Document of The World Bank Report No: ICR00002961 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-81090) ON A LOAN IN THE AMOUNT OF US$100 MILLION TO THE REPUBLIC OF PARAGUAY FOR A PUBLIC SECTOR DEVELOPMENT POLICY LOAN June 13, 2014 Poverty Reduction and Economic Management Argentina, Paraguay, Uruguay Country Management Unit Latin America and the Caribbean Region CURRENCY EQUIVALENTS (Exchange Rate Effective 06/02/2014) Currency Unit = G$ 1.00 = US$ 0.00022 US$ 1.00 = G$4,423.5 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ANNP Ports Company (Administración Nacional de Navegación y Puertos) CAPASA Beverage Company (Cañas Paraguayas Sociedad Anonima) CNEP National Council for State-Owned Enterprises (Consejo Nacional de Empresas Públicas) CPS Country Partnership Strategy DGEP SOE General Directorate (Dirección General de Empresas Públicas) DPL Development Policy Loan GDP Gross Domestic Product ESSAP Sanitation Services Company of Paraguay (Empresa de Servicios Sanitarios del Paraguay) FEPASA Railways Company (Ferrocarilles del Paraguay Sociedad Anonima) LTU Large Taxpayer Unit (Dirección General de Grandes Contribuyentes) MECIP Paraguayan Standard Model of Internal Control (Modelo Estándar de Control Interno del Paraguay) M&E Monitoring and Evaluation NLTA Non-Lending Technical Assistance PDO Program Development Objectives PEFA Public Expenditure and Financial Accountability PSDPL Public Sector Development Policy Loan SET Undersecretariat of Taxes (Subsecretaría de Estado de Tributación) SOE State-owned enterprise UMEP SOE Monitoring Unit (Unidad de Monitoreo de Empresas Públicas) USAID United States Agency for International Development VAT Value-added Tax Vice President: Jorge Familiar Country Director: Jesko Hentschel Sector Manager: Arturo Herrera Gutierrez Task Team Leaders: Raul Felix Junquera-Varela/Fanny Weiner ICR Team Leader: Raul Felix Junquera-Varela/Fanny Weiner Primary ICR Authors: Ana Mie Horigoshi Reis/ Marianne Carolina Caballero Parra PARAGUAY Public Sector Development Policy Loan CONTENTS B. Key Dates ................................................................................................................... ii  C. Ratings Summary ....................................................................................................... ii  D. Sector and Theme Codes........................................................................................... iii  E. Bank Staff .................................................................................................................. iii  F. Results Framework Analysis ..................................................................................... iv  G. Ratings of Program Performance in ISRs ................................................................ vii  H. Restructuring ............................................................................................................ vii  1. Program Context, Development Objectives and Design ............................................ 1  2. Key Factors Affecting Implementation and Outcomes .............................................. 4  3. Assessment of Outcomes ............................................................................................ 9  4. Assessment of Risk to Development Outcome ......................................................... 15  5. Assessment of Bank and Borrower Performance ..................................................... 15  6. Lessons Learned........................................................................................................ 17  7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners........... 17  Annex 1. Bank Lending and Implementation Support/Supervision Processes............. 19  Annex 2. Beneficiary Survey Results ........................................................................... 21  Annex 3. Stakeholder Workshop Report and Results ................................................... 21  Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 21  Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 21  Annex 6. List of Supporting Documents ...................................................................... 22  MAP .............................................................................................................................. 23  i A. Basic Information Public Sector Reform Country: Paraguay Program Name: Development Policy Loan Program ID: P117043 L/C/TF Number(s): IBRD-81090 ICR Date: 06/13/2014 ICR Type: Core ICR REPUBLIC OF Lending Instrument: DPL Borrower: PARAGUAY Original Total US$ 100.00M Disbursed Amount: US$ 100.00M Commitment: Revised Amount: US$ 100.00M Implementing Agencies: MINISTRY OF FINANCE Cofinanciers and Other External Partners: B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept 09/28/2011 Effectiveness: 11/26/2012 11/07/2012 Review: Appraisal: 10/24/2011 Restructuring(s): Mid-term Approval: 12/13/2011 Review: Closing: 12/31/2013 12/31/2013 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Moderate Bank Performance: Satisfactory Borrower Performance: Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Moderately Moderately Quality at Entry: Government: Satisfactory Satisfactory Quality of Implementing Satisfactory Satisfactory Supervision: Agency/Agencies: Overall Bank Moderately Overall Borrower Moderately Performance: Satisfactory Performance: Satisfactory ii C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time Yes None (QEA): (Yes/No): Problem Program at Quality of No None any time (Yes/No): Supervision (QSA): DO rating before Satisfactory N/A N/A Closing/Inactive status: D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration 100 100 Theme Code (as % of total Bank financing) Other public sector governance 34 34 Public expenditure, financial management and 33 33 procurement Tax policy and administration 33 33 E. Bank Staff Positions At ICR At Approval Vice President: Jorge Familiar Pamela Cox Country Director: Jesko Hentschel Penelope J. Brook Sector Manager: Arturo Herrera Gutierrez Arturo Herrera Gutierrez Raul Felix Junquera-Varela/ Program Team Leader: Alexandre Arrobbio Fanny Weiner Raul Felix Junquera-Varela/ ICR Team Leader: Fanny Weiner Ana Mie Horigoshi Reis/ ICR Primary Author: Marianne Carolina Caballero Parra iii F. Results Framework Analysis Program Development Objectives (from Program Document) The overall development objective of the proposed Public Sector DPL (PSDPL) is to contribute to effectiveness and efficiency of the public sector. This is expected to be reached via the following specific objectives: (i) exerting effective Oversight of SOEs; (ii) improving Central Administration's internal financial controls; and (iii) strengthening the tax system. Revised Program Development Objectives (if any, as approved by original approving authority) (a) PDO Indicator(s) Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years SOEs oversight: SOEs financial operations are carried out in a Indicator 1 : transparent manner and are subject to the scrutiny by the Government and civil society Online Audited financial Value publishing of statements for No audited financial (quantitative or SOEs audited 2012 have been statements Qualitative) financial published on statements UMEP's website Date achieved 07/01/2011 12/31/2013 11/22/2013 Comments (incl. % (Achieved) 100 percent achieved achievement) Indicator 2 : SOEs oversight: Timely delivery of SOEs audited financial statements SOEs financial Audit reported for statements are Value 7 out of 9 SOEs No audited financial available no later (quantitative or were published statements published than June 30 of Qualitative) before June 30, the following 2013. year Date achieved 12/31/2010 12/31/2013 11/22/2013 (Achieved) Only 7 of 9 audits were published on June 30, however one Comments of the SOEs is not operational and therefore does not furnish financial (incl. % statements to be audited; and the other SOE published it with a delay of achievement) less than a month. SOEs oversight: Recovery of 20 percent of the past-due debt Indicator 3 : accumulated by Central Administration entities with SOEs Value 0.00 20.00 0.00 iv (quantitative or Qualitative) Date achieved 12/31/2010 12/31/2013 11/22/2013 (Not achieved) 0 percent. The Budget Law 2013 included a program Comments (budget line) in the budget of the Ministry of Finance but was not (incl. % implemented. The 2014 budget of SOEs also includes a line for those achievement) repayments. SOEs oversight: Rate of timely payments reaches 80 percent for basic Indicator 4 : services provided to the State by SOEs (Electricity, Telecommunications, Water) Value (quantitative or 51.00 80.00 77.00 Qualitative) Date achieved 12/31/2010 12/31/2013 12/31/2013 Comments (Underachieved) 90 percent achieved. Even though the Budget Law of (incl. % 2013 included a provision for those payments, regulation for its achievement) implementation was never established. SOEs oversight: At least 5 SOEs have established targets that can be Indicator 5 : monitored on a regular basis by UMEP 7 SOEs have At least 5 SOEs management have established Value contracts targets that can (quantitative or No targets monitored establishing be monitored on Qualitative) targets that are a regular basis by monitored on a UMEP regular basis Date achieved 12/31/2010 12/31/2013 11/22/2013 Comments (Overachieved) 100 percent. New management contracts for 2013-2015 (incl. % were signed between the SOEs and the Government. achievement) SOEs oversight: The number of hours of power outage as measured by Indicator 6 : hrs/year per user has dropped to 11 hours Value 11.20 hrs/year per 11.00 hrs/year 15.87 hrs/year per (quantitative or user per user user Qualitative) Date achieved 12/31/2010 12/31/2013 31/12/2013 Comments (incl. % Not achieved. . achievement) SOEs oversight: The coverage of ESSAP water access as measured by Indicator 7 : the percentage of households in urban areas with access to water has increased to 89.2 percent Value (quantitative or 79.4 percent 89.20 percent 89.4 percent Qualitative) v Date achieved 12/31/2010 12/31/2013 11/22/2013 Comments (incl. % (Achieved) 100 percent achievement) SOEs oversight: The percentage of user complaints to ESSAP has Indicator 8 : decreased to 18 percent Value (quantitative or 19.00 percent 18.00 percent Not available Qualitative) Date achieved 12/31/2010 12/31/2013 11/22/2013 Comments This indicator was removed from management contracts and stopped (incl. % being monitored. achievement) SOEs oversight: Fixed telephone line installation time has decreased to Indicator 9 : 17 days Value (quantitative or 20.00 17.00 10.00 Qualitative) Date achieved 12/31/2010 12/31/2013 11/22/2013 Comments (incl. % (Overachieved) 100 percent achievement) Central Administration Internal Financial Control: PEFA Indicators for Indicator 10 : internal control and internal audit (PI-20 and PI-21) for 50 percent of the ministries are rated C PI-20 and PI-21 Value for 50 percent of (quantitative or PI-20 and PI-21: D+ Achieved the ministries are Qualitative) rated C Date achieved 12/31/2010 12/31/2013 11/22/2013 Comments (incl. % (Achieved) 100 percent achievement) Indicator 11 : Tax System: Tax-to-GDP ratio is at least 13.8 percent Value (quantitative or 13.40 13.80 13.80 Qualitative) Date achieved 12/31/2010 12/31/2013 11/22/2013 (Achieved) 100 percent GDP measurement methodology in the country has been altered through Comments the inclusion of the sale of energy by the Bi-national energy firms Itaipu (incl. % and Yasireta to the national production levels, the number above does achievement) not include this change. With this inclusion the tax to GDP ratio would decrease to 12.7 percent. Notwithstanding, using this altered GDP vi calculation, and adding to the tax collection (numerator of the indicator) the royalties provided by these Bi-national firms, the Tax-to-GDP ratio would reach 15.5 percent for 2012. (b) Intermediate Outcome Indicator(s) Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years Tax System: Ratio of audits of large taxpayers that result in additional Indicator 1 : assessment exceeds 70 percent Value (quantitative or 55.00 70.00 75.00 Qualitative) Date achieved 12/31/2010 12/31/2013 11/22/2013 Comments (incl. % (Achieved) 100 percent achievement) G. Ratings of Program Performance in ISRs Actual Date ISR No. DO IP Disbursements Archived (US$ millions) 1 03/29/2012 Satisfactory Satisfactory 0.00 2 10/06/2012 Satisfactory Moderately Satisfactory 0.00 3 03/27/2013 Satisfactory Satisfactory 99.75 4 12/21/2013 Satisfactory Satisfactory 99.75 H. Restructuring Not Applicable vii 1. Program Context, Development Objectives and Design 1.1 Context at Appraisal 1. More than half-way through its mandate, the Government of President Lugo had been making considerable progress in the execution of the Government Plan. The Strategic Economic and Social Plan for 2008-2013 aimed to achieve a sustainable and equitable economic growth path, and to improve effectiveness and efficiency of the public sector while addressing the urgent needs of Paraguay’s most vulnerable groups. 2. In addition to its Plan, the Government was committed to maintain a stable macroeconomic framework. The Paraguayan economy was strengthened and was the fastest growing economy in Latin America in 2010, at a rate of 13.1 percent. The 2009 crisis had temporarily interrupted the economic turn-around observed in the years before it, but in the post 2009 scenario the Government was able to implement a counter-cyclical stimulus package while maintaining medium-term reform efforts. As part of the Government’s fiscal consolidation program, debt-to-GDP 1 ratio was reduced and was expected to be manageable even under a significant slowdown in global growth; and inflation was kept under control, with single-digit inflation in most years. 3. To continue progress on the implementation of the Government Plan, the administration sought to build on a Programmatic Development Policy Loan series that had started in 2009. The programmatic series was prepared in the context of an incoming government and an uncertain economic outlook; it was conceived to support the Government via four components: internal financial control, oversight of state-owned enterprises (SOEs), efficiency of public expenditure, and civil service reform. The first operation (First Public Sector Programmatic DPL – P113457) was approved and fully implemented in 2009. However, the triggers for the second operation were not completed in time2, resulting in the cancellation of the series. 4. Despite the termination of the Programmatic Series, the First Public Sector Programmatic DPL largely achieved its Program Development Objective and medium-term outcomes on three of the four areas it supported. In Tax System, it contributed to improving revenue collection and the equity of the tax system. In the Public Sector Financial Control, the operation contributed to (i) improving the effectiveness of the Central Administration’s internal and financial control; and (ii) strengthening the oversight of SOEs to ensure their sound and transparent financial management. In Expenditure Management, the operation contributed to protecting budgetary allocations for social and capital expenditures during the financial crisis, while marginally enhancing their overall efficiency and equity. 5. The medium-term reforms achieved in tax administration and SOEs oversight, as well as in other areas, were considerable, but still susceptible to political change. At the time of preparation of this operation, two years remained in the administration’s 1 Gross Domestic Product 2 The triggers were achieved with a slight delay in respect to the two-year period authorized between the board dates of two operations in programmatic series. 1 mandate, and the main challenge was to advance the reform agenda and consolidate its achievements without a majority of the governing administration in the Congress. 6. Within this context, the Government requested World Bank support for its reform effort focusing on the most successful areas of reform so far. Through a streamlined continuation of the aforementioned Development Policy Loan (DPL), the Government decided to focus on SOE oversight, internal control, and the tax system. Given both the need for streamlining the reform program and the normative requirements of programmatic DPLs, the Government requested a stand-alone operation, but indicated its commitment to continue reforms in the medium term. The operation was aligned with the Bank’s FY09-13 Country Partnership Strategy (CPS) and directly supported two out of three CPS pillars: (i) governance and anti-corruption; (ii) growth with equity. The SOE and internal control components supported the first pillar, while the tax administration component supported the latter. 1.2 Original Program Development Objectives (PDO) and Key Indicators 7. The overall objective of the PSDPL was to contribute to the effectiveness and efficiency of the public sector. This was expected to be reached via the following specific objectives: (i) exerting effective oversight of SOEs; (ii) improving the Central Administration’s internal financial control; and (iii) strengthening the Tax System. Paraguay’s Public Sector Development Policy Loan – PSDPL Program Development Objectives (PDOs) and Key Outcome Indicators Policy Area 1. SOEs Oversight PDO 1 – Exerting effective oversight of SOEs  SOEs financial operations are carried out in a transparent manner and are subject to scrutiny by the Government and civil society. Target: online publishing of SOEs audited financial statements.  