Document of The World Bank FOR OFFICIAL USE ONLY...6 Contact Person: Félix Adames Telephone No.:...

Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 59159-PA

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$55 MILLION

TO THE

REPUBLIC OF PANAMA

FOR THE

ENHANCED PUBLIC SECTOR EFFICIENCY TECHNICAL ASSISTANCE PROJECT

February 2, 2011

Poverty Reduction and Economic Management Unit Central America Country Management Unit Latin America and Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective January 2011)

Currency Unit = Panamanian Balboa 1 Balboa = US$1

US$ 1 = 1 Balboa

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ACND National Development Agreements

(Acuerdos de la Concertación Nacional para el Desarrollo) CFAA/CPAR Country Financial Accounting Assessment/Country Procurement

Assessment Report CGR Comptroller’s Office

(Contraloría General de la República) CPS Country Partnership Strategy DGCP General Directorate Public Procurement

(Dirección General de Contrataciones Públicas) DGI National Revenue Administration Office

(Dirección General de Ingresos) DIPRENA Budget Office (Dirección de Presupuesto de la Nación) DNC National Public Accounting Office

(Dirección Nacional de Contabilidad) DPI National Public Investment Office

(Dirección de Programación de Inversiones) GDP Gross Domestic Product GoP Government of Panama IBRD International Bank for Reconstruction and Development IDB Inter-American Development Bank ICR Implementation Completion Report IFMIS Integrated Financial Management Information System IFMS Integrated Financial Management System INADEH National Human Development Institute

(Instituto Nacional de Formación Profesional y Capacitación para el Desarrollo Humano)

INEC Statistics Office (Instituto Nacional de Estadísticas y Censo)

LSMS Living Standards Measurement Study MEF Ministry of Finance

(Ministerio de Economía y Finanzas)

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MIDES Ministry of Social Development MINSA Ministry of Health MTEF Medium-Term Expenditure Frameworks MTFF Medium-Term Fiscal Frameworks M&E Monitoring and Evaluation NFMM New Financial Management Model

(Nuevo Modelo de Administración Financiera, NMAF) OECD Organization for Economic Co-operation and Development ORAF Operational Risk Assessment Framework PFM Public Financial Management PIB Performance-informed Budgeting SIAFPA Panama Integrated Financial Management System

(Sistema Integrado de Administración Financiera de Panamá) SMP Presidential Goal’s Monitoring Office

(Secretaría de Metas Presidenciales) TACP Procurement Administrative Tribunal

(Tribunal de Administración de Contrataciones Públicas) TAL Technical Assistance Loan UNDP United Nations Development Programme WB World Bank

Vice President: Pamela Cox Country Director: Felipe Jaramillo

Sector Manager: Sector Director:

Veronica Zavala Louise J. Cord

Task Team Leader: Pedro Arizti

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Table of Contents I. Strategic Context ...............................................................................................................1

A. Country Context ........................................................................................................1

B. Sectoral and Institutional Context ...............................................................................3

C. Higher Level Objectives to which the Project Contributes ...........................................6

II. Project Development Objectives ........................................................................................6

A. PDO ..........................................................................................................................6

1. Project Beneficiaries ..................................................................................................7

2. PDO Level Results Indicators.....................................................................................7

III. Project Description .........................................................................................................8

A. Project components ....................................................................................................8

B. Project Financing ..................................................................................................... 10

1. Lending Instrument .................................................................................................. 10

2. Project Cost and Financing ....................................................................................... 11

C. Lessons Learned and Reflected in the Project Design ................................................ 11

IV. Implementation............................................................................................................. 13

A. Institutional and Implementation Arrangements ........................................................ 13

B. Results Monitoring and Evaluation ........................................................................... 14

C. Sustainability ........................................................................................................... 14

V. Key Risks and Mitigation Measures ................................................................................. 15

VI. Appraisal Summary ...................................................................................................... 16

A. Economic and Financial Analysis ............................................................................. 16

B. Technical ................................................................................................................. 16

C. Financial Management ............................................................................................. 16

D. Procurement ............................................................................................................ 17

E. Social (including safeguards) ................................................................................... 17

F. Environment (including safeguards) ......................................................................... 17

Annex 1: Results Framework and Monitoring .......................................................................... 18

Annex 2: Detailed Project Description .................................................................................... 24

Annex 3: Implementation Arrangements ................................................................................. 38

Annex 4: Operational Risk Assessment Framework (ORAF).................................................... 54

Annex 5: Implementation Support Plan ................................................................................... 57

Annex 6: Team Composition ................................................................................................... 59

Annex 7: Economic and Financial Analysis ............................................................................. 60

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PAD DATA SHEET

The Republic of Panama

Enhanced Public Sector Efficiency Technical Assistance Project

PROJECT APPRAISAL DOCUMENT

Latin America and the Caribbean Public Sector and Governance Unit (PREM-LCSPS)

Date: February 2, 2011 Country Director: Felipe Jaramillo Sector Director: Louise J. Cord Sector Manager: Veronica Zavala Team Leader(s): Pedro Arizti Project ID: P121492 Lending Instrument: Technical Assistance Loan

Sector(s): Public Sector and Governance Code BC - Central Government Administration (100%) Theme(s): Public Expenditure, financial management and procurement (75%), Code 90 - Management for development results (25%) EA Category: C

Project Financing Data: Proposed terms:

Variable Spread Loan (VSL) with a repayment schedule linked to commitments and with only the interest rate conversion. Front end fee equal to one quarter of one percent (.25%) of the loan amount to be paid by the borrower. Payable in 25 years, including a 4-year grace period with a level repayment schedule with repayments on each May 15th and November 15th.

[ X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other:

Source Total Amount (US$M) Total Project Cost:

Cofinancing: Borrower:

Total Bank Financing:

IBRD

IDA

New Recommitted

60.130

5.130

55.000

55.000 0

0

Borrower: Republic of Panama

Responsible Agency: Ministry of Finance (Ministerio de Economia y Finanzas)

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Contact Person: Félix Adames Telephone No.: (507) 507-507-7050 Fax No.: (507) 507-7301 Email: [email protected]

Estimated Disbursements (Bank FY/US$ m)

FY 2011 2012 2013 2014 2015 2016

Annual 0 10 15 15 10 5

Cumulative 0 10 25 40 50 55

Project Implementation Period: From May 2011 to March 2016 Expected effectiveness date: April 2011 Expected closing date: September 30, 2016

Does the Project depart from the CAS in content or other significant respects?

○ Yes x No

If yes, please explain:

Does the Project require any exceptions from Bank policies? Have these been approved/endorsed (as appropriate by Bank management? Is approval for any policy exception sought from the Board?

○ Yes x No ○ Yes x No ○ Yes x No

If yes, please explain:

Does the Project meet the Regional criteria for readiness for implementation?

x Yes ○ No

If no, please explain:

Project Development objective The objective of the Project is to assist public agencies of the Borrower in producing, using and disseminating timely and quality performance information, thereby allowing a more efficient, transparent and accountable use of the Borrower’s public budget funds.

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Project description Component/Part 1: Strengthening performance-based budget management and evaluation. The provision of support to the Ministry of Finance (MEF), including, goods, IT equipment, operating costs, training and technical assistance for the carrying out of activities aimed at: (a) improving the institutional and technical capacities of MEF for performance-based strategic planning and budgeting in order to create conditions for enhancing the quality of public spending; and (b) supporting the development and institutionalization of monitoring and evaluation functions and systems at the national level and in Pilot Sectors. Component/Part 2: New Financial Management Model: Strengthening budget execution, treasury, accounting and control. The provision of support to MEF (only with respect to Part (a) below) and the Comptroller’s Office (CGR), including goods, operating costs, training and technical assistance, for the modernization of the Borrower’s current financial management system, through the carrying out of activities aimed at: (a) consolidating and integrating all core public financial management processes within the Borrower’s Central Government, focusing on interoperability and integration among selected MEF areas such as budgeting, accounting, treasury, payroll, public procurement, public investment and planning; (b) modernizing control systems performed by CGR; and (c) supporting the Borrower’s statistical capacity. Component/Part 3: Strengthening public procurement and contracting. The provision of support to the General Directorate of Public Procurement (DGCP), including goods and IT equipment, training and technical assistance, for the reform of the Borrower’s public procurement process, through the carrying out of activities aimed at: (a) supporting the institutional strengthening of DGCP, as well as building the capacity of public procurement officials; (b) supporting the ongoing legal and regulatory reforms to pursue the modernization of the Borrower’s public procurement system and processes; (c) supporting the ongoing development of the Borrower’s e-procurement platform PanamaCompra version2; and (d) developing a research center in the Borrower’s Procurement Administrative Tribunal. Component/Part 4: Creation and Support of Project Management Capacities. The provision of support to MEF, CGR and DGCP including, inter alia, goods and IT equipment, training and technical assistance for the carrying out of adequate management, monitoring, reporting, auditing and evaluation of Project implementation activities, as well as the Borrower’s public sector efficiency reform agenda.

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Safeguard policies triggered? Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waterways (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60)

○ Yes x No ○ Yes x No ○ Yes x No ○ Yes x No ○ Yes x No ○ Yes x No ○ Yes x No ○ Yes x No ○ Yes x No ○ Yes x No

Conditions and Legal Covenants: Financing Agreement

Reference Description of Condition/Covenant Date Due

Loan Agreement (Article V)

The Tripartite Inter-Institutional Agreement has been executed on behalf of the parties thereto

Loan Effectiveness Condition

Loan Agreement (Article V)

The Operational Manual has been adopted by the Borrower, through MEF, CGR and DGCP, in a manner acceptable to the Bank.

Loan Effectiveness Condition

Loan Agreement, Schedule 2 (Section I.A.3)

Establish the Reform Steering Committee

30 days after the Effective date

Loan Agreement, Schedule 2 (Section I.D.1)

Agreement signed between DGCP and Procurement Administrative Tribunal

3 months after the Effective date

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I. Strategic Context

A. Country Context 1. Panama is an upper-middle income country with a dollarized economy and a per capita gross national income of US$6,740. The country has about 3.5 million people; nearly three-quarters of them live in urban areas, mostly around the Panama Canal. About 10 percent of the population is of indigenous origin and primarily reside in remote rural areas. Panama has an open economy traditionally centered on the Canal, trade and financial services. 2. Over the last 50 years, Panama’s real Gross Domestic Product (GDP) growth has averaged about 5 percent, which has ranked it among the faster growing economies in Latin America. With an ethnically diverse population, a world famous canal, and a modern financial and trade sector, Panama has been a prime benefactor of the increasingly globalized world economy. In the four years prior to the global economic crisis in 2008, Panama saw growth averaging 8.5 percent per year and the unemployment rate falling from 13.8 percent to 5.6 percent. Growth was fueled not only by the buoyant global economy, but also by strengthened domestic policies that improved fiscal balances, reduced financial sector vulnerabilities, and enhanced productive investment. In addition, through a historic national referendum in 2006, Panama approved a US$5.25 billion expansion of its canal. These factors contributed to strengthened investor confidence, lower interest rates, and greater stability, which allowed the economy to weather the global crisis better than most countries. 3. Despite the global crisis, Panama has continued to see growth, albeit modest. Compared to a regional average output contraction of 2.5 percent in 2009, Panama did relatively well with growth of about 2.4 percent in 2009. The direct effects from the global crisis were modest and the financial system remained stable. However, the economy was indirectly affected through declines in credit growth, reduced trade financing, and a halt in new real estate construction, which, in turn, was felt in sectors such as agriculture, transport, trade and construction. Growth is expected to accelerate to over 6 percent in 2010-2011. 4. The Government’s investment plan for the 2010-2014 period amounts to US$13.6 billion, which is significantly higher than during the prior administrations. About US$7.3 billion will be invested in the social sectors, of which US$2.9 billion will be for training and social assistance. Most of the investment will be in the regions outside Panama City (about US$4.2 billion) but the single most important investment project will be the metro transport system for the City of Panama (about US$1.8 billion). Expected investments outside urban areas include irrigation projects, roads to enhance logistical advantages and interconnection with ports, and rural electrification. The investment program represents an increase of about 1 percent of GDP in capital expenditures per year. 5. Tax reform approved by the National Assembly is expected to increase tax collections. The first of the two phases of the tax reform was implemented before the end of 2009 and included an increase in taxes for casinos and taxes on income of companies operating in the Colon Free Trade Zone. The total increase in tax collection for the Central Government for this phase is estimated about 1 percent of GDP per year. The second phase of the reform was

2

approved by the National Assembly on March 15, 2010 and includes higher taxes on consumption and lower taxes on personal and corporate income. The Government is expected to collect an additional 1 percent of GDP per year from this most recent reform. The combined additional revenues of about 2 percent of GDP will be sufficient to finance the additional capital expenditures required by the new investment plan. The tax reform was planned to be neutral in terms of equity, but the value added tax increase may have a very modest impact on the poor. 6. A combination of a gradual rise in revenue and a containment of current expenditure should allow the authorities to expand public investment while keeping public debt sustainable in coming years.1

The fiscal adjustment since 2005 and higher GDP growth resulted in a fall of the consolidated public debt-to-GDP ratio from 62.3 percent in 2004 to 38.8 percent in 2008. But in 2009 the debt stock increased to about 39.4 percent of GDP owing to slower growth and lower revenues. The Government expects to maintain the deficit within the bounds of the Fiscal Sustainability Law, which implies a deficit of less than 2.0 percent of GDP in 2010 and a stock of the public debt stock that rises slightly to around 40 percent of GDP over the next three years and thereafter begins to decline, which is fiscally sustainable. In particular, the increase in investment will be financed by the additional revenues collected by the new tax reform, while at the same time current expenditures are contained.

7. In March 2010, during the aftermath of the crisis, Panama achieved investment grade status from Fitch, Standard & Poor’s and Moody’s credit rating agencies. Panama’s credit rating upgrade reflects a sustained improvement in public finances, underpinned by recent tax reforms, and the economy's resilience to the global financial crisis and associated recession. By achieving investment grade, the country hopes to lower the cost of borrowing and increase access to additional financing from institutions and investors that are restricted to high-grade investments.

8. Despite Panama’s status as an upper-middle income nation, its economic development has been characterized by a high degree of inequality and persisting poverty. The country has one of the highest indexes of inequality in the region and the world (0.47 Gini coefficient), with the richest 20 percent of the population responsible for half of the country’s total consumption. Poverty is concentrated in rural and indigenous areas and poverty data from the recent 2008 Living Standards Measurement Study (LSMS) shows that 32.7 percent of the population still lives in poverty, while 14.4 percent of the population lives in extreme poverty. 9. Public Expenditures have been growing hand in hand with the increase of the GDP in the country. However, Panama needs to focus on the quality and efficiency of those expenditures. The Government of Panama (GoP) investment plan for the 2010-2014 period amounts to US$13.6 billion, more than doubling the public investment of the prior 5 years. Panama spends around 17 percent of GDP in the social sectors, which is higher than the 14 percent average of the region, but there is low efficiency and insufficient targeting of those expenditures, and social outcomes are not in line with the level of public spending. Despite robust growth and investment, this means that meeting a number of key social targets remains a challenge. Life expectancy has increased significantly over the years; however, malnutrition remains a major challenge, particularly in indigenous areas where 62 percent of children under 1 Current expenditures are expected to remain constant as a share of GDP.

