Report No. 44007-PY Paraguay Integrated Fiduciary Assessment April 2008 Country Management Unit Argentina, Institutional Capacity and European Commission Chile, Paraguay and Uruguay Financial Sector Management EuropeAid Co-operation Office Financial Management, Operations Support Unit Fiscal and Municipal European Commission Delegation Latin America and the Caribbean Region Management Division to Uruguay and Paraguay The World Bank Inter-American Developmemt Bank European Union Document of the World Bank, the Inter-American Development Bank and the European Union ParaguayIntematedFiduciary Assessment ii OPACI Spanish acronymfor the Inter-MunicipalCooperationOrganizationofParaguay PC Spanish acronymfor the Colorado Party PEFA Public ExpenditureandFinancialAccountability PETROPAR State-ownedoil company, `Petr6leos Paraguayos' PFM PublicFinanceManagement PGN Spanish acronymfor General State Budget PI PEFAIndicator PIUS ProjectImplementationUnits PNI-CISNI Spanish acronymfor NationalIntegrityProgramand Inter-institutionalCouncilofthe National Integrity System PR Procurement RAS RevenueAdministrationSystem SEE1 Spanishacronymfor Sub-secretariatof EconomicsandIntegration SET Spanish acronymfor State SecretariatofTaxes SIABYS Spanishacronymfor IntegratedGoods and Services System SIAF Spanishacronymfor IntegratedFinancialManagementSystem SIARE Spanishacronymfor IntegratedSystem of Administrationof State Resources SICAP IntegratedSystemof Accountancy andProjectAdministration SIC0 Spanishacronymfor NationalPublicAccountingSystem SICP Spanish acronymfor ProcurementInformationSystem SIGADE Spanish acronymfor the UNCTAD Debt ManagementandInformationSystem S I N A R H Governmenthumanresources management system S N Sub-National SOE State OwnedEnterprise SSEAF Spanish acronymfor Sub-secretariatofFinancialAdministration STP Spanish acronymfor the TechnicalSecretariatof Planning TI TransparencyInternational TSA Treasury SingleAccount UAF Administrationand FinanceUnit UCIP Spanishacronymfor Public InvestmentCentralUnit UIP Spanishacronymfor the Paraguay IndustrialUnion UNCTAD uoc UnitedNationsConferenceon TradeandDevelopment Spanishacronymfor Operational ProcurementUnits USAID USAgency for InternationalDevelopment VAT Value Added Tax WB World Bank WBI World BankInstitute WB IDB EC Vice President: Pamela Cox Vice President: Santiago Levy Europaid Co-operation Office Country Director: Pedro Alba Manager: Mario Marcel Director-General: Koos Richelle Manager FM:Roberto Tarallo Division Chief: Vicente Fretes Head of Delegation in Uruguay and Manager PR: Enzo De Laurentiis Task Manager: Gerard0 Reyes Paraguay: William Hanna Task Manager: Alexandre Tagle Task Manager: Juan Planas Arrobbio Co-Task Manager: Gustavo Sierra Co-Task Manager: Vera L6cia Co-Task Manager: Andres Mac Valente Paramav IntegratedFiducian,Assessment iii TABLE CONTENTS OF MAINABBREVIATIONSAND ACRONYMS ................................................................................. i TABLE OF CONTENTS ........................................................................................................................... 111 PREFACE ..................................................................................................................................................... v EXECUTIVE SUMMARY ................................................................................................................... VI RECENT ACHIEVEMENTS PFM& PR IN .................................................................................................... VI IDENTIFIED PFM& PRMAINWEAKNESSES ............................................................................................ vi1 THEUNDERLYINGGOVERNANCECHALLENGES v111 STRUCTUREOF THE IFA ............................................................................................................................ ....................................................................................... IX 1 INTRODUCTION: CONTEXT & SCOPE OFTHE STUDY . ............................................................. 1 ECONOMIC CONTEXT.................................................................................................................................. 1 POLITICALAND INSTITUTIONAL CONTEXT 1 THEPUBLIC SECTOR INPARAGUAY ............................................................................................................ .................................................................................................. 3 PFMAND PRINSTITUTIONAL AND LEGAL FRAMEWORK ............................................................................ 4 INTEGRATED FIDUCIARYASSESSMENT: RELEVANCE. OBJECTIVE AND SCOPE ............................................ 6 IFAMETHODOLOGY ................................................................................................................................... 7 IFAPARTICIPATORYPROCESSOFIMPLEMENTATION .................................................................................. 8 IFADISSEMINATION STRATEGY................................................................................................................. 8 STRUCTURE OF THE REPORT ........................................................................................................................ 9 2. KEY ISSUESFORPUBLICFINANCIAL MANAGEMENT AND PROCUREMENT ............10 CREDIBILITY AND EFFICIENCYOF THE BUDGET PROCESS .......................................................................... 10 FISCALTRANSPARENCY ............................................................................................................................ 12 CONTROLEFFECTIVENESS ........................................................................................................................ 12 3 PUBLICFINANCIAL MANAGEMENTPERFORMANCEFRAMEWORK .THEUNDERLYING GOVERNANCE CHALLENGES ......................................................................................... 14 ............................... 16 ........16 PFMREFORMPROGRESSDURINGTHEPERIOD2004-06............................................................................. INTRODUCTORY COMMENTS: PRIORITIZATION OF INDICATORS AND INTERNATIONAL COMPARISON 17 CREDIBILITY OF THE BUDGET ................................................................................................................... 19 COMPREHENSIVENESS AND TRANSPARENCY ............................................................................................. 24 POLICY BASEDBUDGETING ...................................................................................................................... 31 PREDICTABILITY AND CONTROL INBUDGET .......................................................................... 34 ACCOUNTING.RECORDING AND REPORTING............................................................................................. EXECUTION 46 EXTERNAL SCRUTINY AND AUDIT 48 DONOR PRACTICES .................................................................................................................................... ............................................................................................................. 52 4 INPUTSFROM COUNTRYPROCUREMENTASSESSMENT . ...................................................... 56 MAINFEATURES PUBLICPROCUREMENTINPARAGUAY OF 56 PILLAR IREGULATORY FRAMEWORK PILLAR 11 INSTITUTIONAL FRAMEWORK AND MANAGEMENT .. ...................................................................... ...................................................................................................... 58 CAPACITY ................................................. 60 PILLAR I11.PROCUREMENT PILLAR Iv.INTEGRITY OPERATIONSAND MARKET PRACTICES.......................................................... 62 AND TRANSPARENCY OF THE PUBLIC PROCUREMENT SYSTEM ............................... 63 5 MANAGEMENT OF IFIS AND DONORFUNDS . .............................................................................. 65 IFISAND DONOR FUNDSINPARAGUAY 2004-06 . .................................................................................... 65 INSTITUTIONAL ARRANGEMENTS .............................................................................................................. 66 PLANNING AND APPROVAL DONOR OF FUNDEDOPERATIONS .................................................................... 67 EXECUTIONOFDONOR IFISFUNDEDOPERATIONS AND RELIANCE ONCOUNTRY SYSTEMS AND ................68 INSTITUTIONAL SETTINGS FOR MANAGING DONOR FUNDEDPROJECTS: PUBLIC WORKS. AGRICULTURE. AND SOCIAL ACTION ................................................................................................................................. 70 ParaauavInteDatedFiduciarvAssessment iv THECHALLENGEOFEFFICIENTEXECUTION ............................................................................................... 71 6 CONCLUSIONS . ..................................................................................................................................... 72 GOVERNMENTAL ACTION PLANFOR PUBLICFINANCIALMANAGEMENTAND PROCUREMENTREFORM .................................................................................................................... 73 ANNEX 1.1 -WBI GOVERNANCEINDICATORS DEFINITIONS . ................................................. 80 ANNEX 1.2 PEFA SCORINGMETHODOLOGY - ............................................................................... 81 ANNEX 3.1 -SUMMARY TABLE OFPEFAPERFORMANCE INDICATORS .............................. ANNEX 3.2: OVERVIEW OFPEFAINDICATORS. BENCHMARKINGCOUNTRIES ...............8389 ANNEX 3.3: 2005 WBI GOVERNANCEINDICATORS -BENCHMARKINGCOUNTRIES ........91 BIBLIOGRAPHICALREFERENCES ..................................................................................................... 92 LIST OF PERSONSINTERVIEWED ...................................................................................................... 96 ParaguayIntegratedFiduciary Assessment V PREFACE The Paraguay Integrated FiduciaryAssessment (IFA) was preparedjointly by the World Bank (WB), the Inter-American Development Bank (IDB), and the European Commission (EC) on the basis of findings from missions that visited Paraguay in October-November 2006 and April-May 2007. The IFA Team was led by Alexandre Arrobbio (WB). Core team members were: Andres Mac Gaul, Zeinab Partow, and Anthony Gaeta (WB), Gerardo Reyes-Tagle and Gustavo Sierra (IDB), Vera Valente (EC); Federico Guala; Celina Anazco; Justina Duarte; Gerardo Uiia; and Marcel0 Barg (Consultants). Efraim JimCnez (WB) was the Task Team Leader for the Paraguay Country ProcurementAssessment Report. Also contributing to the report were Linn A. Hammergren; Natalia Bavio; Luz Meyer; Santiago Scialabba; Eliana Dam; Gilma Unda (WB); Maria Eugenia Roca; Carolina Vera (IDB); andAlfred0Le Pera(Consultant). Quality assurance was provided through internal meetings at both Institutions and by the peer reviewers: Juan Gaviria; Jesko Hentschel; Nicola Smithers (WB); Marco Formentini (EC) andthe IDBManagementReview Committee. The preparation of the IFA also benefited from comments and support from Alvaro Cubillos (IDB), and James Parks, Felipe Saez, Pedro L. Rodriguez, Jessica Poppele, Carter Brandon, Alvaro Soler, Andres Pizzaro, Fernando Lavadenz, Estanislao Gacitua- Mario, MariaAngelica Sotomayor, Roberto Panzardi, and Jamil Sopher (WB). Acknowledgements The IFA Team would like to thank the government team ledby Lic. G6mez Acosta, Vice Minister of Administration and Finance; and consisting of Mr. Acosta Ferreira, General Director of Budget; Mr. Cardozo, General Director of Treasury; Ms. Aguero, General Director of Public Accounting; Mr.Alvarez, General Director o f Credit and Public Debt; Mr. Max Rejalaga, General Director of Public Procurement; Mr. Cabrera Villalba, Executive's Auditor General; Mr. Airaldi, Auditor General. The Team gratefully acknowledges all the support received. Paraguav IntegratedFiduciaryAssessment vi EXECUTIVESUMMARY i. ThisIntegratedFiduciaryAssessment(IFA)forParaguayisanexerciseinwhich the Government convened its development partners, including the World Bank (WB), Inter-American Development Bank (IDB), and the European Commission (EC), in a consultative process designed to establish an Agenda on Public Financial Management (PFM) and Procurement (PR), and other related governance aspects. It i s expected that this process will contribute to: i)identify key PFM & PR strengths and weaknesses ofthe Central Government of Paraguay, including those related to the management and implementation of the foreign- financed (through grants and loans) public investment programs; and ii)prepare an action planto guide future efforts in PFM and PR for all Central Government .. spending. 11. Paraguay has made important progress in a number of governance areas in recent years. The World Bank Institute (WBI) governance indicators show some progress during the last decade. It is also seen that public services are being delivered more effectively, including in what attains to PFM and PR. Nevertheless, important challenges still remain, particularly inthe area of curving down corruption. Paraguay ranked 111 out of 163 countries in Transparency International's 2006 survey. The purpose of the IFA i s to assess PFM and PR performance in Paraguay. It acknowledges the governance context and the corruption inparticular, which affects boththe PFM and PRYbut does not analyze themper se. RecentAchievementsinPFM& PR iii. SincethebeginningofPresidentDuarteFrutostermin2002,theGovernmenthas made significant efforts oriented to PFM & PR reform. On PFM, an important tax and customs reform was initiated in 2004; technical improvements to the budget process have been implemented in the areas of financial planning and cash management, as well as in budget accounting through the introduction of a commitment stage. The external audit function has also been improved through the institutional strengthening of the Comptroller General of the Republic (CGR) supported by IDB and the U S Agency for International Development (USAID). Finally, the Government is currently initiating a reform of the internal audit function and the Financial Management Integrated System (SIAF) with the technical and financial support of IDB and USAID. In Procurement, the newly adopted legislation, the enhanced role of the General Directorate for Public Procurement (GDPP), and the development of the centralized public procurement systemhave strengthenedtransparency. iv. These reforms have contributed to stronger fiscal discipline for the Central Administration, improved tax collection, and more transparency in the area of procurement. However, the initiatives undertaken in the area of control are too recentto show significant results. ParaguayIntegratedFiduciaryAssessment vii Identified PFM & PR Main Weaknesses V. The three main PFM and PR challenges identified by IFA are related to improvements on: budget process efficiency, fiscal transparency, and control effectiveness. The common feature o f these challenges i s their link with Paraguay's political and institutional context and the difficulty inaddressing their technical dimension without adopting broader governance changes. vi. Credibility and Efficiency of the budget process. The credibility and efficiency o fthe budgetprocess are affectedby deficiencies inthe following three functions: the ability to effectively execute budgeted expenditures; the multi-year perspective infiscal planning; and the financial planningof annual cash flows. vii. The limited ability to execute budgeted expenditures can be seen inthe systematic under-execution o f the budget, which has been on the order o f 40 percent for the investment budget over the period 2004-06. This under-execution undermines the rationale o f the budget process for both domestic and donor funded resource utilization. Three factors inparticular are contributing to this problem: 0 Tension between the Congress -which enjoys wide power to increase the budget- and the Executive with respect to the final dispositions of the budget. Congress tends to add expenditure items, while the Executive limits actual execution to cash availability. 0 Technical aspects in PR planning, execution and monitoring. There i s no real- time monitoring of contract execution through their different stages: i)draw up o f technical specifications and documents, and ii)processing o f PR. There i s a rigid relationship between the Annual Contracting Plans and the Budget, and adjustments require slow procedures. Also, although it is permitted, there i s little authority delegation for contract processing, which usually generates delays. 0 Other factors include the frequent adjustments to budget expenditures during execution and the co-existence o f sustained fiscal surpluses with persistent payment arrears within the Central Administration. This is aggravated by the lack o f consolidated information on payment arrears from decentralized entities and in particular o f state-owned enterprises (SOEs) such as PETROPAR. ... v111. Expenditure efficiency is also affected by the poor capacity o f budget execution. From the PR point of view, the impact over efficiency is due, among other things, to: i)delays in payments, forcing the bidders to include financial expenditures in their prices; ii)more thanhalf o f the processes are not benefited from economies o f scale resulting from the aggregation of acquisition processes; and iii)existence of requirements that hinder the participation offoreign firms. ix. Fiscal Transparency. Without pretending to be exhaustive, the IFA deals with issues related to fiscal transparency in Paraguay, by considering two dimensions. On one hand, the management of transfers to sub-national governments. These transfers represented 4.3% o f consolidated public expenditure during 2006, and respond to a relatively simple distribution scheme. However, the country lacks a Paraguay InteeJated FiduciarvAssessment ..* Vlll transparent and unified registry of sub-national transfers, which hinders the determination of the real functioning of the system, and also its eventual correlation with current legislation. Since 2006, measures were taken to start reverting this situation. On the other hand, the existence of significant fiscal risks associated to the quasi-fiscal losses by the Central Bank and SOEs, and to the contingent liabilitiesassociatedwith the pension system. X. Control Effectiveness. The IFA identifies effectiveness of the control system as Paraguay's biggest PFM and PR challenge. First, shortcomings ininternal control framework and procedures weaken the performance in most expenditure categories related to salaries and goods & services. Second, Internal Audit is undermined by lack of trained staff, harmonized norms and procedures, and institutional independence.Third, external audit still experiences weaknesses such as the limited effectiveness of follow up on audit recommendations. Finally, the control environment i s weak, due to the lack of accountability and the high level of discretion given to senior management by insufficient and inadequate human resources policies and work practices. This is compounded by the lack of internal control standards and procedures for the public sector, and in some cases by their disconnection from the financial management integrated systems (SIAF). With respect to foreign-financed public investments, the weaknesses noted above are to some extent mitigated by an ad-hoc ring-fenced control framework required by International Financial Institutions (IFIs) and donors operating inthe country. xi. This discussion has particular relevance for IFIs and donors collaborating with Paraguay. Public sector investment has depended crucially on IFIs and bilateral donor lending and grants. According to budget information, such grants represented 8.3% of Central Administration's total revenues on average terms throughout 2004-2006, whereas lending disbursementsamounted to an additional 9.1%. These figures remain significant, despite the existence of negative net transfers with IFIs, driven partly by favorable economic conditions and partly by prudent fiscal practices, as well as by difficulties for obtaining congressional approval of IFIs and donors financedprojects. xii. In addition to the weaknesses discussed above, and as with other Government spending, Paraguay's governance shortcomings are particularly harmful to the smooth implementation of IFIs and donor financed operations. This becomes evident with respect to the institutional arrangements for planning, monitoring and coordinating donor-funded operations. These arrangements suffer from institutional overlaps and redundant systems, which add unnecessary bureaucracy and undermine information reliability. Similarly, rigidities and instability in humanresourcesmay affect the Government's ability to reachits goal ofavoiding outsourcing to international organizations for the implementation of new projects without introducing major risks. The underlying governance challenges xiii. The challenges outlined above must be considered within the context of Paraguay's control environment. Lasting effects of technical reforms will not take hold without commensurate changes inthe broader governance agenda. This ParaguayInteasatedFiduciawAssessment ix in turn will require pro-active and sustained dialogue with all segments of Paraguayansociety. While the goals of such a dialogue are ambitious, short term objectives can be more modest, including, for example, the initiative to ensure strong ownership by the authorities, beginning perhaps with a single ministry or agency and avoiding unrealistic or overly ambitious measures. These initiatives should, inturn, seek to integrate PFM and PR reform proposals alongside actions inthe areas ofhumanresourcesandinstitutional strengthening. Structureof the IFA xiv. Chapter 1 provides a descriptive summary of Paraguay's economic and governance context as well as the scope andmethodology of the study. Chapter 2 describes the PFM and PR key issues and their inter-connection with Paraguay governance context. Chapters 3 and 4, respectively, describe how PEFA and OECD-DAC indicators are used for the assessment of Paraguay's Central Government PFM & PR. These indicators provide the Government with a powerful analytical tool for cross-country and over-time comparisons. The fifth chapter focuses on fiduciary aspects characterizing the management and implementation of external financing. The paper concludes with Chapter 6. 1. INTRODUCTION:CONTEXT& SCOPEOFTHE STUDY EconomicContext 1. Global Economic Performance. Real GDP growth reached a high-mark of 4.1% in 2004, to some extent reflecting the recovery from the regional crisis of 2001-02. Growth slowed to 2.9% in 2005 and recovered to 4.0% in 2006. This three-year growth pattern reveals an exceptionally good economic performance, following a decade of stagnation. It also suggests the existence of continued structural impediments to faster growth', and the vulnerability ofthe economy to supply-driven shock^.^ 2. Inflation stayed at record-low levels in 2004 (2.75%) and then s ikedto 9.9% in 2005 and 12.5 in 2006. Some of this inflation was "importedyy' and some was the consequence of domestic supply constraints on specific sectors5. 3. Public finance. Under the umbrella of a stand-by agreement with the International Monetary Fund (IMF), the government successfully implemented a fiscal program centered on a tax and customs reforms. This has helped to maintain an overall fiscal surplus, averaging 1.0% of GDP over the period 2004-2006, as well as to reduce debt arrears and the stock of external debt. Further achievements are needed, though, to assure sustained fiscal soundness. For example, while Central Government fiscal revenues (Central Administration and Decentralized Entities)were raised, sustainability remains a question. Part of the increase was brought by exceptionally robust economic activity. Also, overall public expenditures have shrunk inGDP terms, but mostly due to cuts in public investment, whereas little progress was observed during the period in terms of reducing current expenditures and losses from SOEs in terms of the gross product. 4. Externalsector.According to official figures, the current account balance deteriorated gradually, going from a surplus of 2% of GDP in 2004 to a 3.4% deficit in 2006. The main factor explaining this effect i s the widening of the trade deficit, largely due the boost of the economy and to a significant increase inrecorded imports generated by the strengthening of customs controls and revenue collection. Two additional factors should also be considered when interpreting these figures: first, the sharp increase in revenues from transnational hydroelectric companies; and second, the increase of international remittances. These two sources of revenue prevented the current account gap from growing at a faster rate. Notwithstanding the deterioration of the current account balance and the negative external financing of the public sector, the Central Bank was able to increase its international reserves from US$1.16 billion at end-2004 to US$l.67 by end-2006. PoliticalandInstitutionalContext 5. PoliticalContext. The current Administration began its five-year term inAugust 2003, with the support of roughly 38% of the vote. The `Partido Colorado' (PC) won 13 of Brazil, a 100-timeslarger economy, grew at 4.2% in2004. Argentina and Uruguay grew at average rates of 8.9% and 8.5%, respectively, during 2004-2006. 2Consideringthe relatively small size of the economy and the prevalenceof exceptionally favorable international conditions. A severe drought that affected agricultural output in2005, and the rise in oil prices that took place untilsecond quarter of 2006. Highoil prices. Beef, hit, vegetables, and construction. Paraguay IntematedFiduciarvAssessment 2 the 17 departments and retained its hold on the executive branch, although has lost the majority inboth Chambers o f Congress. 6. The period (2004-06) brought to an end almost a decade o f serious political instability, and it also saw the launching o f an ambitious reform agenda, driven by the authorities and supported by International Financial Institutions (IFIs) and donors. The aim of the reforms has beento help the Government tackle the country's most critical challenges, including reducing poverty; creating a sound investment climate for business development and sustained economic growth; andcurbing the widespread corruption, at least that associated with public sector decision-making. However, despite some clear successes, there are still many challenges related to the improvement o fthe institutional framework, and the prevention o f politicization o f the public management and corruptionpractices. 7. Institutional Context. The 1992 Constitution provides the basic institutional framework for democratic government. Since then, the Legislature has an essential role inthe scheme ofdivision ofpowers, andcounts withthe capacity to increase the budget proposal expenditure. 8. Governance. The perception o f quality o f governance, measured by the World Bank Institute (WBI) Governance Indicators6, indicate that after a worsening in the second part of the 1990s, governance in Paraguay registered an improvement in the current decade. Still, the WBI instrumentsreveal that all dimensions of governance inParaguay continue to be weak. The numbers, however, show important variations. Government overall (quality o f provision o f public services) has improved over the past decade. This suggests that PFM andPRYthe subject o f this study, are not perceived to be among the most problematic areas o f governance. The PFM and PR reforms between 1996 and 2005, and in particular the improvements resulting from the procurement and customs reforms, generated some impact, though limited. Nevertheless, Paraguay continues to suffer from a high perception o f corruption. Table 1.1 below shows the evolution o f governance indicators from 1996 to 2005. 9. High perception of corruption. This highperception o f corruption i s corroborated by other monitoring mechanisms. Paraguay was ranked close to the bottom-147 o f 159 countries surveyed-in Transparency International's (TI) 2005 Corruption Perceptions Index, though improved in2 0 0 k l i m b i n g to 111 out o f 163 countries surveyed-, Its overall 2005 score on TI'Sscale o f 2.1 (1 being most corrupt to 10 beingleast) reflects only slight improvement over its 2004 score o f 1.9. In 2004, WBI gave Paraguay the lowest control o f corruption indicator among Latin American countries (8.8 on a scale from 0 to 100). 10. According to the corruption surveys carried out by the Council for the National System o f Integrity (CISNI) and the WBI in 1999 and 2005, respectively, corruption seems to be more prevalent in the political sphere -in particular the Legislature and the judiciary. The executive i s also affected by the politicization o f the civil service, which favors cronyism in public employment, and the prevalent corruption practices in services such as the customs administration. See Annex 1.1 for the definitionof the dimensionmeasuredby eachindicator. Governanceda 1996 , Indicator 2000 2002 - 2003 2004. 2005 +is. ' 1998 E Voice and Accountability 35.6 39.6 29.5 29.0 36.2 40.6 41.1 Political StabilityINo 35.8 25.9 16.5 14.2 22.2 25.9 28.3 Violence Government Effectiveness 15.7 9.6 9.6 9.1 10.0 12.4 23.4 Regulatory Quality 78.9 33.0 16.7 30.0 25.1 27.6 22.8 RuleofLaw I 33.0 I 22.1 I 18.8 I 12.0 , 12.5 I 11.1 , 16.4 I Control of Corruption 33.2 7.8 9.3 4.4 4.4 8.8 7.4 11. LimitedImpact of Public Sector Reform. Given Paraguay's challenging governance conditions, the impact o f public sector reform efforts in Paraguay over the last decade has been moderate. Although the Paraguayan public sector i s relatively small compared to regional standard^,^ it plays a key role in several economic activities, and, despite government efforts and commitment to embark on reform, its functioning i s characterized by high levels o f inefficiency, a weak institutional framework, and a control environment affected by patronage and widespread corruption. The strengthening o f the public sector appears as a key issue within this context, and a necessary condition to assure the effectiveness o f recent reform efforts.' Beyond technical aspects, this process will require strong consensus and political will to be successful. ThePublicSector in Paraguay 12. Paraguay's public sector is composed o f the Central Administration, 55 decentralized entities and 232 municipalities. The Central Administration covers all the agencies within the executive, legislative and judicial branches as well as the Comptroller General o f the Republic (CGR). The Central Government includes the Central Administration and the decentralized entities. The latter represent around half o f budgeted expenditures, and include both commercial entities -state-owned enterprises and financial institutions- and non-commercial entities -1 7 departmental (regional) administrations, social security entities and funds, public universities, and regulatory entities; all o f them regulated by the Central Government's Financial Administration Law (LAFE). Municipalities are regulated by the Municipal Organic Law (LOM) and adopt the LAFEonly as supplementary. 'InParaguay, Central Government total expenditures represented 17.5% o f GDP in 2005, against 29.5% o f GDP inArgentina andUruguay for the sameyear. aProgress was observed during the 2004-2006 in the areas of tax reform, rationalization o f the government pension system, and financial sector reform to strengthen the banking system. Paraguay InteeratedFiduciarv Assessment 4 2004 2005 2006 Source:FinancialReports, (2004,2005 and2006), MinistryofFinance. PFMand PRInstitutional and LegalFramework 13. PFM Legal Framework. The LAFE and its accompanying regulation are well organized and provide a clear and comprehensive legal framework for financial management. The LAFE covers activities related to budgeting, accounting, registry & reporting, control, and debt management. It assigns the supervision o f the financial administration to the Under-Secretariat o f Financial Administration, which depends on the Ministry o f Finance, and requires the use o f the Integrated Financial Management System(SIAF)throughout the Central Government. 14. However, there are several exceptions to the application o f the LAFE, such as the existence o f expenditure increases introduced by Congress to the Executive's budget proposal without identified alternative sources o f financing; failures to fully comply with reporting requirements by decentralized entities; the absence of evaluation of budgetperformance; and the partial use o f SIAF. 15. Internal audit i s assigned to institutional auditors in the respective agencies with the coordination and supervision o f these assigned to the Office o f the Executive's Internal Auditor (AGPE). External control, as stipulated in the LAFE and the Constitution, is assigned to the Comptroller General (CGR). Both the AGPE and the CGR have their organic egisl la ti on.