Timely delivery of SOEs audited financial statements. Target: SOEs audited financial statements are available no later than June 30 of the following year.  Recovery of 20 percent of the past-due debt accumulated by Central Administration entities with SOEs. (Baseline 2010: 0 percent of the certified aggregated amount of debt was reimbursed (Gs 365 billion).  Rate of timely payments reaches 80 percent for basic services provided to the State by SOEs (Electricity, Telecommunication, and Water). (Baseline Jan-Jun 2010: 51 percent)  At least 5 SOEs have established targets that can be monitored on a regular basis by UMEP.  The number of hours of power outage as measured by hs/year per user has declined to 11 hours (Baseline: 2010: 11.2 hs/year per user)  The coverage of ESSAP water access as measured by the percentage of households in urban areas with access to water has increased to 89.2 percent (Baseline January 2010: 79.4 percent).  The percentage of user complaints to ESSAP has decreased to 18 percent (Baseline 2010: 19 percent).  Fixed telephone lines installation time has decreased to 17 days (Baseline 2010: 20 days). Policy Area 2. Central Administration Internal Control PDO 2 – Improving the Central Administration’s internal financial control  PEFA Indicators for internal control and internal audit (PI-20 and PI-21) for 50 percent of the ministries are rated C, which shows: (i) A more comprehensive set of internal control rules, and (ii) a broader coverage and quality of internal audit function and a higher degree of management response to internal audit findings. (Baseline: 2008 Integrated Fiduciary Assessment rating for PI-20 and PI-21: D+) Policy Area 3. Tax System PDO 3 – Strengthening the Tax System  Tax-to-GDP ratio is at least at 13.8 percent. (Baseline 2010:13.4 percent)  Ratio of audits of large tax payers that result in additional assessment exceeds 70 percent. (Baseline 2010: 55 percent) 2 1.3 Revised PDO and Key Indicators, and Reasons/Justification Not Applicable. 1.4 Original Policy Areas Supported by the Program Policy Area 1 – SOEs Oversight 8. The policy goal was to strengthen the SOE oversight framework previously established with the support of other Bank operations. The size and performance of SOEs represent a significant challenge to Paraguayan economy 3 , and while the Government program had made significant strides in improving SOE oversight and governance, the intention was to further strengthen and consolidate those achievements. In turn, this would improve the efficiency and efficacy of SOEs and presumably be reflected in better government finances and basic services delivery. In the recent past the Paraguayan SOE sector moved from a completely decentralized model, with virtually no transparency and accountability mechanisms, to an example of best practice in the region. Many of these achievements were reached under the previous DPL, and consolidated under this operation. The reform measures were based on three pillars: institutional framework; financial transparency; and results-based management. The solidification of previous reforms was to be achieved through creating an adequate institutional framework for SOE oversight and ownership based on regional examples and good practices; increasing transparency by strengthening audit and financial management of SOEs and by publishing annual financial statements; and introducing the fundamentals of results-based management in the largest SOEs, with a view to improving service delivery performance. Policy Area 2– Central Administration Internal Financial Control 9. The policy goal was to improve the administration’s internal financial control. Advances in the policy were already significant, as exemplified by the gradual successful implementation of the Paraguayan Standard Model of Internal Control (Modelo Estándar de Control Interno del Paraguay – MECIP), which began in 2008. Throughout 2010, the gradual implementation of MECIP continued to make solid advances. The improvements mentioned were reflected in the 2011 Public Expenditure and Financial Accountability (PEFA) assessment, showing an upward trend in Paraguay’s internal control and auditing. The PEFA indicators for internal control and internal audit (PI-20 and PI-21) for 50 percent of the ministries were expected to be rated C, which would show: (i) a more comprehensive set of internal control rules, and (ii) a broader coverage and quality of internal audit function and a higher extent of management response to internal audit findings. Policy Area 3 – Tax system 10. The policy goal was to improve the tax system. To address low tax revenues, the Government implemented a comprehensive tax reform in 2004 aimed at simplifying and increasing the efficiency of the Paraguayan tax system. The tax administration (SET) 3 The SOE sector in Paraguay is comprised of 9 companies, with an aggregate budget equivalent to 14.1 percent of GDP and total investments equivalent to 1.3 percent of GDP. 3 focused on streamlining core processes such as taxpayer register and taxpayer single account and on overhauling IT infrastructure and IT systems. This resulted in significantly increasing the number of taxpayer registered in the tax roll and expanding e-service. At the moment of the preparation of the operation, the Government had shifted its reform effort to increasing the efficiency of its large tax payers unit. Strengthening the Large Taxpayers Unit’s (LTU) audit capacity was deemed a key component of the reform effort and was hence selected as prior action for the operation. The increase in tax audits performed by the LTU in 2009-2010 was considered a second significant step, and was hence also selected as a prior action. The selected prior actions were deemed to support the key outcome indicators of the tax component of the reform plan. Key outcome indicators for the tax component were that (i) the tax-to-GDP ratio remains above 13.8 percent; and (ii) the ratio of audits of large tax payers that result in additional assessment exceeds 70 percent. 1.5 Revised Policy Areas Not Applicable 1.6 Other significant changes 11. Initially approved by the Board of Executive Directors on December 13, 2011, the Program was not declared effective until November 7, 2012. The impeachment of President Lugo in June 2012 delayed Congress approval and therefore effectiveness. The effectiveness date was extended twice, resulting into an elapsed time of 11.5 months after Board approval. 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance Goals Prior Actions/Targets for Board Approval – DPL Program 1. SOEs Oversight 1.1 Establishing  The Government has strengthened the institutional framework associated with SOE Institutional management through: (i) the submission to Congress of a law draft proposing the Framework for legal establishment of the CEP and the UMEP and (ii) the approval by CEP of the Government UMEP’s Organizational-Operational Manual. Ownership of SOEs   CEP ensures greater transparency in SOE management via implementation of annual external audits, elaborated according to CEP standards.  The Government has developed a strategy to liquidate expenditure payment arrears 1.2 Exerting and ensure the timely payment of basic services by Central Administration entities to Effective SOE SOEs, which includes: (i) the creation of an Inter-institutional Technical Commission Oversight  composed by the Ministry of Finance, the State Attorney General, and the SOEs; (ii) the validation of expenditure payment arrears between the Central Administration and the SOEs; and (iii) the Government has established specific mechanisms to ensure timely payment of services provided by SOEs to Central Administration entities.  The Government has introduced a results-based framework, aimed at increasing SOEs’ service delivery capacities. At least 5 SOEs, representing around 80 percent of 1.3 Introducing consolidated SOE expenditures, have signed their respective performance SOE’s Results- management contracts, which include standardized management procedures and Based Management  financial targets.  UMEP has recently established a balanced scorecard that connects it directly to SOEs’ economic, financial and technical follow-up indicators. 