveness of social spending, particularly through the CCT program. With respect to the latter, disseminating Bank and other donor-prepared evaluations of Mi Familia Progresa in terms of its costs and benefits could provide the impetus for further strengthening the program (e.g., through better targeting), generating broad political support and securing adequate dedicated public resources to finance it in future. The timing of the Bank’s analytical input would be most effective if it could contribute to the political debate surrounding the Presidential election cycle (first-round elections will take place in September 2011). Another aspect of the operation that could benefit from follow-up relates to customs reform and redefining the role of customs officials in order to further reduce corruption and accelerate customs clearance times. Ongoing monitoring through the Bank’s Doing 11 Business Indicators based on investment climate surveys will help to track developments in this area. In terms of consolidated banking supervision, although all the key profiles for risk-based supervision have been completed and applied to all financial groups, the unfinished agenda relates to supervision of economic conglomerates, which may de facto control financial institutions. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The development objectives of the programmatic DPL series remain highly relevant today in the context of the ongoing challenges facing Guatemala. These objectives were fully aligned with the Government’s development priorities as articulated in the August 2008 Country Partnership Strategy Report, namely to (i) enhance economic fundamentals, (ii) sustain growth and productivity, and (iii) expand opportunities for vulnerable groups. Each of the policy areas supported by the 1st and 2nd DPLs falls under these three over- arching objectives. The operations’ design was consistent with the stated program development objectives, and the DPLs’ implementation proved to make an important contribution toward implementing the Government’s program. Numerous counterparts in Guatemala noted the vital role that the Bank’s development policy lending plays, not so much in setting the Government’s priorities, but rather in helping the Government achieve its priorities. The policies reflected in the 1st and 2nd DPL prior actions were measures already identified by the Government as essential to their strategy; incorporating them into the framework of a DPL was effective in accelerating their implementation and helped the Government remain focused on its medium-term objectives and the near-term measures needed to reach them. Although the number of components in the DPL matrix is large, they represent a sound and consistent framework with a strategically appropriate and achievable scope. Because the DPLs were the Bank’s main instrument for country dialogue, it was important to cover the range of relevant policy areas rather than focusing more narrowly. As mentioned above, a DPL is confined to short-term measures due to its short time-horizon. But some reforms require more long-term input. When assessing the DPLs’ outcomes, therefore, it is important to acknowledge when expected results are unrealistic within the given time-frame. The Bank demonstrated its responsiveness to the changing economic environment by revising policy actions to address specific challenges stemming from the economic crisis. The Bank also restructured its support to accommodate the Government’s greater financing needs, increasing the loan size of the 2nd DPL and eliminating the planned 3rd DPL in order to consolidate support at a critical time. The Bank’s response was mirrored by greater financial support from the IMF and IDB as well. By enlarging the overall 12 programmatic DPL lending package to US$550 million and accelerating the disbursement schedule, Bank support helped the Government to meet the demands of the economic crisis and ensure that social expenditures were protected despite a sharp decline in tax revenues. The DPL series also responded to the need to help mobilize credit to micro- and SMEs because of the negative effect of the global economic downturn and credit crunch on the Guatemalan economy and, in particular, firms’ access to credit. The scope of the 2nd DPL was expanded to support the creation of a Movable Assets Registry under which firms can use movable assets as collateral when borrowing. 