3

five are chronically malnourished; in contrast to 11 percent in urban areas. Malnutrition rates in indigenous areas have increased since 2003, when 57 percent of children were chronically malnourished. Average years of schooling among adults have increased significantly; yet, there are major socioeconomic and ethnic differences in school enrollment, especially in secondary education. 10. Today, one of Panama’s main bottlenecks for improving the effectiveness and efficiency of public programs is still the low institutional capacity. The public sector in Panama is not perceived as having mastered operational efficiency or being able to effectively deliver the services that citizens expect. In 2008, “inefficient Government bureaucracy” and “corruption” were the top two cited “problematic factors” for doing business in Panama2

. The public sector quality in terms of accountability, effectiveness and efficiency in service delivery, as well as transparency in budget formulation and execution, remains low. The capacities of the Central Government to monitor and manage for results are also weak. In order to tackle these significant challenges, the proposed operation intends to support strengthening of the institutional capacities to strategically plan, manage and execute strongly designed public programs.

B. Sectoral and Institutional Context 11. The 2009 presidential election was won with over 60 percent of the vote with a campaign that highlighted economic growth based on strategic economic sectors, an ambitious investment agenda and a battle against insecurity and corruption. Since taking office, the President has strongly reinforced that reducing corruption, achieving more efficient public expenditures and more transparent bureaucratic structures are part of his core political priorities. To this end the Government has adopted long term national development agreements, and the Presidential Agenda has specified goals with tangible public targets. Additionally the Fiscal Responsibility Act (Ley 34) is being implemented, requiring the budget to be formulated within the parameters of fiscal responsibility and efficiency, and in direct relationship to the national development agreements, and to include a set of performance indicators. Many of the initiatives mentioned below point to the Government’s commitment to these goals.

12. A new Strategic Plan to guide the major reforms includes, as a top priority, increasing effectiveness of public expenditures as well as revenue management. In January 2010, the GoP made public the Government’s Strategic Plan for 2010-2014, which articulated, among other priorities, the goal to increase the efficiency, transparency and distribution of public expenditures and improve tax administration. To achieve this goal, the GoP, under the leadership of the Ministry of Economy and Finance (Ministerio de Economia y Finanzas, MEF), has adopted priority reforms, discussed below, to:

• Strengthen and modernize planning and budgeting. • Strengthen the financial management system and the financial control framework. • Continue comprehensive procurement reform.

2 In the World Economic Forum’s (WEF) 2008 firm surveys.

4

• Develop a national monitoring and evaluation system in addition to the gradual introduction of performance-informed budgeting and a more efficient public investment system.

• Improve statistical data production and dissemination.

13. The reform priorities identified by the Government are consistent with findings of diagnostics undertaken in recent years. The 2006 Public Expenditure Review (PER, Report No. -----) identified a number of features of the Panama’s public finances as reducing the impact and efficiency of public spending across sectors, including (i) absence of proper sector planning and budgeting; (ii) imbalance between maintenance and investment expenditures, and blurred distinction between both in sector budget classifications:; (iii) lack of systematic monitoring and evaluation of programs and projects and (iv) inadequate targeting and allocation of resources. Recommendations from the 2006 Country Financial Accountability and Procurement Assessment Report (CFAA/CPAR, Report No. 40496-PA) have informed the procurement and financial management reforms to date, and the design of current reforms, which are discussed below. Additionally, following the Government’s request the World Bank in collaboration with the Inter-American Development Bank (IADB) is producing the 2010 Public Expenditure and Financial Accountability (PEFA) report. 14. Although much progress has been made in improving budgetary and public financial management in recent years, substantial challenges lie ahead in increasing effectiveness during budget preparation and efficiency during budgeting execution. Panama’s financial management and budgetary systems have made some progress towards comprehensiveness and transparency, in part drawing on the recommendations of the PER and the CFAA Budget monitoring and execution are now more timely and transparent and extensive financial performance information is made public. Moreover, there are few off-budget expenditures. However there is ample room for improving the strategic allocation of resources and increasing operational efficiency in expenditures, including through (i) the formulation of a medium-term expenditure framework, (ii) the development of the “bottom-up” budgeting process incorporating sector strategic business plans, (iii) the compliance with public investment programming procedures during budget preparation, (iv) the adequate execution of procurement plans, and (v) the inclusion of budget ceilings as part of the formulation process and the control of in-year budget modifications to assure predictability of funds. 15. The functions of monitoring and evaluation of public programs require substantial improvement. The monitoring and evaluation systems are very weak. An effective, comprehensive monitoring and evaluation system is required to inform planning and budgetary decisions, strengthen accountability and support results-based management, and so increase the efficiency and effectiveness of the public sector.

16. Key financial management functions related to accounting, recording and reporting are carried out by the Ministry of Finance and the Comptroller’s Office with robustness but the system is due for an upgrade both in terms of technology and roles and responsibilities. Several advances have been made in the consolidation of the single treasury account in terms of the timeliness, scope and publication of quarterly budgets, fiscal balances, debt and payroll reports, and annual financial statements. Despite this, there is a need to improve

5

their quality and disaggregation, and to modernize standards, disclosures, and consolidation as identified in the 2006 CFAA. In addition, it is necessary to move towards the separation of external audit functions from other incompatible tasks, such as ex-ante audits, endorsements, payments, and consolidation of financial statements. This implies that some functions might have to migrate from the Comptroller’s Office to the MEF.

17. The GoP has identified the continued strengthening of the national procurement system as a tool to transform the national budget into a process that connects public resources to results that improve the lives of Panamanian citizens and as a powerful transparency device. The Bank assessment in 20063 pointed to inadequate procurement practices in the Central Government and rigid internal controls that restricted the capacity to generate savings in budget implementation. However, efforts led by the DGCP such as PanamaCompra which reduce payment times to suppliers of goods and services, and PanamaTramita and PanamaEmprende, which simplify business processes, are strong steps in the right direction. The Government of Panama has strengthened the public procurement system not only by increasing its transparency through the use of the e-procurement platform PanamaCompra but has also significantly increased its efficiency through the introduction of framework agreements for common use goods.4

Further reforms will focus on i) linking procurement, budgeting and planning; ii) continuing the improvement of the public procurement legal framework, and standardized procedures: iii) strengthening the procurement monitoring and evaluation systems; and iv) developing the mechanism and tools required to professionalize procurement staff, and to tune up saving strategies.

18. Increasing accountability and transparency in the public sector relies on a stronger legal framework and making progress towards its full implementation. Implementation of the strengthened legal framework and improved expenditure management will strengthen accountability and service delivery, and build trust in Government. The GoP has made great strides in its willingness and commitment to improve transparency and fight corruption by approving the Fiscal Responsibility Law (Law no. 34, 2008) and the changes introduced to the procurement law (Law no. 22, 2006), and the Law of Access to Information and Habeas data (Law no. 16, 2002). The full implementation of these initiatives, in combination with quick gains in service delivery, could help curb the fairly high levels of perceived corruption in the country within a feasible political timescale. Improving trust in Government will be essential to decrease tax evasion and improve compliance with rules and regulations. In addition, public perceptions of Government effectiveness could be greatly improved by gains in sectors which are most relevant for Panamanians, including basic infrastructure and education, which are strongly correlated to citizens’ trust in Government across the region. Increased trust in Government could be then transformed into political support for further reforms. If the Government aims at tackling tough public sector issues mirroring many Organization for Economic Co-operation and Development (OECD) countries (such as civil service reform) it will need a fair amount of political capital and higher levels of trust.

3 Part of the Country Financial Accountability and Procurement Assessment Report (CFAA/CPAR), World Bank (2006). 4 From April 2007 to January 2010 the Government has procured over US$154 million through these framework agreements, which have created a more transparent and competitive market. In 2009 the Government saved just over US$20 million in the procurement of fuel.

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C. Higher Level Objectives to which the Project Contributes

19. The higher level objectives of this operation are related to efficiency, transparency and accountability of the public sector. The Project components and activities would support the implementation of better management practices in the use of public resources around the budget cycle by generating and promoting use and dissemination of performance information. This would contribute to enhanced efficiency and effectiveness of public programs as well as transparency and accountability in the use of public resources. Figure 1 summarizes the causal link.

Figure 1: Linking the PDO with Higher Level Objectives

20. This project is fully aligned with the World Bank Group’s Country Partnership Strategy (CPS) for Panama for the period FY11-FY14. 5

More specifically, the Project is directly linked to the CPS pillar that aims to “Enhance Public Sector Transparency and Efficiency” by institutionalizing the use of performance information throughout the budget cycle, strengthening financial management and procurement systems and carrying out tax reforms. As detailed in the CPS this will be mainly achieved by creating effective monitoring and evaluation of public sector programs, creating performance-based budgeting processes, and modernizing financial management and procurement systems. Additionally, the operation has been designed in close collaboration with the Bank team preparing the Development Policy Loan scheduled to go to the Board during FY11.

21. The proposed operation builds on and follows upon progress achieved through previous Bank work. The prior support was channeled through the Public Policy Reform Technical Assistance Project (P055844) and subsequent additional financing (P105526) under loan No. 7446 that was finally closed in May 2010. The TAL helped increase the policy making capacity of the MEF, provided tools and support to increase the statistical capacity of the country (e.g. LSMS 2008), supported the new e-procurement platform (e.g. PanamaCompra2) of the Procurement Agency (Dirección General de Contrataciones Públicas, DGCP) and strengthened some audit functions in the Comptroller’s Office Lessons learned from the previous operation are highlighted in section II.C.

II. Project Development Objectives

A. PDO

The objective of the Project is to assist public agencies of the Borrower in producing,

using and disseminating timely and quality performance information, thereby allowing a more efficient, transparent and accountable use of the Borrower’s public budget funds.

5 World Bank Group’s Country Partnership Strategy (CPS) for Panama; Report No. 54265-PA discussed by the World Bank Board of Directors on September 21, 2010. The document date is August 24, 2010

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` 1. Project Beneficiaries

22. The main project beneficiaries and key stakeholder are:

• Ministry of Economy and Finance (Dirección de Inversión Pública, Ministerio de Economia y Finanzas, MEF)

• The President’s Office (Unidad de Seguimiento de Metas Presidenciales) that monitors all the President’s campaign goals.

• The Comptroller’s Office (Contraloría General de la República, CGR) still in charge of many key functions like ex ante financial controls, auditing, personnel payment and statistics.

• The Procurement Agency (Dirección General de Contrataciones Públicas, DGCP) in charge of the public procurement reform.

• Line Sector Ministries that are the final implementers of many of the reforms contained in the reform and executors of public programs.

• Public service beneficiaries, civil society groups and the donor community.

2. PDO Level Results Indicators 23. The key results and results to measure progress towards the PDO are shown in Table 1. For more details see the results framework in Annex 1:

Table 1: Key Results and PDO Indicators Component Objectives

(outcomes and outputs) PDO Indicators

(see Annex 1 for component level indicators)

Component 1: Strengthening performance-based budget management and evaluation

Improved budget strategic planning and evaluation functions in the MEF and pilot sector Ministries facilitate prioritization of allocations, predictability of program funding, transparency and accountability. This would be accomplished by: (i) improving the institutional and technical capacities for performance-based strategic planning and budgeting, and (ii) designing, implementing and institutionalizing an integrated M&E system, coordinated at the Central Government between the Ministry of Finance and sector ministries.

1. Performance orientation of the budget: The budget document is presented to Congress using program classifications and financial and non- financial performance information in the 2014 budget

Component 2: New Financial Management Model: Strengthening budget execution, treasury, accounting and control

The MEF and CGR produce and disseminate quality financial reports covering all Government across that meets modern accounting and audit standards. This would be accomplished by (i) integration of budget, accounting and treasury financial system areas and harmonization of payroll, procurement, planning, and public investment systems in the MEF and pilot sector Ministries, and (ii) implementation of ex-post financial control system for the budget based on a risk analysis in CGR.

2. Quality of financial information: A consolidated Government statement is prepared annually with few omissions a consistent format over time and disclosure of accounting standards (IPSAS or national).

3. Efficacy of Internal Audit Function: Internal Audit makes progress towards being executed following professional standards and its recommendations are followed by authorities by the end of the Project.

Component 3: Strengthening public

Increased transparency in the use of budget funds and the value for money of public procurement that would be accomplished by improved PanamaCompra platform and

4. OECD procurement benchmark index: Substantial increase in the ratings of the OECD benchmark methodology to assess

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Component Objectives (outcomes and outputs)

PDO Indicators (see Annex 1 for component level

indicators) procurement and contracting

general national procurement legal framework. national procurement systems. 5. Private sector perception surveys:

Improved perception of transparency and efficiency in Panama’s public procurement system.

III. Project Description

24. The proposed operation has been conceived partly as a continuation of the technical assistance loan closed in May 2010 6

that supported reforms in the area of procurement, financial management and production of relevant data and information for better policy-making. The current operation would continue providing support for some of these reforms and include further areas of support including improved, introduction of performance-based budget management and strengthened evaluation and strategic planning functions. The Project would be implemented over a five-year period, one year beyond the current administration to leave room for transition with the new administration. The Project would comprise the following three components (in addition to the fourth one on project management):

A. Project components 25. The Project consists of the following components/parts: 26. Component/Part 1: Strengthening Performance-Based Budget Management and Evaluation (US$9 million). The provision of support to MEF, including, goods, IT equipment, operating costs, training and technical assistance for the carrying out of activities aimed at:

a. improving the institutional and technical capacities of MEF for performance-based

strategic planning and budgeting in order to create conditions for enhancing the quality of public spending, including, inter alia: (i) strengthening and harmonizing institutional planning and budgeting frameworks; (ii) organizational strengthening and re-designing of MEF and other sector planning and budgeting responsible units within the Borrower’s Central Government structure; (iii) introducing annual and multi-annual budget planning and programming tools; (iv) defining and institutionalizing methodologies for strategic planning and budgeting; and (v) developing technical, managerial and organizational capacities for result-based planning and budgeting; and

b. supporting the development and institutionalization of monitoring and evaluation functions and systems at the national level and in pilot sectors, including, inter alia: (i) designing and implementing a national monitoring and evaluation system under MEF coordination and leadership; (ii) designing and implementing pilot monitoring and evaluation systems in Pilot Ministries; (iii) enhancing the production, quality, utilization and availability of performance information; (iv) developing technical, managerial and organizational

6 See Public Policy Reform Technical Assistance Loan (P055844) and Public Policy Reform Technical Assistance Loan Additional Financing (P105526) and Implementation Completion and Results Report (IBRD-46350 and IBRD-74460), Report No. ICR00001669, November 23, 2010.

9

capacities for the institutionalization of monitoring and evaluation functions and systems; and (v) producing and disseminating methodologies for the institutionalization of monitoring and evaluation functions and systems.

