Report No. PIC3328 Project Name Venezuela-Public Sector Modernization r(n) and Decentralization Project (PSMoD) Region Latin America and Caribbean Sector Public Sector Management Project ID VEPA41807 Borrower Agency The Republic of Venezuela Executing Agencies Selected States and selected Central Ministries Date this PID Prepared June12, 1997 Date initial PID Prepared January 29, 1996 Project Appraisal Date June 25, 1997 Project Board Date November 6, 1997 1. Background: Since the first round of gubernatorial and municipal elections in 1989, Venezuela has been in the process of transferring responsibilities to the states. Already a large number of functions , including productive enterprises, is being administered by the State governments. Recent macroeconomic measures toward fiscal restraint as well as limited resources and capacity at the state level have prompted the state governments to seek innovative solutions to managing assets and services. Some of these initiatives mirror reforms at the national level to divest from operating functions and creating appropriate legal and regulatory frameworks. As a result the project strategy is to support: state governments efforts to privatize productive assets within consistent national reform strategies, the adoption of normative/regulatory frameworks in the airport and ports sectors, the privatization initiatives of the Ministry of Communications and Transport (MTC), its organizational and functional restructuring and institutional strengthening activities. Substantial progress has been made during preparation with the States of Falc6n (e.g. on hotel sold and three more in process) and Sucre (e.g. salt mines and one port already privatized), and with MTC (e.g. bidding documents prepared for airport infrastructure). The project, which builds upon the experience of a Bank region-wide initiative to support subnational governments privatization programs, will make a substantial contribution to the wider Public Sector Reform program being implemented by the Government. It is expected that, if the pilot experiences are successful, the model will be expanded to other interested states in a larger follow-up operation. 2. Project Objectives. The objectives of the project are to: -- Increase efficiency in the management of state productive enterprises and infrastructure, and improve the fiscal and financial situation of participating state governments, by promoting private sector participation. -- Strengthen the national regulatory framework in the transport subsectors, increase efficiency in the management of national transport infrastructure, and rationalize existing institutional structures. 3. Project Description. The project has two components: a) privatization at the State level; and b) reform and decentralization at the National Government. 4. Privatization at the State Level. This component, which builds upon the experience of a Bank region-wide initiative to support subnational governments privatization programs, would support three pilot state governments tailor and execute a customized strategy for transferring to the private sector productive public enterprises and the construction, operations and maintenance of transport infrastructure. The best modalities for private sector participation will be applied on a case-by-case basis, including concessions, contracting out, sale of assets, etc. While the states may have privatization programs of larger scale and sectors' coverage, the assistance will focus on a restricted number of "transactions" in activities that either do not face regulatory issues (i.e. competitive enterprises) or where there already exists a national reform strategy (i.e. airports and ports). 5. Bank support would be channeled towards: -- Transactions' design and implementation. These include the use of consultant services to prioritize and customize privatization programs, develop sales strategies, design wide stock-ownership privatization programs, organize auctions, prepare information sheets, bidding documents and contracts, and assist sale closures. -- Strengthening the sub-national governments' capacity to design and implement transactions, monitor contracts, evaluate performance, and create the supervisory and institutional frameworks that would ensure the sustainability of the initiatives (consultant services, equipment and training). 6. The States' Privatization Programs Consulting Team would include a national coordinator for state reforms, a legal/institutional expert, and an expert on participatory approaches to privatization. The team would work across states to support the development and implementation of their customized privatization strategies, and help set up, train, and coordinate the work of the states' executing units. The team would be actively involved in the preparation of the general guidelines, workplan, timetable for implementation, and terms of reference for hiring of investment banks and consultant firms. The team will travel to other states to disseminate pilot experiences and set the basis for future assistance. 7. Target beneficiaries would be the States of Falc6n, Merida and Sucre. Falc6n and Sucre have demonstrated high political commitment to privatization and private sector development, and high program's potential. The successful privatizations already - 2- completed in the State of Sucre (salt mines and ports) and in the State of Falcon (hotels) attest to this. Merida has come on board recently, the opening seminar having taken place May 22-23, 1997. The States of Falcon and Sucre, whose preparation is more advanced, would be expected to carry out at least two-three privatization initiatives in the three-year implementation cycle. One-two initiatives will be expected in the case of the State of Merida. It is hoped that successes in these experiences will set the basis for a follow-up project that would include a larger number of states. 