4 2. Central Administration Internal Financial Control & Audit 2.1 Improving  Five ministries, representing approximately 70 percent of Central Administration’s Central overall budget, have established internal control committees, internal control Administration norms, and have trained staff to implement the MECIP. Their respective internal Internal Financial audit units (AIIs) have an adequate number of employees. Control  3. Tax Systems  SET has strengthened its audit capacities for large taxpayers through: (i) the issuance of a resolution by SET and the Superintendencia de Bancos to allow for the audit of financial institutions classified as large taxpayers; and (ii) the implementation of a training program for auditors from the large taxpayers unit (DGGC). 3.1 Improving the  SET has significantly increased the number of large taxpayers subject to tax audits tax system  (Baseline: 2008= 20) through: (i) 40 audits in 2009; (ii) 32 specialized audits of large enterprises in 2010, including two highly specialized ones.  Tax Certificates. SET issued 122,609 tax-compliance certificates in 2009, and 280,105 certificates in 2010. 12. Program implementation and disbursement took place smoothly and without any major issues after the loan became effective. Below, more detail is provided with respect to each prior action and how they support the policy areas chosen for the operation. Establishing Institutional Framework for Government Ownership of SOEs 13. Strengthened institutional framework associated with SOE management. The submission of the “CNEP law” and its approval in September 2013 gave a stronger legal backing than the decrees they had in place. The CEP - which was approved as CNEP (Consejo Nacional de Empresas Publicas) - was established with the status of a vice-ministry, putting it in a strong position within the Government. With the same law, the former technical body UMEP (Unidad de Monitoreo de Empresas Públicas) was institutes as the General Directorate of State-owned Enterprises (Dirección General de Empresas Públicas - DGEP4). The approval of the organizational-operational manuals clarified the roles and functions of both institutions and together those actions gave institutional support for CNEP and UMEP to perform their strategic roles. Exerting Effective SOE Oversight 14. Greater transparency in SOE management via implementation of annual external audits. The annual external audits required from all SOEs greatly increased transparency as all audit reports were published online on UMEP’s website. 15. Development of a strategy to liquidate expenditure payment arrears and ensure the timely payment of basic services by central administration entities to SOEs. The large amount of payment arrears by the Central Administration with the SOEs represented a threat to their finances. As it was considered normal behavior and it is very difficult to cut the provision of basic services, recovering these arrears proved very difficult. The plan initially developed predicted the repayment in 5 parcels of 20 percent in addition to keeping up to date payment of the current bills through the mandatory inclusion of a budget line for basic services’ payments. While the repayments were expected to begin in 2013 and a provision was made for this end, the authorization for the Ministry of Finance 4 For the purpose of this document, the name UMEP will be used. 5 to perform payments by central administration entities was not included in the Regulatory Decree of the National General Budget. In order to facilitate this process for 2014, a line was included in the budget of public entities for that end, guaranteeing the payments to the SOEs. Introducing SOE’s Results-Based Management 16. Introduction of a results-based framework, aimed at increasing SOEs’ service delivery capacities. The implementation of a results-based management model across the Paraguayan SOEs aimed at improving SOEs performance at service delivery. The use of management agreements started with 5 major SOEs that represented 80 percent of total SOE-consolidated expenditures and was eventually implemented by all but 2 of the SOEs. The positive feedback from the SOEs that pioneered the implementation of the agreements was fundamental for the adoption of such model by the other SOEs. However, UMEP’s technicians are very emphatic on the benefits already achieved by easing their monitoring activities. Furthermore, UMEP’s establishment of a balanced scorecard that connects it directly to SOEs’ economic, financial and technical follow-up indicators. The automated tool providing an online connection with SOEs management systems allowed for easier monitoring from UMEP, improving decision-making and performance assessment processes. Improving Central Administration Internal Financial Control 17. MECIP implementation. Advances in the central administration’s internal financial control were already significant, as exemplified by the gradual and successful implementation of the standardized internal control called MECIP. The MECIP was introduced in 2008 through Presidential decree, and was aimed at sustaining continued improvement of public institutions by strengthening internal control practices and capabilities. The implementation of MECIP had been reinforced by the United States Agency for International Development (USAID) supported Umbral program, which provided technical assistance and intensive training to ensure adequate and gradual implementation of MECIP. Throughout 2010, the gradual implementation of MECIP continued to make solid advances. 18. Strengthening of Internal Audit Office (Auditoría General del Poder Ejecutivo – AGPE), and spending units’ Internal Audit Units (AIIs) institutional capacity. The Government issued two decrees that provide the legal foundations for strengthening internal controls throughout the Executive branch. Decree 10883 (2007) upgraded the Office of the Executive’s Internal Auditor (AGPE) to ministerial level and gave AGPE the authority to: a) establish a standard for internal control to be applied to all public entities; and (b) determine the criteria for selection and removal of internal auditors working for the central administration. Accordingly, it has issued instructions supporting the implementation of MECIP throughout the public administration and is auditing the progress being made toward its implementation at institutional level. Third, the Government Auditing Manual was prepared by AGPE in coordination with the General Comptroller’s Office to ensure that auditing procedures were clearly specified and consistent throughout the Executive branch. Finally, and depicted in the 2011 PEFA study, AGPE’s and the AIIs’ technical and institutional capacity was significantly strengthened as a result of a remarkable increase in financial resources and professional staff. These advances were recognized within the DPL through the inclusion of adequate number of employees in AIIs as a prior action. Improving the tax administration and tax system 6 19. The Undersecretariat of Taxes (Subsecretaría de Estado de Tributación – SET) significantly strengthened its audit capacity through executive action and training. The Government implemented two measures in this context: in 2010 SET issued a joint resolution with the Superintendencia de Bancos allowing the audit of financial institutions, for the first time, including those classified as large taxpayers.5 In addition, it implemented a training program for auditors of the LTU. In an environment where low capacity has constrained the Government’s ability to perform its audit and control function, basic training was considered a significant first step. 20. SET increased the number of audits performed. In 2010, a total of 32 audits on large taxpayers were initiated, including 2 highly specialized cases. This was in addition to achievements during implementation of DPL1 were SET managed to double the number of audits on large taxpayers from 20 in 2008 to 40 in 2009. The relevance of this step became even more apparent in the light of several years without audits due to a lack of transparency and adequately trained auditors. 21. Issuance of Tax Certificates instated: in 2009-2010, the Government complemented LTU reforms with issuing tax-compliance certificates. The measure of issuing certificates is an important reform step towards transparency and tax compliance. The authorities demonstrated their commitment by issuing 122,609 certificates in 2009 and another 280,105 in 2010. Certificates can easily be requested either on-line (accessing the tax management system Marangatu) or at SET customer-service platforms. An important feature of the certificates is that taxpayers with payment arrears or delays in the submission of their tax statements are not eligible for the certificate. These certificates are mainly required as a pre-condition for engaging in contracts with the public sector. 