27. Component/Part 2: New Financial Management Model: Strengthening Budget Execution, Treasury, Accounting and Control (US$30.5 million). The provision of support to MEF (only with respect to Part (a) below) and CGR, including goods, operating costs, training and technical assistance, for the modernization of the Borrower’s current financial management system, through the carrying out of activities aimed at:

a. consolidating and integrating all core public financial management processes within the

Borrower’s Central Government, focusing on interoperability and integration among selected MEF areas such as budgeting, accounting, treasury, payroll, public procurement, public investment and planning, including, inter alia: (i) conceptual and functional designing of a new financial management system to be used by all public sector agencies; (ii) defining an applicable technological framework (software requirements, IT security policies, software architecture design, server levels agreements for software, hardware and selected services); (iii) analyzing alternatives for implementing the new financial management model; (iv) customizing/constructing information technology systems compatible with the alternative selected under (iii) above; (v) reviewing and updating the normative framework supporting the new financial management model; and (vi) supporting the implementation of the new financial management model in all public sector agencies, including the provision of the relevant training to personnel working on such agencies;

b. modernizing control systems performed by CGR, through the strengthening of: (i) the Borrower’s financial management control framework; (ii) the internal control framework and internal audit functions in the public sector; (iii) CGR’s institutional support functions, including human resources, IT, and learning management; (iv) the promotion of public participation in the public financial management oversight, including the strengthening of the existing claims and allegations center concerning public financial mismanagement; and (v) the public accounting standards in coordination with MEF.; and

c. supporting the Borrower’s statistical capacity, through: (i) the provision of technical assistance for the improvement of national accounts and survey data; (ii) the provision of training to enhance the capacities of the Instituto Nacional de Estadisticas y Censo (INEC’s; and (iii) the acquisition of the necessary software and hardware to upgrade INEC’s systems and capacity to produce, analyze and disseminate statistics.

28. Component/Part 3: Strengthening public procurement and contracting capacity (US$15 million). The provision of support to DGCP, including goods and IT equipment, training and technical assistance, for the reform of the Borrower’s public procurement process, through the carrying out of activities aimed at:

a. supporting the institutional strengthening of DGCP, as well as building the capacity of public procurement officials, including, inter alia: (i) the development of a curriculum to support the professional development of procurement officials in line with the business needs of the different Government procurement organizations in partnership with the National Human Development Institute (INADEH); (ii) the development and

10

implementation of an educational campaign for suppliers and civil society; (iii) the development of a business continuity model including all aspects related to the security and integrity of the system, along with a document management system; (iv) the creation of a supplier registry and the required management tools to ensure its efficient operation and connection with existing Government systems within the Borrower’s Central Government; and (v) the development of a demand-driven approach to carry out specific efficiency analysis to identify opportunities for savings and efficiency gains;

b. supporting the ongoing legal and regulatory reforms to pursue the modernization of the Borrower’s public procurement system and processes, including inter alia: (i) the drafting of a new procurement law, the necessary regulations and manuals; (ii) the development of training and educational materials on the application of the new legal framework as well as the necessary training to build the capacity of legal and compliance teams throughout the public service; and (iii) the development of standard bidding documents.

c. supporting the ongoing development of the Borrower’s e-procurement platform Panama Compra version2, including inter alia: (i) the development of modules to replace the existing electronic catalogs; (ii) the interface with the financial management system and other public sector management systems; (iii) the modernization of office and management systems, including the review and update of the security system, as well as the implementation of new measures to strengthen the integrity of the system; and (iv) the development and implementation of a complaints management system for DGCP, together with the implementation of quality standards such as ISO and the Capability Maturity Model Integration (CMMI).

d. developing a research center in the Borrower’s Procurement Administrative Tribunal, including, inter alia: (i) the provision of the necessary hardware and software for the set up of a virtual library that would compile best practices in public procurement, as well as relevant doctrine and jurisprudence; and (ii) the carrying out of capacity building activities for public officials, lawyers and civil society stakeholders involved in procurement processes.

29. Component/Part 4: Creation and Support of Project Management Capacities (US$0.5 million). The provision of support to MEF, CGR and DGCP including, inter alia, goods and IT equipment, training and technical assistance for the carrying out of adequate management, monitoring, reporting, auditing and evaluation of Project implementation activities, as well as the Borrower’s public sector efficiency reform agenda.

B. Project Financing

1. Lending Instrument 30. The proposed operation is a technical assistance loan in the amount of US$55 million. The choice of a technical assistance loan responds to the Government’s request to support this important public sector reform through funding and technical assistance. This instrument also replicates previous Bank interventions in this same area that proved adequate for this kind of project.

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31. Retroactive financing would be authorized to secure the commencement of critical activities already identified in the initial procurement plan. Given the necessity to initiate some critical activities this operation would include retroactive financing (details are included in the Loan Agreement).

2. Project Cost and Financing 32. Table 2 summarizes the Project cost and financing by component.

Table 2: Project Costs by component and sub-component

Project Cost By Component Counterpart Financing

US $million

IBRD Financing

US $million

Total US $million

1. Strengthening performance-based budget management and evaluation 9.000 9.000

Subcomponent 1.1. Improving performance informed planning and budgeting processes 2.000 2.000

Subcomponent 1.2. Developing and institutionalizing results monitoring and evaluation (M&E) 7.000 7.000

2. New Financial Management Model: Strengthening budget execution, treasury, accounting and control 30.500 30.500

Subcomponent 2.1. Integrated Financial Management System (IFMS) 19.000 19.000

Subcomponent 2.2. Modernization of the external control framework 8.000 8.000

Subcomponent 2.3. Support to the country’s statistical capacity 3.500 3.500

3. Strengthening public procurement and contracting 15.000 15.000 Subcomponent 3.1.: Institutional strengthening 8.000 8.000 Subcomponent 3.2. Legal and regulatory reform. 1.000 1.000 Subcomponent 3.3. Technology 5.000 5.000 Subcomponent 3.4. Best practice ctr-virtual library. 1.000 1.000

4. Project Management Support 0.500 0.500 Total Baseline Cost 5.130 55.000 60.130

Physical Contingencies 0.0 0.0 Price Contingencies 0.0 0.0

Total Project Costs1 5.130 55.000 60.130 Interest during construction

Front-end Fee (0.25%) 0.1375

Total Financing Required 5.2675 55.000 60.2675 Note: The Government agreed during Negotiations to provide funds to be divided by executing agency (pro rated) to support additional project costs and project management support in the amount specified in this table along the life of the Project. The Government also decided to pay the front end fee and not add to the loan.

C. Lessons Learned and Reflected in the Project Design

33. There are a number of lessons learned from the implementation of the previous operation7

7 Public Policy Reform Technical Assistance Loan (P055844) and Public Policy Reform Technical Assistance Loan Additional Financing (P105526), and Implementation Completion and Results Report (IBRD-46350 and IBRD-74460), Report No. ICR00001669, November 23, 2010.

that are contained in the Implementation Completion and Results Report (ICR) (Report No. 00001669) and can be summarized as follows:

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34. Importance of aligning the Project and the political cycles. The several changes in the administration during the life of the previous Project had significant impacts on its implementation. This Project has therefore sought to align the Project life cycle with the political cycle in order to minimize delays derived from changes in priorities, strategies, and counterparts, and maximize ownership regarding project objectives. The first four years would take place during the present administration and the final year would allow transition for the new administration. In addition, the participation of key political and technical actors at project design and implementation has been key to ensuring that the priorities are correctly defined and to promote ownership.

35. Strengthening implementation capacity and governance arrangements. Project management arrangements should be (to some extend) centralized in an agency with adequate resources and strong management and fiduciary capacity to undertake the Project management duties with the necessary quality standards and in a timely manner. It is important that the staff in the Project executing units is trained in Bank procedures and that this training is carried out prior to the beginning of the Project, to avoid delays once the Project becomes effective. Staff in charge of the procurement and financial administration of the Project should be committed full time to these responsibilities and it would also be important to seek mechanisms/incentives to retain them in their positions. The experience of the previous project also indicates that for countries with low implementation capacity and projects where many implementing agencies are involved, it is recommended to establish clear governance structure and implementing arrangements in order to avoid coordination problems. These findings have been taken into account in the implementation arrangements described below. 36. Importance of careful planning, and sound M&E and financial systems. Deficient planning proved to be the cause of many of the delays experienced in the implementation of the previous project. It is also important to guarantee that sound Monitoring and Evaluation (M&E) and financial systems are in place, in particular for operations involving more than one implementing agency. 37. Quality of the results framework. The activities and outputs proposed in the original design of the previous project were not part of an integrated framework, as they were not connected to the Project’s development objectives. This proved to be one of the major weaknesses of the previous project that could not be overcome. Careful attention has been given to the development of an integrated results framework for this project, which would be regularly tracked and used as an instrument for the supervision of the Project and the dialogue with Government. 38. Importance of close supervision and the Bank’s presence in the country. Experience from the previous Project illustrates the importance of close Bank supervision for the achievement of the Project objectives and the proper implementation of activities. Interviews with counterparts indicated the value they place on the support from Bank specialists and supervision missions. The intense collaboration and supervision that took place in the later years of the previous project, both from the specialists and the recently-opened Panama country office

13

contributed to strong engagement by the Government in the preparation of this operation. Close supervision and engagement would continue. 39. Additional Financing Loan as an instrument to maintain dialogue. This Project shows the importance of the additional financing as an instrument that allowed not only for the completion of several activities, but also helped to redirect and boost the Project and support the achievement of the Project’s objectives. With the additional financing it was possible to design new institutional arrangements for the implementation of the Project, and an improved results framework. In addition, the use of the additional financing was critical to maintain the policy dialogue with the Government and allow a better transition with the new Administration.

IV. Implementation

A. Institutional and Implementation Arrangements 40. The current implementation arrangement model has been developed in conjunction with the Government, taking into account the scope and depth of the reforms proposed as well as the strengths and weaknesses of current Central Government and MEF’s institutional architectures. It also considers previous experience and thus, replicates features that did work well in past loan operations while developing and strengthening others that offered opportunities for improvement, namely (i) coordination mechanisms among key actors, (ii) clear responsibilities for project implementation within the MEF, (iii) adequate capacity of MEF key technical units, and (iv) introduction of a performance-based service provision agreement among actors. 41. The implementation arrangements have been designed to balance autonomy versus coordination needs, to separate administrative from technical functions and to provide highest political support. The implementation arrangements model contains three main features: (i) inter-institutional arrangements, (ii) MEF intra-institutional arrangements, and (iii) a mechanism to provide the reform with high political engagement and technical support.

42. Inter-institutional arrangements. There are three main executing agencies: MEF, CGR and DGCP. The model proposes a decentralized approach very much in line with the arrangements used in the previous project. However, the MEF would serve as the main World Bank counterpart and undertake some general coordination functions to provide project cohesion. The relationship MEF-CGR and MEF-DGCP would be governed by an explicit inter-institutional agreement.

43. MEF intra-institutional arrangements. The previous project had one major unit, the Public Policy unit (Dirección de Políticas Públicas, DPP) as counterpart in the MEF. This new project is broader in its content and has direct involvement with four key units or Direcciones: National Public Investment Office (Dirección de Programación de Inversiones, DPI), Budget Office (Dirección de Presupuesto de la Nación, DIPRENA), National Public Accounting Office (Dirección Nacional de Contabilidad, DNC) and Public Policy Office (Dirección de Políticas Públicas, DPP). A team in the DPI would provide administrative support to the technical focal points in each of the Direcciones. The team would work under a service provision model and the

14

unit’s performance would be assessed on an annual basis by all the four directors.

44. High political engagement and technical support. The current project, while focused on finance functions, is supporting a much broader long term Government agenda that aims at creating a much more efficient, effective, transparent and accountable Public Administration. As such, the Project should be understood as a critical part of a bigger Government reform program. Therefore, the Government proposes the creation of a lean Reform Steering Committee involving the key units in MEF, DGCP and CGR to steer the Project as part of the reform.

45. For full details on the implementation arrangements, please see Annex 3. Also, an operational manual have been prepared by the Government in which full details of project implementation are contained. The adoption of the operational manual (Manual de Operaciones) would be a condition of loan effectiveness.

B. Results Monitoring and Evaluation 46. The DPI in the MEF would be in charge of carrying out all monitoring and evaluation activities. The unit would compile the data needed to feed the monitoring indicators prepare M&E reports and regular progress reports for the Reform Steering Committee and Bank supervision team. Resources under component 4 have been established to strengthen the capacity of the unit to carry out these duties. The DPI’s team would not only be able to monitor and evaluate the Project, but more broadly serve as the main progress report mechanism of a broader Government reform. This would be done by compilation, analysis of data and reporting to the Reform Steering Committee (see Annex 3).

C. Sustainability 47. The Bank assesses sustainability of the reform activities contained in the Project as likely. Evidence from reforms in OECD and Bank related project in Latin America and the Caribbean shows that budget, public financial management and procurement reforms are long term endeavors. Many times these reforms occur in waves and/or start in pilot form that then increase coverage to the rest of the administration. The public sector reform that the Government of Panama has embarked on to make the public administration more efficient, transparent and accountable goes beyond this project and the current Administration. However, over the next five years there are milestones, products and results that if implemented would be stepping stone for further changes. 48. To maximize the probability of success and sustainability of the reforms the Bank has relied on three main pillars: (i) Government broad ownership, demand and political support, (ii) technically sound and non controversial activities and outputs, and (iii) broad participation of key actors that go beyond the main counterparts (CGR, MEF, DGCP) and reach out to President’s Office, pilot sector Ministries and Statistics Office (INEC).

15

V. Key Risks and Mitigation Measures

49. The Bank has assessed the overall risk for the operation as Medium-I (high impact under low likelihood) while the implementation risk is rated as High. This assessment is based on the analysis detailed in the ORAF matrix included in Annex 4 that highlights all possible risks for the operation. Mitigation measures are identified to tackle the risks. 50. The main risks revolve around the capacity of the implementing agencies to smoothly execute the Project. Project implementation in the previous project has been difficult. The following Table 3 shows the main risks and the proposed mitigation measures. For more details on the risks and the mitigations factors see Annex 4 and ISP in Annex 5:

Table 3: Main risks and mitigation measures Main risks Mitigation measures

Fiduciary capacities can be a limiting factor and remain low. As experienced in the previous Public Policy Reform TAL fiduciary teams in some of the key counterparts can limit the advancement of project execution and overall implementation. Given that this project would include further actors this risk aspect needs to be addressed in detail. Specifically on the financial management (FM) front the main risks are as follows: 1) Limited fiduciary capacity

in the implementing entities

2) Involvement of multiple implementing entities, as well as units within MEF

3) The integrated administrative system was not implemented in the previous project

4) Delays in payments to vendors

• Training. Fiduciary experts have visited the client and plan targeted FM and procurement staff training sessions, particularly for the new units.

• Using prior capacities and coordination. The Project is making sure that capacities created through the previous TAL can be used by the Government as expressed in the implementation arrangements in Annex 3. MEF, CGR and DGCP have prior experience and some key personnel would be retained. Additionally, MEF would perform a coordinating function, would create an administrative support unit and would identify or contract dedicated staff for the Project, with appropriate skills and experience, to manage the Accounting and Disbursement aspects of the proposed project.