3.2 Achievement of Program Development Objectives I. Promote macroeconomic stability and financial sector deepening and maintain fiscal space for priority spending The series of programmatic DPLs helped to promote macroeconomic stability through the direct provision of budget financing to maintain fiscal space for priority spending areas, but also by assisting fiscal modernization to increase revenue collections and reduce tax evasion. The improved tax administration system now requires electronic submission of business withholding taxes. The shift to the digital format vastly improved accuracy and efficiency, and allows cross-checking among the profit tax, VAT and the ISO tax regimes and the associated exemptions, as well as performing other controls. The combined impact of these administrative control measures added 0.3 percent of GDP to fiscal revenues in 2010. The implementation of the transitional Solidarity tax to replace the IETAAP also maintained revenues (equivalent to over 1 percent of GDP), which helped the Government to meet the revised targeted tax revenue outcome indicator for 2010 (total tax revenues were 10.5 percent of GDP). Even though the fiscal target was eased under the 2nd DPL to account for the crisis- induced fall in revenues, and despite the shift in policy measures away from the envisaged tax increases (inappropriate during a downturn because it would counteract expansionary policies) to more immediate tax administration measures, the Government still missed the 2010 target deficit of 2.8 percent of GDP. The DPLs’ accommodative stance and the revenue gains from anti-evasion efforts proved insufficient to offset the effects of the crisis, as the fiscal deficit reached 3.3 percent of GDP. With respect to promoting financial sector stability and deepening, consolidated supervision has been implemented in 9 of the 11 financial groups licensed by the Banking Superintendency as of April 2011, and all four key profiles for risk-based supervision (institutional, financial, risk, and control environment) have been completed and applied to all financial groups, surpassing the outcome indicator. The Banking Superintendency is in the process of finalizing a single matrix for consolidated risk-based supervision and determining one overall risk rating for each financial group (initially the work on risk- based and consolidated supervision started in parallel with two different manuals that are being merged). Central Bank efforts to standardize issuance of short-term debt reflects some progress toward financial market deepening, consistent with the targeted outcome indicators. 13 However, weaknesses remain which limit the deepening of bond markets in line with longer-term objectives. For example, banks are exempt from a tax on government bond transactions, which has concentrated 90 percent of domestic public debt holdings in four banks, thus limiting broader private sector participation. The registry of movable assets had a directly positive effect on financial market development by increasing the amount of credit in the economy.2 Although total credit stagnated in 2009-2010 under the global credit crisis, the registry increased the amount of movable guarantees so that the share of credit guaranteed by movable collateral reached 4.1 percent of total credit as of December 2010, from a base of zero in 2008, exceeding the outcome target. II. Improve governance and transparency of public financial management and expenditures The step of institutionalizing the Government’s commitment to greater transparency by creating the Vice Ministry for Fiscal Transparency and Evaluation provided an important signal. But this commitment was made more credible by the adoption of the Access to Public Information Law, which empowers citizens to hold Government accountable for its use of public resources. Specialized offices have been created in 85 percent of Central Government agencies to facilitate access to public information, exceeding the outcome indicator. This success contrasts with the continued challenge of making more transparent the operations of public trust funds to facilitate greater efficiency and accountability. The policy measures supported by the DPLs introduced monthly financial reporting and annual external audits of trust funds. Whereas this represents a significant improvement relative to 2008 when no financial oversight was performed, external audits are not available for all trust funds, and it is not possible to judge whether the reports are being used to improve their management. Government commitment to transparency would have been more credible if, for example, the operations of publicly funded trust funds had not expanded so much during the lifetime of the operations without concomitant legal reforms to regulate their use. Whereas trust fund oversight was strengthened with the support of the DPLs, their continued use has not been curbed, implying that progress vis- à-vis the development objective has been limited. In terms of strengthening the public financial management and procurement systems, the MoF launched an internal reorganization to absorb, operate and upgrade SIAF and Guatecompras, but they have yet to fund the absorption of current staffing levels financed until now by external sources. Whereas Guatecompras has to a degree increased 2 To isolate the impact of the registry, we measure the market share of credit supported by the registry in total credit. We proxy the amount of credit supported by the registry by the amount of collateral registered. Since the registry does not measure collateral by type of borrower (i.e., small vs. large) we measure the effect on total credit. 