^ 16. P F M Institutional Framework. As stipulated in the Constitution and the LAFE, the Executive, through the Ministry o f Finance (MoF), i s responsible for budget formulation and execution. The key public institution for aspects related to the budget process is the Under-Secretariat o f Financial Administration. This Under-Secretariat from MoF i s in turn made up o f eight units, including the General Budget Directorate (DGP), the General Treasury Directorate (DGT), the General Accounting Directorate (DGC), and the General Directorate for Public Credit and Debt (DGCDP)." 17.The implementation of the budget is decentralized to the Ministries, Departments and Agencies (MDAs) and coordinated and supervised by the Under-Secretariat o f Financial Administration. Within MDAs, administrative and financial activities are usually" managed by the General Directorate of Administration and Finance, acting as CGR Organic Law 276/1994; AGPE is regulatedbythe Decree 13245/2001. loThe other units are incharge of Procurement,Norms andprocedures, Pensions, IT and Communications. 11The Ministry ofPublic Works is an exception, with a Vice-Ministry of Financial Administration. an Administration and Finance Unit (UAF).12 The General Directorate includes a Finance Directorate for budget, accounting, treasury, and fixed asset management; an Administration Directorate for general administration and procurement; and a Human ResourcesDirectorate. 18. The Under-Secretariat of Financial Administration, the MDAs and the AGPE share responsibilities for internal control. The Under-Secretariat of Financial Administration ensures overall supervision over budget execution through the SIAF, and also exerts control over cash management. Central Administration MDAs register budget execution figures into SIAF and are responsible for internal control within their administration. In contrast, many decentralized entities operate outside SIAF, and the DGP exerts no control on expenditures fundedby resources generated directly by them. The internal audit function is covered by the Institutional Internal Audit (AII) of each MDA,underthe coordination ofthe AGPE. 19.PR Legal Framework. In August 2003, Paraguay passed a new Government Procurement Law (No. 2051/03), which substantially improved the previous legal framework and set up an agency within the MoF for regulating and issuing guidelines for public sector procurement, the General Directorate for Public Procurement (GDPP). The drafting of the new Law benefited from the technical support of the IDB and the WB, and contains and promotes internationally-accepted best procurement practices. The regulatory decree 21909/03 was subsequently issued, facilitating the implementationofthe Law. 20. PR Institutional Framework. The ProcurementLaw covers almost all types of public pro~urement'~associated with the Central Government and municipal agencies.l4 Within this common legal framework, the GDPP appears as centralized, while its execution is decentralized through over 1,000 Operational Procurement Units (UOC), locatedin307 entities from all three levels of Government. 21. The GDPP has six main functions: i)defining policies and issuing regulations regarding public procurement planning and execution; ii)issuing procedure manuals and standard bidding documents; iii)creating and maintaining a Procurement Information System (SICP);'' iv) providing training and advice to staff working at UOCs; v) prior reviewing of bidding documents, handling procurement complaints and denounces, and, when estimatedto be necessary, requesting the intervention of the relevant audit bodies; and vi) sanctioning suppliers and contractors for non-compliance with contract stipulations and bidding procedures. The SICP covers all institutions ruled by the Procurement Law and works as an effective tool for the dissemination of contracting opportunities, managing complaints concerning procurementprocesses, and providing basic informationfor civil society monitoring. 22. The GDPP also plays an important role in budget execution by: (i)reviewing and approving Procurement Plans preparedand submittedby each UOC, once their budget allocation process is completed; (ii)controlling that the budget has been properly allocated to each procurement process;16 (iii) revising (jointly with the DGP) both the 12Inorder to access and operate the SIAF, a given unithas to be accreditedto as a UAFor Sub-UAF. A Sub-UAF can be created by a M o F resolution; its basic structure is given by the LAFErulingdecree. l3With the exception o fpersonal services and concessions. l4Except for SOEs and financial institutions, and bi-national entities (Itaipu and Yacyreth). I*http:Nwww.contratacionesparaguay.gov,pyl 16For institutions operating under the SIAF, expenditure allocation control is done the through the SICP. ParaguayInteaatedFiduciaryAssessment 6 Procurement Plan and the Financial Plan when the price resulting from a procurement process exceeds the corresponding budget allocation; and (iv) issuing an authorization code (via SICP) for authorizing further payments through the SIAF and the Treasury. The GDPP levies part o f its resources directly from the bidding process, which may, eventually, generate undesirable incentives over the medium term. IntegratedFiduciaryAssessment: Relevance, Objective and Scope 23. The efficient and transparent allocation o f public resources, as well as their uses, will be fundamental elements o f any successhi effort to improve governance and reduce poverty in Paraguay. The analysis o f Public Financial Management (PFM) and Procurement (PR) rules, processes and systems can, therefore, constitute a major contribution. The goal o f the Integrated Fiduciary Assessment (IFA) i s to provide a realistic assessment o fthese two key public sector functions, through the utilization o f a methodology providing a powerful analytical tool for cross-country and over-time comparisons. It i s expected that improvements in PFM and PR would contribute to the overall transparency and efficiency o f the public sector and provide a more appropriate framework to prevent improper practices. However, sustained progress toward overcoming these governance practices requires addressing other areas, such as the politicization o f the State and improper practices affecting the political sphere and the judiciary. 24. Objectives. IFA's main objectives are to (i)establish a dialogue between the government and IFIs and donors in Paraguay on PFM-PR and related governance issues; (ii) identify key issues that compromise the effectiveness and integrity o f the country's PFM-PR and external funded resources; (iii) contribute to the making o f an Action Planfor improvements on PFM-PR. 25. Scope. The IFA covers country-level PFM & PR, as well as fiduciary" and institutional aspects related to the management and implementation o f donor grants and lending, during the period 2004-06. The WB, in cooperation with the IDB and the EC, led the assessment o f the country-level PFM component, by using PEFA indicators," which has allowed for a thorough review of Paraguay's Central Government's PFM cycle. The country-level PR component is assessed by using the IDB-led Country Procurement Assessment Report (CPAR), based on OECD-DACl9 four-pillar characterization assessment. IFA's third component, related to the management and implementation o f donor grants and lending, focuses on key Paraguayan public sector institutions, including five Central Government Ministries," as well as other institutions responsible for inter-ministerial planning and the coordination and monitoring o f donor-funded resources. The analysis o f this component also highlights the links between country-level and donor portfolio management and implementation fiduciary aspects, including the degree o f reliance on donor grants and lending; the efficiency o f project execution processes; the reliability o f current control mechanisms, and Central Government's humanresources and institutional capacities. '*ItPublic l7 refers also to PFMandPRaspects. Financial ManagementPerformanceMeasurementFramework, by Public ExpenditureWorking Group, availableat http://pefa.orglDocurnents.htm, *'Finance,Education, l9OECD-DevelopmentAid Committee.See details in `Methodology' below. Health, Public Works andAgriculture. Paraguay IntegratedFiduciarv Assessment 7 26. The overall effectiveness of governance, and curving corruption more specifically, remain key challenges for Paraguay public sector. This study does not specifically analyze corruption andbroad governanceaspects, but rather relies on the conclusions of related studies such as the WB Institutional Governance Review (IGR) and the WBI survey on governance. IFA Methodology 27. WB Strategy on GovernanceandAnticorruption(GAC). The IFA was implemented in accordance with the guiding principles of the World Bank Governance and Anticorruption (GAC) Strategy; i.e., ensuring country ownership; contributing to strengthening country systems; promoting coordination with other donors to ensure harmonized approaches, and supporting the use of good practices according to international standards. 28. PEFA & OECD-DAC Indicators. These indicators are the main instruments used for assessing Paraguay's fiduciary performance. By facilitating a structured measurement of PFM & PR progresson a consistent basis over time, they generate useful information for all donors, which contribute to reach a better coordination. They also make it possible to obtain periodic data allowing follow-up and monitoring by domestic and international stakeholders. 29, PFM Performance Measurement - PEFA Indicators. The PEFA methodology measures the soundness of Central Government's PFM framework, by calculating 31 indicators based on specific scoring criteria21 defined by the PEFA manual. These indicators provide broad coverage of country PFM systems, assessed around six critical performance dimensions: budget credibility; budget comprehensiveness and transparency; policy-based budgeting; predictability and control in budget execution; accounting, recording andreporting; andexternal scrutiny and audit.22 30. OECD-DAC Procurement Assessment and Indicators. This methodology is based on the indicators developed by the OECDDAC-Issue # 4.23It assesses the capacity of the public sector procurement system based on 12 baseline indicators with their respective compliance/performance indicators, organized around four pillars: (i)legal and regulatory framework; (ii) institutional framework and management capacity; (iii) marketandprocurementpractices; and (iv) procurement integrity andtransparency. 31. Lessons learned and participatory approach. Previous experiences with analytical work (evaluations, studies, etc.) in Paraguay show that early involvement of relevant stakeholders, extensive outreach, andtimely and broad dissemination are critical for the success of this kind of activities. Thus, the Government, jointly with IFA's main development partners (IDB, EC, and WB) defined a highly consultative approach for conducting IFA's main components. This approachtook full account of the specificities of Paraguay's public sector,24and also gave special attention to proper sequencing by 21See Annex 1.2 for details on PEFA scoring criteria. 22Informationon these six dimensions is available at www.pefa.org 23The "Methodolom for Assessment o f National Procurement Systems (version 4)" was publishedin July 2006 under the auspices of the joint World Bank / OECD Development Assistance Committee (DAC) Procurement Round Table initiative. It is a benchmarking tool that incorporates robust scoring criteria, performance measurement criteria and a comprehensive users' guide, which developing countries and donors can use to assess the quality and effectiveness ofnationalprocurement systems. 24Inparticular, lack of institutionalization and inter-institutional links, andthe lack ofstability, distinguishing between i)introduction to the diagnostic tools; ii)participation of Government inthe analysis; (iii) dissemination and discussion of findings, and iv) joint prioritization of corrective measures withthe Government and other donors. 32. Recommendations. The IFA has been designed to focus on analytical aspects and promote dialogue with country authorities and donors on available policy options. Giventhis, its objective was, inprinciple, to identify issues and proposea prioritization. On this basis, the Government -with technical assistance of the IFA team- elaboratedanAction Planto improve the PFM-PR. 33. MethodologicalLimitations. IFA methodology i s deliberately focused on the use of an indicators-basedapproach. As mentioned above, this provides the Government with a powerful analytical tool allowing for cross-country and over-time comparisons, and it also supports country ownership of the instruments. However, this chosenmethodology provides limitedflexibility for cases where indicators do not reflect accurately country- specific situations, and offers a limited span for the specific treatment of broad governance issues. IFA conclusions on broader governance aspects rely on previous related studies, such as the WB Institutional Governance Review (IGR) and the WB Institute's survey on governance. IFA ParticipatoryProcess of Implementation 34. Multi-Donor Cooperation. Both PEFA and OECD-DAC framework components are multi-donor exercises, within which the WB, the IDB, and the EC consult with other donors and establish a dialogue with the Government on key fiduciary and governance- related issues. The Government took ownership of this coordinated approach and requested donors -through the Under Secretariat of Financial Administration25- to participate on a consultative basis for the elaboration of the Central Government PFM & PRmedium-termactionplan. 35. Introductory seminars for disseminationof PEFA & OECD-DAC methodologies. Prior to launching Paraguay's PEFA and DAC-OECD assessments, the Under- Secretariat of Financial Administration expressed its interest for the diagnosis and assigned, within its administration, coordinating responsibilities to ensure adequate, gradual and participatory implementation of related activities. Seminars were jointly organized with the Under-Secretariat for discussing and disseminating indicators' methodologies, as well as to explain their relevance for assessing PFM & PR issues within Paraguay's Central Government. 36. Joint Government-IFA Teams for analysis and review of findings. For each category of PEFA and OECD-DAC indicators, joint government-IFA teams collected relevant data, appliedthe indicators to Paraguay case, and discussed the findings. Inan effort to fit the Government's time constraints, this process was completed throughout severalfield missions over a six-month period. This allowed for a progressive and more thorough absorption of the methodology, which will encourage a more autonomous updating ofthe indicators by the Government inforthcoming years. IFA DisseminationStrategy 37. Dissemination and dialogue are vital components of the IFA process. Dissemination activities are to be developed under the umbrella o f a broader governance dialogue 25Governmentcounterpartfor PEFA and OECD-DAC diagnostics. ParaguayIntematedFiduciaryAssessment 9 related to the recently approved WB Governance and Anti-Corruption Strategy. A specific objective o f the dissemination strategy i s to identify measuresto improve PFM, PRYand the management o f donor lending and grants. Further to the initial MoF review o f the document, the approach will consist o f defining for each major topic the key counterparts within the Government, the donor community and other stakeholders. 38. GovernmentAction Plan for Country PFM-PR improvements. The Governmental Action Plan was prepared under the leadership o f MoF and prioritize actions to be undertaken based on the findings obtained from the indicators analysis o f PFMand PR. This plan was elaborated through a consultative process that involved the donor community that supports the public finance reform in the country, and takes into consideration the general governance limitations affecting the country. 39. Coordination of Donors supporting the public finance reform in Paraguay. The Under-secretary o f Financial Administration counts with the support o f the IFA team and leads the coordination of IFIs and donors working on the public finance reform in Paraguay. The main purpose o f such coordination i s to develop follow-up and monitoring activities that ensure the sustainability o f the Action Plan. It will also facilitate consultation between the Government and donors for the identification of eventual financial needs and technical support, and the development o f synergies. 40. Dissemination of PEFA results and Country PFM-PR Action Plan within Government.PEFA main findings and the PFM-PR Action Plan designedunder MoF leadership are to be disseminated to the MDAs for information and consultation. This activity will help develop dialogue on issues that require inter-institutional solutions, and will also contribute to build consensus on the government ownership of the MoF Action Plan. 41. Institutionalizationof PEFA updatingin MoF. MoF, through the Under-secretariat o f Financial Administration, expressed interest in regularly updating Paraguay PEFA indicators. While BM, IDB and EC had a leadership role in carrying out 2007 PEFA exercise, it is expected that this role will be gradually transferred to MoF. In this context, dissemination activities will also include methodological support to MoF in updating PEFA indicators. 42. Policy Notes and Technical Cooperation. Technical advisory activities and preparation o f policy notes on specific topics will be considered upon MoF request and will be informed by the dissemination process. Structureof the Report 43. Chapter 2 describes the PFM and PR key issues and their inter-connection with Paraguay governance context; chapters 3 to 5 present the detailed analysis for PFM, PRYand Management o f Donor Funds, respectively; and chapter 6 concludes on the prospects for improving PFM and PR inParaguay. 44. While the IFA report captures the different dimensions o f the PEFA report, these dimensions have beenorganized differently to ensure consistency between the different topics covered by this document. Paraguay IntegratedFiduciaryAssessment 10 2. KEY ISSUES FOR PUBLIC FINANCIAL MANAGEMENT AND PROCUREMENT 45. This chapter defines the main challenges confronting PFM and PR functions, and analyses them within the current political and governance context o f Paraguay. The PEFA and OECD-DAC indicators-based methodologies, which detailed analysis is provided in Chapter 3 and 4, respectively, provide crucial insight to evaluate the technical capacity o f Paraguay's PFM and PR functions. This may contribute substantially to the making o f an operational agenda to improve the effectiveness and efficiency o f these functions. It i s important to note, however, that the technical aspects o f institutional reform identifiedby this methodology provide only a partial answer. 46. The real challenge for the achievement of a sustained improvement of PFM and PR functions in Paraguay i s the development o f a sufficiently broad reform agenda that acknowledges the political context inwhich public institutions operate, and that allows the delineation o f an Action Plan in which the implementation of technical measures take into account the political aspects. 47. The results o f the analysis based on these methodologies show that the main PFM and PR issues in Paraguay during 2004-2006 were: the budget process credibility and efficiency,fiscal transparency,and controleffectiveness. CredibilityandEfficiencyof the budgetprocess 48. Three dimensions o f the PEFA framework are particularly relevant to understand the credibility and efficiency o f the budget process in Paraguay. These are: the ability to execute budgeted expenditures, which indicates the ability o f the government to deliver public services in a timely fashion; the multi-year perspective in fiscal planning; and the financial planning o f annual cash flows. The limitations identified by the PEFA framework in these areas hinder the use of the budget as a planning instrument o f public resources. 49. Ability to execute budgeted expenditures. There was a clear trend toward under- execution of Central Government budgeted expenditures over the period 2004-2006. The average deviation from the budget during this period was around 40 percent of capital expenditures, substantially impacting the level o f execution of the overall budget. This i s critical, as it distorts andundermines the rationale o f the budget process. The impact is direct for the case o f funds provided by IFIs, since these are essentially addressed to finance investment expenditures. During 2004-06, executed expenditure levels below budgetedamounts were not associated with sudden revenue shortfalls, but were rather relatedto a combination o f governance and PFM factors. 0 Onone hand, Congress counts with wide powersto modify the budgetsubmitted by the Executive,26 and used these powers to increase spending without identifying matching revenues, as required by the LAFE. The Executive, for its part, has compensated this practice by executing the budget strictly on the basis of available cash resources, which has contributed to substantial rigidity in budget execution. This conflict betweenpowers can mainly be explained by the lack o f a hierarchical structure among various legal sources, and i s exacerbated when the executive and 26For instance, revenuesprojections were increasedby US$62 millionby the Legislature for the adoption of2005 budget law. Source: WJ3 2006. ParaguayIntegratedFiduciarvAssessment 11 legislative branches are controlled by different political parties, such as has beenthe case during the period under study. This also affects investments financed by IFIs and donors, which are approved through processes correlated to the budget calendar. In addition to problems regarding the level o f spending, there i s the interference o f the Congress on the wage structure o f public employment, through the inclusion in the budget o f a detailed annex of Government salaries and positions. Paraguay's civil service becomes thus highly vulnerable to politicization. 0 On the other hand, there are technical aspects related to procurement planning and monitoring that also contribute to the under execution of budgeted capital expenditures. In particular, there is no real-time monitoring o f contract execution duringits different stages: i)draw up oftechnical specifications anddocuments, and ii)processingofPR.ThereisarigidrelationshipbetweentheAnnualContracting Plans and the Budget, and adjustments require slow procedures. Also, although it i s permitted, there is little authority delegation for contract processing, which usually generates delays. Other factors that also help to undermine the ability to execute budgeted expenditures in Paraguay include the existence o f frequent adjustments to budget expenditures during execution and the co-existence o f sustained fiscal surpluses with persistent expenditure payment arrears within the Central Administration - 5.6% o f total expenditures in2004 and 8.3% in2006. This is aggravated by the lack o f consolidated information on payment arrears from decentralized entities. 50. Expenditure efficiency i s also affected by the poor capacity o f budget execution. From the PR point of view, the impact over efficiency is due, among other things, to: i) delays inpayments, forcing the bidders to include financial expenditures intheir prices; ii)morethanhalfoftheprocessesarenotbenefitedfromeconomiesofscaleresulting from the aggregation of acquisition processes; and iii)existence o f requirements that hinder participationo f foreign firms. 51. Multiyear perspective in fiscal planning. Multiyear budget planning i s at an initial stage in Paraguay. In 2005, the MoF carried out an exercise for 2006-2008 that consisted on a simple forecast based on historical trends o f main expenditure and revenue categories. In 2006 the MoF undertook the first multi-annual budget for the period 2007-09, although it was only referential. As observed over the period 2004- 2006, the assessment o f PEFA indicators reveal: i) multi-year projections o f expenditures and revenues based on estimations o f main macroeconomic variables mainly based on retrospective analysis; ii)absence o f periodic analysis o f public debt sustainability (DSA); iii)sectoral strategies dissociated from cost analysis, including quantifiedobjectives; and iv) weak links between the Secretariat o f Planning(STP) and line ministries, compromising the transition that would help sector strategies to become investment plans. Once again, beyond the real capacity issues -adequate multiyear budget planning i s a challenge for many countrie- institutional aspects, such as the insufficient inter-institutional cooperation or the lack o f consensus between Executive and Legislative with regard to the requirement of multiyear projections within the budget law, constitute the main factors to consider for the achievement of a potential improvement, 52. Financial Planning. Cash planning helped preserve fiscal discipline, but it caused rigidities by requiring fixed quarterly expenditure allocations. In fact, Parliament approval of significantly larger budgets than executive revenues forecasts, has at times encouraged the executive to implement strict financial and cash programs which contributed to the tendency towards under-execution. However, this issue was acknowledged by the MoF, which allowed for automatic transferring of expenditure allocations among different quarters in year 2007, although with a small reduction in transferred amounts as an incentive for timely execution. 53. Restoring credibility to the budget process in Paraguay will require a concerted effort on many fronts. This will have to begin with political dialogue and with the consensus on necessarychanges to the budget process, a commitment to compliance with existing legislation, and an adequate approachto the reform of the legal and technical regime of the budget. FiscalTransparency 54. The lack of transparency associated with fiscal practices in Paraguay's Central Government has beendiscussed inseveral former studies, such as the 2005 IMFReport on the Observance of Standards and Codes. Without pretending to be exhaustive, the IFA illustrates about fiscal transparencyissues inParaguayby addressingtwo different dimensions: i)procedures for intergovernmental transfers; and ii)fiscal risks and contingent liabilities. 55. Procedures for Intergovernmental Transfers. The transfers of fiscal resources to sub-national governments (departments and municipalities) in Paraguay represented 4.3% of the consolidatedpublic expenditure in2006, and respondto a relatively simple sharing mechanism applied over a fraction of revenues fiom the collection of the Property Tax, the Value Added Tax (VAT), the Tax on Lotteries, and the distributionof Royalties and Compensations. However, the country still does not count with a transparent registry of sub-national transfers, which hinders the determination of the real functioning of the system, and its eventual correlation with the current normative. Since 2006, measures were taken that start to revert this situation, and as of today it i s possible to obtain information on royalties transferred to departments since year 2007. The achievement of a more transparent management of transfers to sub-national governments appears as a necessitytoday inParaguay. 56. Significant Fiscal Risks and Contingent Liabilities. Although there are no official estimates, Paraguay's fiscal risks and contingent liabilities have been significant in the past, and include: i)quasi-fiscal losses incurred by the Central Bank in the implementation of monetary policy, bank intervention operations and issuance of guarantees; ii)quasi-fiscal operative losses from SOEs; and iii)liabilities accrued by pay-as-you-go pension systems from boththe Central Administration and decentralized agencies. Control Effectiveness 57. The third and perhaps most important challenge to well functioning PFM and PR i s related to ineffective control27.A number of factors undermine PFM and PR control 27 The effectiveness o f a control system relies on the control fiamework (policies and procedures which management has established to achieve the entity's specific objectives) and the control environment. The latter refers to the overall attitude, awareness and actions o f management regarding compliance, control and accountability. Factors o f the environment are the integrity, ethical values and competence o f people. These Paraguay IntegratedFiduciary Assessment 13 system, including: (i)ineffective control procedures, which are analyzed through the assessment of PEFA indicators; (ii)a weak control environment; and (iii)a disconnection between both regulatory supervision and cash management exerted by the Under-Secretariat o f Financial Administration and the responsibility for internal control and audit, which relies on line ministries and the AGPE. The situation i s even more critical for the case o f Decentralized Institutions, for which the use o f the SIAF remains limited. 58. Internal Control. The control framework for payroll is limited by the absence o f a proper payroll calculation system, and there i s a high risk that the MDAs payroll calculations are not consistent with number o f days worked by civil servants. For the case o f non-salary expenditures, internal control related to quality and quantity o f goods and services delivered is not adequate; shortcomings in existing rules and procedures are allowing non-compliance, such as use o f funds for non-intended purposes. In addition, these control procedures are disconnected from MoF integrated financial management system (SIAF). Internal control i s also affected by the existence o f recording and reporting limitations: bankreconciliations provided by the MDAs usually do not provide adequate information to justify differences between bank statements and accounting; financial information on resources received by services delivery units - s u c h as school+ i s not available, which impedes the ability o f the government to ensure that those resources are used for their intended purposes; and information on central government fixed assets i s incomplete.28Inprocurement, available data indicate that around 25% of contracts exceeding the thresholdfor small purchases do not follow an open competitive process, and there are concerns regarding the way in which the Procurement Information System records these contracts. Also, a significant number o f small contracts are awarded under exceptional rules.29 59. InternalAudit. Internal audit i s still one o f the major challenges for improving PFM in Paraguay, as was mentioned inthe 2004 Country Financial Accountability Assessment (CFAA). The institutional capacities o f AGPE and MDAs Internal Audit Units are undermined by organizational limitations and lack o f well-trained human resources. Also, internal audit manuals and norms are not standardized nor in line with international standards. Finally, in terms o f effectiveness, both AGPE and AI1 reports exert a limited role in practice, partly due to the lack o f formal procedures for addressing internal audit findings, and partlyto the absence o f a legally defined regime o f sanctions. Although supported by IDB and the United States Agency for International Development (USAID), the success o f the Internal Audit system reform will depend on the sustainability and strength of the political support; the strengthened inter-institutional integration and communication -in particular with MoF-, in spite o f not being required by law; and the overall attitude towards governance and corruption. 60. External Audit. Despite recent progress achieved in terms o f norms and procedures, CGR audits remain mainly focused on financial aspects. Moreover, audit reports - o t h e r than the Annual Public Accounts to the C o n g r e s e are frequently submitted factors are influenced by the organizational structure, the means of distributingauthority and responsibilities, and the management's control system, including control and personnel policies. 