2.2 Major Factors Affecting Implementation 22. External circumstances affected implementation. Global economic fluctuations, the fragmented state of the Government’s alliance, and the limited capacity of public sector were adequately identified in the Program design and proper mitigation measures were attributed. However unpredictable factors affected implementation causing the delays in the Program. The main unpredicted factor to affect implementation was the unexpected change of Government in 2012. The Government’s lack of majority at Congress and the fragmented political alliances at the time of design were foreseen, but the impeachment of President Lugo, followed by an interim Government and eventually early elections could not be predicted. 23. Nevertheless, the Government’s continued commitment to the operation facilitated implementation after effectiveness was declared. The Government maintained commitment throughout the program, supporting the implementing agencies’ performance at every stage of the Program. Likewise, the Bank’s responsiveness to the Country’s needs allowed sustaining the Program despite political changes within the country. Although the impeachment resulted in a considerable delay in the approval of the 5 “Resolución General” 36/10. 7 loan by the Paraguayan congress and declaration of effectiveness, the Bank's willingness to extend the effectiveness date allowed for implementation and completion of the program. 24. The continuous engagement of the Bank with the country facilitated putting in place a viable operation, as it relied on lessons learned from the previous DPL and on extensive knowledge products. Lessons learned through the previous DPL led the operation to focus on the policy areas that were more likely to garner support. Moreover, experience with the implementing agencies helped identify institutional capacity at the outset and adjust Program to it. Knowledge products were used during the design stage of the operation, but more importantly additional products were generated during the operation, hence leading to a better-informed implementation, and paving the way for further engagement. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization M&E Design 25. Overall, the DPL program benefited from a strong M&E system, with clearly defined development objectives and intermediate indicators. Only 4 of the indicators provided limitations:  As recognized in the Program Document, the Tax-to-GDP ratio is not an optimal indicator of the Government’s tax effort for two reasons: (i) the supported reforms were geared to improve basic core processes which take time to yield results; (ii) the multiplicity of factors that influence the tax-to-GDP ratio muddle the causal linkage between the reforms, indicator, and outcome. Moreover, the country’s capacity only allows for one measurement of GDP per year. The long lags between reliable measures of the indicator increased the risk of a deviation or stalemate on the pursuit of the program’s objectives.  Three service delivery indicators from the SOE Oversight component were extracted from management contracts between the SOEs and the Government. However, during implementation, a second generation of management contracts was signed and one indicator (percentage of user complaints to the water and sanitation company) was discontinued. Consequently, there was no available data for the Bank’s team to continue monitoring. Moreover, the success or failure in achieving these service delivery indicators cannot be directly attributed to the reforms supported by this operation, or are dependent on factors outside its scope. For example, to increase public service delivery often investment is needed; however, many SOEs do not have the financial means for such investments, hence failing on the improvement of service delivery indicators. M&E implementation 26. The Bank regularly monitored progress under through supervision missions and communication with the implementing agencies. The Ministry of Finance, the main counterpart agency, provided effective overall monitoring and evaluation and collected the data needed to assess implementation progress from agreed sources. Technical counterparts were cooperative and accurate in their reporting of data. 8 2.4 Expected Next Phase/Follow-up Operation (if any): 27. Currently the Strengthening Tax Administration & SOE Corporate Governance 6 NLTA (P148234) is in place. This technical assistance aims to contribute for the sustainability of the reforms achieved with this operation, maintains engagement and proved technical input for potential future operations in these areas. More specifically, it tackles the areas of tax administration and SOEs: on the first area, the goal is to contribute to protect sources of Value-Added Tax (VAT) revenue through enhanced control/management of tax refund claims and cross cutting strategic management support; and on the second area, the goal is to contribute to the increase in efficiency and quality of service delivery by SOEs through improved corporate governance. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation 28. The objectives of the PSDPL are consistent with the objectives of the Government of Paraguay and of the Bank. The program continued to contribute to the objectives outlined in the CPS 2012 Progress Report. The Government at the time established improved governance as a priority at the outset, requesting Bank support on stronger internal systems of controls under the Improved Governance and Anti- Corruption pillar of the CPS. 29. SOE oversight was established as a Government priority, given the size and potential impact of SOE over the economy and had been a topic of collaboration between the Bank and the Government of Paraguay in the previous years. Additionally, the SOE component supported the cross-cutting themes addressed by the 2009-2013 Country Partnership Strategy. 30. SET continues the working relationship with the Bank, moving on to second generation reforms. Evidence of this is the recent deployment, per SET’s express request, of a Technical Assistance that includes assistance in preserving the integrity of the National Government’s VAT income through enhanced control/management of tax refund claims. 31. Moreover, continued dialogue with the new Government (sworn-in in August, 2013) has resulted on specific requests for technical assistance on two of the three policy areas (SOE and Tax Administration) and a series of Policy Notes produced by the Bank had chapters on both topics, hence demonstrating the sustained priority of the issues. 3.2 Achievement of Program Development Objectives 32. The PSDPL has achieved its development objectives. In Policy Area 1 it has greatly contributed to the institutionalization of the SOE oversight mechanisms previously implemented. In Policy Area 2 it has supported the improvement of internal controls on several ministries. And in Policy Area 3 it has improved the quality of the tax system. 6 Non-lending Technical Assistance 9 Policy Area 1 – SOEs Oversight -- Exerting effective oversight of SOEs 33. The policy goal of this component was to exert effective oversight of SOEs, and through this channel contribute to the effectiveness and efficiency of the public sector. The size and performance of SOEs constitute a significant challenge to the Paraguayan economy. Nevertheless, significant achievements have been reached with the Government’s efforts and the Bank’s support. Between the early 2000’s and the present day, Paraguay went from a completely decentralized and unorganized with little control of the SOE sector to an example of good practice in the region through its successful SOE reform. 34. Paraguay’s starting point in the SOE sector was very low. There was no centralizing institution with a global view of the sector; the SOEs did not publish audited financial statements, so their finances were not transparent, much less easily available to the public; and management was not performance-linked. The Government designed a reform program in which three main areas were addressed: institutional framework for oversight of SOEs; financial transparency; and results-based management. Under this policy framework the oversight institutions, CNEP and UMEP, were further strengthened; SOEs begun to have external audits conducted and its reports published online, increasing transparency; and the implementation of performance agreements in most SOEs, aiming to improve their performance in service delivery. Overall, some improvements in final service delivery could already be observed, such as the increase in the percentage of households in urban areas with access to water. 