14 transparency through recording Government purchases on a public website, assessments of the effectiveness of Guatecompras show that only a small percentage of direct contracting occurs through Guatecompras Express, implying minimal success in expanding the use of competitive bidding. Moreover, a large share of public contracting still occurs through pre-existing contracts, public trust funds and NGO purchases, iner alia, which are exempt from the procurement rules. Real progress is being made, however, on the results-informed budgeting system. Results indicators have been developed for three-quarters of all Ministries, representing 97 percent of Central Government expenditure, nearly double the outcome target. The reality is that transparency in Guatemala has been very low but in recent years the Government has taken steps to improve it. On balance, the DPL measures helped to improve transparency, albeit only moderately. III. Strengthen the effectiveness of the Mi Familia Progresa Conditional Cash Transfer Program through improved execution and targeting The policy actions supported by the 1st and 2nd DPLs had a very positive impact on the CCT program’s targeting and transparency, primarily through the introduction of proxy means testing to identify eligible beneficiaries. The procedures for verifying co- responsibilities of beneficiaries (i.e., confirming school and health check attendance) are well established, and will soon be greatly improved through the use of scanning technology to digitize verification. The Mi Familia Progresa program was extended into more than 270 municipalities to reach over 900,000 families in a very short period of time. This rapid expansion raises questions about execution effectiveness, but the program’s simple design (e.g., flat benefit levels distributed to family units) and likely modest leakages (due to very high poverty rates in rural areas) mitigates these concerns. The Government confirmed that co-responsibilities are being verified for all recipients through a network of local representatives, double the outcome indicator target of 50 percent. It is not feasible to verify the exact proportion of extreme poor, however, due to lack of updated survey data on household living standards (a new survey will be launched in the coming months). IV. Promote sustainable growth and productivity The tax modernization measures supported by the DPLs – in particular the development and distribution of software for web-based business tax withholding – has directly contributed to higher productivity by reducing the amount of time required to make tax declarations, and at the same time improving accuracy and reducing evasion through cross-checks. The share of firms submitting tax declarations electronically has risen from 34 percent in 2007 to 42 percent in 2010, surpassing the targeted 37 percent. Exporting and importing firms’ productivity has also been stimulated by the new Customs Management System, SAQB’E, which has been implemented in 15 ports (out of 18 in total). By digitizing the customs clearance documentation requirements, clearance 15 times for imports fell from 19 to 17 days (a 10 percent drop) and export clearance times fell from 18 to 17 days (a 5 percent decline), meeting the outcome target. There remains room for further improvement, however, as opportunities for corruption continue to be present. 3.3 Justification of Overall Outcome Rating Rating: Moderately Satisfactory The overall outcome rating reflects two criteria for measuring success: the extent to which target outcome indicators were met, and the extent to which program development objectives were achieved. As stated previously, most outcome indicators were met, with only minor shortcomings (and with respect to the fiscal deficit, these were largely exogenous). Progress toward certain development outcomes was more problematic, however, reflected by moderate shortcomings in implementation. In particular, qualitative progress towards better governance and transparency in public financial management and expenditures was below expectations relating to public procurement and trust fund oversight. The overall outcome rating is therefore moderately satisfactory. 3.4 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development This operation addresses poverty and welfare both indirectly – through more efficient use of public resources – and directly – through measures to improve social safety net targeting. There have been no new measures of poverty since the inception of the 1st DPL, but the CCT program has rapidly increased its scope, currently providing income support to approximately one-third of the population. Whereas the net impact on primary enrollment may be very small, there is some evidence to suggest that the program is helping to keep students enrolled in school longer, and there are almost certainly gains in physical health for beneficiary families. Anecdotal evidence also suggests that rural women are benefiting through increased empowerment. Otherwise, gender issues are mainstreamed rather than being targeted specifically. (b) Institutional Change/Strengthening The programmatic DPL series has a strong focus on institutional development, with a majority of its measures aimed at strengthening Government’s institutional capacity. For example, modernizing tax administration and streamlining its processes not only increases revenues and spreads the tax burden more equitably, but also helps to increase confidence in the Government