28Covering only 53 percent o f total assets, as reported in 2006 Central Government consolidated financial statements, MoF. 2968% of the number o f contracts amount below US$20,000 and 12%are procuredon exceptional basis Paraguay IntegratedFiduciary Assessment 14 with delays, andthere is limited effectiveness of follow-up on audit recommendations, partly due to the absence o f regulating norms defining a code o f sanction for irregularities associated to the management o fpublic resources. 61. Control Environment. The control environment i s critical to the effectiveness o f the overall public sector control system. Weaknesses inthe control environment within the public sector of Paraguay relate to deficiencies in accountability and the high level of discretion given to senior management by insufficient and inadequate personnel policies and work practice^.^' This is compounded by the lack o f internal control standards3' and rocedures for the public sector, which in some cases are disconnected from the SIAF.37 This dimension is not entirely captured by PEFA and OECD-DAC indicators, but i s more relatedto broad governance aspects, such as public sector human resources, institutional capacity and ethics. However, control environment weaknesses were already identified inthe 2004 CFAA and 2005 IGR, and the IFA Team observed -through the PEFA and OECD-DAC field work- that limited progress has been made since then. 62. Control of Donor Funds. Ineffective control affects the fiduciary integrity and effectiveness o f Paraguay's Public Sector, and therefore impacts uponthe management o f IFIs and donors funds. This problem i s to some extent mitigated by the existence o f a ring-fenced control framework required by each IF1and donor operating inthe country. Evaluatingwhether these systems are sufficient to ensure sound management i s outside the scope o fthis study. The underlyinggovernancechallenges 63. The common feature o f the above-mentioned strategic challenges i s their link with Paraguay's political and institutional context and the difficulty to effectively address their technical dimension without broader reform efforts. As described above, these challenges are embedded in a series o f broad governance issues, both technical - h u m a n resources and institutional organization- and "political" -politicization of the civil service and corruption practices analyzed by the WBI governance survey. The full effect of technical reforms will not happen without commensurate changes in the broader governance agenda. This inturn will require pro-active and sustained dialogue with all segments o f Paraguayan society. While the goals o f such a dialogue are ambitious, near term objectives should be more modest. An initial step could concentrate on (i)improving systems and technical aspects with a view to formalize reforms at the appropriate time; (ii)addressing jointly fiduciary and institutional dimensions at the level o f each institution in cases where the institution's senior management supports change; and (iii) encouraging inter-institutional communication and coordination. 64. The scope of this study does not include elaborations on corruption and broad governance issues. However, there exist some institutional and human resources aspects which affect all dimensions o f Paraguay's public sector, and are particularly 30See next section on Institutional Framework and HumanResources. 31To provide the proper control environment within an organization, the International Organization of Supreme Audit Institutions (INTOSAI) has established internal control general standards for (1) reasonable assurance, (2) supportive attitude, (3) integrity and competence, (4) control objectives and (5) monitoring controls. 32Control procedure deficiencies and disconnections from the financial management integrated system are detailed inChapter 3, Indicators 18 to 21. Paraguay IntegratedFiduciary Assessment 15 crucial to PFM and PR. Their direct impact on PFM and PR illustrates the necessity to addressthe issues identified by IFA through a broader governance analysis. 65. Human resource system. The effectiveness o f Paraguay's public sector human resources system is compromised by both rigidity and instability. There i s little connection between effort andreward:job-stability for civil servants is nearly absolute; the job ranking system is inappropriate; core wages were practically fixed over the period under study, and salaries are adjusted mainly through discretional bonuses. Most civil service positions do not require academic or professional training. These sources o f rigidities are combined with the instability resulting from the absence o f clear rules with respect to promotion. This allows for positions to be staffed by practically any civil servant category. Ministers and heads o f administration are therefore free to exercise their authority in personnel decisions, and retain substantial power to replace staff-at all levels o f management-without ju~tification.~~Also, delegation of payment and contracting i s limited.34 These factors can have particularly corrosive effects on the integrity and the efficiency o f normal transition processes, and can also undermine the medium-term planning. This can be especially problematic in agencies with frequent turnover at the top, such as the Ministry of Agriculture, which has had five different Ministers since August 2003. Such a human resource system does not provide incentives for integrity, transparency and accountability. Its impact on PFM and PR processes and particularly on control environment is direct and significant. The implementation o f IFIs and donors funded operations is not exempted from these issues and human resources factors may also limit the Government' objective to stop outsourcing the implementation o fnew projects to international organizations. 66. Inter-institutional coordination. Public sector performance in Paraguay i s also affected by the lack o f inter-institutional coordination, which rarely involves a level lower than that o f Minister or General Director. In addition, formal mechanisms for inter-institutional communication and coordination are limited. These weaknesses negatively affect public sector capacities for designing and executing multi-sectoral public policies, and they are intertwined with and aggravated by (i)bureaucratic inefficiency, including inadequate record keeping and the lack o f manuals or automated systems for registering and tracking documents through government processes; (ii) redundant clearances and checks, superfluous managerial levels, and overlapping o f tasks and processes; and (iii) excessive focus on compliance audits rather than those based on results or corruption detection. This institutional dimension can be particularly harmful to the smooth implementation of the budget. An example of the impact this can produce is given by the institutional arrangements for planning, monitoring and coordinating operations financed by IFIs and donors, which include institutional overlaps and redundantsystems. 33The Decree of `Cargo de Confianza' gives discretion to the Minister authority, Director General, Director, and Headof Department. 34For authorization o f expenditure and payments, the Minister may delegate to his General Director of Administration and Finance; for contracting, the Minister may delegate to the level o f General Director. Paraguay InteaatedFiduciary Assessment 16 3. PUBLICFINANCIALMANAGEMENT PERFORMANCEFRAMEWORK IntroductoryComments:Prioritizationof IndicatorsandInternationalComparison 67. The IFA's exercise on Paraguay's Central Government PFMhas beenmade usingthe `Public Expenditure and Financial Accountability' (PEFA) Performance Measurement Framework. While it captures all PMF dimensions recommended for a Performance Assessment Report, the present IFA organizes these dimensions in a different way to ensure consistency between the different topics covered throughout its entire content. 68. PEFA indicators allow the assessment, on a comprehensive way, o f all aspects o f Central Government PFM. They also provide the recipient government with a powerful analytical tool allowing for cross-country and over-time comparisons. However, this methodology provides limitedflexibility for cases where indicators do not reflect country-specific situations, and it i s limited in its consideration o f control environment and governance issues not directly related to PFM. These latter issues have been already covered inthe WB Institutional Governance Review (IGR) and the WB Institute's survey on governance, and they have also beenmentioned in Chapter 2. 69. International Comparison. This IFA on Paraguay's Central Government also includes an international comparison with other middle and low-income countries for which published results on Central Government PFM performance, based on the application o f the PEFA framework, are a~ailable.~'This comparison i s provided through (i) a consolidated table indicating the overall performance o f Paraguay's Central Government PFM compared to those from other countries, and their relative weaknesses; (ii)a benchmark for each PEFA indicator (PI); and (iii)a detailed scoring per indicator and per Through these comparisons, Paraguay's Central Government overall PMF performance appears as slightly better than the average performance o fthe other selected countries, showing 71.O percent o f scores C and D, against 73.3 percent, respectively. 70. Conversely, with the same selection o f countries, Paraguay i s below the average for five out o f the six WB Governance Indicators in 2005.37As for time comparisons, there are important variations among indicat01-s.~~ Paraguay scores significantly low for Control of Corruption and Rule oflaw, with respectively 14 and 10 points below the selection average. The score for Government Effectiveness is relatively close to the average, showingthat (i)progress was made in areas such as PFM and PR; and (ii) mostcriticalgovernanceissueinParaguayisrelatedtocorruption. that 35These countries include Afghanistan, Bangladesh, Gabon, Ghana, the Kyrgyz Republic, Moldova, Mozambique, and Zambia. Their PFM PerformanceReports (`PEFA reports' are available at www.pefa.org). 36PresentedinAnnex 3.2. 37See detailedscoring inAnnex 3.3. 38See Table 1.1 inChapter 1. Graph3.1: PEFAPFMPerformanceIndicators-Cross CountryComparisons 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 71. Selection of Key Indicators. Due to governance and control environment issues identified in Chapter 2, and to the relatively low overall PFM results assessedby the PEFA framework, the monitoring o f Paraguay's Central Government PFM performance should be focused on key indicators related to expenditure efficiency and ~redibility,~~ fiscal tran~parency,~'and internal and external control.41 The proportion of C and D rankings for these indicators was found higher (83 percent) than the proportion of C and D rankings for all indicators (71 percent). Interms of international comparisons, the performance for these indicators remains within the average range o f other selected countries. PFMreformprogressduringthe period2004-06 72. Since 2004, Paraguay observed progresses in PFM have consisted o f a tax legal reform; improvements related to the budget process; and some recent improvements in the area of control. Except for the tax legal reform, most o f progresses were focused on improvements that did not require a highlevel o f political commitment or changes in current legislation. This is explained by the obstacles to reform posed by the current institutional andpolitical context. 39Indicators 1, 12, and 16. Although Indicator 16 is classified in the section 'Predictability and control in budget execution', the analysis on financial planning relates to bothpredictability and efficiency o f execution. 40Indicators 8 and 9. 41Indicators 18to 21, and 26 to 28. ParaguayIntegsatedFiduciaryAssessment 18 TaxReform: New Tax & CustomsCodes 73. The introduction in 2004 of a new a new tax code (Ley 2421 de Reordenamiento Adminstrativo y de Adecuacidn Fiscal) and a new customs code (Law 2422), was aimed to build up a modern and more comprehensive tax legal framework. The new tax code was designedto expand the tax base by both introducing new taxes (e.g., the personal income tax), and reducing tax exemptions. The new customs code granted operational and financial autonomy to customs and expanded its powers of enforcement in order to generate incentives for compliance with custom norms, by contemplating disciplinary sanctions for public servants whose behavior departs from code-established procedures, and a range of pecuniary and non-pecuniary penalties for cases of smuggling, fraud, or other type of non compliance with customs norms. However, smooth implementation of the legal framework has been impeded by technical anddissemination deficiencies, as well as by political factors. Improvements on the budgetprocess 74. BudgetPlanning.The MoF introduced in2005 an exercise for the period 2006-2008, and issued a Presidential Decree (8215/06) in 2006 establishing the processes and methodology for developing multi year budgets. Despite these progresses, budget planning is at an initial stage in Paraguay, and i s not yet formally included in the formulation ofthe Central Government budget law. 75. Predictability of the availability of funds and FinancialPlanning.Measures have been adopted since 2005 to give more flexibility to financial planning and to strengthen cash management. Cash management measures are already effective and put the GeneralDirectorate of Treasury (DGT) inapositionto technically implement the Treasury Single Account (TSA) for the Central Administration. In2007, the MoF allowed for automatic transferring of expenditure allocations among different quarters to reduce rigidities caused by strict financial planning. 76. Registration of Expenditure Commitment Stage. Since year 2005 the Budget Law's commitment stage is included in budget accounting. In year 2006, this stage was incorporated in different categories of expenditures, representing24.7 percent of Central Administration total expenditures. However, despite of the registering of the commitment stage being a budget accounting process, inParaguay it is made through the Country ProcurementSystem's portal. 77. Budget Control and Cash Management. Since 2007, all Central Administration payments are directly executed from the Treasury. It is expected that the implementation of this new procedure, known as `direct payment', improve the efficiency and the control of payments through the reduction of the number of government active bank accounts. However, for decentralized entities, the Treasury is still making transfers to their MDAs' bank accounts. Improvements on internal and external control 78. Internal Audit. The Government, with the assistance of IDB and USAID, has initiated operations to strengthen AGPE and the internal audit units of main ministries. 79. External Audit. Paraguay's Supreme Audit Institution, the CGR, which has the responsibility of external audit for the entire the public sector, improved its institutional and operational capacities over the period 2004-2006 through the development o f an audit manual, reporting norms and planningguidelines. Also, risk has been introduced as a determinant factor o f audit planning, leading to a focus on areas related to fixed assets, payroll audit and public procurement. These activities were also supported by IDBandUSAID. Credibility of the Budget Indicator 1:Aggregate expenditureoutturn compared to original budget 80. The ability to implement expenditures as budgeted is an important factor in supporting government capacity to deliver public services. This indicator reflects this ability by measuring the government actual annual expenditure compared to the originally budgeted expenditure, as defined ingovernment budget documentation and fiscal reports. More specifically, the indicator is built on the concept o f primary expenditure, for which two categories are subtracted from total expenditure, as it is considered that the government may have little control over them. These categories are the debt service payments and expenditures corresponding to programs financed by IFIsand donors.42 Table 3.1: Paraguay: Central Government -Primary ExpenditureDeviations (*) (2004-2006) YEAR BudgetLaw Executed\I Deviation (billions of G$) (billions of G$) (%) 2004 12,337.1 12,109.7 1.8% 2005 16,074.9 13,623.2 15.3% 2006 17,144.5 15,353.1 10.4% ("Primary Expenditure= Total Expenditure-(Debt ServicePayments+ExpenditureFinancedby IFIs and Donors). `IAccrual basis. Source: World Bank staff estimates, basedon providedby the Under-secretariatof FinancialAdministrationof Paraguay. 81. The deviation o f actual primary expenditure -as defined above- from the budget is summarized in Table 3.1 for the case o f the Central Government. The comparison o f actual expenditure is made with respect to the Budget Law passed by the Legislature inDecember prior to the start ofthe fiscal year. Table 1figures indicatethat there has been a clear trend toward expenditure under-execution in Paraguay over the last years. Naturally, this affects the credibility o f the budget as an expression o f the government's fiscal objectives and a guide to fiscal policy implementation. 82. Observed expenditure deviations cannot be explained by revenue shortfalls, since the Central Government recorded primary fiscal surpluses in all three years, overachieving IMF's stand-by agreement requirements. However, inefficiencies in initial budget planning and execution at both the central and decentralized levels43 and strict cash management practices44 have contributed to deviate outturn from budgeted expenditures. 83. Two important points should be noted with respect to the deviation between primary budgeted expenditure and actual primary expenditure corresponding to the Central Government of Paraguay. First, the most significant deviation corresponds to Decentralized Entities (SOEs, universities, etc.) and it i s considerably smaller for the 42 FollowingPEFA Manualmethodology. 43 MDAs cannot execute their budgets before the approval of the Annual Financial Plan, which was significantly delayed in2004 (June of this year), and startedto regularize over the two following years (March of2005 and 2006) 44 Some remedial measures have been introducedto reduce these rigidities, which became effective since 2007. See PI-17 for details. Dimension Rating Difference between actual primary expenditures and the originally budgeted primary expenditure: In no more than one of the last three years has the actual expendituredeviatedfrom budgetedexpenditure C by morethan an amountequivalent to 15% ofbudgetedexpenditure. YOof countries with YOof countrieswith YOof countries with YOof countrieswith rating A rating B rating C rating D 22.2% 22.2% 44.4% 11.1% Indicator 2: Composition of budget expenditure out-turn compared to original approved budget 85. Where the composition o f expenditure varies considerably from the original budget, the budget will not be a useful statement o f policy intent. The measurement o f this indicator therefore entails an empirical assessment o f expenditure out-turns against the original budget at a sub-aggregate (ministry and other agencies) level. Specifically, this indicator measures the extent to which reallocations between budget lines have contributed to variation in expenditure composition4' beyond the variation resulting from changes inthe overall level o f e~penditure.~~ 86. As shown inTable 3.2, the changes inexpenditure compositionbetweenthe approved and executed budget were moderate during 2004-2006. It is important to note, however, that variances are constrained by the fact that 75% o f the budget (as o f 2005) i s related to the financing o f rigid items such as salaries, pensions, transfers and 45According to data provided by the General Budget Directorate (DGP), average deviation between budgeted and executed primary expenditures for Central Administration was 4.6% for 2004-2006, whereas it was 18.7% for the aggregate o f the 55 DecentralizedEntities. 46Central Government's accrued expenditures inpublic infrastructure have decreased as a share o f total accrued expenditures from 16.6% in2004 to 9.1% in2006. 47Calculated as the weighted average deviation between actual and originally budgeted expenditure, on the basis o f administrative or functional classification, and using the absolute value o f deviation. Based on the available information, 11categories were used for the Expenditure classification (see Table 3.2). 48As measuredby PI-1. debt servicing.49 While this may result in low variances, it may also reduce the government's capacity to achieve a satisfactory, policy-based allocation o f resources across sectors. 87. A detailed analysis o f the variance between budgeted amounts and actual turn-outs at the ministry and agency level indicates that some administrative units executed significantly different amounts o f spending relative to their budgets at least during two o f the three years considered by the sample. These units include, for example, the Ministry of Agriculture and Livestock, a Rural Development Fund, and the Pension System for Employees o f the National Electricity Company (ANDE). On the contrary, budgets are accurate indicators o f actual spending for another set o f agencies, inparticular for the Ministry o f Educationand Culture. Table 3.2: Paraguay: Central Government -Variation of Primary Expenditure Composition (*) ~~ YEAR Sum of Variations by 11Main Variation of Primary Categories'' Expenditure' Difference 2004 6.3% 1.8% 4.5% 2005 15.6% 15.3% 0.3% 2006 16.0% 10.4% 5.6% (')PrimaryExpenditure=Total Expenditure-(DebtServicePayments ExpenditureFinancedby IFIs andDonors). + "The classificationincludesthe following categories:LegislativePower, ExecutivePower, JudiciaryPower, Comptroller General of the Republic, National Treasury, Central Bank, Development and Promotion Organizations, Social Security Entities, SOEs, PublicFinancialEntities, andEducationInstitutions. 'Using BudgetLaw as reference. Source: World Bank staffestimates, basedonMoFdata. Dimension Rating Extent to which variance in primary expenditure composition exceeded overall deviation in primary expenditure: Variance in expenditure compositionexceeded overall deviation in primary expenditure B by 5 percentagepoints inno more than one of the lastthree years. % of countries with YOof countries with % of countrieswith YOof countries with rating A rating B rating C rating D 22.2% 33.3% 11.1% 33.3% Indicator 3: Aggregate revenue out-turn compared to original approved budget 88. Accurate forecasting o f domestic fiscal revenues is an essential factor in determining budget performance since budgeted expenditure allocations are based upon that forecast. A comparison o f budgeted and actual revenue provides an overall indication of the quality o f revenue forecasting. 89. Table 3.3 shows that Central Government actual total revenues had been very close to budgeted resources in two o f three o f the years considered. The small difference between revenues registered by the Budget Law andthose effectively collected by the Central Government responds to different factors; among them, it stands out the instrumentation o f a conservative fiscal policy and the strong recovery o f the economy since 2004, mainly brought about by an improvement o f the regional and international context. 49 Personnel spending is executed at a very high level (98%), while other fbnctional categories, particularly capital spending, are significantlyunder-executed(56%). 90. The calculation o f this indicator allows for a top score, since only in2005 the outturn o f the Central Government was below 97% o f budgeted revenue forecasts. However, this general assessmentisnot capturingthe fact that Central Administration resources had been in general underestimated by the budget (around 5% on average during 2004-2006) whereas those corresponding to the aggregate o f decentralized entities had been overestimated (around 10% on average during the three years under Table 3.3: Central Governmentof Paraguay Actual Total Revenues as a share of Budgeted - Total Revenues(2004-2006) (*) YEAR BudgetLaw" Actual Revenues Actual RevenuesI (Billions of G$) (Billions ofG$) BudgetedRevenues(YO) 2004 15,016 14,993 99.8% 2005 19,036 17,256 90.6% 2006 20,382 19,809 97.2% (7 Domesticrevenuesonly (excludingexternal lending& grants). "BudgetLaw-2004-2006. Source: World Bank Staff estimates, based information provided by the Vice-Ministry of Financial Administration of Paraguay. Overall RatinP 3: "A" Dimension Rating Actual domestic revenue collection compared to domestic revenue estimates in the original, approved budget: Actual domestic revenuecollectionwas below 97% o f budgeteddomestic revenue estimates in A no more than one ofthe last three years. IBenchmarking % of countries with I % ofcountries with I % of countries with I % of countries with I ratingA rating B rating C rating D 66.7% 22.2% 11.1% 0.0% Indicator 4: Stock and monitoring of expenditurepayment arrears 91. Expenditure payment arrears are expenditure obligations that have been incurred by government, for which payment i s overdue, and constitute a form of non-transparent financing. A high level o f arrears can indicate problems such as inadequate commitment controls, cash rationing, inadequate budgeting for contracts, under- budgetingo f specific items and lack o f information. 92. This indicator i s concerned with measuring the extent to which there i s a stock o f arrears, and the extent to which the systemic problem i s being brought under control and addressed. While special exercises to identify and pay off old arrears may be necessary, this will not be effective if new arrears continue to be created -payments due during the last year but not made. Most fundamentally, however, i s the assessment o f the existence and completeness o f data on arrears, without which no assessment can be made. 93. In Paraguay, the stock o f payment arrears i s legally defined as follows: "payments arrears not paid by State entities at December 31 of each year (of any given year) constitutefloating debt, which is to be cancelled, at the latest, by the end of February 50Accordingto data providedby the DGP. (ofthe nextyear)".51By international standards, this is a relatively narrow definition ofpayment arrears.52 94. Within the Central Administration, there is sufficient institutional coverage and the quality of information on payment arrears i s good. All entities submit daily on-line information through the accounting module of SIAF (SICO), as also do a number of decentralized entities, including the National Pension Institute (IPS) and National University of Asuncion.53 Also, a first step toward control of commitments and arrears has been taken with the incorporation of a commitment stage in the accounting module SICO. 95. Weaknesses exist, however, with respect to information coverage on arrears relatedto Central Government SOEs. This information i s available in aggregated terms only and provides no considerations on arrears' age profile, although it i s submitted on a monthly basis to the General Accounting Directorate (DGC), in electronic format. There are two state-owned enterprises (COPACO and ESSAP) regulated under private law and excluded from the public sector budget, that do not submit any information on arrears, althoughthey are legally requiredto do 96. The stock of payment arrears from the Central Administration has increased lately, from 5.6% of total expenditures in 2004 to 8.3% in2006.55The bulk of these arrears were associated to payments due to suppliers of physical investments, transfers (e.g. to municipalities) and wages. Table 3.4. CentralAdministrationExpenditurePaymentArrears (million of G$and % of total expenditure) YEAR 2004 2005 2006 Wages and Salaries 116,189 1.5% 49,579 0.6% 198,533 1.9% Non-wage services 35,091 0.5% 41,152 0.5% 27,282 0.3% Goods 39,105 0.5% 75,766 0.9% 92,269 0.9% Physical Investment 156,183 2.0% 203,714 2.3% 216,408 2.1% Public Debt Service 1,774 0.0% 145 0.0% 1,026 0.0% Transfers 87,064 1.1% 127,228 1.4% 229,640 2.2% Other 3,768 0.0% 4,059 0.0% 107,151 1.0% TOTAL 439,174 5.6% 501,643 5.7% 872,309 8.3% Source: Ministry o f Finance. 51 Law 1535/1999, art. 28 (c). According to IMF Manual on Fiscal Transparency (2001) payment arrears are expenditure obligations that have not been paid by the date specified in a contract or within a normal commercial period for similar transactions. Payment arrears may arise from nonpayment by government in areas such as bills due from suppliers,due salaries or transfers, or due debt amortizations or service. 53 As mandated by article 66 of the LAFE, government agencies and entities are requiredto report monthly and annually to the MoF on their budgetary, financial and equity balances. Monthly reports must be submitted within the f r s t 15 days o f the following month, and annual reports no later than February 1 0 o~f the following year. "RequiredbyBudgetLaw. 55 Figures used in Table 3.4 are referred to the concept o f committed expenditure and not effectively paid, compatible with the IMF definition of floating debt. However, it should be clarified in interpretingpercentages on the Table that within the concept o f committed expenditures there are-in accordance with art. 58 o f Decree 8127100- items not timely requested by MDAs to the Treasury for payment; and that the concept o f "effectively paid" does not consider those items already authorized for payment by the Treasury, but whose payment was not effective. Dimension Rating Stock of expenditure payment arrears (as a percentage of actual total expenditure for the correspondingfiscal year) and any recent change in the stock: The stock of arrears constitutes 2-10% o f total expenditure; and there is no evidence that it has been reduced significantly in the last two C years. Availability of data for monitoring the stock of expenditure payment arrears: Data on the stock of arrears i s generated annually, but may not be complete for a few identified expenditure categories or B specified budget institutions. YOof countries with YOof countries with % of countries with YOof countries with rating A rating B rating C rating D 0.0% 22.2% 33.3% 44.4% Comprehensivenessandtransparency Indicator 5: Classification of the budget 98. A robust budget classification system enables the tracking o f spending by administrative, economic, functional, and programmatic dimensions. Where standard international classification practices are applied, tracking o f expenditures can be facilitated. The international standard for classification systems i s the IMF's Government Finance Statistics (GFS), which provides the framework for economic andfunctional classification o ftransactions. 99. In Paraguay, the public sector consists of the Central Administration, decentralized agencies and municipalities. Budget reporting i s not consistent with a GFS consolidated Central Government concept.56 The budget covers the entire public sector and does not differentiate between central government and the rest o f the public sector and none o f the periodic budget execution reports refer to a GFS- consistent central government concept. The Budget Law contains gross fi ures classified by institution and by economic, functional and programmatic category.f 7 100. Budgeted expenditures are presented according to programs, economic classification, type o f expenditure, function and purpose, source o f financing, and entity. However, public investment is not disaggregated by function in the budget classifier, and frequent changes in the classification o f programs makes difficult to obtain comparisons across periods. 56 According to GFS Manual, the Central Government consists of all government units and all Non Profit Institutionscontrolledor mainlyfmancedby governmentunits. 57 The Financial AdministrationLaw establishes the guidelines to be followed in the revenue and expenditure budgetclassifier, whichis approvedannually as an annex to the budget law. Paraguay Integ-ratedFiduciary Assessment 25 Dimension Rating The classification system usedfor formulation, execution and reporting of the central government's budget: The budget formulation and execution is based on administrative, economic and functional classification (using at least the I O main COFOG functions), using GFWCOFOG standards or a B standardthat can produceconsistent documentationaccordingto those standards. % of countries with YOof countrieswith % ofcountrieswith % of countries with ratingA rating B rating C rating D 0.0% 33.3% 66.7% 0.0% Indicator 6: Comprehensivenessof information included in budget documentation 101. The annual budget and budget supporting documents, as submitted to the legislature for scrutiny and approval, should allow a complete picture of central government fiscal forecasts, budget proposals and out-turns of previous years. At a minimum, the following elements should be included: macroeconomic assumptions, fiscal deficit, financing, debt stock, financial assets, prior and current years' budget outturns as well as summarized revenues and expenditures, and an explanation of the budget implications of new policy initiatives. 