35. The main actions implemented focused on consolidating the oversight function supported by previous Bank operations. This was achieved through the submission and eventual approval of the law institutionalizing CNEP with the status of a vice-presidency, which greatly supported the institution in its regulatory relationship with the major SOEs. Additionally, the strong technical capacity of UMEP supported its relationship with the SOEs. Furthermore, the publication of audit reports and adoption of management agreements between the SOEs and the Government facilitated UMEPs function, as it had increased access to the SOEs financial and performance data. 36. The Key outcome indicators for this policy area were largely achieved.  Online publication of the audited financial statements. UMEP receives monthly financial statements from the SOEs, and audited financial statements are published annually for eight out of nine SOEs7.  Recovery of arrears and timely payments. The initial plan was to have the past-due debt arrears repaid in 5 parcels of 20 percent of the debt beginning in 2013 and that public sector institutions were to prioritize payments for basic services. The budget law included such provisions; however it did not provide how this would be implemented. Hence, no payments for the arrears took place during 2013 and payment of basic services only increased marginally. The 2014 budget law includes a specific budget line for the payment of arrears and basic services and, which should facilitate the process. Furthermore, timely payments have been guaranteed by a provision that impedes public 7 The only SOE that does not prepare financial statements is FEPASA, which currently is not operational. Furthermore, out of the 8 SOEs that did publish their financial statements, 7 were timely and the ports company (Administración Nacional de Navegación y Puertos – ANNP), the only one delayed, was less than a month late. 10 sector institutions from making budget adjustments unless they are in time with basic service payments.  Management contracts. The adoption of management contracts by the 5 major SOEs has improved not only UMEP’s ability to monitor them, but also their own control over the targets. The positive feedback from the SOEs themselves allowed for the implementation of management contracts in all but two of the SOEs, going beyond the initial target.  Service delivery indicators. Some of the key outcome indicators were extracted from the management contracts between the SOEs and the Government and showed actual improvement at service delivery. While the percentage of urban households with water coverage by ESSAP has increased and the time for fixed telephone line installation has decreased, both surpassing the targets, the indicators on numbers of hours of power outage and the one on percentage of user complaints were not achieved by end-2012. As mentioned earlier, the monitoring of indicator on user complaints through the management contracts was discontinued. 37. While from a strictly quantitative perspective it seems that a substantial part of the outcome indicators was not achieved, it is important to emphasize that much progress was made, and that the indicators might not reflect this adequately. Several of the indicators chosen at the design stage of the Program are service delivery indicators. Even though these indicators measure the intended final outcome, they do not necessarily capture the effect of the intervention. As mentioned above, the success or failure in achieving these indicators cannot be directly attributed to the reforms supported by this operation, or are dependent on factors outside the scope of this operation. Policy Area 2 – Central Administration Internal Control – Improving the Central Administration’s internal financial control 38. The policy goal was to improve the administration’s internal financial control. The main advancement in the policy was the gradual implementation of the standardized internal control called MECIP. The MECIP was introduced in 2008 through Presidential decree, and was aimed at sustaining continued improvement of public institutions by strengthening internal control practices and capabilities. The implementation of MECIP had been reinforced by the USAID-supported Umbral program, which provided technical assistance and intensive training to ensure adequate and gradual implementation of MECIP. Throughout 2010, the gradual implementation of MECIP continued to make solid advances, and MECIP adoption and deepening was selected as a prior action for the operation. 39. The improvements mentioned were reflected in the 2011 PEFA, showing an upward trend in Paraguay’s internal control and auditing. The overall rating for PI-20 (Effectiveness of internal controls over non-personnel expenditures) and PI-21 (Effectiveness of the internal audit) was expected to be C for the 2010 PEFA assessment.8 Significant improvements observed in the areas of internal control and internal audit 8 The 2010 PEFA was funded and implemented by the EU with a joint quality control from EU, World Bank and IADB. The C rating was later confirmed on the Official Publication. 11 allowed for an increase in the PEFA score for these two indicators from the D+ rating obtained in the same indicators for the 2008 IFA. PI-20 score increased because internal control procedures and rules were more comprehensive, thanks to the introduction of MECIP. PI-21 score increased because of a higher coverage of a more effective internal audit function, and a higher extent of management response to internal audit findings. 40. Key outcome indicator in the area would reflect the improvement in internal controls through the PEFA assessment. The PEFA indicators for internal control and internal audit (PI-20 and PI-21) for 50 percent of the ministries were expected to be rated C, which would show: (i) a more comprehensive set of internal control rules, and (ii) a broader coverage and quality of internal audit function and a higher extent of management response to internal audit findings. 41. The development objective was achieved for this policy area. The Government complied with all prior actions and was capable of maintaining throughout the period that the program was in place the achievements obtained in terms of internal control: implementation of MECIP continues underway, and PEFA indicators maintain its rating of C for over 50 percent of ministries, exhibiting a more comprehensive set of internal control rules, and a broader coverage of internal audit function, as well as a higher extent of management response to internal audit finding. Policy Area 3 – Tax System – Strengthening the Tax System 42. The policy goal was to improve the tax system. Paraguay’s tax-to-GDP ratio reached an average of 12 percent of GDP between 2004 and 2009, up from 9 percent in the 1990s. However, this tax-to-GDP ratio still represented one of the lowest ratios in the region and only 51 percent of its estimated tax potential. 9 As a result, expenditures including social expenditures were lower in Paraguay than in most Latin American neighbors and public service delivery is lagging. To address low tax revenues, the Government implemented a comprehensive tax reform in 2004 aimed at simplifying and increasing the efficiency of the Paraguayan tax system. As a result the active tax payer base and revenues increased. Under the program, the Government had shifted its reform effort to increasing the efficiency of its large tax payers unit. 43. The improvement of capacity and execution of audit at the LTU and the issuance of tax-compliance certificates were expected to generate higher tax revenues in the medium term. By (i) legally allowing for the audit of financial institutions, (ii) training auditors from the LTU, and (iii) increasing the number of audits, and (iv) issuing tax certificates, these selected prior actions would support the key outcome indicators of the tax component of the reform plan. 44. In terms of the Tax-to-GDP ratio indicator, the target has been reached with a 13.8 ratio for 2012. However, it should be noted that this value does not reflect a recent change in GDP measurement methodology. The country recently altered the methodology through the inclusion of the sale of energy by the Bi-national energy firms 9 Tax potential is measured based on the country’s economic, geographic, demographic, social, and institutional characteristics. IMF (2009), Diagnόstico del Sistema Impositivo Vigente en 2008. 