8. Reform and Decentralization at the National Government. For state reforms to be viable and sustainable, it is critical to put in place at the national level adequate technical and economic regulatory frameworks in priority subsectors (airports and ports), develop sufficient supervisory capacity, and ensure consistency of individual initiatives with overall national objectives. Within the context of the Government's Public Sector Reform Program, this component would support reforms at the national government level that will actively complement state governments' initiatives in the area of increased private sector participation, as well as help the national government carry out two major concessions in airport infrastructure. 9. Bank assistance will be directed to: i) institutional strengthening of supervisory, regulatory and evaluation functions and project management; ii) developing normative and regulatory frameworks to strengthen competition with emphasis on transport subsectors (airports and ports) reflecting the privatization priorities of both states and national governments; iii) concessioning of construction, operation and maintenance of infrastructure (airport and air navigation services); and iv) institutional restructuring studies and personnel audits to streamlining of operative functions and determine retrenchment needs and costs. The Bank will also provide limited policy assistance to the wider Public Sector Modernization Program of the Government for carrying out institutional studies of the public sector. This is expected to provide the basis for continued policy dialogue, and a vehicle for preparing a potential follow-up project. 10. Subcomponent A. Ministry of Transport & Communications (MTC). MTC is key to supporting priority initiatives in the states as well as urgent reforms at the national level in the airport sector. Not only has MTC decentralized roads, ports and airports operations to the states (18 out of 22 states have absorbed all or some of these functions) but the states are also keen in transferring the operation of this infrastructure to the private sector. The project will assist MTC in implementing its rationalization strategy, strengthening its regulatory capacity, putting in place consistent regulatory and competition frameworks in specific subsectors (airports and ports), and supporting its initiatives to concession airports (case of Sim6n BolUvar International Airport) and air navigation services. These reforms complement perfectly the initiatives for concessioning regional airports and are urgently needed to comply with international (FAA) security norms and regulations. The Ministry has began implementation with funds from - 3- the TAL for PIID. 11. Subcomponent B. Institutional restructuring studies to support the wider Public Sector Modernization Program of the government. These studies will provide policy guidance for continuing efforts to rationalize the public sector and continuing the process of decentralization. They may also provide the basis for the design of a follow-up operation. 12. Project Financing. Total project cost is estimated at US$24.4 million equivalent, of which US$8.0 million new financing would come from the Bank, US$8.0 million from the IDB, US$3.8 million from the Government, and $4.6 million (during preparation) from the TAL for Pre-Investment and Institutional Development. The cost estimates draw from the experience of the Technical Assistance for Preinvestment and Institutional Development Project (Ln. 3225-VE) which is funding national and international consultants, equipment, and training, and from privatization experiences in the region. 13 Participatory Approach. The project takes a strong participatory approach to project preparation and implementation, to increase stakeholder ownership of projects, their relevance to local realities, and prospects for sustainability. The project is being prepared in joint collaboration with State governments, and the private sector. In depth private sector involvement is required to assess level of interest and economic viability of privatization projects. 14. Project Implementation. -- Implementation period: Three years (1998-2000) -- Executing agencies: Selected State Governments: design and implementation of customized privatization strategies. -- The Ministry of Transport and Communications: responsible for implementation of agreed action plan for institutional strengthening, regulatory framework in key sectors, and concessions. -- Project Coordination: Cordiplan through its Public Sector Reform Executing Unit will provide overall coordination for the reforms with the support of a States' Privatization Programs Consulting Team and a Public Sector Modernization Team -- Project Oversight: Governors of selected states, Minister of Planning/Cordiplan, and Presidential Commission to Coordinate and Monitor the Restructuring of the Public Administration -- Accounting, financial reporting and auditing arrangements: The National Government will enter subsidiary agreements with each state government participating in the reform according to the constitutional restrictions on direct - 4 - lending to the states. These agreements will grant the states authority for the use of pre-specified funds, and will commit the states to servicing the debt, implementing the reforms and to possible complementary actions. Subaccounting mechanisms may be established to keep track of each state disbursements. -- Monitoring and evaluation arrangements: Action plans will be developed for each part of the project and agreed during appraisal. These will include clear performance indicators which will be reviewed on a semi-annual basis. The action plans may be later amended by mutual agreement to better meet project objectives. Special emphasis will be given to first year activities. 