102. Macroeconomic assumptions used during the Budget preparation stage, even though included inthe Budget messages submittedeach year to the Congress by the Executive Power, lack sufficient foundations beyond a general revision of the economy of the previous two years.s8y59 The fiscal balance for the budget is included, but not for a GFS-consistentdefinition of Central Government (the balance included refers to the Central Administration andthe consolidated public sector). 103. Debt stock figures and composition ofborrowing requirementsare includedin budget reports, which also provide consolidated and disaggregated information regarding current and previous years' budgets. However, budget documents provide no information on financial assets, make no clear and consistent distinction between existing and new budget programs, and do not include adequate estimates of the budgetary impact of all major revenue and expendituremeasures andprograms. Overall Rating 6: "C" Dimension Rating Share of the above listed information in the budget documentation most recently issued by the central government (in order to count in the assessment, thefull specification of the information benchmark C must be met): recentbudgetdocumentationfulfils 3-4 of the 9 informationbenchmarks. 58 A comparison of macroeconomic estimates included on the Budget Messages of 2005 and 2006 with the corresponding actual figures, allows observing that there was a tendency toward a slight underestimation o f GDP growth, whereas annual inflation rate was strongly underestimated (in more than 50% in 2006); nominal exchange rate appreciated significantly, although none o f the budgetsanticipated any changes. 59The government counts with a Directorate of Economic Studies that belongs to the Under-Secretariat of Economics and Integration o f the MoF, in charge of estimating the evolution of the main macroeconomic variables, as well as the resulting expenditures and revenues. The role of this Directorate is currently under consolidation, and it is expected to be more prominent inthe future with respect to the formulation of multi-year budget estimates based on more solid methodologies o f calculation. Paraguay IntegratedFiduciw Assessment 26 I Benchmarking YOof countrieswith I % of countrieswith I YOofcountrieswith I YOof countrieswith I ratingA rating B rating C rating D 11.1% 33.3% 55.6% 0.0% Indicator 7: Extent of unreported Government operations 104. Budget reports should cover all budgetary and extra-budgetary activities of the Central Government in order to provide a complete picture o f Central Government, revenues and expenditures across all categories, and overall financing. This indicator attempts to measure the relative size o f extra-budgetary operations -i.e., Central Government activities not included inthe annual budget law- and activities included in the budget but managed outside the government's budget management and accounting system. 105. In Paraguay, the bulk of Central Government activities are covered by the budget and its supplementary reports. The budget covers revenues and expenditures from all Central Government public entities, including the Central Administration and decentralized public entities, inparticular SOEs. It also covers domestic and external public debt, including multilateral and bilateral lending. 106. Extra-budgetary spending, excluding donor financing, i s estimated to represent less than 1% o f total expenditures. However, while reimbursable donor financing is totally included in the budget, it i s estimated that a significant part o f grant financing received by the country is not included.60Also, projects with external financingthat are still inthe pipelineare not included inthe budget. Eachnewproject has to follow an independenttrack until effective approval, which generates frequent changes to the approved budget to incorporate counterpart financing. 107. Finally, the issue on whether the corporate social responsibility spending by the two hydropower plants should be treated as quasi-fiscal expenditures needs to be addressed. Many o f the funds collected by these entities, whose magnitude remains undisclosed, are fully fungible with other budget funds, since they finance the same spending61 and should therefore be eventually included in the budget, even if the administration o f these funds remains withinthe corresponding enterprise. 60 Partial registry on the National Budget o f funds coming from external grants is against the requirements o f the National Constitution (Art. 202) and the LAFE (Art. 5). In 2007, The CGR has recommended to the DGCDP the compliance to the Manual o f Organization and Functions o f that Directorate, which establishes: "To administrate information from public credit operations and grants, as well as payments from association agreements with international financial organizations" which consists on "Elaboration o f an inventory registering the amounts o f grants, undisbursed balances, beneficiaries, and any other data considered to be relevant". As a follow-up to the recommendation of the CGR, the DGCDP has initiated an inventory o f grants financed by international organizations, which is supported by Decree 10064/07. However, the DGCDP has alerted that an overall compliance of the CGR recommendation would require a joint action of other public agencies and the donor community. 61Building o fnew schools, assistanceto farmers, etc. Dimension Rating The level of extra-budgetary expenditure (other than donor funded projects) which is unreported, i.e., not included infiscal reports: The level of unreported extra-budgetaryexpenditure (other than donor A funded projects) is insignificant(below 1%oftotal expenditure). Revenue/expenditure information on donor-funded projects which is included in fiscal reports: Complete revenue/expenditureinformation is included in fiscal reports for all loan financed projects B andat least 50% (by value) ofgrant financed projects. YOof countries with YOof countries with YOof countries with % of countrieswith ratingA rating B rating C rating D 12.5% 25.0% 37.5% 25.0% Indicator 8: Transparencyof Inter-Governmental Fiscal Relations 108. While the PEFA performance indicator set is focused on PFM by Central Government, Sub-National (SN) Governments in many countries have wide-ranging expenditureresponsibilities. 109. Paraguay is a unitary State, counting with a Capital District (Asuncih), 17 departments and 232 municipalities. The municipalities enjoy fiscal autonomy for approval or their own budgets and the administration of their own assets and resources. Revenues transferred from the Central Government to both departments and municipalities represented 4.3% of the consolidated public expenditure in 2006. These transfers are determined by different sharing mechanisms applied over revenue-collection of the property tax,62 the value added tax (VAT), the Tax on Lotteries, and over the distribution of Royalties and Compensations. 110. Transparency and Objectivity in the horizontal allocation among SN governments. A correct horizontal allocation of transfers to SN governments assumes the existence and compliance of clear and transparent rules -for example, through formulas established by law- that allow those governments to count with a predictable horizon about resources to be received in transfers from the Central Government. 111. Three main laws exist in Paraguay that define the current transfers regime from the Central Government to departments and municipalities: i)Law 1294 of 1986, denominated Municipal Organic Law (LOM); ii) Law 426 of 1994, denominatedDepartmental Organic Law (LOD), that establishes main guidelines for the distribution of VAT and the Tax on Lotteries, and iii)Law 1309 of 1998, that establishes the distribution of Royalties and "compensations to flooded territory" to departmental and municipal governments. These last two norms and their respective modifications are founded onthe PoliticalConstitution of 1992. 112. These norms hadbeen complemented and modifiedby several other laws and decrees that in most cases modified the criteria for distributing resources to SN Governments. This is the case, for example, of Law 1016 of 1997 that ruled aspects of the L O M about the distribution and specific destiny of revenues collected from the Tax on Lotteries; and of several other norms that rule -and insome cases modif+ what was established inLaw 1309/98, such as Law 2148 of 2003 -that created the 62This is a case of "reversed transfer", since the tax is first collected locally, and then 15% o f the revenues is transferredto MoF for redistribution among the country's poorer municipalities inequal parts. Dimension Rating Transparent and rules-based systems in the horizontal allocation among SN governments of unconditional and conditional transfers from central government (both budgeted and actual allocations): No or hardly any part of the horizontal allocation of transfers from central government is D determined by transparent and rules based systems. Timeliness of reliable information to SNgovernments on their allocations from central government for the coming year: Reliable estimates on transfers are issued after SN government budgets have been D finalized, or earlier issuedestimates are not reliable. 63 Among other norms, it is worth mentioning Laws 1829101, 2391104, 2442104, and 2979106; and Decrees 8012100,20936103,7888106. 64 For example, by Executive Power Decree 7888 of 2006, municipalities are required to present annual expenditure and revenues budgets in accordance with the current budget classifier, distinguishing by different types of programs, expenditure composition by economic classification, etc., as a necessary condition for the transfer of Royalties, as it is establishedinLaw 1309 and relatednorms. 65 http://www.hacienda.Pov.vvlweb-oresuouesto. 66 Based on information provided by DGC, starting with the 2007 budget, the MoF informs to the Municipalities Council the amount to be transferred to eachmunicipality. 67 Out oftotal 232 municipalities, 50 did not submittheir financial statements inyear 2006. However, this is not affecting critically the consolidation process, becausethose not submitting were in all cases small jurisdictions -fiomcategories"111" and"IV"inParaguay'smunicipalitiesclassificationsystem,where"I"isthelargest and "IV" the smallest. According to World Bank Report No. 32797, 2006, the municipality of Asuncion represents 41% oftotal municipal spendingandprovides information that canbe consolidated. 68 The DGC sends periodically official notes to municipalities to improve compliancewith datareporting. % of countrieswith % of countries with % of countries with % of countries with rating A rating B rating C rating D 11.1% 0.0% 44.4% 44.4% Dimension Rating Extent of central government monitoring of AGAs and SOEs: Most major AGAsISOEs submit fiscal reportsto centralgovernments at leastannually, but a consolidated overview is missingor significantly C incomplete. Extent of central government monitoring of SNgovernments 'fiscalposition: The net fiscal positioni s monitoredat least annually for the most importantlevel of SN government, but aconsolidated C overview is missingor significantly incomplete. % of countries with YOof countries with % of countrieswith % of countrieswith rating A rating B rating C rating D 0.0% 0.0% 66.7% 33.3% Dimension Rating Number of the above listed elements ofpublic access to information that isfulfilled (in order to count in the assessment, the full specification of the information benchmark must be met: the government A makes available to the public 5-6 ofthe 6 listedtypes of information. 69http://www.hacienda.gov.py "). This informationis available in www.contratacionesvub1icas.gov.pv. This requirementwas establishedby new procurement law (Law 1626/2000). Paraguav IntegratedFiduciarv Assessment 31 YOof countries with YOof countries with YOof countries with % ofcountries with rating A rating B rating C rating D 22.2% 33.3% 44.4% 0.0% PolicyBasedBudgeting Indicator 11: Orderlinessandparticipation in the annual budgetprocess 120. Effective participation in the annual budget process determines the extent to which the budget reflects fiscal and sectoral policies. This requires an integrated top- down and bottom-up budgetin process, involving central agencies, spending agencies and political leadershi$' in an orderly and timely manner, in accordance with a pre-determined budget formulation calendar. Clear and timely guidance on the budget process should be provided in the budget circular and budget formulation manual. 121. Existence of and adherence to a fixed budget calendar. The budget calendar i s usually clear and adhered to, and this was the situation verified throughout 2004-2006, except for new foreign-financed investment, which were presented to Congress individually and without a specified calendar. According to Law 1535 o f 1999 on Government Financial Administration (LAFE), the calendar begins with the General Budget Directorate (DGP) defining main budgetary guidelines for the following fiscal year. Then, these guidelines are submitted for review to the "Economic Cabinet",72 and by April 30* the Executive issues a budget decree `Decreto de Lineamientos Presupuestarios' establishing the guidelines for the preparation of a new BudgetLaw. 122. According to the LAFE, this would leave sufficient time to line ministries, departments and agencies (MDAs) to formulate their budget estimates by June 30th, date when they have to be submitted to the MoF. The MoF is requiredto present the Draft BudgetLaw to Congress by September IS`, the latter has to approve the new and Budget Law by December 20th. Compliance by both M o F and M D A s with this calendar has been high during 2004-2006, with the only exception o f Judicial Power entities, which are not subject to it and submit their own budget drafts to the Congress. 123. Guidance of the preparation of budget submissions. The budget decree introduces ceilings approved by the Economic Cabinet prior to its distribution to the MDAs.~~ While the budget decree does establish clear ceilings, the budgets from ministries and agencies are actually drawn up on a historic basis with two scenarios. The first, called "minimum scenario", based on the amounts o f the "plan financiero". The second, called "maximum scenario" based on the Budget Law74.The substantive 71By `political leadership' is meantthe leadershipofthe Executive, such as the Cabinet or equivalentbody. 72The Economic Cabinet is composedby the Ministry of Finance, the Central Bank, the Ministry of Industry andMinistryofAgriculture. 73Treasury revenuesare directly limitedby the cap establishedby the MoF inthe budgetguidelines decree. On the other hand, resources generated by activities of the public entities, particularly decentralizedentities, are estimated by them. This final estimate is reachedthrough negotiation with the Ministry of Finance. This may bringan element ofuncertaintyto budgetplanningby MDAs, althoughgenerally incidenceof MoF on entities' ownresources is limited. 74Accordingto Decree No7410/ 2006. Paraguay IntegratedFiduciary Assessment 32 Dimension Rating ,Existence ojand adherence to a fured budget calendar: A clear annual budget calendar exists, is generally adheredto and allows MDAs enoughtime (and at least six weeks from receiptof the budget A circular) to meaningfully completetheir detailedestimatesontime. Clarity/comprehensiveness o jand political involvement in the guidance on the preparation of budget submissions (budget circular or equivalent): A comprehensive and clear budget circular is issued to MDAs, which reflectceilings approvedby Cabinet (or equivalent).This approvaltakes place after the B circular distributionto MDAs, but before MDAshave completedtheir submission. Timely budget approval by the legislature or similarly mandated body (within the last three years): The legislaturehas, duringthe last three years, approvedthe budgetbeforethe start ofthe fiscal year. I A l % of countrieswith YOof countrieswith YOof countrieswith % ofcountrieswith rating A rating B rating C rating D 11.1% 66.7% 22.2% 0.0% Indicator 12:Multiyear perspective infiscal planning, expenditurepolicy, and budgeting 125. Expenditure policy decisions have multi-year implications and should be aligned with medium-termavailability of resources. Multi-year forecasts for revenue and expenditure aggregates and the identification of potential sources of deficit financing are the foundation for a multi-year perspective inbudgeting. 126. Multiyearbudget planning is at an initial stage inParaguay. The MoF carried out in 2005 an exercise for 2006-2008 that consisted largely of a forecast of historic trends. Then, a decree (8215/06) was issued in 2006, establishing the processes and methodology for developing multi year budget and considering it as "referentialyy(i.e. encouragedits use) rather thanmandatory. Multiyear fiscal forecast andfunctional allocations. Current budgetary procedures involve macroeconomic forecasts for three years covered by the multi-yearbudget, which has been presented for the first time for the three-year period 2007-2009.75 Expenditures and revenues multi-year projections, although presented in disaggregatedform by program, function and economic purpose, are obtained using historical averages, and lack the support of robust estimations about the future evolution of the main macroeconomic variables.76Finally, linking the investment 75Decree 8770 of 2006. 76Expenditure projections are based upon current-year budgeted figures; as seen in PI-I, evidence fkom 2004- 2006 indicates that these cannot be considered as an accurate measure of expenditure outtum. Dimension Rating Preparation of multi -year fiscal forecasts andfunctional allocations: Forecasts of fiscal aggregates (on the basis ofthe main categoriesof economic classification) are preparedfor at least two years on a C rollingannualbasis. Scope andfrequency of debt sustainability analysis: A DSA for external debt undertakenat least once duringlastthree years. C Existence of sector strategies with multi-year costing of recurrent and investment expenditure: Sector strategiesmay have beenpreparedfor some sectors, but none of them have substantiallycomplete D costingof investmentsandrecurrent expenditure. Linkages between investment budgets andforward expenditure estimates: Budgeting for investment andrecurrentexpenditureare separateprocesseswith no recurrentcost estimatesbeingshared. D 77 Two different exercises of DSA were undertaken in year 2005. One was coordinated by the Fiscal Policy Directorate of the Sub-secretariat of Economics and Integration (SEEI), and the other by the DGCDP, '*It dependingfrom the Sub-secretariat of Financial Administration (SSEAF). should be noted that the DGCDP developed in 2006 a fiscal sustainability model as an exercise for the analysis of public debt, which seeks to cover the Central Administration, and pretendsto extendthe analysisto the whole Non-Financial Public Sector. The DGCDP recognizes the necessity to establish a normative and methodological basis enabling the optimization of a fiscal sustainability model for a medium and long run horizon, and it is now promoting several measures with that objective; for example, by ruling an Annual Strategyfor Public Debt. ParaguayIntegratedFiduciaryAssessment 34 YOof countries with YOof countries with YOof countries with YOof countries with ratingA rating B rating C rating D 0.0% 11.1% 33.3% 55.6% PredictabilityandControlinBudgetExecution 127. The next three indicators are related to the transparency, effectiveness, and efficiency o f Paraguay's Revenue Administration System (RAS). When considering indicator ratings below, it should be kept in mind that Paraguay shows a historical record o f low tax burden compared to regional standards, and it i s currently in a transition period towards achieving greater transparency and efficiency o f its RAS. The introduction in 2004 o f a new tax code (Ley 2421 de Reordenamiento Adminstrativo y de Adecuacidn Fiscal) and a new customs code (Law 2422), was aimed to build up a modern and more comprehensive tax legal framework. However, as it explained below, the implementation o f some changes has been slower than expected. Indicator 13: Transparencyof Taxpayer Obligationsand Liabilities 128. Taxpayers' contribution to ensuringcompliance with tax policy i s encouraged and facilitated by a highdegree o f transparency o f tax liabilities, including clarity o f legislation and administrative procedures; access to information in this regard; and ability to appeal administrative rulings on tax liability. 129. Clarity and comprehensiveness of tax liabilities. Concise and easily accessible tax laws are critical if tax policy i s to be effectively implemented. By the end of 2006, there were seven internal taxes administered by the State Secretariat of Taxes (SET)79 and two taxes administered by the Customs Administration (DNA)8o. Trade taxes -levied on imports only- represent about one half o f total tax revenues8'Some major taxes are not applied uniformly -e.g., discretional treatments for VAT and Income Tax, or considerable tax exemptions, which were partly eliminated since 2006 as a result o f the introduction o f the new tax legal framework (Law 2421)-- and the discretionary powers o f government entities involved is moderate.82Besides, changes brought by Law 2421 may have affected the clarity o f theprocess along the transitionperiod.83 130. Taxpayers' access to information on tax liabilities and administrative procedures. Taxpayer education is an important part o f facilitating taxpayer 79 The implementationof a personalincometax, introducedby the new Tax Law in2004, was suspendeduntil year 2007. Inthat year, the Congressdecidedto suspendagainthe treatmentofthis tax until2009. so Customs fee and "Impuesto Preferencial sobre Zona Franca". *'Thereis also a customs fee on imports,representingaround 15%oftotaltax revenues. 82Taxes leviedon different sectors ofthe Paraguayaneconomy maynot always respondto well-defmedcriteria. For example, the sector of transportation is still benefitedby preferential (lower) rates for VAT and corporate income tax, despite of these privileges being cancelled by Law 2421 of 2004. There were also cases of temporary tax surcharges applied during the period of analysis, e.g., on agricultural exports (Decree 1836 of 2004, derogated by Decree 6275 of 2005). Finally, evidence on tax exemptions shows a wide dispersion ftom year to year. According to consolidated data ftom the Large Taxpayer Unit (LTU) and the General Revenue CollectionAgency (DGR) tax expendituresof2005 were almost four times those of2006. 83 For example, the eliminationof the previous "single tax" and its replacementby the income tax for small taxpayers, whichhasnot beenyet instrumenteduntilmid-2007. Paraguay IntegratedFiduciary Assessment 35 compliance with registration, declaration and payment procedures. Actual and potential taxpayers need easy access to user friendly, comprehensive and up-to-date information on the laws, regulations and procedures (e.g. posted on government websites, made available through taxpayer seminars, widely distributed guidelines/pamphlets and other taxpayer education measures). 131. Paraguay i s a country with a large informal economy and where the efficacy o f tax-education campaigns i s limited by the lack o f a "culture" for tax compliance. Before the approval o f Law 2421 in 2004, there were no systematic initiatives for disseminatingtax information. Inrecent years, some progress has beenaccomplished in this sense as a result of government efforts to improve the accessibility and understandability o f the new tax code.84However, the coverage o f the tax guides, public rulings, education campaigns, and administrative procedures is still far from complete, partly because new taxes are still being implemented and the procedures are still being developed. Besides, access to relevant tax information i s sometimes blocked by country-specific constraint^.^^ 132. Trade taxes are clearly defined by the new customs code, and information on administrative procedures is accessible on-line. However, the DNA i s not implementing campaigns for tax education purposes, although informal trade is widespread inParaguay. 133. Tax appeals mechanism. Taxpayers' ability to contest decisions and assessment made by the revenue administration requires the existence of an effective complaints/appeals mechanism that guarantees the taxpayer a fair treatment. The assessment o f the tax appeals mechanism should reflect the existence in practice o f such a system ensuring its independence in terms o f organizational structure, appointments and finance, its powers in terms o f having its decisions acted upon as well as its functionality interms o f access (number and size o f cases), efficiency (case processing periods), and fairness (balance inverdicts). 134. The process o f appealing internal tax administrative procedures in Paraguay involves the Legal Advisory o f the State Secretariat o f Taxes (SET) and the Treasury Legal Office. Disputes on external taxes are managed by the DNA Department o f Norms and Procedures. When disputes are not resolved by any o f these institutions, they are elevated to the Court ofAccounts. 135. The DNA keeps a record on the amounts claimed by disputes over the last two years, but there is no record kept -by the SET or the DNA- on the number o f tax appeals, processing periods, and verdicts. 84For example, the SET has organized seminars and conferences, distributedpamphlets and used advertising to promote the changes introducedby Law 2421 throughout the country. 85For example, the SET offers a website with basic legislation (www.set.gov.pv) and a call center for assisting tax-payers, although the effectiveness o f these tools remains poor due to several reasons: i)tax-payers residing close to Asuncion are used to attend to the SET for consultation, and those fiom remote areas usually do not receive any kindo f assistance and information; ii)information provided by SET website is not properly updated and it is addressedonly to major tax-payer categories; and iii)access to electronic information is quite limited throughout the country (estimated by SET inless than 1%o f actual and potential taxpayers). Dimension Rating Clarity and comprehensiveness of tax liabilities: Legislation and procedures for most, but not necessarily all, major taxes are comprehensive and clear, with fairly limited discretionarypowers of B the government entities involved. Taxpayer access to information on tax liabilities and administrative procedures: Taxpayers have access to some information on tax liabilities and administrativeprocedures, but the usefulness of the information is limited due to coverage of selectedtaxes only, lack of comprehensivenessandor not C beingup-to-date. Existence andfunctioning of a tax appeals mechanism: A tax appeals system ofadministrative procedureshasbeenestablished,butneeds substantialredesignto be fair, transparentand effective. C YOofcountries with YOof countries with % of countries with % of countries with rating A rating B rating C rating D 11.1% 33.3% 33.3% 22.2% Indicator 14:Effectiveness of measuresfor taxpayer registration and tax assessment. 136. Effectiveness in tax assessment is ascertained by an interaction between registration o f liable taxpayers and correct assessment of tax liability for those taxpayers. The PEFA methodology uses three dimensions to assess this. 137. Controls in the taxpayer registration system. Paraguay uses a "Single Tax- Payer Registry" that accounts for around 300,000 taxpayers." The SET i s currently working on updating and increasing the coverage o f this database. There are no well- established linkages between these tax registries and other government registration systems (e.g. issue of businesslicenses, opening of bankaccounts). 138. Effectiveness of penalties for non-compliance with registration and tax declaration. Law 2421 introduced tax compliance enforcement powers, including periodic random audits of taxpayers from different categories, specific audits ordered by the SET incases where gross irregularities are detected, and the requirement of a satisfactory opinion from an annual external audit (ruled by the SET) for taxpayers with annual gross revenues above G$6 billion. Sanctions are also well specified by the Law. 139. Also, the new customs code contemplates both disciplinary sanctions for public servants whose behavior departs from code-established procedures (ranging from five to ten minimumsalaries), and several types of penalties, such as pecuniary sanctions, seizure o f merchandize, or administrative measures, for cases of smuggling, fraud, or other type ofnoncompliance withcustoms 140. Notwithstanding the observed recent progress in legislation for tax and customs administrations, enforcement capacity needs to be further developed to revert the current situationo fsignificant non-compliance." 141. Planning and monitoring of tax audit programs. The ability of the R A S to identify and investigate important cases o f evasion and fraud, and also to promote the 86 About one half of these taxpayers do not submit tax forms; they are charged with the "single tax" and represent only 1YOoftotal tax revenue. 87Law 2422, Title XII, Chapters 1to 4. 88There are no current studies availableproviding an estimationof informal economic activities and tax evasion in Paraguay. In 2007 the SET started a study for the estimation of evasion of VAT financed by USAID (Umbral-ParaguayProgram). Dimension Rating Controls in the taxpayer registration system: Taxpayers are registered in database systems for individual taxes, which may not be fully and consistently linked. Linkages to other registratiodlicensing functions may be weak but are then supplemented by occasional surveys of C potentialtaxpayers. Effectiveness of penaltiesfor non-compliancewith registration and tax declaration:Penaltiesfor non- compliance generally exist, but substantial changes to their structure, levels or administration are C neededto givethem areal impact on compliance. Planning and monitoring oftax auditprograms: There is acontinuousprogramoftax audits andfraud investigations, but audit programs are not basedon clear risk assessment criteria. C % ofcountries with % of countries with YOof countries with % of countries with rating A rating B rating C rating D 0.0% 12.5% 62.5% 25.0% Indicator 15:Effectiveness in collection of taxpayments. 142. Collection ratio for gross tax arrears. The main emphasis of the tax and customs administration reforms has been to develop the capacity and processes to collect current tax liabilities, but little effort has been made to collect tax arrears from previous years. Two main factors explain this situation. First, arrears are intrinsically low in Paraguay, because its tax system i s based almost exclusively on self- asses~ment.~~Second, since tax debts prescribe in 5 years and the RAS is slow in past. noti ing taxpayers o f arrears, there is an incentive to skip due tax payments from the % 143. Effectiveness of transfers of tax collections to the Treasury. There are three main tax collecting agencies in Paraguay.92All of them deposit collected cash funds on a daily-basis in Treasury accounts held at the BCP. The SET started in 2006 a registry of taxes cancelled by using alternative means of payments (credit certificates andbonds), althoughthese are the exception rather than the rule. 89 One procedureto detect fraud usedby the LTU is named "COA" (Control of Auto-declared Operations)and consistson a crosscheck betweeninformationprovidedelectronically each monthby suppliers and information on sales and gross revenueprovidedby f m s using these supplies. Payments collectedthrough the application o f COA for cases of fraud, other minor infractions, and omissions, representedonly 2,0% and 2,2% of total auditedcases in2005 and2006, respectively. 