• Use of Panama Integrated Financial Management System ( SIAFPA PRO). SIAFPA PRO would be implemented in the implementing entities to monitor project expenditures.

• Fiduciary plans. FM assessment of implementing entities have identified appropriate mitigation measures to be included in the Project design in accordance with the findings and an action plan to strengthen administration and monitoring of project funds (see Annex 3).

• Close supervision. The Bank would continue to monitor and provide technical assistance to the Panamanian Government to reduce the delays in payments to vendors. Also, auditors for the Project audit would be hired 4 months after the effectiveness date to ensure timely submission of the audit and compliance with financial covenants. Finally, specific FM processes and procedures are being designed in order to guarantee that project funds are used economically and efficiently. These processes and procedures would be reflected in the Operational Manual.

Effective project management experts in key counterpart units are scarce. The experience from the previous TAL implementation shows that even when there is clarity, ownership and guidance at the management level, operational teams needed to implement the Project are often weak.

• A new model based on past practice. The current implementation arrangement model (see Annex 3) has been developed in conjunction with the Government considering the scope and depth of the changes proposed as well as the strengths and weaknesses of current Central Government and MEF’s institutional architectures.

• Autonomy with coordination. The implementation arrangements have been designed to balance autonomy versus coordination needs, to separate administrative from technical functions and to provide highest political support.

• Detailed arrangements and political support. The implementation arrangements model contains three main features: (i) inter-institutional arrangements, (ii) MEF intra-institutional arrangements, and (iii) a mechanism

16

Main risks Mitigation measures to provide the reform with the highest political and technical profile.

• Monitoring performance. The administrative units’ performance in MEF, CGR and DGCP would be assessed on a regular basis and reported to the Steering Committee to provide accountability in the quality of service provision. Lack of performance would be reported to the Steering Committee that would execute necessary actions within agencies and the Project execution team to steer the course of the reform and the Project.

• Training and resources. To complement this, the Bank together with the main counterparts has contemplated funding (see component 4) in order to hire, train and retain officials that have capacities to carry out the Project management duties with the sufficient skills.

VI. Appraisal Summary

A. Economic and Financial Analysis

51. A cost-benefit analysis is not well-suited to assess the impact of these institutional reforms, as problems in the quantification of intangibles and issues of attribution make it difficult to express their impacts in monetary terms. However, the benefits of the operation include a number of financial, economic and social gains that are detailed in Annex 7.

B. Technical 52. The Project poses no major technical issues even though implementation of new tools and systems would be demanding. Component 1 is looking into introducing new tools and budget practices that would require attention in terms of the quality of the experts to be contracted and their services. These include evaluations, medium term expenditure plans, or the introduction of budget programmatic classifiers. Additionally, component 2 would support the design, customization and acquisition of an upgraded financial management system. All these activities are not technically controversial and have been implemented in many OECD and countries in the region. However, the focus on technical quality would be critical for success.

C. Financial Management 53. As part of the preparation of the proposed project, a Financial Management Assessment (FMA) was initiated in October 2010 and completed in November 2010. The FMA was carried out in accordance with OP/BP 10.02 Financial Management and the FM Manual “Financial Management Manual for World-bank Operations” approved by the Financial Management Sector Board and published on March 1, 2010. The FMA concluded that since the proposed project is using organizational arrangements that are similar to a recently-closed project, the three main implementing entities (MEF, CGR and DGCP) should have sufficient capacity to manage the fiduciary aspects of the proposed project. The FMA has identified specific mitigation measures to ensure the effectiveness of FM implementation arrangements (presented in Annex II and III). It is expected that satisfactory FM arrangements would be in place before loan effectiveness.

17

D. Procurement 54. Project procurement would be carried out in accordance with the World Bank’s guidelines8

and the provisions stipulated in the Legal Agreement. The various items to be procured under different expenditure categories are described as part of the Project implementation arrangements in Annex 3. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame would be established in the Procurement Plan. The Procurement Plan would be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. The Procurement Plan would also identify the specific activities and items to be financed by the Bank and the associated procurement rules to be applied. A more detailed capacity assessment of the implementing agency as well as a risk mitigations and capacity building plan is also presented in the procurement section of Annex 3.

E. Social (including safeguards) 55. No social safeguards policies are triggered.

F. Environment (including safeguards) 56. No environment safeguards policies are triggered.

8 "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004 revised October 2006 and May 2010; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 revised October 2006 and May 2010

18

Annex 1: Results Framework and Monitoring PANAMA: ENHANCED PUBLIC SECTOR EFFICIENCY TECHNICAL ASSISTANCE PROJECT (P121492)

Results Framework Project Development Objective (PDO)The objective of the Project is to assist public agencies of the Borrower in producing, using and disseminating timely and quality performance information, thereby allowing a more efficient, transparent and accountable use of the Borrower’s public budget funds.

:

PDO Level Results Indicators* C

ore Unit of

Measure Baseline Cumulative Target Values**

Frequency Data Source/ Methodology

Responsibility for Data Collection

Description (indicator

definition etc.) YR 1 YR 2 YR3 YR 4 YR5 Indicator One: Performance orientation of the budget

Qualitati

ve

The budget document presented to Congress does not use program classifications with very limited financial performance information

The budget document is presented to Congress using program classifications and financial and non- financial performance information in the 2014 budget

Continued Continued Annual Annual budget MEF:DPI-DIPRENA

Indicator Two: Quality of financial information

PEFA Score

The consolidated Government financial statement is prepared with several gaps in the breakdown of revenue and expenses lacking accounting standards. TBD by PEFA 2010

A consolidated Government statement is prepared annually with few omissions, a consistent format over time and disclosure of accounting standards (IPSAS or national).

Continued Variable PEFA assessment

MEF:DPI Indicator #25

Indicator Three: Efficacy of Internal Audit Function

PEFA Score

The CGR is focused on ex-ante fiscal compliance (refrendos) and there is little internal audit function per se and internal audit focused on systems monitoring. TBD by PEFA 2010

A new internal audit framework is in place that attempts to

show progress in the internal

audit function that

aims at

Variable PEFA assessment

MEF:DPI Indicator #21

19

Project Development Objective (PDO)The objective of the Project is to assist public agencies of the Borrower in producing, using and disseminating timely and quality performance information, thereby allowing a more efficient, transparent and accountable use of the Borrower’s public budget funds.

:


ore Unit of





definition etc.) YR 1 YR 2 YR3 YR 4 YR5 following

professional standards

with quality and its

recommendations

followed by authorities

by the end of the Project.

Indicator Four: OECD procurement benchmark index

Score

2008 OECD procurement benchmark assessment: Pillar 1: 0.9; Pillar 2: 1.3; Pillar 3: 1.1; Pillar 4: 1.5

Increase in the ratings of the OECD benchmark methodology to assess national procurement systems.

Continued Every 2/3 years

DGCP DGCP

Indicator Five: Perception of transparency and efficiency in Panama’s procurement system

%

Previous surveys show that firms perceive the public procurement system as as slow and non transparent. Baseline: (20--)

Improved private sector perception of transparency and efficiency in Panama’s public procurement system





Annual Private sector perception surveys

DGCP

INTERMEDIATE RESULTS

Intermediate Result (Component One): Strengthening Performance-Based Budget Management and Evaluation

Intermediate Result indicator1.1: Budget planning

Qualitative / %

There is no MTFF/MTEF and public programs have no log-frames, no cost based sector strategies available

MEF has introduced multi-annual fiscal and expenditure frameworks

MEF has introduced logic frameworks for at least 50% of budget

Continued MEF has introduced logic frameworks for at least 70% by

Variable MEF: DPI- MEF: DPI-DIPRENA-DPP

20


:


ore Unit of





definition etc.) YR 1 YR 2 YR3 YR 4 YR5 and not budget ceilings

and budget ceilings by year 2 of the Project.

programs by year 3 Methodologies for unitary cost determination are in place and under implementation in pilot ministries by year 2014, including integration with accounting and performance information systems

year 5 of the Project.

Intermediate Result indicator 1.2: Evaluation of public expenditures

Qualitative / %

0% of Central Government annual investment budget subject to evaluation. There is virtually no evaluation of public programs and no regular performance report is produced

The MEF establishes a M&E unit that produces/coordinates a number of performance reports

• At least 2 different social programs under evaluation every year from year 2 of the Project

MEF consolidates one annual performance report from year 2 of the Project which is submitted to Congress and publicly disseminated.

5% of Central Government annual investment budget subject to evaluation from year 3 of the Project MEF consolidates one annual performance report from year 2 of the Project which is submitted to Congress and publicly disseminated.

MEF consolidates one annual performance report from year 2 of the Project which is submitted to Congress and publicly disseminated.

• Continued

Variable MEF: DPI- MEF: DPI

21


:


ore Unit of





definition etc.) YR 1 YR 2 YR3 YR 4 YR5

Intermediate Result (Component Two): New Financial Management Model: Strengthening Budget Execution, Treasury, Accounting and Control

Intermediate Result indicator 2.1.: Stages in the implementation of New IFMS model

Qualitati

ve

New IFMS model has not been designed yet

Designed Purchased/ 50% Developed

Customized/ 100% Developed

Implemented Implemented Variable MEF, DNC

Intermediate Result indicator 2.2: Institutional Coverage of the New IFMS model

%

New IFMS model has not been implemented. But current SIAFPA covers in a fragmented way the majority of the Central Government agencies and 25% of decentralized agencies. In volume, it. SIAFPA covers only 60% of Central Government resources.

100% of Central Gov9

100% of Central Gov. and 80% coverage in volume

80% of Decentralized Government Agencies and 90% coverage in volume. Central Government budget incorporated to single treasury account system

Variable MEF, DNC

Intermediate Result indicator 2.3: Functional Coverage of the New IFMS model

Qualitati

ve

The current SIAFPA does not include functionalities for budget preparation and is not harmonized with national payroll, procurement and public investment system.

Budget preparation.

Budget, treasury, accounting.

By the end of the Project the new IFMS model would integrate functionalities for budget preparation, budget execution, treasury and accounting; and it has functionalities to interface with national payroll, procurement

9 Using Budget Preparation functionalities.

22


:


ore Unit of





definition etc.) YR 1 YR 2 YR3 YR 4 YR5 and public investment system.

Intermediate Result indicator 2.4.: Redesign of internal control and audit framework

Qualitati

ve

Current audit framework is very weak and based on ex-ante fiscal compliance (refrendos) and there is little internal / external audit function per se and internal audit focused on systems monitoring. TBD by PEFA 2010

New internal control framework and internal / external audit function designed by year 2

Cadre of CGR auditors trained by year 3

New internal control framework and internal audit function implemented by year 4

Intermediate Result (Component Three): Strengthening public procurement and contracting capacity

Intermediate Result indicator 3.1.: Building capacity of public officials involved in public procurement %

Public officials involved in procurement activities are not certificated / accredited

Increasing certification/accreditation

Increasing certification/accreditation

Certification and accreditation of 50% of public officials involved in procurement activities by the end of the Project.

Variable OECD Indicator’s DGCP / Independent audit

DGCP

Intermediate Result indicator 3.2 Standardization of processes

%

Standard bidding documents/processes and standard contracts are not generally used

Increasing use of standard bidding documents



Standard bidding documents/processes and standard contracts used in all bidding processes by the end of the Project.

Variable OECD Indicator’s/ DGCP

DGCP

Intermediate Result indicator 3.3.: Increased use of

% Limited use of framework agreements.

Increasing use of framework

Increasing use of framework agreements

Increasing use of framework

50% increase in number of framework

Variable DGCP Independent audit

DGCP

23


:


ore Unit of





definition etc.) YR 1 YR 2 YR3 YR 4 YR5 framework agreements agreements agreements

agreements in place by the end of the Project.

Intermediate Result indicator 3.4.: Increased use of e-procurement platform

%

Central Government procurement activities limited use of PanamaCompra

Increasing use of PanamaCompra



All Central Government procurement activities undertaken through the Government’s e-procurement platform PanamaCompra by the end of the Project.

Variable OECD Indicator’s/ DGCP Independent audit

DGCP

.

24

Annex 2: Detailed Project Description Component 1: Strengthening performance-based budget management and evaluation (US$9 mill.). 1. This component would support the Government of Panama in the introduction of results-based budgeting practices and the design and implementation of national and sector Performance Monitoring and Evaluation Systems. Together these innovations aim to ensure the provision and utilization of regular, sufficient and reliable performance information for improved strategic planning and budgeting by MEF, program and policy design by line ministries and agencies, internal coordination and managerial control by Presidencia, and external accountability by civil society. By measuring public expenditure results (quality of spending) it seeks to improve budget decision making (prioritization and resource allocation) as well as transparency and accountability in Government. The proposed component would have two major sub-components:

Sub-component 1.1. Improving performance-based planning and budgeting processes.

2. Current status. The Government of Panama needs to strengthen its capacities for strategic planning and programming of both investment and recurrent expenditures. Currently, there are no standardized methodologies and technical procedures for conducting planning functions at national, sector and program levels nor systematic definitions and use of program categories, targets and indicators. Planning functions remain highly ad hoc and weak, and therefore fail to provide strategic direction to resource allocation processes.

3. As a result, Panama lacks adequate information on how efficiently and effectively budget resources have been and the actual results obtained. This is true for both current and investment budgets which are still programmed on the basis of incomplete information, follow a fundamentally incremental pattern, and as a whole lack a results orientation. This situation is principally associated with the limitations of existing institutional arrangements, capacities and tools for conducting technically sound national, sector, and program performance based-planning and budgeting activities. Public expenditure quality in terms of accountability, effectiveness and efficiency in service delivery, as well as transparency in resource allocation is therefore significantly low.

4. At a specific level, planning and budgeting processes in Panama suffer from a number of critical interrelated weaknesses. The most important of these limitations include:

• Lack of integration between planning and budgeting functions. Currently the National

Plan (Estrategia Nacional de Desarrollo) does not work as an effective budget planning or performance management tool. The absence of standardized methods, budget program categories, and standardized procedures for plan formulation and result’s follow up, limit harmonization and integration with the budget process. Current planning exercises at all levels of the administration are therefore of little relevance, particularly, for resource allocation.

• Absence of Medium-Term Fiscal and Expenditure Frameworks prevent the budget from

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having a multi-annual revenues and expenditures perspective and thus sectors and agencies from a reasonable level of certainty about the resources they would actually receive for implementing their programs. The budget is, therefore, a fundamentally annual and incremental process.

• Poor coordination arrangements within MEF planning and budgeting units and between MEF, the Presidency and line Ministries reveal still unclear responsibilities and functions as well as limited organizational structures and capacities for result-based planning and budgeting.

• Outdated investment prioritization tools and weak staff capacities allow low priority programs and projects to be included in the budget. Existing investment prioritization tools are more formal than real and do not necessarily provide MEF and sectors ministries with systematic and rigorous ex ante evaluation information to ensure technically sound investment prioritization.

• Very limited technical and managerial capacities as well as “culture” to manage for results limits the Government’s potential to move from a traditional, line item-based budget approach, toward a more performance-informed, output and outcome-oriented budgeting model.