and legitimize its tax and spending functions. The Banking Superintendency has been highly successful in upgrading its supervision capacity by establishing more thorough criteria for overseeing the banking sector. Further capacity building needs to focus on extending supervision to the conglomerates/economic groups which may control the financial groups and include non- financial companies that may create risks to financial entities. Guatecompras, in contrast, has not achieved the goal of transparency and competition in Government contracting, implying the need for deeper institutional reform. Nevertheless, the system provides the 16 framework for increased transparency and competitiveness in the future through on-line bidding capability and publication of data. Regarding the registry for movable assets, the first two years have been successful in terms of development, but additional measures to increase its efficiency and effective targeting of SMEs will be essential to strengthen institutional capacity further. Planned measures include a recently launched communications campaign to market itself to small businesses and financial institutions that usually service small businesses, such as cooperatives, and making the registration process available on-line. With respect to the CCT program, the targeting and program execution procedures have been strengthened, and should improve further with the planned electronic verification platform and the forthcoming household survey to provide a new proxy means test for identifying eligible households and in particular the extreme poor. The operations’ long-term development goals aim at strengthening more far-reaching institutions such as the rule of law and transparency. The Access to Public Information Law provides a real impetus to civil society groups to mobilize pressure to hold Government accountable and make more efficient use of public resources. And although the public trust fund operations remain somewhat obscure, they are at least on the radar screen and a majority is being monitored on an ex-post basis, the first step in recognizing the scope of the problem and the incentive challenges in trying to address it. 4. Assessment of Risk to Development Outcome Rating: Substantial The risk that development outcomes will not be maintained is substantial and stems from many sources. The program objective to promote macroeconomic stability and enhance fiscal space for priority spending depends on both external and internal factors. The Guatemalan economy is vulnerable to negative exogenous shocks in the global economic environment, affecting trade and domestic demand, which in turn affects available public financing. Whereas the Government’s prudent macroeconomic policies will help to mitigate these effects, the impact of the recent economic crisis demonstrates that macro balances remain vulnerable. Natural disasters represent another source of risk that threatens the macroeconomic environment. Internal factors that present the largest risks derive from the political environment and Government ownership. Fiscal reform efforts have stalled in the past, and the currently rancorous political climate and the upcoming Presidential elections have complicated meaningful policy debate and any potential consensus- building. Although important gains have been made in improving the governance and transparency of public financial management and expenditures, with key systems in place to facilitate open and efficient management, the political will at the leadership level to embrace these processes and embed the concept of transparency into the institutional fabric depends upon the management teams in key ministries to implement transparency initiatives. But 17 the degree to which these teams can achieve a lasting impact is hindered by the frequent personnel changes that characterize Guatemalan politics. The Access to Public Information Law and the creation of information offices in most ministries can help to mitigate backtracking in this arena, but the demand for public information is relatively low and civil society networks are weak. Long-term outcomes will depend on stakeholder ownership in terms of political will on the inside and citizen demand on the outside, both difficult factors to manage. The Mi Familia Progresa Conditional Cash Transfer Program is well established throughout much of the country and execution and targeting continues to improve. It has been financed through ad-hoc budget sources until now, pulling budget from other line items to fund the Mi Familia Progresa Trust Fund. The program has broad support across the political spectrum, but its precarious financing situation and high cost (accounting for 2 percent of the budget) present a negative risk to its future operation. The probability of the program being cut is low, but there is a small probability that targeting will suffer due to weak governance. On the other hand, given that the program is geographically concentrated in areas of very high poverty, total leakage is likely to be small. Improvements in the business environment have contributed to Guatemalan firms’ productivity and their ability to compete in global markets. The customs clearance process is a fundamental component of the trading environment, and the new electronic system has successfully reduced the administrative burden on importing and exporting firms. Nevertheless, corruption remains an issue. Technical solutions can help to further automate the clearance process, but a lasting positive outcome will only emerge when person-to-person interface with customs officials is minimized. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory The programmatic DPL series was prepared in close consultation with the Government and stakeholders such as civil society groups and international donors. The policy measures were identified on the basis of extensive analytical work and in coordination with reforms being supported by other donors in order to maximize the development impact and at the same time provide complementary and therefore reinforcing mechanisms of support, constituting a strategic approach. The operation was conceived to help the new Colom administration achieve an ambitious program of public sector reforms and strengthen public institutions in a way that also increased transparency. The other key structural elements of the Guatemalan economy that needed to be addressed by the DPLs were poverty and social inclusion, and growth and productivity. The Bank team designed the operations specifically to address the institutional environment with a view to strengthening institutional capacity in a sustainable way. The Bank demonstrated a high degree of flexibility in adapting the DPL parameters – both policies and financing structure – to a changing country context. Whereas overall 18 development objectives did not change, the policy actions to achieve them in a climate of macroeconomic and fiscal crisis needed to be revised. Furthermore, additional budget support was needed to fill the financing gap, and the Bank, in conjunction with the IMF and the IDB, were able to meet these new demands. The operations were prepared with a full appreciation and articulation of the risks to program outcomes, and included mitigation measures to address these risks (some more successfully than others). The overall implementation and M&E arrangements were broadly effective, although a few of the monitoring and evaluation criteria proved problematic in terms of measurement. Recall, for example, that it is not feasible to verify the exact proportion of extreme poor in the CCT program due to the lack of updated survey data on household living standards. Another indicator that is difficult to measure because it requires a subjective assessment relates to the oversight of public trust funds. The indicator seeks to measure the use of monthly financial reports and annual external audits by the MoF and the Auditor General to improve trust fund management and efficiency. The discussion above also acknowledges a degree of disconnect between the short-term outcome indicators and the long-term development objectives. Some components of the policy matrix sought to embed the reforms by implementing them across agencies, thereby fostering inter-agency cooperation. But effective cooperation is difficult in the best of times, even with the best intentions. The DPLs have indeed resulted in increased cooperation, such as between the MoF and the Central Bank in issuing public debt, but if the objective is better coordination, then an explicit incentive mechanism may be more effective in encouraging it. (b) Quality of Supervision Rating: Satisfactory As mentioned above, the operations’ design emphasized monitoring and evaluation of the reforms, both implicitly and explicitly. Because the operations formed a programmatic series, sequencing the two operations enforced close supervision in that preparation of the 2nd DPL was contingent on the results of the 1st DPL. Explicit attention to supervision is reflected not only in the target indicators but also was demonstrated by the Bank’s responsiveness to changing country circumstances and the Government’s request to alter the structure and magnitude of the loan. The ISR prepared following the closing of the 2nd DPL was very candid and thorough in its performance assessments. 19 (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory Both quality at entry and quality of supervision were satisfactory, making the overall Bank performance rating satisfactory. 5.2 Borrower Performance3 (a) Government Performance Rating: Moderately Satisfactory The operation was designed to align fully with the Country Partnership Strategy and the incoming Government’s objectives. The Government’s program resulted from a consultative process, including particular consultation with the private sector on fiscal reform. Government ownership and commitment was strong from the outset. The difficult political environment and resulting failure of the originally proposed fiscal reform package led the Government to scale back its reform proposal. Nevertheless, significant progress was achieved, primarily through tax administration improvements which not only raised tax revenue and reduced evasion, but also built institutional capacity. The macroeconomic environment in which the 1st DPL was prepared was characterized