90 Then, arrears are limited to those cases where the taxpayer claims to the Administration for a prorated paymentof itstax obligations, andthen fails to pay on due time. An exceptionalcase of a tax not basedon self- assessment was the temporary tax on vehicles (currently derogated, applied in 2005 and 2006 only). Still, the base for this tax was limitedto cases ofregisteredcar sales or importsduringthese two years. 91New computing-basedsystems developedcurrentlyat the SET are expectedto reducethese delays. 92 Large Taxpayer Unit (LTU), the General Revenue Collection Agency (DGR), and the Customs Administration (DNA). Dimension Rating Collection ratiofor gross tax arrears: the total amount o f tax arrears is insignificant (i.e. less than 2% o f total annual collections). A Effectiveness of transfers of tax collections to the Treasury: All tax revenue i s paid directly into accounts controlled by the Treasury or transfers to the Treasury are made daily. A Frequency of complete accounts reconciliation between tax assessments,collections, arrears records and receipts by the Treasury: Complete reconciliationo ftax assessments, collections, arrears and D transfers to Treasury does not take place annually. YOof countrieswith YOof countrieswith YOof countrieswith YOof countrieswith rating A rating B rating C rating D 0.0% 11.1% 33.3% 55.6% Indicator 16:Predictability in the availability of funds for commitmentof expenditures 145. The effective execution of the budget requires that MDAs receive reliable information on availability of funds to commit expenditures. This indicator assesses the extent to which the MoF provides reliable informationonthe availability of funds to MDAs which manage the main administrative areas --or programs- of the Central Government Budget, and therefore are the primary recipients of such information. 146. Financial and cash planning of Paraguay's Central Government budget execution are coordinated by the General Directorate of Budget (DGP) and the General Directorate of Public Treasury (DGT). The Financial Plan -prepared by each MDA and consolidated by the DGP- determines MDAs monthly allocations for the new fiscal exercise on the basis of the approved budget and its revenue forecasts.93Then, the Cash Plan elaborated by the Treasury ultimately determines MDAs' monthly payment limits. The CashPlan is basedon available cashresources, and programmed quarterly with monthly quotas of expenses that cannot exceed the Financial Plan allocation^.^^ The Cash Plan preserves fiscal discipline, but it presented rigidities up to year 2006 -in particular, allocations not executed during the current quarter were lost by MDAs unless a special request was made to the MoF for transferring them to the next quarter. To mitigate this rigidity, the 2007 Cash Plan authorized the automatic transfer o f non-executed funds to the next month throughout the fiscal year, butapplying areduction of20% oftransferrednon-executedfunds. 147. Central Administration MDAs' payments and transfers are executed by the Treasury according to the Cash Plan and availability of resources. Until year 2006, the Treasury transferred funds to MDA accounts located at state-owned bank `Banco Nacional de Fornento' for the execution of all their payments, except for wages, 93 In recent years, the Financial Plan helped on maintaining fiscal discipline by adjusting budget changes introducedbythe Congress to revenueforecasts. 94As requiredbythe LAFE. which were paid directly by the Treasury to civil servants' bank account^.^' Since 2007, all Central Administration payments are directly executed from the Treasury.96 The implementation of this new procedure, known as `direct payment', improved the efficiency and the control o f payments through the reduction o f the number o f Treasury resource^,^^ Treasury i s still makingtransfers to their MDAsbank accounts. government active bank account^.^' For decentralized entities financed through 148. Adjustments to budget allocations can be made: by Law, in cases where there is an increase in total budgeted expenditures or a reallocation of expenditures among MDAs; by Presidential Decree, incases o f expenditure reallocations withinthe same MDA; or by a MoF resolution, incases of expenditure reallocations within the same program. During the period 2004-06, there was on average 574 of these adjustments per year. Adjustments generating an increase of total budgeted expenditures are normally submitted twice a year, by the end o f the first and the second quarter, and in cases of emergency. The other adjustments to budget allocations, variations between functions or category o f expenditures are more frequent and require an approval o f M O F or Presidency, dependingon the level o f budget detail. OverallRating 16: C+ Dimension Extent to which cash flows are forecast and monitored: A cash flow forecast is DreDaredfor the fiscal . . II Rating year, and are updatedmonthly onthe basis of actual cash inflows and outflows. A Reliability and horizon of periodic in-year information to MDAs on ceilings for expenditure I commitment: MDAs' are able to plan and commit expenditure for at least six month in advance in A accordance with the budgetedappropriations. Frequency and transparency of adjustments to budget allocations, which are decided above the level ofmanagement ofMDAs: Significant in-year budget adjustments are frequent, but undertaken with C YOof countries with YOof countrieswith YOof countries with YOof countries with ratingA rating B rating C rating D 0.0% 0.0% 55.6% 44.4% Indicator 17: Recording and management of cash balances, debt andguarantees 149. Quality of debt data recording and reporting. The maintenance o f a debt data system and regular reporting on main features o f the debt portfolio and its development are critical for ensuring data integrity and related benefits such as accurate debt service budgeting, timely service payments, and well planned debt roll- over. 150. More than 60% o f 2006 stock o f Central Administration debt outstanding in Paraguay consisted o f external loans made by official creditors. The registration o f these loans and other types o f sovereign debt such as domestic and external bonds, i s made through SIGADE, a well-known software developed by the United Nations Conference on Trade and Development (UNCTAD) used for debt recording and management by several middle and low income countries. 95Main Treasury bank accounts are locatedat the Central Bank. 96A system of individual debit cards has also been implementedthrough the `Banco Nacional de Foment0 `and a commercialbank (`Interbank')for the paymentof civil servants wages. 97Direct payment procedures are plannedto be expanded inthe medium term to DepartmentalGovernments. 98As well as for Municipalities. 151. SIGADE, which is managed by the DGCDP from MoF, allows for public debt classification, recording and monitoring, and worked in an efficient, timely and transparent manner over the period 2004-2006 in Paraguay. All Central Administration domestic and foreign debt commitments are recordedusing SIGADE, and then processed periodically for the compilation o f debt indicators, which are publishedandpostedperiodically on the Internet. 152. However, the quality and updating frequency o f debt information i s usually lower for the case o f domestic debt -typically short-term Treasury bonds issued to commercial banks-, and SIGADE does not provide a good account on the debt of the Central Government -for instance, the debt from bi-national hydroelectric plants, which i s estimated around US$ 200 million, i s not considered as 'regular debt' for registration purposes.99Although SIGADE is used as tool for inputtingestimates and projections concerning next fiscal year borrowing requirements and debt-servicing needs to the draft budget law, it remains disconnected from SIAF for the loading o f debt expenditure (debt servicing) and resources obtained through the financing (authorized borrowing) after the Congress' approval o fthe Budget. 153. Extent of consolidationof the government'scash balances. Although the treasury function inParaguay does not include a TSA, the Treasury properly controls cash balances. Also, recently introduced changes, such as the 'direct payment' procedure,"' are significantly improving the quality and frequency o f cash balance consolidations. 154. Within the scope o f the Central Administration, the Treasury opens both its own and MDAs' bank accounts; it also monitors the latter, and manages the former. Treasury direct bank accounts are usually located at the Central Bank and their cash balances are calculated and consolidated daily, while M D A s bank accounts are located at the state-owned bank Banco Nacional del Fomento, which provide daily banking statements to the Treasury on request. Decentralized entities and Municipalities manage their own bank accounts, but this does not affect cash management o f Central Government transfers, as the Treasury exerts a strict control uponthem. 155. The introduction o f 'direct payment' in2007 i s planned to reduce the number o f Central Administration MDAs bank accounts from (current) 40 to 17 by the end o f 2008,''' and the proportion o f resources they represent down to 10 percent o f Central Administration cash balances. However, Central Administration M D A s will maintain other active bank accounts"* for specific purposes, such as the management of IFIs fundedoperations. 156. Although required legal changes may delay the adoption o f a TSA, the consolidation o f cash balances is reliable, efficient, and provides the technical conditions to easily implement a TSA, provided the existence o f a favorable political context. 99 Municipal debt is also not recorded by SIGADE or any other central or local official registration systems. There are 10 "large sized" municipalities currently issuing their own debt instruments in Paraguay, including Asuncion, Ciudaddel Este, andVilla Elisa. looSee Indicator 16 for details. These 17bank accounts will serve for paymentsofrelativelysmall amounts. 102The Treasuryopens andmonitorthese accounts as describedinthe previousparagraph. Paraguay IntematedFiduciarv Assessment 41 Dimension Rating Quality of debt data recording and reporting: Domestic and foreign debt records are complete, updated and reconciled quarterly. Data considered of fairly high standard, but minor reconciliation problems occur. Comprehensive management and statistical reports (cover debt service, stock and B operations) are producedat leastannually. Extent of consolidation of the government's cash balances: Most cash balances calculated and consolidatedat leastweekly, but some extra-budgetaryfunds remainoutsidethe arrangement. B Systemsfor contracting loans and issuance of guarantees: Centralgovernment's contractingof loans Iand issuance ofguaranteesare madeagainsttransparentcriteriaandfiscal targets, and always approved A by a single responsiblegovernmententity. % of countrieswith YOof countrieswith YOof countries with YOof countrieswith rating A rating B rating C rating D 0.0% 62.5% 37.5% 0.0% Indicator 18:Effectiveness of payroll controls 158. The wage bill represents a substantial proportion o f Paraguay's budgeted expenditures (33% in year 2006).'03 Its control effectiveness depends on the level o f integration and reconciliation between payroll data and personnel records, and on the level o f internal control and timeliness on changes to personnel records and payroll. 159. Degree of integration and reconciliation between personnel records and payroll data. The Treasury pays wages directly to civil servants bank accounts each month, based on MDAs global payment requests. The treasury component o f the SIAF i s linked to the Government human resources management system (SINARH). This allows the Treasury accessing to SINARH recording of civil servant identification, ranking and salary basis, preventing double-payments and assuring allocation to the correct budget line. However, M D A s payroll calculations cannot be controlled by the Treasury prior to paying wages. Actually, MDAs use their own calculation systems, which are de-linked to the SIAF, as the SINARH module for payroll calculation i s not yet developed. However, the resulting risk o f miscalculation i s globally mitigated through cash ceilings, which limit payroll to total budgeted figures. 160. Timeliness of change to personnel records and the payroll. The annual budget law includes an annex stipulating detailed personnel structure and salary categories for each MDA. The SINARH incorporates, on a timely basis, potential changes reflected in the budget law, which i s a necessary condition for proceeding with payments by the Treasury, thus preventing the authorization of outdated payments. 103Corresponds to personal services of Central Administration payroll only (sub-groups 110, 130 and 160 of budget classification), excluded contracted personnel and consolidated transfers to Decentralized Entities for salary payments (sub-group 800). Dimension Rating Degree of integration and reconciliation betweenpersonnel records andpayroll data: Integrity of the payroll is significantly underminedby lack of completepersonnelrecords andpersonneldatabase. D Timeliness of changes topersonnel records and thepayroll: Requiredchangesto the personnelrecords and payroll are updated monthly, generally in time for the following month's payments. Retroactive A adjustments are rare. Internal controls of changes topersonnel records and thepayroll: Controlsexist, but are not adequate to ensure full integrityofdata. C Existence of payroll audits to identify control weaknesses andor ghost workers: Partialpayroll audits or staff surveyshavebeenundertakenwithin the last3 years. C % of countries with YOof countrieswith % of countries with YOof countries with ratingA rating B rating C rating D 0.0% 0.0% 50.0% 50.0% Indicator 19: Competition,valuefor money and controls inprocurement 163. A well-functioning procurement system ensures that money is used effectively and efficiently. It also impacts on PFM performance and interrelates with the quality o f the control environment. InPara uay, 25% o f public expenditure takes place through the public procurement system.`Os The assessment o f this indicator is based on the recently completed Country Procurement Assessment Report (CPAR) for Paraguay.lo6 164. Use of open competition for award of contracts exceeding threshold for small purchases. There is accurate data on the method used to award public contracts, which shows that more than 75% o f contracts above the threshold are awarded on the basis o f open competition. The procurement information system - assessedas reliable by the 2007 CPAR- reveals that 88 percent o f contracts awarded in2006 resulted from anopencompetitive process. 165. Justification for use of less competitiveprocurementmethods. Regulations establish the exceptional conditions under which competitive procurement may not be used. Less competitive methods, when used, are justified in accordance with lo4The Annual Budget Law includes an annex detailing, for each MDA, the number of positions per category and their related salary basis. lo5As cited inthe procurement portal and accounting reports from the Central Administration. 106See details inChapter 4. ParaguayIntematedFiduciaryAssessment 43 regulatory requirements, but the Government acknowledges the need to refine the definition o f these requirements, as well as the way by which operations under exceptional conditions is recorded by the Procurement Information System. 166. Existence and operation of a procurementcomplaints mechanism. There exists a mechanism for submitting and addressing procurement process complaints, but it lacks the ability to refer the resolution o f the complaint to an external higher authority. The legal framework establishes the right o f those participating in procurement processes and third parties to challenge the decisions made by the procurement entities by filing a complaint before the Procurement Regulatory Body. However, this Body i s part o f MOF, and therefore not independent from main procurement entities. Overall Rating 19:B+ Dimension Rating Use of open competition for award of contracts exceeding threshold for small purchases: Accurate data on the method used to award public contracts exists and shows that more than 75% of contracts A above the threshold are awardedon the basisofopencompetition. Justification for use of less competitive procurement methods: Other less competitive methods when used arejustified inaccordance with legalandregulatoryrequirements. B Existence and operation of a procurement complaints mechanism: A process for submitting and addressing procurement process complaints is operative, but lacks ability to refer resolution of the B complaintto an externalhigher authority. YOof countries with YOof countrieswith YOof countries with YOof countries with rating A rating B rating C rating D 0.0% 25.0% 50.0% 25.0% Indicator 20: Effectiveness of internal controlsfor non-salary expenditure 167. Effectiveness of expenditure commitment controls. According to the LAFE, accounting records do not foresee a commitment stage. Since year 2005 the budgetlaw's commitment stage is included inbudget accounting for the categories of expenditures identified in the Table 3.5 below, which represented 24.7 per cent of Central Administration total expenditures in year 2006. The registration of the commitment stage i s made by means o f the information coming from the Country Procurement System's portal. Table 3.5: Committed Expenditure Categories used in Paraguay's Budget Accounting -Year 2006 BudgetCategory CommittedBudget `YOofTotal (billion of (3%) Non-PersonalServices 439.2 3.64 ConsumptionGoods 618.5 5.13 Tradable Goods 26.7 0.22 RealInvestment 1819.7 15.7 Source:MoF -GeneralDirectorateofAccounting 168. Internal Control. The LAFE and related secondary legislation foresee that internal control on expenditures on goods and services i s to be carried out by each MDA through their own internal control procedures and those incorporated in the SIAF and the Procurement System, which involve the stages o f expense commitment and authorization, payment execution, and budget and accounting recording. However, internal control related to quality and quantity of goods and services delivered i s merely formal in practice, and relies exclusively on MDA systems. This i s compounded by the absence of a norm enabling the implementation of the Integrated Goods and Services System (SIABYS) and the lack of integration between systems composing the Integrated System of Administration of Estate Resources (SIARE)."' The resulting lack of integration, the limited internal control capacity of MDAs, and the weak control environment of Paraguay public sector, negatively affect the effectiveness of internal control framework. Dimension Rating Effectiveness of expenditure commitment controls: Expenditurecommitment control procedures exist C and are partially effective,but they do not comprehensivelycover all expenditures. Comprehensiveness, relevance and understanding of other internal control rules/ procedures: Clear, D comprehensiveandreliablecontrolrules/proceduresare lackinginother importantareas. Degree of compliance with rules for processing and recording transactions: Rules are complied with C in a significant majority of transactions, but use of simplifiedemergency procedures in unjustified situations is an importantconcern. 'YOof countrieswith YOof countries with 'YOof countries with % of countries with rating A rating B rating C rating D 0.0% 0.0% 66.7% 33.3% Indicator 21: Effectiveness of Internal Audit 169. Internal audit has already been identified by the recommendations of both Paraguay's 2004 CFAA and IMF 2006 Report on Budget Preparation and Expenditure Control as one of the major challenges in the improvement process of Paraguay PFM. The LAFE and Decree 1249/03 establish that the internal audit function of the Government should be based on (i) the GeneralAudit of the Executive Power (AGPE), dependingonthe Presidency; and (ii) the Institutional Internal Audits (AIIs) attached to each MDA. AGPE is responsible for technical and regulatory aspects of Government internal audit and AIIs coordination and organization of their work plans. 170. AGPE's current institutional capacities are not sufficient for allowing the effective achievement of its duties. On one hand, it was insufficiently staffed during the period under study -with fifteen people, out of which only four were career civil servants."' On the other hand, except for the Head position, its regulatory framework does not require a college degree or proved years of relevant experience for recruiting its staff members, and it counts with no human resources management or training systems. To date, the AGPE faces challenges ahead in terms of planning its institutional development, providing leadership to AIIs, and reinforcing its working cooperationwith the Comptroller General of the Republic(CGR). 171. The other components of the internal audit system, the AIIs, are similarly affected by organizational and humanresources issues. They are insufficiently staffed and staff background is not always adequate.Inaddition, staff recruitment procedures lo'The SIARE includes the SIAF, the SINARH and the SIABYS. However, the latter still lacks a legal framework, indispensablefor the reinforcementof the existingprocurementsystem. lo*In 2007, AGPE had a staff of twenty-four people, with eleven career civil servants, which was still insufficient. Dimension Rating Coverage and quality ofthe internal audit function: There is little or no internal audit focused on systems monitoring. D Frequency and distribution of reports: Reports are issuedregularly for most government entities, but may not be submittedto the ministry of finance and the Supreme Audit Institution(SAI) -CGR inthe C case of Paraguay. Extent of management response to internal auditfindings: Internalaudit recommendations are usually ienored (with few excentions). D % of countrieswith YOof countries with YOofcountrieswith YOof countrieswith rating A rating B rating C rating D 0.0% 0.0% 44.4% 55.6% logFor instance, an audit risk approach has not yet been developed. 'loAlthough Law 1626provides a classification o f irregularities, there is no sanction regime associatedto them. IllProgram activities include the strengthening of strategic planning and organization, the promotion of the Auditor General to the rank of minister, and infrastructure-related support. 112The USAID program is actually wider in scope, and covers other activities supporting governance and transparency. Dimension Rating Regularity of bank reconciliations: Bank reconciliation for all Treasury managed bank accounts take place quarterly, usually within 8 weeks of end of quarter. C Regularity of reconciliation and clearance ofsuspense accounts and advances: Reconciliation and clearance of suspense accounts and advances take place at least quarterly, within amonth from end of A period and with few balancesbrought forward. YOof countries with YOof countries with YOof countries with % of countries with ratingA rating B rating C rating D 0.0% 37.5% 62.5% 0.0% Indicator 23:Availability of information on resources received by service delivery units 177. Within Paraguay's context o f deficient public sector control environment and framework, the availability o f information on resources received by front-line service delivery units, such as schools and health clinics, is critical to ensure that resources are used for their intended purposes and that these units do not suffer from unreasonable delays or reallocations. 178. Financial statements from the Ministry o f Health indicate resources transferred to each hospital located at the City o f Asuncion -representing one third o f the total country's population.' l4However, this information is available only aggregated at the level o f `sanitary regions' for all 17 Departments. Since the Ministrymanages contracts andpayments centrally, hospitals receivethe resources in Dimension Rating Collection andprocessing of information to demonstrate the resources that were actually received (in cash and kind) by the most common front-line service delivery units focus on primary schools and primary health clinics): Special surveys undertakenwithin the last 3 years have demonstrated the level C of resourcesreceived incash and in kind by either primary schools or primary health clinics coveringa significant part of the country. `13Civil work advance paymentsare directly recordedas expenses. `I4Information on resources transferredto the National Hospital of Itaguhis also available. IBenchmarking YOof countrieswith I YOof countries with I % of countries with I YOof countries with I ratingA rating B rating C rating D 0.0% 11.1% 55.6% 33.3% Indicator 24: Quality and timeliness of in-year budgetary reports 179. Scope of reports in terms of coverage and compatibility with budget estimates.Budget and accounting classifications are the same and are incorporated to the SIAF, which integrates budget and accounting functions. Expenditureis registered at commitment, accrual and payment stages. However, reporting o f committed expenditures is limited to those re uiring a procurement process such as 'good and services', and 'public investment'.'' 9 180. Timelinessofthe issueofthe report.Budget executionreports andaccounts' balances are prepared monthly by all Government M D A s and reported to the DGC within 15 days after the end of each month, as legally required. Timely compliance is good, since MDAs can be penalized by transfer cuts incases o f delay.'16 181. Quality of information.Budget execution is recorded through the accounting module of SIAF, following national accounting standards. However, the reliability o f accounting records i s affected by insufficient internal control on quality and quantity o f goods and services delivered,' l7 and by incomplete information on Central Government fixed assets.'18 In particular, the reliability o f real estate accounts i s negatively affected by the irregular existence o f corresponding certificates o f ownership, and the inaccuracy o f appraisals. Dimension Rating Scope of reports in terms of coverage and Compatibility with budget estimates: Classification of data allows direct comparison to the original budget. Informationincludes all items of budget estimates. A Expenditureis coveredat bothcommitmentand payment stages. Timeliness ofthe issue of reports: Reports are preparedquarterly or morefrequently, and issuedwithin 4 weeks o f end ofperiod. A Quality of information: There are some concerns about the accuracy of information, which may not always be highlighted inthe reports, butthis does not fundamentallyundermine their basicusefulness. C YOof countries with YOof countries with YOof countrieswith YOof countries with ratingA rating B rating C ratingD 0.0% 0.0% 100.0% 0.0% 'I5Referto Indicator 20. 'I6Incontrast, municipalities are requiredto report quarterly, andtheir level ofcompliance is lower. Dueto this situation, the MoF i s planning to link systematically Treasury transfers to the timely issuance of municipal re orts, startingat year 2008. "'Refer to indicator 20. Covering only 53 percent o f total assets o f the Central Administration, as reported in 2006 Government consolidated financial statements, MoF. Dimension Rating Completeness of the financial statement: A consolidated government statement is prepared annually and includes, with few exceptions, full information on revenue, expenditure and financial B assetdliabilities. Timeliness of submission of the financial statements: The statement is submitted for external audit within 6 months ofthe end of the fiscal year. A Accounting standards used: Statements are presented in consistent format over time with some disclosure of accountingstandards. C YOof countrieswith % of countries with YOof countries with YOofcountries with rating A rating B rating C rating D 0.0% 12.5% 75.0% 12.5% ExternalScrutiny andAudit Indicator 26: Scope, nature, andfollow-up of externalaudit 185. The CGR is assigned the responsibility of public sector external control in Paraguay by its organic Law (276) andby the National Constitution. The former also grants financial and institutional independence to the CGR, which over the period 2004-2006 strengthened its professional and institutional capacity and implemented its 2003-2007 Strategic Plan. 186. Scope of audit performed. All public sector resources and expenditures come under the purview of CGR at both central and sub-national levels, including public financial institutions. CGR annual audit activities cover the equivalent of 70 percent of public sector expenditures. Although CGR audit is still mainly focus on financial aspects, the institution has strengthened its internal standards and work methodologies inrecent years through the development of an audit manual and a code of ethic, internal rules for auditors, reporting norms, and planning guidelines. Also, risk has beenintroduced as a determinantfactor of audit planning, leading to a focus on areas such as registration and inventory of fixed assets, payroll audit, and public ' 1 9There were 50 small-sized municipalities (out o f a total o f232) that didnot submit their financial statements; and there were other 31that presentedfinancial statements with significant inconsistencies, and not allowing for consolidation. Paraguay InteaatedFiduciarvAssessment 49 procurement. In terms o f human resources capacities, although the recruitment o f professional staff and the development o f career and human resources plans are requiredby Law 276, the Congress has not yet approved related regulation. 187. Timeliness of submission of audit reports to the Legislature. Based on financial statements submittedby the DGC no later than April 30' o f each year, the CGR i s legally required to submit an Audit Report o f Annual Public Accounts to the Congress by August 30th; i.e., within 6 months o f the end o f the period covered. The CGR complied with this calendar over the period 2004-2006. By contrast, other audit reports are usually submittedto the Congress within 8 months o f the end o f the period covered. 188. Evidence of follow-up on audit recommendations.The effectiveness of follow-up on audit recommendations i s limited in Paraguay. Recommendations follow-up rarely go beyond formal correspondence from the auditee, partly due to the absence o f regulating norms defining a code o f sanction for irregularities associated to the management of public resources, as defined by Law 1626, and also due to the existence o f a weak control environment. The CGR i s partially mitigating this ineffectiveness through the review o f its recommendations inforthcoming audits. Dimension Rating Scopehature of audit performed: Central government entities representing at least 50% of total expendituresare auditedannually.Audits predominantlycomprisetransaction leveltesting, but reports C identify significantissues.Audit standards maybe disclosedto alimited extentonly. Timeliness of submission of audit report to legislature: Audit reports are submitted to the legislature within 8 months of the end of the period covered and in the case of financial statements from their B receipt by the auditoffice. Evidence of follow-up on audit recommendations: A formal response is made, though delayed or not very thorough, butthere is little evidenceof any follow up. C YOof countries with YOof countries with YOof countries with % of countrieswith rating A rating B rating C rating D 0.0% 14.3% 57.1% 28.6% Indicator 27: Legislativescrutiny of the annual budget law 189. The power to give the government authority to spend rests with the Legislature, and i s exercised through the passing o f the annual budget law. If the legislature does not rigorously examine and debate the law, that power i s not being effectively exercised and will undermine the accountability o f the government to the electorate. The effectiveness o f this scrutiny is determined through the assessment o f its scope, its internal procedures, its timely and correct implementation, and the rules for budget in-year amendments. 190. Scope of the legislature's scrutiny. The scope of the Congress' review includes fiscal policies; budget proposal aggregates figures for the coming year; and detailed estimates o f expenditure and revenue. LAFE also authorizes the Legislature to modify the budget at the approval stage, and in particular to increase the overall level of expenditures provided the existence o f resources to finance them. 191. Although LAFElimits budget increases to capital spending and requires that a source o f additional revenues be identified, in practice the Legislature also increases allocations to current expenditures and adjusts revenue estimates accordingly.120 This i s due to the absence of legal hierarchy between laws, which does not prevent, for instance, LAFE provisions to be contradicted by annual budget laws. As a result, given the attributions given by the Political Constitution of 1992, Paraguay's Legislature has a very important role during the budget process, by being able to modify the expenditure composition submittedby the Executive, and also to increase total expenditures. Although the indicator and its score do not capture this characteristic of Paraguay's legislative control of the budget, this is a structural problem, which significantly undermined Paraguay budget credibility during the period under study (2004-2006). 