5. Sub Component objective. Considering the above limitations, the objective of this sub-component is to improve the institutional and technical capacities for performance-based strategic planning and budgeting with a view to create conditions for enhancing the quality of public spending.

6. Main activities. This project sub component would help the GOP address the following general and specific activities:

7. Strengthening and harmonization of institutional planning and budgeting frameworks. Developing sound and robust performance-based planning and budgeting functions in Panama would require new or improved organizational, coordination, and administrative processes. This would involve review, updating and harmonization of planning and budgeting frameworks, particularly, through executive regulations and/or policy guidelines. These improvements would fill existing regulation gaps, clarify roles and technical responsibilities between different agencies and units, institutionalize new tools, and define the scope of improved public expenditure management functions, among other aspects. While in some countries many of these improvements need to be achieved through politically complex legislation changes, it is important to note that in Panama most of these changes can be introduced under the existing legal frameworks.

8. Organizational strengthening and re-design of MEF and Sector Planning and Budgeting Responsible Units. Effective performance management requires efficient production, administration and utilization of a growing body of Government performance information. This requires different skills and efficient coordination of tasks between planning, budgeting and M&E responsible units within the MEF and line ministries. To ensure these pre conditions are in place, this general activity would help to: i) strengthen the role of the MEF, and the organizational capacity of its main units, ii) optimize the organization and functions of sector budget and planning offices, iii) add new functions and bodies to evaluate public expenditure,

26

and iv) improve coordination mechanisms within the budget cycle between budget, planning and evaluation offices of the MEF, sectors and agencies.

9. These and other reorganization processes would be necessary to strengthen core budget and planning functions which are critical for performance management and that currently do not exist, or are not realized in practice.

10. Introduction of annual and multi-annual budget planning and programming tools. Annual and multi-year budget planning tools are central requirements of a modern public expenditure management and a results-oriented Government. Such tools reinforce the strategic orientation of public expenditure by facilitating clearer identification of Government priorities, re-direction of resources to those priorities and, therefore, better prioritization of annual budget resources. Appropriate multi-annual mechanisms also help improve predictability of income and expenditure of Government agencies, the implementation of their programs, the achievement of their objectives and goals and, finally, the measurement of the results and impact of budgeting decisions. Consequently, the specific activities framed within this general activity include, inter alia: i) the definition of the programmatic classification of expenditure and its incorporation into the annual budget programming process integrating both investment and current spending, ii) the incorporation of “Logical Frameworks” in budget programs, sectors and institutions, iii) the formulation of a Medium Term Fiscal Framework with the fiscal accountability provisions that might be necessary, and iv) the formulation of a Medium Term Expenditure Framework -MTEF and its harmonization with the National Public Investment System - SINIP and the Annual Operating Plans. Technical assistance would be used to support the development and implementation of such tools. 11. Definition and institutionalization of methodologies for strategic planning and budgeting. Improving the quality of public expenditure in Panama, and establishing a performance management culture, requires the standardization of planning and budgeting processes as well as of the procedures and criteria for their adequate integration and harmonization. This entails the definition of methodologies and guidelines so as to institute permanent references for public officials on how to operationalize and conduct these activities in Government regardless of how interested Governments in office are on performance management. To some extent, this is what institutionalization of performance management is about and, since the staff composition in the Panamanian public sector tends to change significantly between administrations, the standardization of methodologies and guidelines is a key step to promote continued development of skills and competencies in planning and budgeting for results among Government officials. Main actions comprised in this general activity include: i) harmonization of the general SINIP ex-ante evaluation methodology with the results-oriented model, ii) preparation of a performance budgeting procedures methodological manual, including the budget program classification, iii) Standardization of methodological procedures for the preparation the National Development Strategy, the sector plans and their integration to the budget process under a results-based management framework, iv) development of a methodological manual for preparing and reviewing the Medium Term Fiscal and Expenditure Frameworks, v) dissemination and updating of the results based planning and budgeting methodological series.

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12. Development of technical, managerial and organizational capacities for results-based planning and budgeting. Developing adequate capacities at all levels of the Panamanian Government is a sine qua non condition for the effective implementation of a results-oriented planning and budgeting model. Capabilities of professional staff in the Panamanian administration are generally low. Hence, achieving appropriate competency levels in national Government and sectors requires sensitization and training for different audiences (e.g., Government officials, Congress, citizens, etc.) and at different levels of complexity. In order to ensure adequate skills and enable informed dialogue with key users this general activity includes actions to: i) train MEF and central level institution’s staff in the objectives, concepts, applications and use of results based planning and budgeting tools, ii) support capacity building activities aimed at improving formulation and prioritization of investment projects, and iii) carry out courses, seminars and forums for sensitization and dissemination of performance management though different audiences.

Box 2.1: Links and synergies in the Project components This project is based on a holistic approach to Public Financial Management (PFM) reform; it covers the full cycle from budget preparation to implementation, as well as monitoring. Whilst these components would be managed and implemented by different Government entities their interrelation and coordination ensures that “The whole is greater than the sum of the parts”. That is to say, while these individual components are justifiable as stand-alone activities, this project, in-line with the Government's desire, would also address the linkages between the different components. In doing so it not only looks at strengthening and improving the specific functions but also leverages the benefits that can be generated in an integrated public administration. 10

Even though there are operational synergies in placing these three components under one single project, the most important benefit is the convening power among Government actors. Theoretically, all these reforms could be done independently. However, the Bank has already created a common forum inside the Government for diverse actors such as CGR, MEF, DGCP, Presidencia and sector Ministries to move in the same direction in a coordinated manner. The value of this asset is difficult to assess but helps the Government as a whole to be able to increase sustainability and effectiveness of the reform.

Sub-component 1.2. Developing and institutionalization of M&E functions and systems at the national level and pilot sectors.

13. Current status. As of today, Panama has no results-based M&E functions built-in as part of the duties and responsibilities of the public administration. There are general mandates instructing to conduct evaluation and follow up activities, particularly ex-ante evaluation and financial monitoring. But there is no specific development of those mandates establishing the scope, roles, and procedures for carrying out ex post evaluation work nor are there defined technical guidelines, methodologies, institutional arrangements and independent bodies, with the duty and capacities, to ensure the optimal development of these activities in the context of national or sector Monitoring and Evaluation Systems.

14. Consequently, production, management, and use of performance information in key Government decision-making and accountability processes are still significantly weak. In practice, there is a lack of sufficient, timely and reliable performance information to feed

10 For example, the introduction of performance budgeting with stronger strategic planning and evaluation functions requires solid public financial systems to among other things be able to cost programs for planning, make financial data available to track execution and allow the development of quality evaluations. Equally the linkage between the e-procurement platform and the financial management system will deliver a level of fiscal control and governance that far surpasses the current oversight carried out by the comptroller's office, this in turn frees the comptroller's office to adopt a more strategic and modern approach to its function.

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budgeting and planning, implementation of programs, and accountability processes. As a results, there are no technical instruments for results measurement (e.g., results frameworks, targets, indicators, evaluation methods, etc.) nor are there efficiency and effectiveness incentives to guide public expenditure management and the public administration towards a focus on results.

15. However, a number of Government agencies, particularly the Presidency, do monitor subsets of projects which are considered priorities by the President of the Republic (e.g., the so called “imperdonables”) and the same is true for the Health and Education sectors which have by themselves undertaken a number of M&E and performance information improvement activities. These activities, however, are not yet conducted in a systematic way or following internationally accepted “good practices” and standards.

16. Sub component objective. The objective of this sub component is to support the Government of Panama in the development and institutionalization of monitoring and evaluation functions and systems at national level and pilot sectors. Emphasis would be given to improving and strengthening the institutional capacity of the Government for the evaluation and monitoring of budget programs, (including both current and investment expenditures) and to ensure effective use of performance information (see box 2.2) for budget decision-making and accountability11

.

Box 2.2: Generation and dissemination of performance information The core of the current operation and of the Government reform is to create capacities and processes that allow the generation of quality performance information. In turn, this performance information in the hands of public sector managers would generate better decision making in the allocation of public funds and resources. Additionally, the dissemination of this performance information outside the Government to key actors such as Congress and civil society enhances accountability and transparency reducing corruption and increasing trust in Government. Performance information is a very broad term and in the context of this operation it is meant both financial information and non financial information. Financial information such as budget allocation and cost figures by item, project or program and financial audit reports are to some extend available in the country. However, as identified in the ongoing PEFA 2010 report, the quality is very low due to system fragmentation and lack of application of accounting and auditing standards. Non financial information is less common in the country and it can include among others project and program evaluations, spending reviews, good and services procurement data and reports, institutional performance data, performance audits, and general socio-economic statistics linked to policy analysis.

17. Main activities. This project sub component would help the GOP address the following general and specific activities:

18. Design and implementation of a national monitoring and evaluation system under MEF coordination and leadership. The development of a national M&E system is a key component of the performance management reforms that the GoP has proposed to establish. This system would allow the evaluation function to become a permanent activity in Government; conducted under parameters of technical quality and integrated to key management and decision making processes.

19. To advance the development of the system, it would be necessary to carry out the institutional design, defining the necessary regulatory, technical, and financial instruments to set

11 For more details on the basics of the Performance-based Budgeting approach see: Performance-informed Budgeting in Latin America: Experience and Opportunities, Working Paper 0309, World Bank (April 2009) ; http://siteresources.worldbank.org/EXTLACREGTOPPUBSECGOV/Resources/LCSPS_Working_Paper_0309_Performance_informed_budgeting.pdf

http://siteresources.worldbank.org/EXTLACREGTOPPUBSECGOV/Resources/LCSPS_Working_Paper_0309_Performance_informed_budgeting.pdf�

http://siteresources.worldbank.org/EXTLACREGTOPPUBSECGOV/Resources/LCSPS_Working_Paper_0309_Performance_informed_budgeting.pdf�

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it in motion and carry out a series of more specific actions to start its operationalization. Actions include: i) technical definition of the portfolio of methodologies to be used, ii) development of a Governments evaluation strategy with the necessary policy guidelines for implementation, iii) preparation of arrays of indicators for all budget programs, iv) design and implementation of "performance contracts" to link M&E with the Budget process, v) design and implementation of an evaluation agenda with four initial pilot evaluations of strategic programs, vi) design and implementation of incentives to promote production and utilization of performance information, and vi) improvement of existing accountability mechanisms.

20. Design and implementation of pilot M&E systems in selected ministries. This general activity would help the GoP develop and institutionalize sector level M&E systems and capacities. In a few sectors, M&E functions are more developed than at the central level, including the health and education sectors which have begun to use M&E information to follow up plans and service delivery. These sectors need support and serve as important cases to inform and support the development of performance management and M&E systems in other strategic sectors where the practice has not yet started. In this context, under MEF coordination, specific actions in support of M&E sub systems in selected sectors include: i) review of existing M&E practices and diagnostic of current institutional capabilities to monitor and evaluate results, ii) formulation of internal policy guidelines to operationalize M&E, iii) definition of institutional arrangements and organizational re design to strengthen responsible units and coordination, iv) preparation of arrays of indicators and targets for all budget programs.

Box 2.3: Pilots in sector ministries As evidenced in similar reforms in many OECD and Latin American countries reforms, the involvement of sector ministries is a sine qua non condition. It is clear that the political leadership of central units such as MEF, CGR and DGCP play a catalytic role, but it is finally in the sectors where public project and programs are being implemented, executed, monitored and many times evaluated. The technical expertise and political buy-in of the Ministries remains critical. Mindful of this fact during the Project preparation the Bank has been working in close collaboration with the MEF to reach out to sector Ministries to serve as pilots since the Government has decided to implement the reform gradually and move in phases. In the area of planning, budgeting and evaluation, this operation has the intention to start with two social sectors and during preparation contact were held with the Ministry of Health and the Ministry of Social Development. These ministries were supported with some others in an initial exercise carried out as part of the previous Bank operation as well as with support from the IADB and the President’s Office. During that initial exercise an analysis of their budget structure and its alignment with sector policies as well as the Government’s national plan and its indicators was conducted. Tentative plans regarding the M&E system were analyzed. The current operation would support the implementation of the necessary changes including training of personnel. On the procurement front and in order to address a growing demand for efficiency in the procurement process of individual ministries, this sub-component would support a demand driven approach to carry out Ministry specific efficiency analysis to identify opportunities for savings and efficiency gains. One Ministry that has requested specific support and volunteered as pilot is the Ministry of Government (Ministerio de Gobierno) a critical player in the country’s public administration. Additional pilots would be considered in consultation with sector Ministries and always led by the DGCP. 21. Enhancing the production, quality and utilization of performance information. This general activity aims to improve the quality of the performance information flow process -generation, administration, access and use - by strengthening technical capacities, institutional arrangements and protocols to manage results information in the Central Government. Despite

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the existence of a large number of information systems, the quality and availability of performance information remains inadequate for evaluating Government results. This is partly because of unclear institutional arrangements and regulations, limited staff capacities to manage and use performance data, and, partly too, due to the absence of metadata (information about existing information). To help GoP address these issues some of the specific actions include: i) mapping of performance information flows including collection processes and schedules, units of analysis, sources, producers and users, ii) design of quality control mechanisms and protocols for both institutional records and statistics, iii) implementation of corrective action plans for the information flows that so require, iv) mechanisms to strengthen user-provider dialogue, v) support to the improvement of statistics and administrative records in pilot sectors, vi) performance information audits. 22. Development of technical, managerial and organizational capacities for the institutionalization of M&E functions and systems. These activities would be guided by an action plan for the development of capacities, in which universities and training institutions would participate. The plan would include specific actions for the definition of applied content on a range of topics (e.g., logic framework methodology, performance indicators, performance budgeting, setting M&E systems and units, evaluation tools, etc) as well as a calendar of sequenced courses, workshops, seminars, and study tours specifically tailored for Government officials, Congress representatives, academics, civil society organizations and the media. Customized training would also be conducted regarding the implementation of the new methodologies as well as on the application of protocols for improving the quality, administration and utilization of performance information.

23. Production and dissemination of methodologies for the institutionalization of M&E functions and systems. Through this general activity the Project would help the GOP systematizing and disseminating a series of methodological manuals which would serve as the primary reference for conducting M&E work within the Government agencies, under the national guidelines of the Panamanian administration. Methodologies would be a key tool for supporting the development and institutionalization of the M&E functions and systems and are required as core capacity building reference material for practitioners and officials. The methodological manuals would be related to the M&E and information management tools and to the operationalization of the systems. Emphasis would be made on dissemination inside and outside the public sector through courses, workshops, seminars, virtual channels, etc. and activities would also include the production of a plan for the management of cultural change within the pilots.

Component 2. New Financial Management Model: Strengthening budget execution, treasury, accounting and control (US$30.5 mill.). 24. Current status. The current financial management system in use in Panama, SIAFPA (Sistema Integrado de Administración Financiera de Panamá), has modules for budget execution, accounting, treasury, procurement and fiscal control. It was developed more than a decade ago (mid 90s) using client-server technology with distributed databases and was implemented in all of Central Government and around 40% of the decentralized Government.