15. Project Sustainability. The project takes a focused approach and narrow definition of objectives that will facilitate both implementation and performance evaluation. Work with the States will entail: a) clearly defined privatization projects that have an inherent irreversibility quality to them, and b) strengthening monitoring capacity to improve supervision of contracts. Early involvement of relevant actors is meant to respond to local necessities at the design stage, and develop a lasting partnership that will carry through the implementation stage and beyond.. In the case of the National Government, the development of regulatory and institutional frameworks will facilitate private sector participation and strengthen competition. 16. Lessons from Previous Bank Involvement. The preparation of the proposed project is benefiting from LAC experience in public sector modernization and the large number of world-wide privatization initiatives the Bank has supported. The following are some of the lessons learned from these experiences. General: -- Political and economic opposition can be reduced if large sectors of the public understand the program and the need for reform. (PCR, Rep. No. 15239) -- To promote a structural reform program, some benefits for the public should exist from the beginning. Program design should take this into account and implement measures which produce early results. (PCR, Report No. 15239) On private sector development: -- Government commitment is the most important factor affecting performance (Annual review of evaluation Results 1993, OED, Report No. 13794) -- In the design and implementation of public enterprise reforms, the issue of sector reform should be addressed (PCR, Report No. 15239) -5- -- Where privatization is not feasible, alternatives such as leases or management contracts need to be actively explored. (Lessons & Practices No. 2, OED) On institutional arrangements: -- Adopt a participatory approach to project preparation to increase resources, ownership and sustainability (World Bank Participation Sourcebook, ESD) -- Draw on specific but adaptable action plans and annual work programs for each component that focus on outputs, define evaluation criteria and performance indicators to judge project progress (MOP, Report No. P-6740-HO) -- Give implementation support for establishing sound criteria and a solid institutional basis for the administration of the project, especially with regard to procurement (MOP, Report No. P-6740-HO) -- Emphasize counterpart responsibilities of the beneficiary agencies and the staffing of key positions (MOP, Rep. No. P-6740-HO) On decentralization: -- Agreements between the central government and states are important to confirm commitment of all parties involved (SAR, Report No. 13474-VE) 17. Environmental Aspects. The project will not have environmental components or impact, and therefore has been classified as Category C -- no environmental analysis necessary. 18. Program Objective Categories. The primary PCs are Private Sector Development (PSD) and Public Sector Management (PB). 19. Project Benefits: -- Transferring productive enterprises and transport infrastructure to the private sector, at both state and national levels, will: -- Increase efficiency and permit international standards and regulations to be met. -- Transfer investment responsibility to the private sector (i.e. BOT agreements) which will lead to lower public transfers to public enterprises and stimulate private investment. -- Increase state and national governments' sources of revenue (recurrent concession fees on private exploitation of public resources (mines) and infrastructure (airports and ports) or one-time - 6 - privatization/sale proceeds of e.g. hotels). -- Improve fiscal outlook of the state budgets and relieve their financial pressures onto the national government. -- Allow governments to focus on priority public sector activities. -- Widen stock ownership through worker and civil participation privatization schemes. 20. New competition and regulatory frameworks in airports and ports will: -- Provide the adequate environment for private sector participation. -- Comply with international norms and regulations. 21. Risks. Risks are associated with: -- Institutional instability. To minimize this risk the project is weighted toward the States and will rely on fixed-term elected officials rather than appointed officials. In the National Government the project will define clear action plans, and develop implementation capacity at less unstable middle-management level. -- Weak implementation capacity. Great attention is placed during preparation to: i) develop workable institutional arrangements, ii) support the establishment and strengthening of technical executing units and the use of long-term consultants, ii) develop focused training seminars on key issues (i.e. privatization best practices, procurement), iv) provide direct technical assistance, v) define clear and focused objectives and outputs, and vi) diversify executing agencies. -- Availability of Funds. State government counterpart fund do not suffer from the budgetary problem of the National Government. The project is thus protected in at least one of the two components. -- Willingness of the private sector to participate. Develop transparent international bidding procedures and appropriate regulatory framework, increase access to information. Eliminate price controls, maintain appropriate exchange and interest rates policies. 1/ "Exclusive" responsibilities, such as roads, ports, airports and mines, have been assumed by a large proportion of States. "Shared" responsibilities (such as health, attention to the minor, attention to the aged, sports, education, nutrition, housing, and culture) are also being transferred although at a slower pace. -7 - Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending June 20, 1997. - 8 -