192. Extent to which the legislature's procedures are well-established and respected. The legislature's procedures for budget review are firmly established in the Constitution, and are respected.121 193. Adequacy of time for the Legislature to provide a response to detailed budget proposals. The Congress has almost four months to review the budget proposals, from September 1st, when the Executive submits its budget proposal, until December 20th, the last date to approve the budget proposal according to the Constitution. 194. Existence of rules for in-year amendments to the budget without ex-ante approval by the legislature. The LAFE defines responsibilities and procedures to increase and reprogram the budget law during its fiscal year of execution. For the case o f a budget increase,'22 the Congress has to approve a law which expressly identifies additional sources of revenues to finance the expenditure increase. To increaseexternal debt, the Executive has also to submitto Congress a budget increase bill accompaniedby a request for approval of the loanagreement. Reprogramming of resources is submitted to Congress approval only in the cases of transfers between MDAs. Conversely, transfers withinthe same MDAand changes of sourceof funding are to be approved by presidential decree; and transfers within the same budget program are to be approved by MOF Res01ution.l~~These rules set strict limits on the extent andnature of amendments and are consistently respected. However, delegation to MDAs for transfers within the same budget program could be considered for a more flexible budget execution. 120For example, revenues projections were increased by US$ 62 million by the Legislature for the adoption of 2005 budget law. Source: WE3 2006. '*'As an initial phase of the approval process, the Joint Budget Committee -composed by 15 deputies and 15 senators- reviews the budget proposal submittedby the Executive between September 1'' and October 30", and presents a report to the two Chambers. From October lSt to 15", the Chamber of Deputies debates the draft budget in plenary sessions, and has to vote during this period. Between November 16" and 30", the Senate considers the budget proposal submitted by the Executive and the changes introduced by the Chamber of Deputies. If the Senate does not express any objections, the budget law is adopted; otherwise, the draft is returnedto the Chamber of Deputies, which has to vote exclusively on Senate objectionsbetweenDecember 1" and 10". The draft then returns to the Senate to debate exclusively on the Chamber of Deputies reactionto its objections till December 20". This last phase and the Senate adoption close the approval process. Legislature complete rejection ofthe budgetproposalcan be obtainedonly by a vote with an absolute majority oftwo thirds ineach Chamber. '22Article 23, LAFE. 123Article 24, LAFE. YOof countries with YOof countrieswith YOof countrieswith % of countrieswith rating A rating B rating C rating D 0.0% 37.50% 25.0% 37.5% Indicator 28 -Legislativescrutiny of externalaudit reports 196. This indicator focuses on the submission o f audit reports regarding the execution o f the budget from Central Government entities to the Legislature, the ability of the Legislature to examine these reports on time, and the ability of those entities to implement recommended actions. In Paraguay, the National Constitution and the LAFE foresee the creation o f a Legislative Committee -composed by members o f both Chambers- that exercises the revision and scrutiny o f the executed budget each year. The efficacy o f this Committee will depend on the availability of sufficient financial and technical resources, as well as on its ability to review external reports on due time. The Committee may also recommend actions and sanctions to be implemented by the Executive, in addition to adopting the recommendations made by external auditors. 197. Timeliness of examination of audit reports by the legislature.According to what i s stipulated by the LAFE (Art. 67), the MoF must submit to the Executive and the Congress the Financial Report before March 31 which should include consolidated financial statements, reflecting the financial, economic, budgetary and asset position o f government entities, as well as a comparative statement o f amounts budgeted and executed ineach fiscal year. The LAFEestablishes (Art. 69) that within the four months after the presentation o f the Executive annual report, the CGR has to submit to the Congress a report and audit opinion about the Financial Report, based on the Annual Audit Plan, which include a representative sample o f public entities and uses for its elaboration information provided by MoF and CGR own i n f ~ r m a t i o n . ' ~According to Art. 70 o f the LAFE and Art. 282 o f the National ~ Constitution, the Legislature Joint Congressional Committee'25 has a maximum and not deferrable deadline o f 30 days to approve or reject the Financial Report and the lZ4The CGR is currently under a stage of redesign of its Annual Audit Plan, as part of the activities being financedthroughUSAID's Programa Umbral. lZ5Five senators andeight deputies. Dimension Rating Timeliness of examination of audit reports by the legislature for reports received within the last three D years): Examinationof audit reports by the legislaturedoes not take place or usually takes more than 12 monthsto complete. Extent of hearings on key findings undertaken by the legislature: In-depthhearings on key findings C take place occasionally, cover only a few audited entities or may include with ministry of finance Issuance of recommended actions by the legislature and implementation by the executive: Actions are C recommended, but are rarely acted uponby the executive % of countries with YOofcountries with % of countrieswith % of countrieswith rating A rating B rating C ratingD 28.6% 14.3% 42.9% 14.3% Donor Practices Indicator Dl Predictabilityof Direct Budget Support - 201, Between 2003 and 2006, four direct budget support lending operations financed by IFIs were approved in Paraguay, which represented a total amount of US$85 millions (see Table 3.6). Annual disbursementsof these operations coincided with the estimates obtained by the IFIs in 2003 and 2004. However, foreseen disbursements for 2005 -according to the agreements between the IFIs and the Government- suffered delays, since these operations lacked the Congress approval requiredby the country legislation. This cause of delays has been a recurrent factor related to external financing by donors in Paraguay during the period under analysis, so it is taken into consideration for the overall rating of this indicator. 126For additional information, see www.contraloria.gov.py Paraguay Inteaated Fiduciary Assessment 53 Table 3.6: Direct Budget Support External Loans(2003 2006) - 2003 2004 Creditor Institution Financial Financial Assistance Assistance Assistance Assistance Foreseen Provided Foreseen Provided IDB ~ ~ $ miIIion" 2 0 US$20 million US$ 0 US$ 0 World Bank US$30 million' US$30 million US$ 0 US$0 2005 2006 Creditor Institution Financial Financial Assistance Assistance Assistance Assistance Foreseen Provided Foreseen Provided Dimension Rating Annual deviation of actual budget supportfrom theforecast provided by the donor agencies at least six C weeks prior to the government submitting its budget proposals to the legislature (or equivalent approving body): Inno morethan one out ofthe last three years has direct budget support outturnfallen short of the forecast by morethan 15%. In-year timeliness of donor disbursements (compliance with aggregate quarterly estimates): Quarterly A disbursement estimateshave been agreed with donors at or before the beginning of the fiscal year and actualdisbursementsdelays (weighted)have not exceeded25% intwo of the lastthree years. YOof countries with rating YOof countries with % of countries with YOof countries with A rating B rating C rating D 28.6% 14.3% 42.9% 14.3% Indicator 0 2 - Financial Information provided by donorsfor budgeting and reporting on project andprogram aid 202. IFIsand donors operating inParaguay provided financial information referred to each o f the lending operations in a complete and timely manner during the period under analysis (2004-2006). Given that disbursements corresponding to lending operations are incorporated to the budgets o f their respective MDAs, financial information i s consistent with the budget classifier. As confirmed by the MoF, foreseen deadlines for planned disbursements corresponding to different lending operations were respectedby IFIs and donors, which count with quarterly information about these disbursements. Table 3.7 shows the distribution o f disbursements corresponding to lending operations duringthe period under analysis. ParaguayInteaatedFiduciarvAssessment 54 Table 3.7: Loan Disbursements(2004-2006) IFI-Donor Disbursement2004-2006 IDB 44% JapaneseGovernment-JBIC 26% WorldBank 16% FINAME-Brasil 6% CorporacidnAndina de Foment0 4% FONPLATA 2% Other 2% Total (US%385 millions) 100% Dimension Rating Completeness and timeliness of budget estimates by donors for project support: Not all major donors D provide budget estimates for disbursement of project aid at least for the government's coming fiscal year and at leastthree monthsprior its start. Frequency and coverage of reporting by donors on actual donor jlows for project support: Donors C providequarterlyreports within two monthsof end-of-quarter on the all disbursementsmade for at least 50% of the externally financed project estimates in the budget. The information does not necessarily provideabreak-downconsistent with the government budgetclassification. % of countries with rating YOof countries with 'YOof countrieswith YOof countrieswith A rating B rating C ratingD 0.0% 0.0% 42.9% 57.1% 127Only WB andIDBprovidedcompleteinformationduringthis period. Indicator 0 3 -Proportion of aid that is managed by use of nationalprocedures 206. Country systems are used only for the execution of loanoperations, which are estimated to represent around 60% of total financing from IFIs and donors in Paraguay during 2004-2006, as mentioned inindicator PI-2. 207. However, the use of country systems i s partial, since it only comprises the budgeting, accounting consolidation and treasury stages, and excludes government accountability to IFIs and donors, internal control and external audit, which are managedby independentsystems. 208. Currently, accountability to IFIs is not possible in an automatic form through country systems, and CGR audit norms are still not considered acceptable by IFIs for the external audit of projects. With respect to budget execution, entities in charge of the im lementation of the projects usually run 'ring-fenced' systems parallel to SIAF.'' Dimension Rating Overall proportion of aidfunds to central government that are managed through national procedures: C 50% or more of aid funds to central government are managedthrough national procedures. YOof countrieswith rating YOof countrieswith YOof countrieswith YOof countrieswith A rating B rating C rating D 0.0% 14.3% 14.3% 71.4% 12*See Table 5.5, Chapter 5. ParaguayIntegratedFiduciarvAssessment 56 4. INPUTSFROMCOUNTRYPROCUREMENTASSESSMENT MainFeaturesof PublicProcurementinParaguay 209. Interms of government procurement (PR) Paraguay has made great progress inthe regulatory and institutionalfields, major improvementshave beenintroducedin the PR processes and inconflict resolution and the generalized perception i s that there i s a lot of improvement, both in terms o f the quality o f processes and in their efficiency and efficacy. 210. The newPR legal framework and the dynamism o fthe recently created GDPP introduced substantive changes in the operation o f the country's public PR. The principles o f economy and efficiency, equality and free competition, transparency and publicity are explicitly set forth in the new Law and began being applied, to a great extent, since the law was enacted. A fundamental element that contributed to these achievements i s the development o f a public PR system and the Website, http://www.contratacionesparaguay.gov.py, where most o f the Government's purchases and contracts are published.lZ9 This has introduced efficiency and greater speed and transparency inthe public PR process. 211. The improvements in the above areas have not been accompanied by a strengthening o f the oversight and audit mechanisms. On the other hand, the positive development o f IT tools i s limited by the substantive deficits in the digital communications infrastructure available in Paraguay. Also, with the exception o f the Project Implementation Units (PIUs), public PR in Paraguay is carried out by procurement units lacking clear terms o f reference for the responsibilities and duties o f procurement officials, and likewise, the minimumqualifications of the members o f the UOCs have not beendefined. Some improvements were observed with respect to the relationship with the private sector and other public entities after the publication o f CPAR: procedures for carrying out Public Hearings were formali~ed'~~; and agreements were signed with several civil society organizations, as well as with local and foreign public entities.131 212. It is also true that in terms of market opening and efficiency and in the processes o f transparency and control, there exist opportunities for substantial improvements in order to bringthe overall performance o f the system closer to what is internationally considered satisfactory, in accordance with the methodology applied. 213. There i s still evidence o f inefficiencies in public PRY with a relevant percentage o f contracts in arrears and being awarded through procedures not benefited from economies o f scale. Likewise, the Law favors domestic companies over foreign ones, which i s considered an important restriction to international participation in PR processes. On the other hand, although the GDPP i s an independentunit, its staff is still vulnerable to political eventualities. lZ9Excludingonly public works concessions, personal services, purchases usingrevolving funds, contractsby public financial companiesand institutions,andthose by bi-nationalentities -1taipu andYacireth. 130Referto Resolution208/07 ofthe Legaland Technical Central Unit ofthe GDPP. 13'Agreements were signedwith INECIP (Instituteof ComparativeStudies inPenalandCivil Sciences), CAPACO (Chamber of ConstructionofParaguay), UIP (IndustrialUnion of Paraguay), TransparenciaPY, CGR, GTZ, OPACI (Inter-MunicipalCooperationOrganizationof Paraguay) and with `ChileCompra'. Paraguay IntegratedFiduciarvAssessment 57 214. As for control and transparency, major weaknesses are evidenced by the control systems, with an almost total absence o f follow-up o f the penalization processes and a recurrence o f irregular practices, something that generates a climate o f relative tolerance regardingprocesses with poor transparency. 215. Based on the work conducted, the banks' joint fiduciary review team considers that Paraguay's public PR system requires substantialimprovementsin its market development practices and transparency, internal control and internal and external audit processes. To a lesser extent, the system should also firther strengthen the existing regulatory framework, provide stability to the key staff of the GDPP, and adopt systems that contribute to the monitoring, performance evaluation and observation o f payments. To move forward with the reform andmodernizationo f PRY the national challenge lies in complementing the efforts already made with the support o f judiciary agencies and effective control methods that prevent, identify, correct and penalize acts o f corruption or improper practices. Eveninthose instances where cases o f timely and appropriate control instances have been detected, the resulting findings have had no concrete consequences, diluting the importance o f controls and consecrating the status quo, even within a more efficient regulatory framework and with a proactive and trained regulatory agency. 216. The Government's and civil society's commitment, as well as timely action for the implementation o f the measures included in the Action Plan will contribute to the consolidation of the important progress made by Paraguay since the last review, conducted by the Banks in2003. 217. The Chart below summarizes the final results o f the characterization o f the level o f performance evaluated for each of the above-mentioned four pillars. Over a maximum score o f 3, the Public Procurement System scored 2.2 for pillar (i), Legal and Regulatory Framework; 2.08 for pillar (ii),Institutional Framework and Management Capacity; 1.53 for pillar (iii), Procurement and Market Practices; and 1.68 for pillar (iv), Integrity and Transparency o f the Public Procurement System. Paraguay OECD-DAC Assessment (Baselineand CompAance/Performance Indicators) I I Pillar I Pillar II Capacity IMin I ax Under Minimum 0.00 1.00 Standards Substatial Improvements 1.01 2.00 Pillar Ill Required Improvements Required 2.01 2.75 Satisfactory 2.76 3.00 Accomplished Pillar I.Regulatory Framework Pillar I.Legislativeand Regulatory Framework OECD-DAC Indicators - 1. The country's procurement legislative and regulatory framework complies with applicable obligations deriving from nationaland internationalrequirements. !2. The country has appropriateregulations& tools to support implementationof its framework 218. The main conclusion with regards to the regulatory framework is that it promotes effective, competitive and transparent PR processes, and it represents a major improvement as compared to the previous situation, since it includes in a single, complete and consistent framework all the regulations relating to PR. Furthermore, the new regulatory framework reflects the international best practice, adjusted to Paraguay's context, although it still retains some discriminatory provisions, especially against foreign companies. 219. The work o f standardizing the bidding documents carried out by the GDPP, together with the concomitant process control, has produced major improvements in the quality of PR. Substantial progress has been found in the quality of the bidding documents (although their use i s not yet mandatory, inpractice they are usedin 90% of the tenders and competitions), in the process implementation times, in the exponential increase of the publication of the calls for bids, and in the objectivity of ParaguavIntea-atedFiduciaryAssessment 59 factors and criteria for the evaluation of pr0posa1s.l~~The draft contracts in public tenders reflect conditions that are generally acceptable according to international standards. Additionally, an effective and agile mechanism has been established to receive and manage complaints, in the first instance by the GDPP and secondly, before the administrative courts. Inthat sense, it is necessary to deepen these actions to thus continue with the development o f the system, e.g. by developing a Procurement Manual applicable to all the UOCs which i s still an outstanding area. 220. Likewise, it is important to develop biddingdocuments for faster modalities o f PRYsuch as the Proposal Competitions and Direct Procurement (which in actual fact are price comparisons or "Shopping"), in view of the fact that they are the modes usually employed by the Municipalities.133 Although the Municipalities (232 intotal) jointly represent no more than 2% o f the total national PRYtheir impact in the efficiency o fpublic PR i s important from the point o f view o f citizens' perceptions. 221. There are regulatory tasks that are complimentary to the existing legal framework, a majority o f which can be implemented through resolutions from the GDPP, such as determining the timeframes for consultant short listing and selection. Additionally, the creation and implementation o f a registry o f suppliers and PR through framework agreements with suppliers should also be subject to standardization. 222. Regarding possible legislative reforms, it should be noted that the International Competitive Bidding (ICB) process i s not established as the most appropriate or default arrangementfor contracts for significant amounts or with high degree o f complexity, but rather applied as an exception to the National Competitive Bidding (NCB) method, in which foreign companies that are not established in Paraguay cannot bid; and that ICBs are only used as a result o f international agreements or when it has been established that there are no domestic suppliers. On the other hand, we should notethat most ofthe contracts with a reference value above US$500,000 were awarded through ICBs. 223. Inthis sense, it is also necessary to take into account that Paraguay's private sector has a low level o f development, with over 85% small and medium enterprises and with sectors where it has been established a possible cartelization of suppliers and builders, resulting in a limited competition at the local level and with little use o f importednewtechnologies. Although the impact o f a greater international opening of the Paraguayan business structure needs to be evaluated, it is clear that a greater use o f ICBs -which include margins o f local preference- will not only ensure the best use of public funds, but will also provide incentives for the domestic private sector to modernize and seek out markets.'34 The adoption o f ICBs would also contribute paving the road to the extension o f the country's free trade agreements, which so far has market reserve in government PR but shall eventually have to be opened up to the trade partners. 132After the preparationofCPAR, the use ofthree standardbiddingdocuments was required(Goods, ConsultancyandPublic Works; see Decree 10395 of 05/21/07)andthere are other six biddingdocuments drafts publishedinthe Web. 133It is expectedto introducethe Note ofInvitationandPurchase Order for DirectContractsduring2008, and the implementationof electronicpurchaseswas approvedthrough `Convenios Murco' (Decree 11193/07).The implementationofthe biddingto lowestpricemechanismis under analysis. 134See paragraph209. 224. Another aspect o f the Law subject to reforms relates to the procurement o f consulting services, since it would be possible to specify in a clearer way that the selection o f consultants should be based on technical qualifications andthe quality o f proposals, more than as a function o f the most economical offer. This clarification i s pertinent becausethe Law provides no special treatment to that end, although init and -in the rules- it is determined that consultants should be selected based on some selection model such as quality and cost, quality, lowest price, fixed budget, or consultant's background. 225. The legal framework establishes the right o fthe individuals who participate in bidding processes to challenge the decisions adopted by the requesting entities, by means o f a filing before the GDPP. Although this is an important progress compared to the previous legislation and the GDPP i s an entity different from the requesting agencies -except for the case of PR by the Ministry o f Finance- inDecember 2007 the Parliamentapproved a Law giving autonomy andautarchy to the GDPP, changing its name to "National Directorate of Procurement". 226. As for the enforcement o f the Law, it should evolve in the direction o f eliminating, or at least reducing significantly, the cases o f excessive use o f non- competitive methods. For example, from the information analyzed, it may be seen that almost 13% o f the public contracts (both in terms o f amount and number o f processes) inyears 2005 and 2006 were awarded directly without competition (Direct Procurement by Exception). Annex I includes statistical information on the methodologies employed for contracts invarious value ranges. Pillar11.InstitutionalFrameworkandManagementCapacity 3. The public PR system is mainstreamedand well integratedinto the public sector governance system. 4. The country has a functional normative/regulatory body. 5. The country has institutional developmentcapacity. 227. The GDPP reports directly to the Under-secretariat o f Financial Administration under the MoF. This placement within the MoF gives it institutional weight and facilitates its operational capacity. The possibility o f conflict o f interests incases o foversight o fPRconducted bythe Ministry'sUOC exists, although to date, the current management has given proof o f its independence with the annulment o f contracts and even administrative summaries of officials of the above mentioned department. The GDPP has budgetary autonomy through a budget that i s funded out of the equivalent o f 0.5% o f the value o f the contracts that are executed under the public system. However, the importance o f securing the stability of its key officials is noted, by establishing arrangements that limit the possibility o f their removal for factors alien to their professional performance or ethical behavior, thus promoting their independence, albeit remainingwithinthe structure ofthe Ministryo fFinance. 228. The regulatory centralization and operational decentralization has a weak link which i s the limited influence that the GDPP has over the Operational Procurement Units(UOCs) andPIUs, which report administratively to each agency; andwhich put their staff, hierarchy, composition, experience and other operational characteristics outside the sphere of control o f the GDPP. At the operational level, the UOCs lack consistently applied procedures interms o f an orderly and systematic recording of the documentation related to PR processes, or a security protocol for files, as well as for maintaining updated records referring to such processes. Likewise, there are insufficient records on the quality and quantity inspection processes prior to the acceptance o fthe goods. 229. Inthe case of civil works certificates, deficiencies were found in the sample reviewed. There are no systematic compliance reports to certify the execution o f the budget and reconcile such execution with the budgetprogramming. It is essential for the UOCs to have unified operating parameters across the various agencies to which they belong and to develop contract follow-up and monitoring systems to enable them, beyond obtaining data on the execution, commitments and balance, to have a useful tool for a better management o f contracts and data in real time, including a mechanism o f disclosure o f the presentation o f work certificates and payment dates, as explained be10w.l~~ 230. The budgetary management of public PR has substantially improved with the use o f control and planning tools -the budget availability codes (CDPs) and the Annual Contract Plans (PACs)- although there i s a significant gap inthe entities that are not connected to the SIAF. These entities -representing 59% and 57% o f the country's public procurement in the years 2004 and 2005, respectively- lack a budget availability control inreal time, and present risks of financial unavailability at the time o f payments for the procurement systems and limit the capacity to monitor public expenditure interms o f financial management. 231. Also lacking in the contracting entities -including those connected to the SIAF- is arealtime monitoring andcontrol system of contract execution. The PACs should evolve towards a greater level o f use, which is the on-line updating with the GDPP, indicating the progress status o f each process in real time and including the amounts and data o f the awardees once the contracts have been executed. Such information should also be publicly disclosed, which will provide better quality information to the private business sector and facilitate control by civil society. 232. The development and start up o f the Public Procurement Information System (SICP) i s a landmark inthe management o f public PR inthe country. The use o f this system as an operating and control tool and as database i s the pillar o f the public PR system, with initiatives existing within the GDPP to expand its functionality. The system provides key utilities for internal users (Government) and external users (suppliers, civil society). 233. Currently the SICP seeks to solve the issue o f disseminating the calls in the procurement processes and the later dissemination o f their results. Pending development are the more transactional stages of the PR platform (framework agreements, e-procurement, electronic payment cycles, factoring, ordering and other financial instruments associated with the procurement cycle) as well as the complementary systems o f a solution o f such characteristics, among which we may mention, a registryo f suppliers, contract management, financial management and the integration with third-partysystems. 13'After the CPAR was published,Decrees 7981and 8602 were issued, allowing GDPP to verify contract executions; also, the Department of Contract Executions ofthe GDPP was created (which will become a Directorate after the National Directorate of Public Procurement is established). ParaguayIntegratedFiduciaryAssessment 62 234. The limitations faced by the SICP result mainly from the little development o f Paraguay's IT infrastructure and the low connectivity, where the penetration o f the Internet is one o fthe lowest inthe world. Pillar111.ProcurementOperationsandMarketPractices 6. The country's PR operations andpracticesare efficient. 7. The country's public PR market functionswell 8. The countryhas contract administrationanddisputeresolutionprovisions 235. The officials assigned to PR management tasks are the current target of a comprehensive training process by the GDPP. There are uneven capacities in the UOCs and PIUs, which is explained by the different hierarchy o f each UOC within the agency in which it operates. Across PIUs, on average the level of training is higher since they benefit from courses and workshops facilitated by the funding organizations. A problem associated with the difficulties for the development o f local PR management capacities i s explainedby the highturnover o f staff inthese units. 236. Training o f the private sector i s incipient, although the GDPP has plans to expand the offering of courses and workshops for suppliers, mainly on aspects relating to the preparation and submittal o f bids and the contents and practices includedinthe new Law. 237. Paraguay lacks a legal framework to enable public-private partnerships; however, these are feasible under the current legal framework. There are, however, dialog and coordination forums with chambers and associations. Some examples such programs are: the National Integrity Program and Inter-institutional Council o f the National Integrity System (PNI-CISNI); Transparencia Paraguay, as watch-dog o f the procurement system; and the whistle-blower protection system developed by the private and public sector (INECIP), primarily with a control focus, postponing a dialog and agreements between the buyer and the supplier. Taking into account the significant limitations in the control agencies and the perceived high corruption indexes, not surprisingly the first instance o f relationship with the private sector i s targeted at tackling the problems resulting from the lack o f effective controls in public PR. 238. At the operational level, there some agreements signed between private sector companies and trade chambers and the GDPP. Agreements are being made, for example, regardingthe limitation o f the documentationrequirements inPR processes, and work is under way to establish a Voluntary Supplier Registry that will replace these filings ineach process. 