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25. Although SIAFPA is composed by the main functionalities of a common Integrated Financial Management Information System (IFMIS) and is implemented in all Central Government, actually less than 60% of the total public expenditure of Central Government is executed by SIAFPA, the rest of public expenditure is executed as transfers to each local treasury, using more than 6,000 local bank accounts where institutions receive funds and make the payments.

26. Additionally, SIAFPA has important functional and technical limitations. It does not include the budget preparation process; its decentralization is too expensive, because each location needs to have a dedicated network connection; it is still necessary to send physical and signed documents to be authorized, which slows the financial management process; it is based on outdated information technology; and it covers only a low percentage of decentralized institutions.

27. These limitations have led to the proliferation of customized parallel systems in Government institutions and inside the MEF, generating unnecessary costs to the public administration, inconsistent information and delaying in the public administration process and reporting.

28. Furthermore, the ex ante controls, refrendos, performed by the Contraloría General de la República (CGR) are executed three times during the budget execution process (with the contract, invoice and payment), and also on the debt payment and income processes. These controls are delaying the financial management process because the payment of one invoice takes between 25 and 53 days, increasing the price of products to the Government because vendors need to include longer financing costs.

29. These have contributed to the adoption of extra-budgetary and exception execution mechanisms (Fondos Administrados and Agentes Fiduciarios, Specific Funds and Fiduciary Agents), that have also affected the implementation of the Single Treasury Account as those funds are channeled outside the system. This situation creates difficulties in the production of timely, accurate and reliable financial information for public policy decisions.

30. To pursue the Government objective of fighting bureaucracy bottlenecks and enhance public administration process, the Ministry of Finance (MEF) has led an initiative to put in place a new Financial Management Model (Nuevo Modelo de Administración Financiera, NMAF) that integrates and modernizes Public Financial Management processes in Panama. This would involve investment in a new integrated financial management system to replace SIAFPA that would incorporate all necessary functionalities for an effective PFM system. The process would also include technology update and would incorporate the International Monetary Fund Government Finance Statistics Manual 2001 and International Public Sector Accounting standards, within an inter-operability framework.

31. Component objective. This component would focus on the modernization of the PFM system by supporting the implementation of the new Financial Management Model. This would consolidate and integrate all the core financial management processes for the Central Government in Panama supporting integration and interoperability of different MEF areas

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including budgeting, accounting and treasury. These would be harmonized with other management systems such as payroll, public procurement, public investment and planning. It would also modernize control systems performed by the CGR shifting from refrendos to system-embedded risk management, institutional internal control frameworks and ex-post controls. The new model would bring significant improvements for the Panama PFM system and would help to focus on budget execution efficiency and align budget to policy.

Sub-Component 2.1. Integrated Financial Management System –IFMS.

32. This sub-component would consolidate and integrate all the core public financial management processes. The new model would be a significant improvement for PFM functions in Panamá and would become a management tool for the Government to improve the formulation of its public policies and programs and to increase the efficiency and effectiveness of their implementation.

33. The new FM model would contribute to reduction in budget execution time, simplifying administrative processes, improving integration between IFMS and other administrative systems guarantying the information quality and consistency. This new model would also improve the efficient use of public resources by the expansion of the single treasury account system and to the extent possible supporting the International Public Sector Accounting Standards (IPSAS) adoption.

34. The IFMS software would consist of a fully integrated, interoperable and web-based application that would integrate and gradually replace the existing SIAFPA and other parallel FM applications implemented in different Government agencies. This software would include interfaces to payroll system, public investment system, PanamaCompra, and other administrative systems.

35. The new system would be implemented with the support of this project in the majority of the Central Government agencies, but the new FM model would be designed and prepared for its quick adaptation and expansion to decentralized institutions and even local Governments.

36. Main Activities: This project sub-component would help the GOP undertake the following activities::

37. (a) Conceptual and Functional Design. The new FM model would include detailed design of budget formulation, accounting, treasury and budget execution processes, and would support the IPSAS adoption process. This model would be prepared for use in all public sector agencies and must be validated and approved by MEF authorities, in order to ensure ownership during the implementation process.

38. (b)Technological Framework definition. This activity would include definition of software requirements, IT security policies, software architecture design, infrastructure design, service level agreements (SLAs) for software, hardware and related services.

39. (c) Analysis of alternatives for implementation new FM model. The activities (a) and (b),

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would serve as the basis for the identification and selection of the most adequate and cost-effective solution to support the new FM model, the analysis has to include alternatives such as an “off-the-shelf” solution, “in-house” software development and outsourcing of software development. If the decision is to acquire an “off-the-shelf” solution, this activity would include a fit-gap analysis to identify the most adequate solution to acquire.

40. (d) Customization/construction of information technology system. Depending on the decision of activity (c), this activity would guide and execute the contracting of software customization (in case decision if to acquire an “off-the-shelf” solution) or would guide the software construction by individual consultants or outsourcing.

41. (e) Legal and normative framework. It supports the redefinition of processes and procedures and the production of an updated set of regulations, internal norms and manuals on the basis of activity (a).

42. (f) Implementation and capacity building. This activity would support the roll-out of the new FM model in the Central Government, and develop users’ capabilities to operate the system in a sustainable manner. The activity would include training at both the central normative level in the MEF and the decentralized operation level in all other entities and spending units of the Central Government.

Graph 2.1: Implementation Process for the Integrated Financial Management System

Sub-Component 2.2. Modernization of the external control framework. 43. In context of implementation of the new FM model, this sub-component would include the modernization of control functions managed by the CGR, which is critical for more efficient public financial management in Panamá. This would involve aligning the CGR's strategic plan, institutional support functions and resources.

44. Main activities. The main activities in this sub-component include the following:

45. Strengthening of financial management control framework. It would support the modernization process of the financial audit functions moving towards ex-post risk based approach, incorporating modern audit techniques.

46. Strengthening of the internal control framework and internal audit function in the public sector. This activity would support through the CGR, which has the regulatory authority

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regarding internal audit function, to increase within the public sector the capacity of the internal audit function enhancing internal control and improving public sector management and accountability;

47. Strengthening of CGR’s institutional support functions. This activity would strengthen the CGR’s support functions such as human resources, information technology and learning management among others, in order to improve its performance and efficiency, through the implementation of new processes, methodologies and systems.

48. Strengthening promotion of public participation in the public financial management oversight. It would promote public participation in public sector financial management oversight, including the creation of a claims and allegation center concerning public financial mismanagement.

Sub-Component 2.3. Support the country’s statistical capacity.

49. As in the previous operation this technical assistance loan would at the request of the Government support some core statistical functions, processes and data sources to improve a number of key statistics. These improvements would allow better socio economic data for key indicators used in macroeconomic policy making, budget planning, and management and evaluation of public programs. The support would primarily benefit the Statistics Office INEC but also indirectly the sector Ministries and the MEF who are users of these data.

50. The subcomponent would have three major sets of activities that include (i) technical consultancies for improvement of national accounts and survey data, (ii) training to enhance capacities in the INEC, and (iii) acquisition of software and hardware to upgrade INEC systems and capacity to produce, analyze and disseminate statistics.

Component 3: Strengthening public procurement and contracting (US$15 mill.). 51. Current status. The Government of Panama has continued to strengthen the public procurement system since its initial procurement reform in the mid 2000’s. The GoP has made very significant achievements in efficiency and transparency through the introduction of a modern e-Procurement platform as well as significant savings through the application of modern procurement methods such as framework agreements. Nevertheless in order to capitalize on these initial gains there are still many areas that need to be strengthened and achievements consolidated. This has become very apparent to the current administration as it is finding that the procurement system does not have the capacity to deliver the Government development program, in particular it has serious shortfalls in the legal and regulatory framework as well as in human resources. The current legal framework is not designed to address major infrastructure projects with form a cornerstone of this administrations program, this weakness is further compounded by the lack of specialized skills in the public sector to efficiently undertake complex procurement activities. In an attempt to address these issues the Government has passed several amendments to the Law, which has resulted in a fragmented Legal Framework. This in turn places at risk many of the reforms that have been achieved to date as the gaps in the system have the potential to undermine public confidence as the system begins to strain and crack under this additional

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pressure. 52. Component objective. The objective of this component is to continue supporting the public procurement reform process that was previously undertaken under the Public Finance and Institutional Development Policy Loan, following the substantial developments achieved by the DGCP. The component would address four key areas: institutional strengthening, legal and regulatory reform, technology and the Procurement Administrative Tribunal. The component would finance technical assistance, equipment and training. This component covers both the DGCP through sub-components 1-3 and the Procurement Administrative Tribunal though subcomponent 4. The execution of the components would be administered by the DGCP. Sub-Component 3.1. Institutional strengthening.

53. This sub-component would support the institutional strengthening of the DGCP and would build the capacity of public procurement officials (in both the DGCP and spending agencies). The DGCP would, in partnership with the Government’s training institution (INADEH), develop, of curriculum specifically designed to support the professional development of procurement officials in line with the specific complexity and business needs of different Government procurement organizations. This subcomponent would also address specific training and educational needs, along with the development and implementation of an educational campaign, for suppliers and civil society. It covers areas such as support for the Framework Agreement directorate as it expands the use of these agreements to cover the majority of common use goods and services procured by the public administration as well as the setting up of a unit to monitor the performance of procurement activities undertaken by the Government. It would also support the development of a business continuity model including all aspects related to the security and integrity the system, along with a document management system to improve and increase the efficiency DGCP’s operation. This sub-component would also support the creation of a supplier registry as well as the management tools required to ensure its efficient operation and connection with existing Government system. In order to address a growing demand for efficiency in the procurement process of individual ministries, this sub-component would support a demand driven approach to carry out Ministry specific efficiency analysis to identify opportunities for savings and efficiency gains Sub-Component 3.2. Legal and regulatory reform.

54. This sub-component would support the drafting of a new procurement law based on international best practices as well as the associated regulation, manuals and standard bidding documents. The legal reform would address the shortcomings mentioned above in order to develop a robust legal and regulatory framework that can accompany the countries development. This sub-component would also provide activities to strengthen the skill set of the Government officials working in the legal and compliance departments.

• Legal and normative framework. It supports the drafting of a new procurement law as

well as associated regulations and manuals.

• Capacity building. This activity would support the development of training and

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educational materials on the application of the legal framework.

• Standardization. This activity would support the development of standard bidding documents and contracts.

• Institutional Strengthening. This activity would build the capacity of the legal and compliance teams across the public service.

Sub-Component 3.3 Technology. 55. This sub-component would support the ongoing development of the GOP's e-procurement platform, PanamaCompra version2. It would include the development of modules to replace the existing electronic catalogues, and to interface with the financial management system and other public sector management systems. The sub-component would also address the modernization of office and management systems that are required to manage a modern regulatory body. In addition, it would address issues related to the security of the current systems used by the DGCP and would support the implementation of new measures to strengthen the integrity of the system. The sub-component would also support the development and implementation of a complaints management system for the different directorates of the DGCP as well as the implementation of Quality Standards such as ISO and the Capability Maturity Model Integration (CMMI).

Sub-Component 3.4. Best practice center-virtual library. 56. This sub-component would support the development of a research centre for the Procurement Administrative Tribunal, including a virtual library. This would identify and investigate best practices in public procurement doctrine and jurisprudence. The key objectives are to ensure that the decisions taken by the tribunal are based on international best practices and backed up with the necessary evidentiary case material, and to make this information accessible to all interested parties. The sub-component would cover the hardware and software requirements to set up the virtual library, and would support capacity building activities.

Component 4: Creation and Support of Project Management Capacities (US$0.5 mill.).

57. This component intends to support and create project management capacities in the administration and specifically in the MEF, CGR and DGCP to implement not only the World Bank project but the Government public sector efficiency reform agenda. The component consists of resources to underpin the implementation arrangement model described in Annex 3. 58. The following Table 2.1 shows the planned disbursements as detailed in the Loan Agreement while Table 2.2 summarizes the main proposed activities per component and subcomponent and its cost.

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Table 2.1: Disbursements as detailed in the Loan Agreement Category Amount of the Loan

Allocated (expressed in USD)

Percentage of Expenditures to be

financed (inclusive of Taxes)

(1) Goods, Non-consultant services, Training, Operating costs and consultants’ services for Parts 1 and 2(a) of the Project

28,000,000 100%

(2) Goods, Non-consultant services, Training, Operating costs and consultants’ services for Parts 2(b) and (c) of the Project

11,500,000 100%

(3) Goods, Non-consultant services, Training, Operating costs and consultants’ services for Part 3 of the Project

15,000,000 100%

(4) Goods, Non-consultant services, Operating costs, Training and consultants’ services for Part 4 of the Project

500,000 100%

TOTAL AMOUNT 55,000,000

Table 2.2: Project Costs by component and sub-component

Project Cost By Component Counterpart Financing

US $million

IBRD Financing

US $million

Total US $million

1. Strengthening performance-based budget management and evaluation 9.000 9.000

Subcomponent 1.1. Improving performance informed planning and budgeting processes 2.000 2.000

Subcomponent 1.2. Developing and institutionalizing results monitoring and evaluation (M&E) 7.000 7.000

2. New Financial Management Model: Strengthening budget execution, treasury, accounting and control 30.500 30.500

Subcomponent 2.1. Integrated Financial Management System (IFMS) 19.000 19.000

Subcomponent 2.2. Modernization of the external control framework 8.000 8.000

Subcomponent 2.3. Support to the country’s statistical capacity 3.500 3.500

3. Strengthening public procurement and contracting 15.000 15.000 Subcomponent 3.1.: Institutional strengthening 8.000 8.000 Subcomponent 3.2. Legal and regulatory reform. 1.000 1.000 Subcomponent 3.3. Technology 5.000 5.000 Subcomponent 3.4. Best practice ctr-virtual library. 1.000 1.000

4. Project Management Support 0.500 0.500 Total Baseline Cost 5.130 55.000 60.130

Physical Contingencies 0.0 0.0 Price Contingencies 0.0 0.0

Total Project Costs1 5.130 55.000 60.130 Interest during construction

Front-end Fee (0.25%) 0.1375

Total Financing Required 5.2675 55.000 60.2675 Note: The Government agreed during Negotiations to provide funds to be divided by executing agency (pro rated) to support additional project costs and project management support in the amount specified in this table along the life of the Project. The Government also decided to pay the front end fee and not add to the loan.

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Annex 3: Implementation Arrangements 1. Previous Bank experience in project implementation in Panama has shown 12

that the implementation arrangements are critical, and that as important as project design and technical content is the execution arrangements that would allow smooth implementation. Lessons learned from overall portfolio implementation as well as the previous public sector reform project point towards two critical issues: the importance of strengthening implementation capacity and of having clear governance arrangements for project execution.