by strong growth and sound macro balances. The global financial crisis and economic slowdown began to drag down Guatemalan growth in 2008 and 2009, with significant implications for Government service provision (tax revenues fell sharply) and poverty (remittances suffered a significant decline), which in turn helped to shape the 2nd DPL. The Government maintained its prudent macroeconomic policy stance. There have been moderate obstacles on the transparency front, in particular relating to Guatecompras and public trust funds. The Guatecompras system has indeed increased transparency through recording Government purchases on a public website, but efforts to expand the use of competitive bidding have stalled; only a small share of purchases eligible for direct contracting occurs through Guatecompras Express. Moreover, pre- existing contracts that can be renewed automatically do not need to be processed through Guatecompras. Public trust funds also fall outside Government procurement rules. This was the rationale behind increasing transparency through the introduction of monthly monitoring and annual external audits of trust funds. Some audits remain to be completed, and it is unclear whether the monitoring reports are being used to improve trust fund management and efficiency. The Government has met its commitment to establish information offices in a majority of Central Government agencies. 3 For a Development Policy Loan providing budget support, the borrower consists of the government, which also acts as the implementing agency. 20 Borrower performance has also been satisfactory vis-à-vis financial sector outcomes. The registry for movable assets has made a strong impact in its two years of existence, and the Banking Superintendency has consistently expanded risk-based supervision and consolidated supervision. Mi Familia Progresa remains the Government’s flagship program, reflected by its rapid expansion and consistently high profile. The Government has been receptive to external advice on implementation and has sought timely resolution of implementation obstacles. The Government has met most of the targeted outcomes, demonstrating drive for results except in the areas of governance and transparency in public financial management and expenditures, where results were below expectations. Overall, Government performance merits a moderately satisfactory rating. 6. Lessons Learned The implementation challenges relating to the fiscal reform component of the 1st and 2nd DPLs illustrate the difficulties of achieving program objectives that depend on legislative approval, particularly in the area of tax reform. Repeated attempts to increase revenue collections through raising tax rates and expanding the tax base have failed in the past, and continue to face stiff opposition. Moreover, it is important to acknowledge the intrinsic difficulty of implementing redistributive tax reform in a highly unequal society and within a short time horizon. The experience of the 1st and 2nd DPLs implies that the Bank could be more modest in its expectations, and could foster support for reform by identifying and helping build constituencies with shared interests or who stand to gain from reform. Another related lesson that can be drawn from the DPLs is that although the planned fiscal reforms would have generated significant revenues, measures to improve tax administration can also generate large revenue gains, and are politically more palatable. In Guatemala, introducing tax controls and modernizing tax systems not only increased efficiency but had a big pay-off through reducing evasion. Another lesson that can be derived from the operation relates to the policy measures on increasing the transparency of public trust funds. The stated objective was to increase transparency in the hope that eventually this would create pressure to increase oversight and efficiency. But this result has yet to come to fruition. The real objective was to ensure that all public resources are spent in a transparent way consistent with Government priorities in order to minimize leakages. Although audits can potentially help in this regard, they do not address the underlying reasons for continued and expanding use of public trust funds (such as prohibitive procurement rules, for example). Designing policies that take into account these deeper impediments will have a greater impact. Despite uneven progress in increasing transparency and accountability, even modest advances can have a significant impact, especially when starting from a very low level. For example, the passage of the Access to Public Information Law overcame initial opposition precisely because of corruption scandals, which drew the ire of the public and thus provided the impetus for the law to pass. In a similar vein, even though the 21 application of Guatecompras has been imperfect, it has provided access to information on unfair contracting practices that, once made public, generated support for greater transparency. Success in strengthening the supervision of the financial sector was not achieved simply through the policies supported by the 1st and 2nd DPLs, but rather as a result of a larger program of Bank