239. Another area where improvements are being introduced i s in payment management, which has been identifiedas one of the weak points inthe system. The delay in effecting payment negatively impacts the willingness to participate inpublic PR processes or is reflected in quoting higher prices, discounting the financial costs associated to such delays, thus producing inefficiencies in the system. It also has negative effects particularly for small and medium enterprises. The Treasury has initiated a process of direct payment to suppliers, which substantially reduced the payment times. This initiative i s still in its first stages, but its dissemination to a majority of the state suppliers i s being contemplated. The payment delay or risks o f timely payment privileging favored contractors are factors that reduce the credibility o f governmental PR systems, so that actions that contribute to systematizing and rationalizing payments should be firmly promoted inthe reform and modernization o f government financial management andPR. 240. It will be important to develop partnerships with the private sector, to establish action roles and codes andto gradually eliminate the cartelizationthat exists in certain sectors -e.g. the road construction sector- and the collusion consequences that inpractice have been recorded in processes with a limited number o f offers and for amounts consistently higher thanthose of the official budgets. PillarIV. Integrityandtransparencyof the publicprocurementsystem Pillar N.Integrity ofthe PublicProcurementSystem OECD-DAC Indicaton - ` 9. The country has effective control and audit systems 10. The country has an efficient appeals mechanism 1 I.The public has broad access to information 12. The country has ethics and anticorruptionmeasures in place 241. Paraguay has substantially improved its relative ranking in the Corruption Perception Index prepared by Transparency International: fiom holding position 141 among 146 countries in2004, and 147 o f 159 countries in2005, the 2006 CPI ranked it 111th o fthe 163 countries surveyed. 242. In spite of the improvement in the perception of corruption, Paraguay's control arrangements continue beingweak and inefficient. There are limitations inthe policies, the scope o f the control procedures andthe audit methodology applied by the General Controllership o f the Republic (CGR) and the Executive Power's General Audit Office (AGPE) regarding public PRYwherefore the internal control o f these essentially falls on the reviews by the Institutional Internal Audit offices (AII), which have a lower level o f effectiveness, since they report directly to the authorities o f each institution. The CGR concentrates its review activities in those cases where irregularities have been reported, something which absorbs a great share o f the time o f its staff, with little additional time to conduct investigations on their own initiative. 243. Likewise, the audits focus in the verification o f compliance with formal requirements o f a financial type to be verified once the processes cannot be reverted. The audit methodologies employed do not include risk analysis inorder to determine the opportunity, nature and extension o f the procedures to be used and types o f transactions and functional processes to be audited. The CGR i s therefore reactive instead o f proactive, something that limits its capacity to prevent, detect and correct faulty procedures at an early stage. 244. The reports of AI1 are sent to the AGPE generally without adequate feedback processes for their follow-up, something that completes a scenario o f low control with few corrective actions or sanctions. Currently, the sanctions o f an administrative nature (disbarment by the GDPP) are applied in an effective manner and on a due process basis; however, the criminal behaviors are not sanctioned when the corresponding files are sent to the courts, inview o f the fact that there i s no system in place to follow-up on the procedures. The CGR, on its part, can act towards public prosecution only when it has been proven that there has been damage to the state assets. In all other cases, the sanctions are purely of an administrative nature. There are notable weaknesses inthe capacity to sanction public officials, and even less those who holdfirst or second line positions inthe hierarchy. ParaguayIntegratedFiduciarvAssessment 64 245. Since there i s no effective sanction mechanism, both for the private sector and the public sector, the removal o f negative elements is delayed, both in bidding companies and in officials responsible for the management o f the various stages in the contractingprocess, hindering further the objective of attaining greater efficiency andtransparency. 246. Transparency Paraguay notes among the recommendations resulting from their Evaluationofthe Procedures appliedbythe GDPP: (i) needofsettingupoperationalagreementswiththeGeneralAuditOfficesofthe the three branches o f Government and with the General Controllership o f the Republic, in order to improve the control o f the procurement and contract management processes, preventingthe summaries that are initiated from beingclosed due to lack o f information or follow-up; and (ii)the communication of the GDPP resolutions to the Civil Service Secretariat (Secretaria de la Funcih Pziblica) and to the Prosecution Service (Ministerio Pziblico) in those cases where the administrative and/or criminal liability o f public officials has been ascertained. 247. Both actions are currently being implemented, to the extent that the GDPP and the CGR have agreed with the Prosecutions on the filing o f the complaints in pre- established formats for the purpose o f avoiding duplications. However, the results o f these actions will take some time to bear tangibleresults. 248. There i s no code of ethics for public officials or specific rules to resolve cases o f conflicts o f interests, which implies an important regulatory gap. Although public officials are obliged to file financial disclosure forms, their frequency is not regulated, so that they loose their validity when they are not updated. The actions relating to collusion with suppliers have not been criminalized or regulated, so there are no legal tools for the authorities to identify and sanction such practices on the part o f the private sector. 5. MANAGEMENTOFIFIsAND DONORFUNDS IFIsandDonorFundsinParaguay 2004-06 - 249. By being a small sized economy with restricted access to both domestic and external financial markets, Paraguay's public sector financing depends crucially on IFIs and donors loans and grants. 250. Table 5.1 shows grants disbursementsand official lending net transfers during 2004-2006. Donor grants reachedUS$ 62.2 million in2005, and represented 8.3% of Central Administration's total revenues on average terms throughout 2004-2006.136 Lending disbursements amounted US$128.3 million in 2004 and US$150.4 million in2006. These lending disbursementsdecreased along the period as a share of total budgeted expenditures from the Central Administration -from 11.4% in 2004 to 8.4% in2006. Table 5.1: Disbursement Aid (million of US$,unless specified) Concept 2004 2005 2006 Grants Gross Disbursements 33.3 62.2 51.9 Relativesize (in %) GrossDisbursements/ CentralAdministration GrossDisbursements 88.2 77.0 110.6 Amortizations 102.3 80.6 82.7 NetDisbursements -14.1 -3.6 27.9 InterestPaid 49.0 39.8 41.2 GrossDisbursements 40.10 30.04 39.78 Amortizations 72.23 55.34 59.51 NetDisbursements -32.13 -25.30 -19.73 InterestPaid 28.05 18.41 17.93 AnnualNetTransfers -60.18 -43.7 1 -37.66 OfficialLendingRelativesize (in %) GrossOfficialLendingDisbursements/ Central AdministrationBudgetedTotalExpenditures 11.4% 8.1% 8.4% 251. Multilateral and bilateral lending net transfers were negative in all three years considered, which i s consistent with the observed economic growth and the implementation of sound fiscal policies that allowed the country to leave behind its record of debt payment arrears. 252. Table 5.2 illustrates changes and trends in terms of the stock o f multilateral and bilateral lending-public sector's main source of financing- inParaguayduring 2004-2006. Overall, the Table shows that Paraguay has maintained the composition and reducedthe burdenof its external debt during these three years. Both multilateral and bilateral debt decreased innominal (US$) andrelative (GDP) terms. The nominal decrease is a consequence of negative net transfers -net debt repayment137- consistent with the context of continued primary and financial fiscal surpluses. 13`Grants figures includedhere are those includedon the Budget. As was mentionedinChapter 3 (pI-7), the Governmentestimatesthat suchfigures representonly a fiaction ofthe total amounts receivedby the country in terms of grants. 137See Table 5.2 for details on debt flows. Another factor behind negative net transfers in recent years is the political unwillingness of Congress to approve loans which have already been signed by the government. The relative decrease -from 23.1% to just 14.6% of GDP- compoundsthe effect of the nominal debt reduction withbotheconomic recovery and the nominal appreciation of the Guarani with respect to the D01lar.l~~ of year As 2006, 80.2% of the Central Administration's stock of external debt outstanding consistedinmultilateral and bilateral loans. Table 5.2: Paraguay -Central Administration: Stock of Multilateral and Bilateral Debt (2004-2006) Concept 2004 2009 2006 WIs LENDING Stock of Lending (million of US $) 1062.5 1010.9 1056.5 IDB 725.3 704.0 743.3 WB 233.3 213.7 226.0 Other 103.9 93.2 87.2 Stock ofLending/Total ExternalDebt (in %) 54.9% 55.7% 58.2% Stock of Lending (million of US $) 471.71 415.85 399.02 Japan 212.92 178.43 191.35 Taiwan 129.71 123.76 114.82 Other 129.09 113.66 92.84 Stock of Lending/ Total ExternalDebt(in%) 24.4% 22.9% 22.0% Stock ofLending/ GDP (in%) 7.1% 5.5% 4.0% Sources: PublicAccountingFinancialReports(2004-2006) Institutionalarrangements 253. The coordination and management of IFIs and Donors funding is defined by the LAFE and its application decree as well as by the annual budget law. While the execution of donor funded operations is the responsibility of the recipient institution^,'^^ the MoF and the Secretariat of Technical Planning of Economic and Social Development (STP) are the main entities responsible for the processes of planning, approving, monitoring and coordinating IFIs and donor funded operations. The STP is involved in the planning and approval of donor funded operations, the monitoring of technical cooperation grants, and donor coordination, through the General Directorate of International Technical Cooperation and the General Directorate of Investment Promotion and External Financing. The MoF has an overall responsibility upon country donor funded resources. Through the DGCDP and the Debt Policy Directorate, the MoF plays a key role inthe negotiation and approval of donor and IFIs lending, as well as in the monitoring of those loans through the DGCDP and the Public Investment Central Unit (UCIP). 140 13'End-year nominal exchange rates where G$6240 and G$5170per US$ in2004 and 2006, respectively. 13'Except for the cases where donors directly implement their operations - See Section on Implementation o f Donor funds. 140The scope of the Department of Control and Evaluation (General Directorate o f Budget), established in 2007, also includes control o f donor and IFIs lending operations. Paraguay IntegratedFiduciary Assessment 67 254. The five above mentioned Directorates of MoF and STP have limitedhuman resources, with less than 60 staff in total, and their activities are partially ~verlapping'~~, which enerates redundancies such as the existence of several donor monitoring databases14', or redundantreporting requirements. Qnern' Of PublicCredit DirectorateofDebtPolicy ' UCIP 1 General Director 1 Director 1 GeneralCoordinator 1Coordinator 3 Heads of Departments 1Coordinator for nom 5 Specialists 3 Heads of Departments 9 Specialists compliance 1Assistant 11TechnicalSpecialists 1Coordinator for Ability to includespecialists monitoring fromother departmentsif 6 monitoringspecialist needed Total staff: 16 Total staff: 13 Total staff 9 Total staff: 7 255. Although an institutional re-organization may appear relevant, its implementation would be complex in the current context, and solutions based on strong inter-institutional cooperation are probably more appropriate inthe short term. This is illustrated by the cooperation developed between the DGCDP and the Debt Policy Directorate for their common mandate on IFIs loan negotiations. Those Directorates agreed to develop a task-force approach, whereby joint teams are systematically set up for loan preparation and negotiation. This approach, which streamlines the activities o f both units, is easy to implement and should be considered for replication. Planningand Approvalof Donorfunded operations 256. Impact of country sector planning on donor funded operations. Despite the recent efforts from the MoF, the STP and line ministries, sector strategies still consist o f broad objectives and do not link to budgeting.'44As a result, the preparation of donor operations, although consistent with government strategic objectives, relies on donor planning expertise, which inevitably reduces the country ownership on the design. 257. Legalistic and fragmented process and calendar of preparation and approval. As shown in the table 5.4, the preparation and approval phase is punctuated by the adoption o f several legal documents, and associates an important number of actors. Thus, there is an opportunity for streamlining this process without affecting the control effectiveness, providedstrong political will. 141Such as inthe case of IFIs loan monitoringcovered by UCIP and Public Credit General Directorate. 142Public Credit General Directorate database (SIGADE) for debt monitoring; UCIP database for project monitoring o f physical and financial execution; STP database o f Pre-investment projects Those databases are - not systematically inter-linked,nor integrated to SIAF. 143The General Directorate ofInternational Technical Cooperation is staffed with twelve civil servants. 144Refer to Chapter 3, Indicator 12. Paramay Integrated Fiduciaw Assessment 68 'able 5.4: Planning and Approval of Donor Funded Operations Phase Lending&Grantsincluded io the f . . Other Grants Budget '. Pre-Identification Lineministries LineMinistriesDonor Initiation of the process of Request sent by line ministries to Request sent by line ministriesto (i) authorization to preparethe MoF and transmittedafter review to MoF for IFIs grants and (ii)Ministry operation STP for prioritization ofExternalRelationsfor the others. STP~rioritization'~' STP GeneralDirectorateof - STP GeneralDirectorateof - InvestmentPromotionandExternal InternationalTechnicalCooperation Funding MoF receives STP conclusions Transmits the request to Economic N/A Committee Economic Committee Approval Reviewof the request; ifapproved, it N/A (MoF, Min of Agriculture, Min i s sent to the Presidency for of Industry) approval. PresidencyAuthorization to Presidency adopts a decree of Not mandatory - usually applied for prepare an operation authorization to prepare the grant requests sent by MoF operation. Start working on the Project LineMinistry andIFIDonor LineMinistry andIFI/Donor Preparation Document Negotiation DGCDP & Debt Policy Directorate; Line Ministries, MOF, Ministry of LineMinistry andIFI. ExternalRelationsandDonor MoF assures the transmission of the document throughout the phase of approval of loan agreement Impact Assessment of the CentralBank: monetary impact N/A proposed project Secretariat of Environment: environmentalimpact CGR Approval If approved, the proposal is sent N/A backto MoF Presidency Approval of loan Authorization decree, which also Authorization decree, which also agreement assigns the responsibilityto sign the assigns the responsibilityto sign the loan agreement to a member of grant agreement to a member of government government Agreement Signature Once the contract is signed, MoF Grantsin cash: same procedures sends to Presidencythe contractwith as for loans; copy of the budget provisions for first year of agreement sent to STP execution Grants in kind: agreement sent to STP Incorporation of the first year of Presidencytransmits to Congress For grants in cash only, Presidency execution in the budget transmitsto Congress Ratification by Ministry of Only in the cases of operations with Grants from IFIs followed by External Relations the government of Germany and MoF (grants from IFIs):N/A Japan Applied for other grants followed by Ministry of ExternalRelations Congress Approval Publicationinthe Official Journal Publicationinthe Official Journal Execution of Donor and IFIs funded operations and reliance on country systems 258. Country PFM and PR systems can be defined as those used for the management o f country public financial resources. Their use for the execution o f donor funds depends on whether (i) the donor organic rules authorize the transfer of implementation responsibility to the beneficiary country; (ii)funds are lent or granted; and (iii) the reliability o f those country systems allows the donor to transfer partially or totally the responsibility. Thus, two aspects should be measured to determine the level o f reliance on country systems: the proportion o f donor funds 145The STP reviews (i) consistency between the project proposal and the sector strategy; (ii) of overlap risk with existing projects; (iii) sustainability of the project proposal; and (iv) relevance ofthe targeted beneficiaries. whose execution responsibility i s given to the country; and for these funds, which steps of the budget and PR cycles are implementedwith the same systems as country own resources. The present section analyzes those two dimensions for the case of Paraguay. 259. Estimation of the proportion of donor funds under government execution. In Paraguay, 100 percent of IFIs and donors lending operations are administrated by the Government. Conversely, most of bilateral donors manage directly the financial and PR execution of their grants. The EC manages directly the execution of grant funds ifthey finance a specific activity - service, goods, or work - but the execution responsibility is transferred to government for budget support grants. Finally, IFIs transfer the execution responsibility to government for all their grants. Over the period 2004-2006, an estimated average of 60 ercent of total annual donor-IFIs disbursements was executed by the Government, although the use of such systems was partial, as explained below. 260. Level of reliance on Country system. Lending and grant funds executed by government rely on country system for budgeting, accounting consolidation, and treasury. Conversely, reporting to IFIs, internal control and external audit rely on `ring-fenced' systems. IFIs-purpose reports cannot currently be automatically produced through country system, and CGR audit standards are not yet estimated acceptable by IFIs for external audits of projects. For budget execution, project implementing entities usually run`ring-fenced' systems parallel to SIAF.14' 261. On the institutional dimension, the situation is also balanced: in 2006, out of the 23 project implementation units (PIUs) of the Central Administration, 39 percent were staffed exclusively with external consultants; 35 percent were staffed with civil servants only; and 26 percent included both civil servants and consultants. Interestingly, while some ministries -such as the Secretariat of Social Action- manage projects only through consultant-staffed PIUs, others -like the Ministry of Public Works- are relying mainly on civil servants. 262. Relative to neighboring countries with more stable and effective public sector, and considering Paraguay PFM and PR challenges, the level of reliance on the country system in Paraguay is high, and government decisions to avoid outsourcing project execution is reinforcing this tendency. 263. Government decision to avoid outsourcing project execution. Through the 2006 budget law, the Government prohibited new projects to outsource their execution to international organizations. The government position was motivated by the objectives of reducing the outsourcing transactional and developing sustainable capacity. This measure was quickly implemented throughout the Government. For instance, the Ministry of Agriculture, whose strategy in the early 2000s was to extensively outsource, is now only outsourcing one loan and two grants that will all be closed by mid-2008. Still, this strategy puts more directly the government in front of the fiduciary and governance challenges of budget efficiency, control and institutional weaknesses. 146See indicator PI-2. 147See Table 5.5 14*Between3 and7 percent ofthe volume offundsmanaged. Paraguay IntegratedFiduciarv Assessment 70 Table 5.5: Level o pelianceon country systems for donor and IFIs funds executed by Government Implementation , ` UseofCountrySysiem Budget formulation 100%ofIFIs/Donorsfunds executed by the Governmentare includedinthe budget. implementationoutsourcedto internationalorganization:`ring-fenced' system Use of PR Portal -- Projectswhose Project directly managed by government institution: rules followed for donor funded Budget execution -- Recordingofthe resourcesare similarto those for nationalresources. execution is done through`ring fenced' systems The Government is developing, with the support of IDB, a module of SIAF specifically (excludingthe designedfor the recordingof the execution of IFIs and donor projects, the IntegratedSystem o f treasury function) Accountancy and ProjectAdministration (SICAP). The SICAP is planned to be implemented for IDB projects by 2008 and expandedto all donor projects executed by government in the forthcomingyears. - Projects whose implementationoutsourced to international organization: payment procedure Treasury function -similarto directly that usedfor decentralizedentities Project implemented by Government: payment procedure similar to that used for CentralAdministration Financial IFIs require systematically the design of project specific procedures of internalcontrol. Those Management& proceduresare compiledinanoperationalmanual IFIs funded expenditures are incorporatedin the National Public Accounting System (SICO) andconsolidatedin theNationalPublicInvestmentAccount. Executedthrough `ring fenced' systems Executedthrough `ring fenced' systems (privatesector audits) Institutionalsettings for managingdonorfundedprojects:PublicWorks, Agriculture, and Social Action 264. The organization and the constraints associated to the execution of donor funds vary among ministries. This section intends to illustrate this variety through three distinct examples: Ministry of Public Works, Ministry of Agriculture, and Secretariat of Social Action. 265. As mentioned inthe previous section, the Ministry of Public Works is relying mainly on civil servants and organic directorates to execute donor funded programs. Coordination units are light entities to guide and monitor the execution by ministry's directorates. Project contracts, payments and accounting are executed by the Vice- Ministry of Administration and Finance'49. In addition, the Ministry includes a DGCDP, responsible for the IFIs specific reporting and disbursement requirements. The Ministryagreed with the WB to design an Institutional Governance Action Plan (IGAP) to improve its fiduciary and governance framework. The impact of such a plan is higher on an institution like the Ministry of Public Works where human resourcesare stable. 266. The organization is different at Ministry of Agriculture, where a specific General Directorate was established in 2000 to coordinate and manage donor funded projects (DINCAP). This Directorate was also delegated financial authority, with the set up of an autonomous financial sub-direction (Sub-UAF). However, due to the limited effectiveness of DINCAP, the implementation of donor funded projects has usually been outsourced. Besides, unlike the Ministryof Public Works, this ministry i s unstable with a high rotation o f Ministers since 2003'50,generating in the context of Paraguay public sector, high managerial rotation and affecting planning capacity, 149 Usually inParaguay, this is finction assignedto the levelofGeneral Director. 150Five ministers since 2003. Paraguay IntegratedFiduciaw Assessment 71 efficient execution, and control. However, within a year, the Ministry o f Agriculture succeeded to substantially reduce the proportion o f outsourced operations, with the execution o f only one operation still outsourced, and IDB and WB support an Action Plan under preparation to re-activate the financial and administration directorate of DINCAP. This plan intends to address inan integrated way fiduciary and governance aspects, while focusing the activities on only one directorate. It foresees an agreement and a formal commitment fiom the Minister; well defined procedures for internal competitive recruitment and replacement; defined job requirements; measures to provide economic incentives; and the implementation of an effective control fiamework. 267. The Secretariat o f Social Action faces another challenge than the two previous cases. This is a relatively small entity in terms o f staff strength, where project were and are still implemented through PIU staffed with consultants and where implementation was outsourced. The additional workload o f fiduciary execution combined with its flat limited human resources will probably lead to maintain PIUs staffed with consultants. It is however key for the Secretariat to receive delegation o f authority for financial aspects (establishment o f a Sub-UAF). The challenge of efficient execution 268. While control i s the main fiduciary challenge at country level, its impact upon the management of donor funds is adjusted by the ring-fenced control framework'51 required by IFIs and donors operating in Paraguay. Conversely, execution o f donor operations is equally affected by country-level issues than national budget execution, as the below examples illustrate. First, the initial plan o f execution o f , a donor operation is usually distorted by an initial delay, frequently higher than nine months, between the IF1and the Congress approval of the operation. Then, the annual rate o f execution i s usually under-performing. For the period 2004-2006, the rate of execution o f donor funded operations at Ministries of Education, Health and Public Works represented on average less than 60 percent o f the budgeted amounts. As a result, a high proportion o f operations are extended. During the same period, 42 percent o f active lending operations at the Ministries of Agriculture, Education, Health, and Public Works extended their closing dates for a period between 13 and 49 percent of their initial life-span. lS1 For lending operations, control requirements include a clear design o f flow o f funds, a manual o f internal control procedures, an accounting and budget execution system, an independent annual external audit. For operations involving transfer o f funds to beneficiaries, concurrent audit are now systematic. In addition, operations are regularly supervised by fiduciary staff from the IFIs. ParaguayInteaatedFiduciarvAssessment 72 6. CONCLUSIONS 269. Paraguay has taken important steps in recent years to improve the effectiveness o f its PFM and PR functions. These reforms have contributed to stronger fiscal discipline, improved tax collection, and greater transparency, particularly inthe area o f PR. Muchwork remains, however. The analysis produced by IFA has made clear that the PFM and PR agenda in Paraguay faces three main challenges: efficiency o f the budget process; fiscal transparency, and; control effectiveness. This agenda calls for a range o f technical and operational interventions. Meaningful and sustainable change, however, will depend on broad and intensive dialogue within Paraguayan society about good governance. Such a dialogue, led by Government with the participation o f civil society and the private sector can help create the incentives, political will, and crucial checks and balances necessary for difficult, long-term reforms. 270. These far-reaching changes will take time, but Paraguay can pursue a pragmatic, realistic and achievable set of objectives over the near term. First, any initiative must have strong ownership o f the authorities. This may mean that efforts will focus on a single ministry or agency; sweeping measures across Government unaccompanied by real commitment are doomed to fail. Second, measures should integrate PFM and PR reforms alongside actions inthe areas o f humanresources and institutional strengthening. Third, specific actions planned during this immediate stage of the Government's reform strategy should avoid reliance on the passage o f laws. 271, The PEFA and OECD-DAC exercises have provided useful information on PFM and PR functions in Paraguay. They also include methodology, which is designed to allow the Paraguayan authorities to take ownership o f the process o f monitoring PFM and PR performance over time. Most important, these cooperative instruments are establishing an important forum for dialogue and consultation for Paraguay and its development partners. ParaguayIntegratedFiduciaryAssessment 73 GOVERNMENTAL ACTION PLANFORPUBLIC FINANCIALMANAGEMENT AND PROCUREMENT REFORM The Action Plan was preparedby the Government of Paraguay, under the coordination of the Ministry of Finance. It is based on main findings identified by the Integrated Fiduciary Assessment (IFA) and other recent studies related to Public Finance Management (PFM) and Procurement (PR) in Paraguay, and it was undertakenwith the technical support of the World Bank, the IDB and the European Commission. The Plan was presentedto and discussed with representativesfrom international organizations and donors supporting PFM reform inthe country. Although the Plan was elaborated taking into account PFM's three general principles -strategic resource allocation, fiscal discipline, and effective and efficient delivery of public service- it is structured around four thematic areas, which reflect main findings identifiedby the IFA and stress out PFM limitations inParaguay.These four areas are: 0 Credibility and Efficiency ofthe Budgetary Process; Control Effectiveness; 0 Aggregate Fiscal Risk; and 0 Managementof Fundsfrom IFIsand Donors. Reaching an effective and timely implementation of the measures proposed in the Plan depends to a large extent on the progress obtained by the country on broader governance aspects, inparticular: 0 Constitucional Aspects: o Checks and balances, with a focus on the relationship between the Executive and the Legislative; o HierarchicalRelationship betweendifferentlaws. Civil Service andArchitecture ofthe State: o Human Resources Management: rules for recruitment, promotion, mobility, training and civil service career; o Wage Policy; o Inter-institutional Coordination andCommunication; o Architecture of the State, considering, inter alia, better adequacy between available functions and resources; and reduction o f overlappings of functions and tasks. 0 Transparency and Control of Corruption. 73 - X* * - - - X X X X X X - X ParaguayIntematedFiduciaryAssessment 80 ANNEX 1.1 WBI GOVERNANCEINDICATORS DEFINITIONS - - WBI Governance Indicators provide (i) analytical framework for measuring the quality o f an governance; and (ii) time and cross country comparison. They include six dimensions: Voice and accountability; Political Stability and Absence o f Violence; Government Effectiveness; Regulatory Quality; Rule o f Law; and Control o f Corruption. The table below provides the definition o f these six dimensions. Dimension Definition Voice and Measures the extent to which a country's citizens are able to participate Accountability inselecting their government, as well as freedom of expression, freedom o f association, and a free media. Political Stability Measures the perceptions o f likelihood that the government will be andAbsence o f destabilized or overthrown by unconstitutional or violent means, Violence including domestic violence andterrorism. Measures the quality o f public services, the quality o f the civil service Government and the degree o f its independence from political pressures, the quality o f Effectiveness policy formulation and implementation, and the credibility o f the government's commitment to such policies. Regulatory Measures the ability of the government to formulate and implement Quality sound policies and regulations that permit and promote private sector development Measures the extent to which agents have confidence inand abide by the Rule o f Law rules o f society, in particular the quality of contract enforcement, the police, andthe courts, as well as the likelihood o f crime and violence. Control o f Measures the extent to which public power i s exercised for private gain, Corruption including petty and grand forms o f corruption, as well as `capture' o f the state bv elites and Drivate interests. ParaguayInteaatedFiduciaryAssessment 81 ANNEX 1.2 -PEFASCORINGMETHODOLOGY Most o f the indicators have a number o f dimensions linked to the subject o f the indicator. Each o f these dimensions must be assessed separately. The overall score for an indicator i s thenbased on the assessmentsfor the individual dimensions of the indicator. Combining the scores for dimensions into the overall score for the indicator i s done by Scoring Method 1 (Ml) for some indicators and Scoring Method 2 (M2) for other indicators. It is specified in the indicator guidance for eachindicator what methodology should be used. Method 1 (M1) is used for all single dimensional indicators and for multi-dimensional indicators where poor performance on one dimension o f the indicator i s likely to undermine the impact o f good performance on other dimensions of the same indicator (in other words, by the weakest link in the connected dimensions of the indicator). For indicators with 2 or more dimensions, the steps in determining the overall or aggregate indicator score are as follows: 0 Each dimension i s initially assessedseparately and given a score. 