2. The ORAF matrix contained in this PAD explains in detail that the main risks associated to the operation are the fiduciary capacities and the lack of effective project management experts in key counterpart units (see Annex 4). As experienced in the previous Public Policy Reform TAL fiduciary teams in some of the key counterparts can limit the advancement of project execution and overall implementation. Given that this project would include further actors this risk aspect needs to be addressed in detail. Additionally, the experience from the previous TAL implementation shows that even when there is clarity, ownership and guidance at the management level, operational teams needed to implement the Project are often weak. 3. Therefore, implementation arrangements are assessed as being the critical factor for the operations success. With that in mind the current implementation arrangement model has been developed in conjunction with the Government based on previous experience, taking into account the scope and depth of the changes proposed as well as the strengths and weaknesses of current Central Government and MEF’s institutional architectures. It replicates features that worked well in the past while developing and strengthening other parts that were weaker, namely (i) coordination among key actors, (ii) clear responsibilities for project implementation within the MEF, (iii) adequate and capacity of key MEF technical units and (iv) introduction of a performance-based service provision agreement among actors.

4. Given that this project would be executed by three key autonomous entities (MEF, DGCP and CGR) each of them would need some degree of autonomy that needs to be balanced with the need for proper alignment, coordination and integration among the different components and responsible agencies so as to ensure strategic orientation of the reform process and the achievement of the Project’s development objective. Also, the nature of the functions to be carried out, and the multiplicity of actors involved, requires project administration functions to be separated, from technical functions. Finally, given that this project is part of broad and long term Government public sector reform it would need to take advantage of the existing high level political support. 5. The model contains three main features: (i) inter-institutional arrangements, (ii) MEF intra-institutional arrangements, and (iii) a mechanism to provide the reform with the highest political and technical profile. The model contains three main features: (i) inter-institutional arrangements, (ii) MEF intra-institutional arrangements, and (iii) a mechanism to provide the reform with the highest political and technical profile.

12 See Public Policy Reform Technical Assistance Loan (P055844) and Public Policy Reform Technical Assistance Loan Additional Financing (P105526) and Implementation Completion and Results Report (IBRD-46350 and IBRD-74460), Report No. ICR00001669, November 23, 2010.

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Figure 3.1: Main Executing Actors

6. Inter-institutional arrangements. As shown, in Figure 3.1 there are three main executing actors: MEF, CGR and DGCP. The model proposes a decentralized approach very much in line with the arrangements used in the previous project. However, these equally important actors have the MEF as primus inter pares serving the role of main World Bank counterpart and fulfilling some general coordination functions to provide project cohesion. The relationship MEF-CGR and MEF-DGCP would be governed by an explicit inter-institutional agreement. As shown in Figure 3.2 the main functions (technical, procurement, disbursements, activity execution) would remain in the DGCP and CGR (figure 3.2. applies equally to CGR and DGCP), while the MEF would carry out general coordination functions and serve as the main interlocutor with the Bank for supervision, financial reporting and audit purposes. Additionally, in order to arrange the execution of the funds, the Procurement Administrative Tribunal (Tribunal Administrativo) would allow DGCP to execute Project activities. For that purpose, DGCP would not later than 3 months after the effective date enter into an inter-institutional agreement, satisfactory to the Bank, with the Procurement Administrative Tribunal therein allowing DGCP to execute Project activities.

Figure 3.2: Inter-institutional Arrangements DGCP-MEF (same for CGR-MEF)

7. MEF intra-institutional arrangements. The previous project had one major unit (Dirección de Políticas Públicas, DPP) as counterpart in the MEF. This new project is broader in its content and has direct involvement with four key units or Direcciones which report to two different Deputy Ministers (Vice Ministros): DPI, DIPRENA, DNC and DPP. As agreed with the Government the implementation of project would involve a key unit, namely the Dirección de

Ministerio de Economia y

Finanzas (MEF)

Direccion General de Contrataciones Publicas (DGCP)

Contraloria General de la

Republica (CGR)

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Programación de Inversiones (DPI) where a team would provide administrative support to the technical focal points in each of the Direcciones. The team would work under a service provision model and the unit’s performance would be assessed on an annual basis by all the four directors. As detailed in Figure 3.3 the functions carried out by this administrative team would be general coordination of the Project, linking with DGCP and CGR project execution teams, and financial and audit reporting. The technical focal points in each Dirección would be in charge of providing the technical support for the preparation of TORs for technical assistance.

Figure 3.3: MEF Intra-institutional Arrangements

8. High political and technical profile. The current project is supporting a much broader long term Government agenda that aims at creating a much more efficient, effective, transparent and accountable Public Administration. As such, the Project should be understood as a critical part of a bigger reform project. One of the key issues that all OECD country leaders have agreed upon in reforms of this nature undergone over the last decade is that it needs the highest political support and a vehicle to facilitate this support. Therefore, the model proposes the creation of a lean Reform Steering Committee that help steer the Project as part of the reform. As shown in Figure 3.4, this committee would be composed of MEF Vice Minister, DGCP’s Director and CGR’s Contralora. The committee would meet on a regular basis, assess progress and provide strategic and technical advice to the implementing team. The committee could also be expanded to include members from other key actors like pilot sector Ministries or Presidencia.

Figure 3.4: Reform Steering Committee

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9. Further mechanisms to improve project implementation. The Bank has discussed with the Government that in order to increase the likelihood of project implementation the Project would be implemented considering a phased approach. This would allow that the implementation mechanism and units are not overwhelmed by activities. Additionally, the Bank and the Government have agreed to have a contingency plan (or Plan B), in regards to components that may need to be changed, adapted or dropped in the future, if there is weak capacity to carry components forward or obstacles are encountered some months into implementation. For that purpose, the introduction of the Steering Committee would help review progress on a regular basis allowing corrections along the way and ensuring that stakeholders can manage the reform more closely. Also, the implementation teams’ performance would also be reviewed by the same Steering Committee to analyze whether the services they provide are up to required standard and whether changes in the personnel need to be done to improve operational performance. 10. The following table 3.1 summarizes the key actors and the units that would have to carry out procurement functions as well as handle a designated account:

Table 3.1: Responsible units by component

(1) Technical duties include the preparation of TORs and bidding documents, reviewing the inputs from consultants and other technical work. (2) Supporting actors include participation in the design of the activities and participation in the implementation. These actors should have a say in the preparation of TORs and bidding documents, reviewing the inputs from consultants and other technical work.

11. Summary of Project FM arrangements. The Project would have three main executing agencies: the Ministry of Finance (MEF), the Comptroller’s Office (CGR) and the General Directorate for Public Procurement (DGCP) following a decentralized approach, similar to the arrangements used for the previous project. Therefore, each of these entities would have responsibilities for managing the fiduciary aspects of their respective components, including (i) budget formulation and monitoring, (ii) cash flow management (including processing payments and submitting loan withdrawal applications to the bank), (iii) maintenance of accounting records (including the administration and maintenance of an inventory of project assets), (iv)

Component Key technical actors (1) Support actors (2) Procurement and Fund

Management

1

• Dirección de Programación de Inversiones (DPI) in the Ministerio de Economía y Finanzas (MEF)

• Dirección National de Presupuesto (DIPRENA)

•

• Dirección de Políticas Públicas (DPP)

• Dirección de Tecnología de la Información (DTI)

• Pilot Sector Ministries • President’s Office

• Dirección de Programación de Inversiones (DPI), Ministerio de Economía y Finanzas (MEF)

2

• Dirección Nacional de Contabilidad (DNC) in the Ministerio de Economía y Finanzas (MEF) for sub-component 2.1.

• Contraloría General de la República (CGR) for sub-component 2.2.

• Dirección de Programación de Inversiones (DPI)

• Dirección de Políticas Públicas (DPP)

• Dirección de Tesorería • Dirección de Tecnología de la

Información (DTI)

• Office of International Affaires, Contraloría General de la República (CGR)

3

• Dirección General de Contrataciones Públicas (DGCP)

• Tribunal Administrativo de Contrataciones

• Office of the Director, Dirección General de Contrataciones Públicas (DGCP)

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preparation and submission of in-year and year-end financial reports, (v) administration of underlying information systems, and (vi) arranging for the execution of financial audits.

12. Within MEF, the Project would have direct involvement with various key units, such as DPI, DIPRENA and DPP. However, there would be an overall administrative support unit which would be responsible for the administrative aspects of the components under the responsibility of MEF, as well as monitoring and consolidating information for the entire project. The administrative support unit would be under DPI and would contract staff with appropriate skills, experience and qualifications.

13. It is expected that satisfactory FM arrangements would be in place before loan effectiveness. Detailed Project FM arrangements. 14. Staffing: Within MEF, staff for the administrative support unit would be identified or contracted, with appropriate skills and experience, to manage the Accounting and Disbursement aspects of the proposed Project. Within CGR and DGCP, as with the previous project, internal operational units responsible for the administrative aspects of the Project should already have the staff required. It is important to point out the possibility of having experienced fiduciary staff incorporated into this new operation (experienced with the recently-closed project). 15. FM System: SIAFPA PRO, which is a module of the Integrated Financial Management System (IFMS) in Panama specifically designed to monitor project expenditures, would be utilized for the Project. SIAFPA PRO would enable the monitoring of financial information and the preparation of project financial statements for MEF, CGR and DGCP.

16. Project Financial Reporting: On a semi-annual basis, for monitoring purposes only, MEF would consolidate financial information and prepare an unaudited interim financial report (IFR) containing at least: (i) a statement of sources and uses of funds and cash balances (with expenditures classified by subcomponent or categories of expenditures); (ii) a statement of budget execution per subcomponent (with expenditures classified by the major budgetary accounts); and (iii) a reconciliation of the advance to the Designated Account. MEF would be responsible for submitting interim reports to the Bank not later than 45 days after the end of each semester.

17. On an annual basis, MEF would prepared consolidated project financial statements including cumulative figures, for the year and as of the end of that year, of the financial statements cited in the previous paragraph. The financial statements would also include explanatory notes in accordance with the Cash Basis International Public Sector Accounting Standard (IPSAS), and the entity’s assertion that loan funds were used in accordance with the intended purposes as specified in the Loan Agreement. These financial statements, once audited, would be submitted to the World Bank (WB) not later than six months after the end of the Government’s fiscal year (which equals the calendar year).

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18. Working papers for the preparation of the semi-annual and annual financial statements would be maintained in the entity’s premises, and made easily accessible to WB supervision missions and to external auditors.

19. Internal Control and Audit: It is expected that an Internal Auditor would be hired for the Project. In the course of its regular internal audit activities, the internal auditor would review the internal controls of the Project as well as compliance with the procedures set out in the operational manual. The results of such audits occur would be made available to the Bank and external auditors.

20. External Audit: MEF would prepare the consolidated annual project financial statements, which would be audited following International Standards on Auditing (ISA), by an independent firm and in accordance with terms of reference (TORs), both acceptable to the Bank. The audit opinion covering project financial statements would contain a reference to the eligibility of expenditures. Each audit report would also be required to include a section on the state of the internal control in each entity. MEF would submit its final annual audit report to the Bank no later than 6 months after the end of the fiscal year.

21. The audit work described above can be financed with loan proceeds. MEF would arrange for the contracting of the first external audit within 4 months after Loan Effectiveness. The first external audit contract would be expected to cover at least two years.

Audit Report Due Date 1) Project specific financial statements (including on the Designated Account statement)

June 30

2) SOE June 30

22. It is important to note that audited financial statements for the recently-closed project (P055844) were submitted to the Bank timely and presented unqualified opinions. 23. Flow of Funds: The Project would have three Designated Accounts: one in MEF, one CGR and one in DGCP. Considering the results of the assessments, the following disbursement methods may be used by MEF, CGR and DGCP to withdraw funds from the loan account: (a) reimbursement, (b) advance, and (c) direct payment.

24. All three accounts would be opened in the central bank, Banco Central de Panamá (in US dollar which is the currency used in Panama) to be used exclusively for deposits and withdrawals of loan proceeds for eligible expenditure. Funds deposited into the DAs as advances would follow Bank’s disbursement policies and procedures, as described in the Disbursement Letter and Disbursement Guidelines.

25. The ceiling for advances to be made into the DAs would be included in the Disbursement Letter. The reporting period to document eligible expenditures paid out of the DAs is expected to be on a quarterly basis.

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26. Supporting documentation for documenting project expenditures under advances and reimbursement methods would be records evidencing eligible expenditures (e.g. copies of receipts, invoices) for payments for goods valued at US$100,000 equivalent per contract or more, consultant firms costing US$75,000 equivalent per contract or more, individual consultants and Non-Consultant services costing US$40,000 equivalent or more, and operating Costs and Training costing US$20,000 equivalent or more. For all other expenditures below these thresholds, supporting documentation for documenting project expenditures would be Statements of Expenditures (SOEs).

27. Each implementing entity would be responsible for maintaining supporting documentation submitted for justification of expenditures. All SOE documentation should be maintained for post-review and audit purposes for up to 18 months after the final withdrawal or two years after the closing date (which ever is later).

28. Direct Payments supporting documentation would consist of records (e.g.: copies of receipts, supplier/ contractors invoices). The minimum value for applications for direct payments and reimbursements would be included in the Disbursement Letter.

29. The disbursement deadline date would be four months after the closing date specified in the Loan Agreement.

30. Risk Assessment and mitigation measures to address FM issues (see ORAF Matrix for further information): From a Financial Management’s perspective, the following is a list of key risks and issues identified at this stage.

• MEF, DGC and DGCP have prior experience with Bank processes. However, we have seen in the previous project, fiduciary capacity can be a limiting factor.

o This would imply additional training and supervision from the Bank’s side. o MEF would identify or contract staff for the Project, with appropriate skills

and experience, to manage the Accounting and Disbursement aspects of the proposed project.

• The participation of multiple implementing entities in the proposed project adds to the complexity of the operation and the need for additional coordination among the various actors.

o MEF would perform some general coordination functions, including monitoring and consolidating financial information for the Project, for the Project to provide more cohesion and would be the main World Bank counterpart.

o Within MEF, as the Project would imply involvement of various key units, an administrative support unit would be created to perform the administrative aspects of the components under the responsibility of MEF.

• Under the previous project, the integrated administrative system was not implemented as originally envisioned in the PAD, which did not facilitate the preparation of project financial reports.

o SIAFPA PRO, which is a module of the Integrated Financial Management System (IFMS) in Panama specifically designed to monitor project expenditures, would be utilized for the Project. SIAFPA PRO would enable

45

the monitoring of financial information and the preparation of project financial statements for MEF, CGR and DGCP.

• As part of the internal processes in Panama, the implementing entities would have to submit every payment to CGR for review which significantly delays the payment process (from 60 to 90 days on average) and has the potential to delay implementation of the Project. This is a country issue which has the potential to affect the proposed project, as the FM arrangements contemplate the use of country systems.

o The Bank would continue to monitor and provide technical assistance to the Panamanian Government to reduce delays in payments to vendors.