support that has been sustained over time. The implementation of consolidated supervision is a long-term process reflecting the importance of financial groups in the financial system. As highlighted in the CPS, complex institutional issues may require support across various instruments and over an extended period of time. This complementarity of short-term and long-term support underscores the inherent limitations of DPLs to achieve long-term development goals because of the timing inconsistency between program development objectives and the short-term policy interventions designed to achieve them and, because of the short timeframe of DPLs, the short-term outcome indicators used to assess progress. For example, real progress in transparency of Government purchases takes years of reform effort at the institutional level; it is unreasonable to expect results as a consequence of short-term policy interventions. This timing paradox complicates program design and makes the selection of appropriate outcome indicators particularly challenging. The final lesson drawn from the implementation experience of the DPLs stems from the request to increase financing in the 2nd DPL in order to address the demands of the economic crisis. The DPL provided a lot of flexibility in a moment of need. Specifically, the Bank’s flexible response helped to support pro-cyclical fiscal policy by enabling the Government to continue to function and at the same time protect priority spending. Whereas this is not a fundamental objective of development policy lending – which by definition focuses on long-term structural issues – it nevertheless was effective in this case by sustaining progress in the long-term reform agenda in the face of negative shocks. 22 Annex 1 Bank Lending and Implementation Support/Supervision Processes (a) Task Team members P112312 – First Fiscal and Institutional Development Policy Loan Responsibility/ Name Title Unit Specialty Lending Keisgner Alfaro Sr Procurement Specialist LCSPT Juan Belausteguigoitia Lead Environmental Economist LCSEN Enrique Fanta Ivanovic Sr Public Sector Specialist LCSPS Antonio Blasco Sr Financial Management Specialist LCSFM Sr Disaster Risk Management Armando Guzmann LCSUW Specialist Mariluz Cortes Consultant IEGCC Stephen Brushett Lead Transport Specialist LCSTR Cecilia Corvalan Sr Transport Economist LCSTR Martha Garcia Staff Assistant LCSPE Michael Geller Sr Program Assistant LCSPE Sr Private Sector Development Michael Goldberg LCSPF Specialist Yira Mascaro Lead Financial Sector Specialist AFTFE John Newman Lead Poverty Specialist SASEP Enrique Pantoja Sr Land Administration Specialist LCSAR Tova Solo Jose Eduardo Gutierrez Ossio Consultant LCSPE Alberto Leyton Representative LCCSV Manuel Salazar Sr Social Protection Specialist AFTSP Pierre Werbrouck Consultant LCSAR David Gould Lead Economist LCSPE Task Team Leader Carlos E. Sobrado Senior Poverty Specialist EASPR David Varela Sr Public Sector Specialist LCSPS Waleska Garcia-Corzo Co-Task Team Leader P114373 - Second Fiscal and Institutional Development Policy Loan Responsibility/ Name Title Unit Specialty Lending Elizabeth Currie Lead Financial Officer BDM Enrique Fanta Ivanovic Senior Public Sector Specialist LCSPS Anna Fruttero Economist LCSHS Jose Eduardo Gutierrez Ossio Consultant LCSPE Alberto Leyton Representative LCCSV Manuel Salazar Sr Social Protection Specialist AFTSP Rashmi Shankar Senior Economist LCSPE Co-Task Team Leader 23 Ilias Skamnelos Special Assistant FPDVP Carlos E. Sobrado Senior Poverty Specialist EASPR Supervision David Gould Lead Economist LCSPE Task Team Leader Lead Financial Officer/Sovereign Elizabeth Currie BDM Debt Barbara Cunha Economist LCSPE Enrique Fanta Ivanovic Senior Public Sector Specialist LCSPS Alejandro Alcala Gerez Sr Counsel LEGLA Anna Fruttero Economist LCSHS Maria Lucia Guerra Bradford E T Consultant LCSPE Jose Eduardo Gutierrez Ossio Consultant LCSPE Alberto Leyton Representative LCCSV Reynaldo F. Pastor Chief Counsel LEGLA Manuel Salazar Sr Social Protection Specialist AFTSP Rashmi Shankar Senior Economist LCSPE Ilias Skamnelos Special Assistant FPDVP Carlos E. Sobrado Senior Poverty Specialist EASPR Marie Georgiana J. Valent Vidal E T Consultant LCSPE Ricardo Antonio Tejada Financial Officer BDM Elizabeth Ruppert Bulmer Sr. Country Economist LCSPE ICR Team Leader Caroline Cerruti Financial Sector Specialist LCSPF Financial sector, ICR Christian Schuster ET Consultant LCCGT Transparency, ICR (b) Staff Time and Cost P112312 – First Fiscal and Institutional Development Policy Loan Staff Time and Cost (Bank Budget Only) Stage US$ Thousands (includes travel and No. of Staff Weeks consultant costs) Lending FY09 22 90.3 FY10 0 0.0 Total: 22 90.3 P114373 - Second Fiscal and Institutional Development Policy Lending FY09 23 113.7 FY10 9 50.7 Total: 31 164.4 Supervision FY10 16 98.3 FY11 8 76.6 Total: 24 174.9 24 Annex 2. Beneficiary Survey Results (N/A) 25 Annex 3. Stakeholder Workshop Report and Results N/A 26 Annex 4. Summary of Borrower's Comments on Draft ICR [The following comments were translated from Spanish.] Initially, the series of DPLs proposed in the Country Partnership Strategy with the World Bank comprised 3 operations for a total amount of US$500.0 million. However, only 2 operations were signed and disbursed. The DPL series satisfactorily achieved the objective of contributing to the main policy objectives of the Government through: 1) support for strengthening governance, transparency and monitoring and evaluation of major public expenditure and investment; and 2) supporting macroeconomic stability and greater fiscal space for priority expenditures.  