0 Combine the scores for the individual dimensions by choosing the lowest score given for any dimension. 0 A '+' should be added, where any o f the other dimensions are scoring higher (Note: It is NOT possible to choose the score for one o f the higher scoring dimensions and add a '-' for any lower scoring dimensions. And it is NOT possible to add a '+' to the score o f an indicator with only one listed dimension). Method 2 (M2) i s based on averaging the scores for individual dimensions of an indicator. It i s prescribed for selected multi-dimensional indicators, where a low score on one dimension o f the indicator does not necessarily undermine the impact o f a high score on another dimension o f the same indicator. Though the dimensions all fall within the same area o f the PFM system, progress on individual dimensions can be made independent o f the others and without logically having to follow any particular sequence. The steps in determining the overall or aggregate indicator score are as follows: 0 For each dimension, assess what standard has been reached on the 4-point calibration scale (as for Ml). 0 Go to the Conversion Table for Scoring Method M 2 (below) and find the appropriate section o f the table (2, 3 or 4 dimensional indicators), 0 Identify the line inthe table that matches the combination o f scores that has been given to the dimensionsofthe indicator (the order ofthe dimensional scores is immaterial), Pick the corresponding overall score for the indicator. The Conversion Table applies to all indicators using M 2 scoring methodology only and cannot be used for indicators using M1, as that would result in an incorrect score. The Conversion Table should NOT be used to aggregate scores across all or sub-sets of indicators, since the table was not designed for that purpose. In general, the performance indicator set has not been designed for aggregation, and therefore, no aggregation methodology has been developed 81 Conversion Table for Scoring Method M 2 Scores for Overall score Scores for Overall score individual dim. M2 individual dim. M2 D D D D D D D D D C C+ D D D C D D B C D D D B D+ D D D+ c A c C+ D D A C D D C C D+ C B C+ D D C B D+ C A B D D C A C B B B D D B B C B A B+ D D B A C+ A A A D D A A C+ 3-dimensional idicators D c c c D+ D D D D D C C B C D D C D+ D C C A C+ D D B D+ D C B B C+ D D A C D C B A C+ D C C D+ D C A A B D C B C D B B B C+ D C A C+ D B B A B D B B C+ D B A A B D B A B D A A A B+ D A A B C c c c C c c c C C C C B C+ C C B C+ C C C A C+ C C A B C C B B C+ C B B B C C B A B C B A B C C A A B C A A B+ C B B B B B B B B C B B A B B B A B+ C B A A B+ B A A A C A A A B+ A A A A B B B B B B B B A B+ Note: It is of no importance in B B A A B+ which order the dimensions in an B A A A A indicator are assigned the A A A A A individualscores The table CANNOT be applied to indicators usingscoring method M1. 82 ParaguayIntegratedFiduciarvAssessment 83 ANNEX 3.1-SUMMARY TABLE OFPEFAPERFORMANCEINDICATORS No. Indicator Scoring PFM-OUT-TURNS Credibilityofthe budget PI-1 Aggregate expenditureout-turncomparedto original approvedbudget C PI-2 Compositionof expenditureout-turncomparedto original approvedbudget B PI-3 Aggregate revenueout-turncomparedto original approvedbudget PI-4 Stock andmonitoringof exuenditureuavmentarrears r , c+ -A KEY CROSSCUTTING ISSUE& ComprehensivenessandTransparency PI-5 Classificationofthe budget B PI-6 Comprehensivenessof informationincludedinbudgetdocumentation C PI-7 Extentof unreportedgovernment operations B+ PI-8 Transparency of inter-governmentalfiscal relations D+ PI-9 Oversightof aggregate fiscal risk from other public sector entities C PI-10 Public access to key fiscal information A BUDGETCYCLE Policy-Based Budgeting I PI-13 I Transuarencv oftaxuaver obligationsand liabilities I c+ I PI-14 Effectiveness of measuresfor taxpayer registrationandtax assessment C PI-15 Effectiveness incollectionof tax payments D+ PI-16 Predictabilityinthe availability of funds for commitment of expenditures C+ PI-17 Recordingandmanagement ofcashbalances, debt andguarantees B+ PI-18 Effectivenessofuavroll controls n+ PI-19 Competition,value for money and controls in procurement B+ PI-20 Effectiveness of internalcontrolsfor non-salary expenditure D+ PI-21 Effectiveness of internalaudit n+ I Accounting, Recordingrod Reporting PI-22 Timeliness andregularityof accounts reconciliation C+ PI-23 Availability of informationon resources receivedby servicedelivery units C PI-24 Quality andtimelinessof in-year budgetreports C+ PI-25 Quality andtimelinessof annual financialstatements C+ ExternalScrutiny and Audit - . PI-26 I Scoue. nature and follow-ur, of external audit r+ I~ 1 - PI-27 I Legislativescrutiny of the annualbudget law PI-28 I Legislativescrutinv of externalauditreuorts II n+ B+ c I DONORPRACTICES D-1 Predictabilityof Direct BudgetSupport C+ D-2 Financialinformationprovidedby donorsfor budgetingandreportingonprojectand D+ programaid D-3 Proportionofaidthat is managed by use of nationalprocedures C Paraguay IntegratedFiduciary Assessment 84 Indicator BridExplanstion andCardinalDataused PFM-OUT-TURNS: Credibility ofthe budget Aggregate expenditure out-turn C Innomorethanoneofthe lastthreeyears hasthe actual compared to original approved expendituredeviatedfrom budgetedexpenditureby more budget than an amount equivalentto 15% ofbudgeted expenditure. PI-2 Compositionof expenditureout-turn B Variance inexpenditurecompositionexceededoverall comparedto original approved deviationinprimary expenditureby 5 percentagepoints in budget no more than one ofthe last three years. PI-3 Aggregate revenueout-turn A Actual domestic revenuecollectionwas below 97% of comparedto original approved budgeteddomestic revenueestimatesinno morethan one budget ofthe lastthree years. PI-4 Stock and monitoringof expenditure C+ The stock of arrears constitutes2-10%oftotal expenditure; payment arrears andthere is no evidencethat it hasbeenreduced significantly inthe lasttwo years. Dataon the stock of arrears is generatedannually, butmay not be completefor afew identifiedexpenditurecategoriesor specifiedbudget institutions. PI-5 B The budgetformulationand execution is basedon administrative,economic andfunctionalclassification (usingat leastthe 10mainCOFOG functions), using GFWCOFOGstandards or astandardthat can produce consistent documentationaccordingto those standards. PI-6 Comprehensiveness of information C Recentbudgetdocumentationfulfils 3-4 ofthe 9 includedin budget documentation informationbenchmarks. PI-7 Extentof unreportedgovernment B+ The level of unreported extra-budgetaryexpenditure (other operations than donor funded projects) is insignificant (below 1% of total expenditure). Complete income/expenditure information is included in fiscal reports for all loan financed projects and at least 50% (by value) of grant financed projects. PI-8 Transparency of inter-governmental D+ No or hardly any part ofthe horizontalallocationof fiscal relations transfers from central government is determinedby transparent andrules basedsystems. Reliableestimateson transfers are issuedafter SN governmentbudgetshave beenfinalized, or earlier issuedestimates are not reliable. Fiscalinformation(ex-anteand ex-post)that is consistent with centralgovernment fiscal reportingis collectedfor at least75%(by value) of SNgovernment expenditure and consolidated into annualreports within 18months of the end ofthe fiscal year. PI-9 3versightof aggregate fiscal risk C Most majorAGAsPEs submit fiscalreports to central Fromother public sector entities governmentsat leastannually, but aconsolidatedoverview i s missingor significantly incomplete.The net fiscal positionis monitoredat least annually for the most importantlevel of SN government, but aconsolidated overviewis missingor significantly incomplete. PI-10 'ublic access to key fiscal A The governmentmakesavailableto the public 5-6 of the 6 nformation listedtypes of information. 84 ParaguayIntegratedFiduciarvAssessment 85 1 ' Indicator BriefExplanationandCardinalData used BUDGETCYCLE i x . . Policy-Based Budgeting Orderlinessandparticipationinthe A A clear annualbudgetcalendarexists, is generally adhered annualbudgetprocess to andallows MDAs enoughtime (andat leastsix weeks from receipt of the budgetcircular) to meaningfully complete their detailedestimatesontime. A comprehensiveandclear budget circular is issuedto MDAs, which reflectceilingsapprovedby Cabinet(or equivalent). This approvaltakes placeafter the circular distributionto MDAs, but beforeMDAshavecompleted their submission. The legislaturehas, duringthe lastthree years, approvedthe budgetbefore the start ofthe fiscal PI-I2 Multi-year perspectiveinfiscal D+ Forecastsof fiscal aggregates(onthe basis ofthe main planning, expenditurepolicy and categoriesof economicclassification) are preparedfor at budgeting leasttwo years on arolling annual basis.A DSA for external debt undertakenat least once during lastthree years. Sector strategiesmay havebeen preparedfor some sectors, but noneofthem have substantiallycomplete costingof investmentsandrecurrentexpenditure. Budgetingfor investmentandrecurrentexpenditureare separateprocesseswith no recurrent cost estimates being shared. PredictabilityandControlin BudgetExecution PI-13 Transparencyoftaxpayer C+ Legislationandproceduresfor most, butnot necessarily obligationsand liabilities all, major taxes are comprehensiveand clear, with fairly limited discretionarypowers of the government entities involved.Taxpayershaveaccess to some informationon tax liabilities and administrativeprocedures,but the usefulnessof the informationis limited due coverageof selectedtaxes only, lack of comprehensivenessand/or not beingup-to-date. A tax appeals systemof administrative procedureshas been established,but needssubstantial redesignto be fair, transparentand effective. PI-14 Effectivenessof measuresfor C Taxpayersare registeredindatabase systems for individual taxpayer registrationandtax taxes, which may not be fully andconsistently linked. assessment Linkagesto other registratiodlicensingfunctionsmay be weak but are then supplementedby occasionalsurveysof potentialtaxpayers. Penaltiesfor non-compliance generally exist, but substantialchangesto their structure, levels or administrationare neededto givethem a real impacton compliance.There is acontinuousprogramof tax audits and fraud investigations, but audit programs are not based on clear risk assessmentcriteria. PI-15 Effectiveness in collectionoftax D+ The total amount oftax arrears is insignificant(Le. less payments than 2% oftotal annual collections).All tax revenue is paid directly into accountscontrolledby the Treasury or transfersto the Treasuryare made daily. Complete reconciliationoftax assessments.collections. arrears and transfersto Treasury does not take placeannually. PI-16 Predictabilityin the availability of C+ A cash flow forecast is preparedfor the fiscal year, and are funds for commitment of updatedmonthly on the-basisof actual cash inflows and expenditures outflows. MDAs' are able to planand commit expenditure for at leastsix monthinadvance inaccordance with the budgetedappropriations. Significantin-yearbudget 85 Paraguav IntegratedFiduciary Assessment 86 Iadjustmentsfrequent, but undertakenwith transparency. I Indicator Brief Explanation and Cardinal Data used PI-17 Recordingandmanagement of cash B+ Domestic andforeigndebt records are complete, updated balances, debt andguarantees andreconciledquarterly.Dataconsideredof fairly high standard, but minor reconciliationproblemsoccur. Comprehensivemanagementand statisticalreports (cover debt service, stock andoperations) are producedat least annually.Most cashbalancescalculatedand consolidated at leastweekly, but some extra-budgetaryfunds remain outsidethe arrangement. Centralgovernment's contracting of loansandissuanceof guarantees are made against transparentcriteriaandfiscal targets, and alwaysapproved by a single responsiblegovernmententity. PI-18 Effectivenessof payroll controls D+ Integrity of the payroll is significantlyunderminedby lack of completepersonnelrecordsandpersonneldatabase. Requiredchangesto the personnelrecords andpayroll are updatedmonthly, generallyintime for the following month's payments. Retroactiveadjustmentsare rare. Controlsexist, but are not adequateto ensure full integrity ofdata. Partialpayroll audits or staffsurveyshave been undertakenwithin the last 3 years. PI-19 Competition,value for money and B+ Accurate data on the methodusedto awardpublic controlsinprocurement contractsexists and showsthat morethan 75% of contracts above the thresholdare awardedonthe basisof open competition.Other less competitivemethodswhen used are justified in accordance with legalandregulatory requirements.A process for submittingand addressing procurementprocess complaintsis operative, but lacks ability to refer resolutionofthe complaintto an external higher authority. PI-20 Effectiveness of internalcontrolsfor D+ Expenditurecommitmentcontrolproceduresexist and are non-salary expenditure partiallyeffective, but they do not comprehensivelycover all expenditures.Clear, comprehensiveand reliablecontrol rules/procedures are lackingin other importantareas. Rulesare compliedwith ina significant majorityof transactions, but use of simplified/emergencyprocedures in unjustifiedsituationsis an importantconcern. PI-21 Effectiveness of internalaudit D+ There is little or no internalauditfocused on systems monitoring.Reports are issuedregularlyfor most governmententities, but maynotbe submittedto the ministryof finance andthe SAI. Internalaudit recommendationsare usually ignored(with few - excentions) .......... . - Accounting, Recording and Reporting PI-22 Timeliness and regularity of C+ Bankreconciliationfor all Treasury managedbank accounts reconciliation iccountstake place quarterly, usuallywithin 8 weeks of 2nd of quarter. Reconciliationandclearance of suspense iccountsand advancestake place at leastquarterly, within 3 monthfrom end of periodandwith few balancesbrought Fnrward PI-23 Availability of information on C resourcesreceivedby service primaryhealthclinic coveringasignificantpart of the deliveryunits :ountrv. 86 ParaguavIntenatedFiduciarvAssessment 87 BriefExplanationandCardinalData used Quality andtimeliness of in-year C+ Classificationof data allowsdirect comparisonto the budgetreports original budget. Informationincludes all itemsof budget estimates.Expenditureis coveredat bothcommitment and paymentstages. Reportsare preparedquarterlyor more frequently, andissuedwithin 4 weeks of endof period. There are some concerns aboutthe accuracyof information,which maynot alwaysbehighlightedinthe reports, butthis doesnot fundamentallyunderminetheir basicusefulness. PI-25 Quality andtimeliness of annual C+ A consolidatedgovernment statementis preparedannually financial statements andincludes, with few exceptions, full informationon revenue, expenditureandfinancial assetdliabilities.The statement is submitted for external auditwithin 6 months of the end ofthe fiscal year. Statements are presentedin consistent format over time with some disclosure of accounting standards. ExternalSrrutiny andAudit PI-26 Scope, natureand follow-up of C+ ~Central government entities representingat least 50% of external audit total expendituresare auditedannually.Audits predominantlycomprisetransaction leveltesting, but reports identify significant issues.Audit standards may be disclosedto alimited extent only. Audit reports are submittedto the legislaturewithin 8 monthsofthe endof the periodcoveredand in the case of financialstatements from their receiptby the audit office. A formalresponse is made, thoughdelayedor not very thorough, but there is little evidenceof any follow up. PI-27 Legislativescrutinyofthe annual B+ The legislature'sreviewcoversfiscal policiesand budget law aggregatesfor the comingyear as well as detailed estimates of expenditure andrevenue.The legislature's proceduresfor budgetreview are firmly establishedand respected.They includeinternalorganizational arrangements, suchas specializedreview committees, and negotiationprocedures.The legislaturehasat leasttwo monthsto reviewthe budgetproposals.Clear rules exist for in-yearbudget amendmentsby the executive, which set strictlimits on extent andnatureof amendmentsandare consistently respected. PI-28 Legislativescrutinyof external audit D+ Examination of audit reports by the legislature does not reports take place or usually takes more than 12 months to complete. In-depth hearings on key findings take place occasionally, cover only a few audited entities or may include with ministry of finance officials only. Actions are recommended,but are rarely acteduponby the executive. 87 Paraauav Integrated FiduciarvAssessment 88 \ ' No. Indicator Scoring BriefExplanationandCardinalData used DONORPRACTICES D-1 Predictabilitvof Direct Budget C+ I In no more than one out of the last three years has direct I support budget support outturn fallen short of the fbrecast by more than 15%. Quarterly disbursement estimates have been agreed with donors at or before the beginningof the fiscal year and actual disbursements delays (weighted) have not exceeded25% intwo ofthe lastthree years. D-2 FinancialInformationprovidedby Dt Not all major donors provide budget estimates for donors for budgetingandreporting disbursement of project aid at least for the government's onprojectand aid program coming fiscal year and at leastthree months prior its start. Donors provide quarterly reports within two months of end-of-quarter on the all disbursements made for at least 50% of the externally financed project estimates in the budget. The information does not necessarily provide a breakdown consistent with the government budget - classification. D-3 Proportionof aidthat is managedby C 50% or more of aid funds to centralgovernmentare use of nationalprocedures managedthroughnationalprocedures. 88 Paraauav IntegratedFiduciarvAssessment 89 ANNEX3.2: OVERVIEW OFPEFAINDICATORS-BENCHMARKING COUNTRIES Paraguay Average Ghana Kyrgvr Momblqut Zambia Bangladesh Afghanistan Republic 77= A A B A B KEY CROSS- 6, C omprehensivenessof PI-6 'nformationincluded in C C+ C B B A ud et documentation B+ C+ A NIA C+ B+ C A C+ A I B I B l c I A B+ B C+ C+ B C B A B D+ D+ payer registration C C C NIA C+ C B+ C+ D+ D+ collectionoftax C D+ D + I c payments I D + 'I-16 Predictabilityinthe availability of funds for commitment of C C+ expenditures ~ '1-17 Recordingand managementof cash balances,debt and NIA B P guarantees '1-18 1 Effectivenessofpayroll controls C D+ '1-19 Competition, value for moneyand controls in D C+ rocurement I I controls for non-salary 1 D+ 1 D+ 1 C I D+ I D+ c c+ C C C expenditure PI-21 Effectivenessof internal i -...I:. D+ D + D + D C+ c c+ D+ D C dUUll PI-22 Timeliness and regularitv of accounts C+ c+ c NIA B B B+ C+ C C+ reconciliation PI-23 Availability of information on resources receivedby service C C D D C C B C C D deliveryunits PI-24 Quality andtimelinessof in-year budgetreports c+ c c+ C+ C+ c c+ C+ C C PI-25 Quality andtimeliness of annualfinancial C+ c c+ D B NIA C+ C+ C C I 1 1 1 1 1 1 ID-2 FinancialI;dformation NIA ~ ~ ~ ~ providedby donors for budgeting and reporting on projectand program D-3 Proportionof aid that is managedby use of NIA national rocedures 90 ANNEX 3.3: 2005WBIGOVERNANCEINDICATORS-BENCHMARKING COUNTRIES 2005 Paraguay Average Ghana Kyrgyz Mozambique Gabon Moldova Zambia Bangladesh Afghanistan Governance Republic Indicators Voice and Accountability 41.1 34.24 58.9 22.7 44.4 29.5 32.4 36.2 31.4 11.6 Political StabilityMo 28.3 30.62 50.5 13.7 47.2 53.8 27.8 45.3 6.6 2.4 Violence Government 23,4 Effectiveness 27.92 53.6 20.6 44.0 32.1 27.8 19.6 21.1 9.1 Regulatory Quality 22.8 28.66 49.5 24.8 28.2 47.5 38.1 26.7 14.9 5.4 Rule of Law 16.4 26.72 48.3 13.5 31.4 40.1 35.3 34.3 19.8 1.4 Control of Corruption 7.4 21.52 45.3 13.8 31.0 35.5 27.1 23.2 7.9 2.5 ParaguayIntegratedFiduciaryAssessment 92 BIBLIOGRAPHICAL REFERENCES Alvarez, Juan Angel, 2003, "Antilisis de la eficiencia del gasto," Master's Thesis, Universidad Catblica. 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Available in Internet: httu://~~~,contraloria.gov.~~/listados.asp?cat=8 Dr.Cabral Mereles, CCsar Rambn, 2004, "El proceso de formulacidn deunnuevo marcode relaciones laboralesorientadaspor unpacto entre trabajadores, instituciones y usuarios. Principios orientadores, aspectos que favoreceny que dificultanunacuerdo" (November), pp 2-15. Available inInternet: httu://www.ouas.org.br/rh/uublicacoes/textos/mesa redonda 2 el proceso de formulacion de un nuevo marc02 .uut Globalizacion.org, "AmCrica Latina castigadapor la Corrupci6n", January 9th 2007. 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Available inInternet: htto://www.marr.rrov.pv/vision.htm Ministry of Agriculture and Livestock, "Organigrama", 2007. Available inInternet: http://www.mag.gov.Dv/orfianirrrama.htm MinistryofAgriculture andLivestock, "Educaci6n", 2006. Available inInternet: http://www.marr,gov.rw/Educacibn.htm Ministry ofAgriculture and Livestock, "Ley No81/92, QuC establecela Estructura Orghica y Funcional del Ministerio de Agricultura y Ganaderia," 1992.Available inInternet: http://www,leyes.com.tw/todas dis~osiciones/l992/leves/le~ 92.htm 81 MinistryofAgriculture andLivestock, "Marco Juridico," December22nd 1992.Available inInternet: http://www.maa.pov.Dv/carta organica.htm MinistryofAgriculture andLivestock, "Plan de DesarrolloAgrario Rural, Proyectosy Programas", 2007. Available inInternet: http://www.mag.gov.py/ Ministry ofAgriculture and Livestock, GeneralDirectorate of Plannificacion, "El Sector Agropecuario y Forestal en Cifras," 2006. Available inInternet: htto://www.marr.rr0~.~~/Estadisticas/rev2006.~df MinistryofEducationand Culture, "Direcci6n de FormacihProfesional. Estructura Orghica, Misi6n y Visibn, Marco Legal", May 21st 2007. Available inInternet: http://www.mec.gov.rv/dEB/introduccion 03.html Ministry of Education and Culture, "Direcci6n Generalde Gesti6n Social," 2007. Available inInternet: htto://www.mec.gov.uv/gs/ MinistryofEducationandCulture, "Direccibn Generalde RecursosHumanos," 2007. Available inInternet: htto://www.mec.rrov.Dy/dmhhl MinistryofEducationand Culture, "Normativas," 2007. Available inInternet: http://www.mec.gov.pv/nor.html Ministry of Education and Culture, "Organigrama Generaldel Ministerio de Cultura," November 2006. Available inInternet: http://www.mec.gov.pv/orrr,htm Ministry of Finance. Undersecretariatof Financial Administration State, "Decreto Reglamentario de la Ley 1535 de Administracih Financieradel Estado," April 1st 2000. Available inInternet: htto://www.hacienda.rrov.Dv/sseaf/index.Dh~?oution=comcontent&task=view&id=202&Itemid=171 Ministry of Public Works and Communications, "Ley No167/93 Que aprueba con modificaciones el Decreto -Ley No5 de Fecha24 de Marzo de 1991. Que establece la Estructura Orghica y Funcionesdel Ministerio de Obras Publicas y Comunicaciones," 1993. Available inInternet: httt,://www.leyes.com.tw/todas dis~osiciones/l993/le~es/le~ 167 93.htm MinistryofPublic Works andCommunications, "Organigrama General," 2004. Available in Internet: h~://www.mopc.~ov.11~/www2004/weboreanic~rama archivodOrrranirrrama moDc.xls Ministryof Public Works andCommunications, "Plan de 10s primeros 100dias," December 23rd 2003. Available inInternet: h~://www.mopc.gov,p~/www2004/web~rimeros 1OOdias.htm 94 ParaguayIntegratedFiduciaryAssessment 95 Ministryof Public Works andCommunications, "Plan de 10s primeros 500 dias," December 23rd2003. Available inInternet: http://www.mo~c.~ov.uv/www2004/gestion.htm Ministryof Public Works andCommunications,"La Institucion," 2004. Available in Internet: http://www.mowgov.uv/ MinistryofPublic Works andCommunications, "Autoridades." Available inInternet: http://www,msDbs.gov.uv/autoridades.php Ministry of Public Health and Social Welfare, "Decreto No21.376/98, Que establecela nuevaorganizacih funcional del Ministerio de SaludPublica y Bienestar Social," 1998. Available inInternet: http://www.leves.com.w/todas dimosiciones MinistryofPublic Health and Social Welfare, "Institucional," 21de Mayo de 2007. Available inInternet: http://www.mspbs.gov.py/institucional.php Ministry of Public Health and Social Welfare, "Recursos Humanos del Sector Salud en el Paraguay. Estudio Situacional," 2000. Available inInternet: hffr,://www.observatoriorh.org/esu/docs/datos-de-paraauav.doc Ministry of Public Healthand Social Welfare, "U.O.C. UnidadOperativa de Contrataciones," 2007. Available inInternet:hffr,://www,msubs.(Eov,p~/muoc.php?accion=mauro MinistryofPublic Health and Social Welfare, National InstituteofHealth, "Politica Nacional de Recursos Humanos en Salud 1999-2003," 1999.Available inInternet: http://www.ins.aov.py/Documentos/POLITICA%2ODE%2ORR.HH.doc International Labour Organization, "Legislaci6n de laFormacion Profesional. Paraguay," 2007. Available inInternet: httu://www.cinterfor.org.uv/~ublic/suanish/region/am~ro/cinterfor/dbase/legis/uar/vii. htm Presidencyof Paraguay, "Ley 1626/00 de la Funci6nPublica," 2000. Available inInternet: httu://www.leyes,com.uy/todas dis~osiciones/2OOO/leves/lev 1626 0O.htm Presidency of Paraguay, "Politica Nacional de Ciencia y Tecnologia," October 2002. Available inInternet: h~://~~~.conacvt.org.pv/docs/Politica%2ONacional%2Ode%2OCvT%20%200ctubre%202002.udf Secretariatof Public Function, "Censo Integral de Funcionarios P6blicos," 2003-2004. Available inInternet: www,sfp.gov,pv/pdfs/libro/libro%2OInfo~e%20Censo%2OFuncionarios%203.pdf Secretariatof Public Function, "Primera Fase. EL ANTES: Lapreparacion," 2006. Available inInternet: httu://www.sfD.~ov.~v/ua~inas.ph~?id=4 LatinAmerican Universities, "Paraguay," October 2006. Available inInternet: http://www.rau.edu.uy/universidad/univ.htm 95 ParaguavIntegratedFiduciary Assessment 96 LISTOFPERSONSINTERVIEWED G6mez Acosta, Miguel Vice-minister.Under-secretariatof Financial Administration, MinistryofFinance. Acosta Ferreira, Manuel General Director. Under-secretariatof Financial Administration. General Directorate of Budget, Ministry of Finance. Alvarez, Juan h g e l General Director. Under-secretariatof Financial Administration. Directorate of Public Debtand Credit, MinistryofFinance. Aguero, Maria Teresa General Director. Under-secretariatof Financial Administration. GeneralDirectorate of Public Accounting, Ministry of Finance. Cardozo, NelsonFelix General Director. Under-secretariatof Financial Administration. GeneralDirectorate of Treasury, Ministry of Finance. Bareiro, George General Director. Under-secretariatof Financial Administration. General Directorate of Technology and Communications, Ministryof Finance. Mencia, Elba Chief of Department. Under-secretariat of Financial Administration. Departmentof Control of Financial and Budgetary Execution, General Directorate of Budget, Ministry of Finance. Reyes, Anibal Under-secretaryof Financial Administration, Ministry of Finance. Alarcbn, Manuel Director. Directorate o f Fiscal Policy, Ministry of Finance. Delgado, Jorge Departmentof Banking Network, Ministryof Finance. Aiiazco, Modesto Fariiia Chief of Department. Public DebtProcessing, Ministry of Finance. Martinez, Oscar Chief of Department. Financial Resources, Ministryof Finance. Taboada, Rafil Chief of Department. Control andFollow up of Programs, MinistryofFinance. Torres, Carmelo Director. Budget, Ministry of Public Health and Social Welfare. Recalde, Nilda General Coordinator. Ministry of Public Health and Social Welfare. Romero, Alicia Accountant. ProcurementUnit,UAPI, Ministry of Public Health and Social Welfare. Rojas, Gerard0 President. Agricultural Credit of Habilitation, Ministryof Agriculture and Livestock. ParaguayIntegratedFiduciaryAssessment 97 NGez, Mario Assessor ofthe Minister. Ministry of Agriculture and Livestock. Benitez, Blas Deputy Director. HumanResources, Ministryof Agriculture and Livestock. Espinola, Carlos Director. HumanResources, Ministryof Agriculture and Livestock. Villasboa, Heriberto Director. Public Credit, Ministry of Public Works and Communications. Dos Santos, Miguel Director. HumanResources,Ministryo fPublic Works and Communications. Meza, Sim6n L. Director. Finance, Ministry of Public Works and Communications. Pineda, Robustiano Chief Project Coordinator. Ministry of Public Works and Communications. Miranda, Hugo Chief of ExecutionUnit. IDBProgram, Ministry of Public Works and Communications. Riveras, Fabio DepartmentofExecution, Directorate of Highway Administration, Ministry of Public Works and Communications. Yegros, Oscar Executive Coordinator, Ministryof Education and Culture. Rivas, Aristides GeneralDirector. Auditor GeneralOffice. Ayala, Albert0 GeneralDirector. Control of Social Resources.Auditor General Office. VazquCz, Ruben Director. Bicameral Commission of Budget, Congress of Paraguay. Reynal, Maria Lourdes Assistant. Commission of Accounts and Control of Budgetary Execution, DeputiesChamber, NationalCongress of Paraguay. I J 97 IBRD 33464R 62W 60W 58W 56W 54W 18S 18S B O L I V I A PARAGUAY Capitán Pablo Capitán Pablo Capitán Pablo To Lagerenza LagerenzaLagerenza 20S Santa Fé Puerto Puerto 20S Cerro León Cerro León A L T O Bahía Negra Bahía Negra (1,000 m) (1,000 m) General Eugenio General Eugenio General Eugenio PA R A G U AY To A. Garay A. Garay A. Garay Boyuibe Fortín Fortín Madrejon Madrejon Fuerte Olimpo Fuerte Olimpo B R A Z I L Fortín Carlos Fortín Carlos A. Lopez A. Lopez Puerto Puerto Tres Palmas res Palmas To Fortín Fortín B O Q U E R O N Campo Infante Rivarola Infante Rivarola Kilómetro Kilómetro Grande 160 160 o Mariscal MariscalMariscal c 22S Estigarribia EstigarribiaEstigarribia Puerto Puerto Doctor DoctorDoctor To Pedro P. Peña Dourados Pedro P. Peña Pedro Peña C h a La Victoria La ictoria Filadelfia Filadelfia Pilcomayo r a n Puerto Pinasco Puerto Pinasco AMAMBAYAMAMBA Pedro Juan Pedro Juan CaballeroCaballero GVerde Aquidabán Yby Yaú Yby aú Fortín Fortín Leonida Escobar Leonida Escobar CONCEPCIONCONCEPCION Fortín Ávalos Fortín Ávalos Pozo Pozo Concepción ConcectiónConcectión Capitán Capitán Sánchez Sánchez Colorado Colorado Bado Bado Fortín Fortín Monte Lindo Monte Lindo P R E S I D E N T E General General Díaz Díaz Fortín Teniente Fortín eniente SanSan Lima Lima To Rojas Silva Rojas Silva 24S Las Lomitas H A Y E S ParaguaPedroPedro S A N Salto del Salto del 24S Guairá Guairá y CANENDIYÚ CANENDIYÚ Pilcomayo P E D R O Curuguaty Curuguaty Rosario Rosario Villa illa San San Hayes Hayes Estanislao Estanislao Itaquayry Itaquayr A R G E N T I N A CORDILLERACORDILLERA CAAGUAZU CAAGUAZU To ASUNCIÓNASUNCIÓN CaacupéCaacupé CoronelCoronel Cascavel OviedoOviedo PARANA CENTRALCENTRALItaIta Paraguari Cerro Pero Paraguari Cerro Pero Ciudad del Ciudad del (842 m) (842 m) O Este Este This map was produced by the Map Design Unit of The World Bank. To Villarrica illarrica Formosa Santa The boundaries, colors, denominations and any other information PARA- ARA- GUAIRA Abaí Abaí ALTSanta Rita Rita 26S shown on this map do not imply, on the part of The World Bank Villa illa 26S Group, any judgment on the legal status of any territory, or any OlivaOliva Caazapá Caazapá endorsement or acceptance of such boundaries. PARAGUAY Pilar Pilar NEEMBUCÚ GUARIGUARI Desmochado Desmochado MISIONES C A A Z A PA San Juan San Juan BautistaBautista I TA P U A Paraná San Ygnacio San Pedro San Ygnacio San Pedro del Paraná del Paraná SELECTED CITIES AND TOWNS CoronelCoronel Paraná BogadoBogado Encarnación Encarnación DEPARTMENT CAPITALS NATIONAL CAPITAL To Santo Tomé RIVERS 28S PAN-AMERICAN HIGHWAY MAIN ROADS RAILROADS 0 50 100 150 Kilometers DEPARTMENT BOUNDARIES 0 50 100 Miles INTERNATIONAL BOUNDARIES 60W 58W 56W 54W JULY 2006