12 Itaipu and Yasireta to the national production levels, with this new methodology the ratio would actually fall to 12.7. Notwithstanding, using the concept of fiscal tax burden10, which would imply using this altered GDP calculation, and adding to the tax collection (numerator of the indicator) the royalties provided by these Bi-national firms, the Tax-to- GDP ratio would reach 15.5 percent for 2012, and 14.7 percent in 2011. 45. It should be noted, however, that the tax-to-GDP ratio is not the best indicator of progress towards improvement of the tax system. For any individual country in "normal times", revenue collections, measured as a proportion of GDP, do not change much year to year (see Moore (2013) or Bird (2010)). This mainly reflects the fact that the overall tax take is to a significant degree determined by the structure of national economies. While it is easier to collect revenue through taxes in economies that are mostly high income, urban, and open, the government of an average low income country raises less than 20 percent of GDP in taxes. The high share of the agricultural sector in Paraguay’s GDP and the fact that agriculture is mostly exempt have to be taken into consideration. One cannot expect large increases on the tax-to-GDP ratio under these conditions.11 46. On the other hand, linking improvements in control of compliance with increased level of voluntary compliance or increased revenue is not an easy task. First of all, the tax administration has started to control the large taxpayer segment and showed some initial good results. The starting point is a very low capacity both in terms of infrastructure and tax auditor skills. Secondly, while change in tax policies show immediate results it takes time for administrative change to bear fruit. 47. Program design recognized to an extent that the tax-to-GDP ratio is a suboptimal indicator but chose it in light of the absence of better alternatives. In the PD some caveats were included in terms of the inherent limitations of this indicator to measure revenue performance. It was decided though to choose the tax take against better alternatives in view of the fact that Paraguay does not measure the tax compliance gap on a regular basis. 48. Through the prior actions, and attainment of the key outcome indicators, the development objective of the policy area (i.e. to strengthen the tax system) was achieved. Going beyond the fact that the Paraguayan tax system increased its tax-to-GDP, during the period covered by the program, other significant achievements were attained: the Large Tax Payers unit evidenced increased capacity by maintaining, and exceeding, a 70 percent ratio of audits resulting in additional assessment during the same period. These outcomes, complemented by the prior results selected by the Bank: stronger audit capacity of the SET, increased size of large taxpayers’ base, and issuance of tax certificates; all result in a stronger tax system for the country. 10 For an description and application of tax burden and its measurement of its ratios in Latin America, see More Than Revenue Taxation as a Development Tool, 2013, edited by Corbacho, et al.; IDB. 11 It is more useful to think in terms of tax potential of the tax system or tax effort. Tax potential can be viewed as legal and economic potential and the design of the tax systems needs take into account the economic, social, and institutional context. More specifically, there seems to be a significant and positive relationship between tax burden and several factors such as level of development (per capita GDP), and trade (import and exports as a percentage of GDP). 13 3.3 Justification of Overall Outcome Rating Rating: Moderately Satisfactory 49. Despite failing to achieve several PDO Indicators, the PSDPL can be said to have attained its development objectives. The SOEs reform achieved even more than expected as the law institutionalizing the CNEP with a vice-ministry status was approved by Congress and the implementation of management contracts in some of the SOEs were so well received that they triggered the adoption of those by other SOEs. While many of the indicators were not fully achieved, this can be attributed more to a flaw in indicator choice than to an unsuccessful intervention. Particularly, the service delivery indicators are linked to many other variables than only SOE oversight, and their achievement can hardly be attributed only to the reforms implemented. 50. In the case of the tax reform, the tax system was successfully improved, as evidenced by the increase in the tax-to-GDP ratio. Moreover, in terms of internal audit control, implementation of MECIP continues underway, and PEFA indicators maintain its rating of C for over 50 percent of ministries. Nonetheless, shortcomings in some of the outcome indicators subtracted from the program’s overall performance. 3.4 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 51. The operation was part of a sustained engagement with the country on SOE’s and Tax Administration, two policy areas linked to the World Bank’s goals of poverty reduction and shared prosperity. A stronger tax administration protects government income that can be allocated in further redistributive efforts for the less well-off, whereas SOEs efficiency and transparency enhances public service provision to the main beneficiaries of the services: those on the bottom deciles of the income scale. (b) Institutional Change/Strengthening 52. The PSDPL has had a significant impact on the institutional framework of SOE oversight and tax administration. While previously CNEP was supported by a parliamentary decree, this operation had the submission of a law proposal that formally established CNEP as a prior action, and the law was finally approved in September 2013. That had a considerable impact on the institution’s authority as an oversight institution. Similarly, the strengthening of the Large Tax Payer Unit as a result of the program should also be noted. The Program’s focus on the Large Taxpayer Unit reform is critical because of the ripple effects of strengthening a specialized unit within an Administration. The capacity enhancements within the unit allow it to pilot key processes that can be rolled out to other taxpayer segments and functional areas. (c) Other Unintended Outcomes and Impacts (positive or negative, if any) N/A 3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops N/A 14 4. Assessment of Risk to Development Outcome Rating: Moderate 53. Institutional changes supported by the operation have exhibited no signs of deterioration, and remain in place in all relevant Government agencies. The transitional Government maintained commitment to reforms despite political turmoil while the current Government has exhibited commitment to the reforms through the continued engagement with the Bank in the form of Technical Assistance, covering tax administration and SOE oversight. In this sense, the risk to development outcome is moderate. 54. In the case of the SOE reform, the institutionalization of CNEP through a law gave a strong legal backbone to the reforms achieved so far. As a consequence it has greatly reduced the risk of a setback in the reform path. On the contrary, the Bank is supporting the Government in the identification of subsequent reform steps to further expanding and consolidation the reform agenda. 55. However, on the tax administration component, lack of autonomy of the SET makes the agency vulnerable to political change. International best practices in tax administration encourage agency independence for Tax Administration when possible. The SET is currently subscribed to the Ministry of Finance, and is as such vulnerable to political interest that may come from the Executive Branch. Hence the reforms made in terms of Tax Administration could minimize their risk of reversal by engaging in a process of institutional emancipation from the MoF. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory 56. Operation design relied on sound analytical work, lessons learned from previous DPL and a fruitful relationship with the counterpart. Substantial analytical work provided the basis for an in-depth dialogue with the Government, and the lessons learned from the previous Public Sector DPL operation informed the policy framework of the operation. The Bank team had an intimate knowledge of the country’s situation and challenges allowing for sound Program design. Nevertheless, the choice of some indicators was not fully adequate to measure the achievement of the PDO, as some were subject to many other variables12, making the link between actions and indicators a weak one. (b) Quality of Supervision 12 See analysis of link between PDO Indicators and Development Objectives on Section 3.2 Achievement of Program Development Objectives 15 Rating: Satisfactory 57. The performance of the Bank on supervision was deemed satisfactory. The team continued to provide analytical and advisory services as part of supervision in addition to monitoring closely the developments and to ensure that prior actions are sustained and desired outcomes are achieved. Moreover, during the period of unexpected political transition, the Bank continued to provide technical assistance to the counterparts that helped ensured that reform progress under the Program would continue. 58. The sector and country teams coordinated to assure fiduciary and operational control during the time before and after effectiveness. The team undertook two supervision missions between December 2011 and May 2012, while during the political transition the supervision was continued from headquarters. After effectiveness and disbursement another mission was deployed to continue supervision, as reflected in the filed Implementation Status Reports. (c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory 59. Overall, the Bank’s performance is considered moderately satisfactory for the reasons stated above. 5.2 Borrower Performance (a) Government Performance Rating: Moderately Satisfactory 60. The Paraguayan government’s strong ownership of the proposed reforms guaranteed the successful implementation. However, despite their extraordinary commitment to the reforms in a context of political turmoil, there were delays in the declaration of effectiveness and an extension was necessary. Consequently, this resulted in the disbursement taking place only 11 month after Board approval; however, once declared effective the disbursement followed immediately. (b) Implementing Agency or Agencies Performance Rating: Satisfactory 61. The Ministry of Finance, the main counterpart agency for the loan in its fiduciary relationship with the Bank, successfully supported the implementation of the program, provided effective overall monitoring and evaluation of the loan and collected the data needed to assess implementation progress from agreed sources. Moreover, given the overall achievements under the program and the sustained implementation of reforms even during political transition periods, implementation effort has been satisfactory. 16 62. Technical counterparts were cooperative and accurate in their reporting of data, and maintained steady and clear communication with the Bank team. On the SOE component, particularly, the technical personnel at UMEP were very cooperative with the Bank and engaged with the Program. Consequently, Implementing Agency performance is deemed Satisfactory. (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory 63. Overall, the Borrower’s performance is considered moderately satisfactory for the reasons stated above. 6. Lessons Learned 64. Strong national ownership proved once again to be a crucial element of a successful operation. The strong commitment with the reforms is evidenced by the fact that despite the political instability during the Program’s implementation, changes were made and outcomes achieved. 65. A strong knowledge background was essential for the choice of policy actions, simultaneously combining relevance and political feasibility. More specifically the team’s expertise in the specificities and challenges of the country was essential for a proper assessment of the support for reforms across constituencies and gauging of political risk. 66. Importance of having relevant, attributable and achievable indicators. When choosing the PDO indicators, it is not only important to choose indicators sought to capture the intended final outcome, but to also ensure that there is a significant causal relationship. Indicators that are too broad and which might be easily impacted by many factors that are not controlled by the intervention carry the risk of compromising the measurement of the actual achievements and impact. 67. Sustained engagement on the part of the Bank continues to be critical to effectively support reform processes over the medium and long term. The uninterrupted relationship between the Bank and the counterpart even at times when significant reform was not feasible laid grounds for an effective partnership when the opportunity was presented. 68. Supporting a policy area that counts on the clear commitment from the government allows for increasingly complex reforms. In particular, the Government’s focus on large taxpayers shows its commitment to shift from improving basic core processes to second generation reforms, and the program’s successful support of these measures exhibits the Bank’s adequacy as a development partner in the policy area. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies 17 77. The Borrower provided no comments for the Tax System and Internal Financial Control components. As for the SOE policy area, the Borrower provided updated information on the indicators, which were included in the ICR. (b) Cofinanciers - Not applicable. (c) Other partners and stakeholders - Not applicable. 18 Annex 1. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Names Title Unit Lending Alexandre Arrobbio Lead Public Sector Specialist AFTP4 Natalia Cecilia Bavio Finance Analyst CTRLN Jasmin Chakeri Senior Economist OPSPQ Carolina Diaz-Bonilla Senior Economist EASPW Enrique Fanta Ivanovic Senior Public Sector Specialist LCSPS Federico Guala Consultant AFTP4 Alejandro Guerrero Ruiz Public Sector Mgmt. Spec. LCSPS Raul Felix Junquera-Varela Senior Public Finance Specialist LCSPS Friederike N. Koehler-Geib Senior Economist LCSPE Mariano Lafuente Public Sector Mgmt. Spec. LCSPS Andres Mac Gaul Senior Procurement Specialist LCSPT Claudia Rocio Manrique Program Assistant LCSPS Patrick Rittenauer E T Consultant LCSPE Fanny Weiner Public Sector Mgmt. Spec. LCSPS Jorge Luis Alva-Luperdi Senior Counsel LEGES Alejandro Alcala Senior Counsel LEGES Supervision Raul Felix Junquera-Varela Senior Public Finance Specialist LCSPS Fanny Weiner Public Sector Mgmt. Spec. LCSPS Friederike N. Koehler-Geib Senior Economist LCSPE Ana Mie Horigoshi Reis Junior Professional Associate LCSPS Marianne Caballero Parra Junior Professional Associate LCSPS Daniel Chalupowicz Financial Management Specialist LCSFM (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) US$ Thousands Stage No. of staff weeks (including travel and consultant costs) Lending FY(10) 39.72 258,686.69 FY(11) 22.87 138,524.73 FY(12) 16.01 54,055.52 Total: 78.60 458,266.94 19 Supervision/ICR FY(12) 3.88 20,166.72 FY(13) 15.96 79,430.91 FY(14) 9.04 39,099.71 Total: 28.88 138,697.34 20 Annex 2. Beneficiary Survey Results N/A Annex 3. Stakeholder Workshop Report and Results N/A Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR The Borrower did not prepare an ICR for this Program, and provided no comments for the Tax System and Internal Financial Control components. As for the SOE policy area, the Borrower provided updated information on the indicators, which were included in the ICR. Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders N/A 21 Annex 6. List of Supporting Documents World Bank (2009), Paraguay - Country Partnership Strategy FY09-FY13, Report No. 48087-PY, 7 April 2009, Washington, DC. World Bank (2009), Paraguay – First Public Sector Programmatic Development Policy Loan, Program Document. Report No. 47712-PY, 31 March 2009, Washington, D.C. Bird, Richard (2010). Taxation and Development. Economic Premise No. 34, PREM World Bank, Washington DC. World Bank (2011), Paraguay – First Public Sector Programmatic Development Policy Loan, Implementation Completion and Results Report, Report No. ICR00001966, October 11, 2011, Washington, DC. World Bank (2012), Paraguay - Country Partnership Strategy Progress Report FY09- FY2013; Report No 66782-PY, April 2012, Washington DC. World Bank (2009-2013), Documents in Program’s Electronic File, including Loan Agreement, PD, Aide Memoirs, Back-to-Office Reports, and Project Status Reports; WBDocs, Washington, D.C. Moore, M. (2013). Obstacles to Increasing Tax Revenues in Low Income Countries. International Centre for Tax and Development (ICTD); United Nations Research Institute for Social Development (UNRISD) 22 MAP 23