The series of Fiscal DPLs was partially successful. While in some areas supported by the DPL series the results were successful (strengthening tax administration, strengthening the administration and supervision of the financial sector, governance and transparency, improving the investment climate), the results were not very encouraging in the area of fiscal reform (increased public spending and modernizing public financing), due to the fact that a series of reforms pushed by the Government at the end of 2008 was not approved.  This series of DPL operations helped to maintain a continuous dialogue between the country and the Bank. The DPL series served as a two-way communication channel between the Government’s administration, the Bank and the international community on progress in the country’s development strategy and in the reform policies being encouraged.  The resources of the 1st and 2nd DPLs were used to tend to budgetary requirements. In this sense, they financed various actions in the sectors listed in the following table.  Non-approval of the Fiscal Reform Initiative presented to Congress made it difficult to manage and negotiate a third Fiscal DPL. At the end of August 2010, the World Bank informed the Government that the actions and reforms proposed for a 3rd DPL were insufficiently substantive to cover such an operation. Moreover, it indicated that the total level of budget support granted to Guatemala had reached US$550.0 million in the last two years. In this regard, the World Bank – conscious of the additional costs the Government must incur to cover reconstruction needs – proposed financing under an emergency loan in the amount of US$100.0 million for Education and Health (currently in Congress pending approval). 27 Préstamos de Apoyo Presupuestario   Sectores beneficiados  2009 2010 Desarrollo Rural Desarrollo Rural Agua  y saneamiento Agua  y saneamiento Mantenimiento y reconstrucción de red vial Mantenimiento y reconstrucción de red vial DPL 1 Sector agricola Sector agricola Catastro Catastro Servicio de Deuda Pública Medio ambiente, manejo de cuencas Construcción de escuelas Desarrollo Rural Desarrollo Rural Servicios de seguridad ciudadana Servicios de seguridad ciudadana Educación Educación Servicios de salud Servicios de salud DPL 2 Producción agricola Producción agricola Recursos naturales Recursos naturales Catastro Catastro Mantenimiento y reconstrucción de red vial Mantenimiento y reconstrucción de red vial Sistemas de comunicaciones Sistemas de comunicaciones 28 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders N/A 29 Annex 6. List of Supporting Documents Acción Ciudadana, 2010. �ndice de Acceso a la Información Pública del Organismo Ejecutivo del 2010, Guatemala City, 2010. “Rendición de Cuentas 2010�, presentation by Mi Familia Progresa, Secretaría de Obras Sociales de la Esposa del Presidente (SOSEP), March 2011. “Análisis del programa ‘Mi Familia Progresa’ con énfasis en al ámbito educativo�, Empresarios por la Educación, Guatemala City, March 2011. 30 IBRD 33413R1 91°W 90°W 89°W 88°W G UATEMA LA SELECTED CITIES AND TOWNS DEPARTMENT CAPITALS NATIONAL CAPITAL M E X I CO RIVERS GUATEMALA PAN AMERICAN HIGHWAY MAIN ROADS 18°N 18°N RAILROADS DEPARTMENT BOUNDARIES Paxbán INTERNATIONAL BOUNDARIES 92°W Carmelita n Pedro P E T É N Sa Tikal El Naranjo Melchor L. Petén Itzá de Mencos BELIZE 17°N 17°N Flores Mopán Usum ac La Libertad i nt M EXI C O a To Tuxtla Gutiérrez n sió Pa Sayaxché lá q ui ha ac M Gulf Salinas San Luis of n Honduras cué 16°N Can 16°N n Sarstún Ixcá Barillas iyú Modesto Lívingston Ch Méndez uz Puerto HUEHUETENANGO A L TA V E R A PA Z ta Cr San Barrios . Cahabón Sierra de I Z A B A L QUICHÉ á Mts ele Chajul Cham Ca habón El Estor L. de S gu Izabal Morales a Cobán Cob Huehuetenango Polochic Sier egro N Los Amates SAN ra d e lo Mot agu a MARCOS s Ch u BAJA VERAPAZ Tajumulco TOTONICAPAN Santa Cruz a c ú s Z A C A PA Salam Salamá 15°N (4220 m) Quich Del Quiché EL 15°N San Marcos Totonicap Totonicapán Motagua PROGRESO Zacapa To To S El Progresso O Tonalá O i e G El Progreso AN NG Suchia N Quetzaltenango Sololá Solol GUATEMALA Chiquimula LLr r TE NA ZAT SOLOL SOLOL� Chimaltenango CHIQUIMULA a TE ET te Jalapa HO NDUR AS AL QU Mazatenango L.Atitlan GUATEMALA JALAPA SACATE- Antigua Esquipulas IM Retalhuleu M CH Ocós a d PEQUEZ Guatemala Z UE RETALHULEU r e Q PE Cuilapa Jutiapa TE Escuintla Champerico I CH JUTIAPA SU SANTA ESCUINTLA ROSA 14°N 14°N Sipacate San José Las Lisas SALVADO EL SA LVA DO R 0 20 40 60 Kilometers To La Unión 0 10 20 30 40 50 Miles To La Unión This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information PA CIFIC O CEA N shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 13°N 13°N 92°W 91°W 90°W 89°W 88°W NOVEMBER 2006