31. FM supervision: A World Bank Financial Management (FM) Specialist may perform a supervision mission prior to effectiveness to verify the implementation of FM arrangements. After effectiveness, the FM Specialist must review the annual audit reports, should review the financial sections of the semi-annual IFRs, and should perform at least one supervision mission per year. 32. Procurement. Procurement for the Project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004 and revised October 2006 and May 2010; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004 and revised October 2006 and May 2010, and the provisions stipulated in the Legal Agreement. The general description of various items under different expenditure category is described below. For each contract to be financed by the Loan/Credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan would be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

33. Procurement of Works: The proposed operation will not finance works.

34. Procurement of Goods: The proposed project would finance contracts for procurement of goods necessary to support development and implementation of information systems as well as training activities. More specifically, the Project would purchase computer infrastructure, such as servers and computer network equipment, desktops, office equipment, software packages and printing services. The procurement would be done using Bank’s standard bidding documents (SBD) for all international competitive bidding (ICB) and National SBD agreed with (or satisfactory to) the Bank for other procurement

35. Direct Contracting (single source): During project preparation, DGCP (Dirección General de Contrataciones Públicas) identified the need to purchase search engine software directly from Google to support querying features of the PanamaCompra website. This contract is anticipated to be a direct contract estimated to cost around USD 700,000. During preparation, the Project team explained to DGCP that the request would be reviewed by the Bank once DGCP provides the detailed estimated cost as well as the documentation supporting the request, which would need to be prior reviewed by the RPM according to BP 11.00. The Bank stressed that

46

while the request would be carefully reviewed, actual no objection would depend on the underlying justification presented by DGCP which needs to be in line with procurement policies for direct contracting.

36. Procurement Legal Framework. Law 22, the Ley de Contrataciones Públicas or Government Procurement Law became effective in December 2006 and introduced major changes for procurement processing in Panama. In addition, law 22 was modified by a series of consecutive laws in 2008 and late 2009:

• law 41 from July 2008, which amends the country’s Government Procurement Law (Ley 22);

• law 69 from November 2009, which modifies specific procedures of the Government Procurement Law (Ley 22), the most important of which is the creation a new procurement method named Licitación Abreviada; and

• law 80 from December 2009, which modifies a number of procedures of the Government Procurement Law (Ley 22), the most important of which are the procedures for re-bidding and the detailing of the procedures for implementation of the method named Licitación Abreviada.

37. Law 69 introduced a new procurement method named “Licitación Abreviada”, which can be used for any process above US$30,000 and requires only 5 business days for submission of bids after publication of an invitation for bids in PanamaCompra and direct invitation to qualified bidders. The period for submission of bids for “Licitación Abreviada” may become a constraint for participation, particularly in large-value and complex processes. Consequently, a special provision is recommended to be included in the loan agreement to address this issue. 38. The following issues are additional differences between the Panamanian procurement legal framework and the Bank’s procurement policies:

• use of bracketing, which is minimum and maximum bid prices; • rejection of bids that do not accompany a compliant bid security at the time of bid

opening; • open bidding for selection of consultants; • Impossibility for foreigners to register at PanamaCompra to submit electronic bids. • the “contratación por mérito” might become quite an arbitrary selection method and

evolution of its use should be carefully monitored; and • for bids above $175,000.00, a pre-bid meeting can be arranged and it is not clear if

attendance would become a mandatory requirement to bid.

39. Special Provisions for the legal agreement: Based on the review of the Panamanian procurement legal framework, the following special provisions were prepared and incorporated in the legal agreement.

In addition and without limitation to any other provisions set forth in the Procurement Schedule or the Guidelines, the following principles of procurement shall expressly govern all procurement of goods (International Competitive Bidding)

47

• Foreign bidders shall not be required to be registered with local authorities as a

prerequisite for bidding; • No bids shall be rejected, and no provisional awards shall be made at the time of bid

opening; • The invitation to bid shall not establish, for purposes of acceptance of bids, minimum

or maximum amounts for the contract prices; and • The invitation to bid shall not require mandatory attendance at a pre-bid meeting as a

condition to bid.

In addition and without limitation to any other provisions set forth in the Procurement Schedule or the Guidelines, the following principles of procurement shall expressly govern all procurement of goods (National Competitive Bidding):

• Foreign bidders shall not be required to be registered with local authorities as a prerequisite for bidding;

• No bids of proposals shall be rejected, and no provisional awards shall be made at the time of bid opening;

• The invitation to bid shall not establish, for purposes of acceptance of bids, minimum or maximum amounts for the contract prices;

• The invitation to bid shall not require mandatory attendance at a pre-bid meeting as a condition to bid; and.

• The time allowed for preparation and submission of bids shall not be less than 4 weeks, unless otherwise agreed to by the Bank.

In addition and without limitation to any other provisions set forth in the Procurement Schedule or the Guidelines, the following principles of procurement shall expressly govern all procurement shopping:

• Foreign bidders shall not be required to be registered with local authorities as a

prerequisite for bidding; • No bids shall be rejected, and no provisional awards shall be made at the time of bid

opening; • The invitation to bid shall not establish, for purposes of acceptance of bids, minimum

or maximum amounts for the contract prices; • The invitation to bid shall not require mandatory attendance at a pre-bid meeting as a

condition to bid; and • A minimum of three quotations shall be obtained as a condition to award the contract.

In addition to and without limitation to any other provisions set forth in the Procurement Schedule or the Consultant Guidelines, the following principles of procurement shall expressly govern all procurement of consultants' services:

• Foreign consultants shall not be required to: o furnish any certificate issued by a local authority about their legal capacity or

tax status for the purposes of submitting a proposal; and

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o submit their proposals in person. 40. Selection of Consultants: The proposed project would finance several contracts for consultant services, including inter alia development and implementation of information systems to support performance-based budget management and M&E systems, technical assistance for modernizing the internal and external control framework, delivery of training activities, legal assistance for design of procurement legal framework, technical legal advice on tax-collection issues. In addition, individual consultants might be hired to strengthen the teams at the three implementing agencies that would coordinate project implementation. 41. Short lists of consultants for services estimated to cost less than USD 200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

42. In addition to quality-cost based selection, small and non-complex contracts for consulting services would follow the procedures for selection based on the consultant’s qualifications, selection under fixed budget and least cost selection as defined in the Guidelines. Such cases would be reflected in the updates to the procurement plan. Complex consulting services may follow the procedures for quality-based selection with previous approval by the Bank in the procurement plan.

43. Operational Costs: The Project is expected to finance operational costs that include travel, per diem, small-value office supplies, transportation, rental of office spaces for training and others. The Project would also finance financial audits. These contracts would follow local procedures that are acceptable to the Bank.

44. Training: The Project would finance several training activities for staff of the three proposed implementing agencies (training on procurement would also be included for sector ministries as part of component 3), including specialized training in financial management, results framework, performance-based budget, internal controls, tax-collection, procurement, accounting and others. These contracts would follow local procedures that are acceptable to the Bank.

45. Assessment of the agency’s capacity to implement procurement: Following the design of the previous operations with these agencies, there would be three different teams implementing procurement for the Project: MEF or the Ministry of Economy and Finance, CGR or the Controller’s Office and DGCP or the Procurement regulatory body. All these agencies have long experience implementing Bank-financed operations. These agencies finished implementing loans 4635-PA and the additional financing, loan 7446-PA in May 2010, a few months before the proposed operation started to be designed. MEF, CGR and DGCP already attended multiple training on Bank-financed procurement delivered in 2007, 2008, 2009 and 2010.

46. All procurement processes financed by the Project would be recorded at PanamaCompra, a system owned and operated by DGCP, the country’s procurement regulatory body. PanamaCompra is a system for disclosure of information on Government procurement. It

49

discloses bidding opportunities as well as contract awards. All bidding documents and amendments as well as clarifications are available for download at the web portal. Bidding processes are implemented by sector agencies following procedures defined in the law. These agencies publish their invitation for bids, contract awards, bidding documents and amendments, and clarifications in PanamaCompra’s website.

47. Because this project is a repeater with agencies that have recent experience implementing Bank-financed projects, a simplified assessment of the capacity of MEF, CGR and DGCP to implement procurement actions for the Project was carried out. The assessment reviewed and updated previous evaluations done by the Bank regarding the organizational structure for implementing the Project and the interaction between the Project’s staff responsible for procurement and these agencies’ relevant central unit for administration and finance.

48. Procurement cycle management

: CGR and DGCP usually implement few contracts of small-value on annual basis. DGCP was created by Law 22 in late 2006 and the agency still needs to staff up to be able to fulfill its roles and responsibilities. Many internal business processes are still being designed or reviewed. On the other hand, MEF and CGR have very clear and crystallized internal controls and processes. The internal workflow of a procurement process is clear to all staff working at “Departamento de Proveeduría y Compras” at CGR. Internal manuals and instructions are available to provide help if necessary.

49. Law 22 mainstreams most procurement steps up to contract award and, therefore, the overall processing would become very similar amongst all agencies of the administration. In general, all agencies have similar arrangements in which sector teams submit a request for contracting to the procurement team for processing. The procurement team would prepare bidding documents based on specifications or terms of reference provided by sector teams and it would follow the procedures of the procurement cycle up to the award phase. CGR needs to clear all contract awards before the contract can be legally effective according to the country’s procedures. The prior review office at Contraloría reviews not only all procurement processes but also payments of all line ministries ex-ante.

50. According to law 22, all complaints regarding procurement processes shall be addressed to DGCP which is in charge of evaluating it and taking a decision.

51. CGR has two specific procurement practices that are not consistent with Bank’s procurement procedures and therefore the need for the special provisions listed above:

• for processes up to USD 5,000 CGR publishes a specific notice in PanamaCompra

and quotations are delivered to CGR by either fax, mail or email. Email is the means used most frequently by bidder to submit quotations. No public opening ceremony is held for processes up to an estimated cost of USD 5,000. If only one quotation is received and that quotation complies with the requirements set by CGR, the contract would be awarded. This is a major difference to the Bank’s shopping procedures which require a minimum of three quotations to award the contract.

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• CGR informed the mission that for open biddings, bidders are required to deliver their bids in person. Mailed bids are not accepted. This is also a major difference from the Bank’s procurement procedures and thereby special provisions should be in place in addition to the guidance already given to CGR.

52. It is expected that neither of the implementing agencies would rely on services provided by a funds management consulting company or agency. All three agencies are expected to follow institutional processes and procedures to carry out procurement and effect payments for the proposed additional financing operation. 53. Organization and functions:

Allocation of responsibilities in a procurement process is mainstreamed by law 22 and the roles clearly defined. In CGR, for example, the “Departamento de Proveeduría y Compras” has a team of 9 staff responsible for operating CGR’s internal warehouse. Moreover, there are three coordinators of open bidding processes and processes are distributed according to the workload of each coordinator. The coordinators of open biddings are in charge of preparing the specific conditions of the bidding documents and sending them to the head of the team for review. Law 22 allows for simple contracts, which are called “purchase orders”, up to a maximum amount of USD 250,000. If a detailed contract is required, it is commonly prepared by the requesting unit and reviewed by the “Departamento de Proveeduría y Compra”.

54. For contracts above USD 30,000, a “resolución” is required before the award.

55. Bidders are granted five working days to complain against the award and all complaints shall be addressed to the “Tribunal de Contrataciones Publicas”. By the time of this assessment, the Tribunal was not operational yet and its role was being exercised by DGCP whilst judges are appointed.

56. Evaluation of bids is done by the requesting unit but award is made by the procurement unit. The procurement unit is usually not represented in the evaluation of bids. According to local law, bid evaluation committees are appointed for each specific procurement process by the purchasing agency.

57. Support and control systems:

all three implementing agencies would use PanamaCompra to advertise bidding opportunities and contract awards.

58. In addition to PanamaCompra, CGR has two internal information systems which are used in a procurement process. SICO is the document control system, which is used to find the status of a document and the place where it is sitting. SIGAME is CGR’s information system used internally and also by line ministries to follow-up the status of the mandatory prior review done by CGR in bidding documents and payments.

59. Record-keeping:

recordkeeping is very good at CGR, DGCP and MEF as indicated in a post-review carried out in April 2010.

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60. Staffing:

CGR has impressive 23 staff in charge of delivering timely and effective support to internal procurement and managing its internal warehouse. The head of the procurement team has extensive experience with Government procurement having worked for the past 20 years on the field and she already attended several training offered by the Bank recently.

61. DGCP relies on a high-performer procurement specialist with solid experience on Bank procedures.

62. MEF has a team of specialist that attended several training delivered by the Bank recently and the team is spearheaded by a seasoned specialist with previous experiences on projects financed by the Bank and the IADB.

63. Most of the issues/ risks concerning the procurement component for implementation of the Project have been identified and would comprise the following two sets of risks.

64. First, there is a set of risks associated with the institution as follows:

• Information availability: none of the three implementing agencies have a procurement

management information system. These agencies have all their processes available at PanamaCompra but reporting by this system is limited.

• Limited experience with procurement of large and complex packages of information

systems: components 1 and 2 of the Project would finance complex packages of information systems for which the implementing agencies have limited experience with. Even though this is a sector-specific issue, experience shows that loose technical specifications or terms of reference would impact the outcomes of procurement processes.

65. Secondly, regarding risks related to the country’s broad procurement operational framework, two main risks might impact implementation of the Project:

• Lack of accountability of staff working on procurement; and • Limited planning process, which causes unplanned procurement processes to arise during

the course of the fiscal year.

66. Considering that the proposed implementing agencies have recent experience executing projects financed by the Bank and that the Project would be a repeater from an institutional perspective, the proposed action plan for procurement is simple as the agencies already have capacity on procurement.

Action plan Action Timeframe Status

1 Preparation of a procurement plan for at least the first twelve months of project implementation.

Before Negotiations Procurement plan received and reviewed by the Bank on January 27th, 2011.

2 Development of internal guidelines for Before Implementation An advanced version of

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management of procurement processes and such guidelines to be part of the Project’s operational manual.

the operational manual was presented to the Bank during negotiations.

67. The overall project risk for procurement is average. 68. The thresholds for procurement methods that would be used for preparation of the procurement plan would be as follows:

Procurement Method Goods ICB $250,000 NCB Up to $250,000 Shopping Up to $30,000

69. The thresholds for review by the Bank that would be used for preparation of the procurement plan would be as per the table below. These thresholds might be reviewed during project implementation provided that capacity to implement procurement increases.

Type of review Goods Consultants Prior review $30,000 and above $100,000 and above Post review Up to $30,000 Up to $100,000 All direct contracting would require prior review by the Bank regardless of the amount.

70. Procurement Plan: A Procurement Plan for (more than) the first 18 months of project implementation has been prepared, was discussed and accepted during Negotiations on January 27, 2011, and it will provide the basis for the procurement methods and review by the Bank.

71. The procurement plan would be available on the internet at SEPA, the regional procurement plan monitoring system. SEPA would allow MEF, CGR, DGCP and the Bank to monitor implementation of the procurement plan remotely as well as follow-up on necessary updates to the plan. The Procurement Plan would be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutionalcapacity.

72. Frequency of Procurement Supervision: In addition to the prior review supervision, the capacity assessment of the Implementing Agency has recommended a minimum of one supervision mission per year in the field to carry out post review of procurement actions. 73. Monitoring & Evaluation.: The Dirección de Programación de Inversiones (DPI) in the Ministerio de Economía y Finanzas (MEF) would be in charge of carrying out all monitoring and evaluation activities. The unit would compile the data needed to update the indicators and would interact with the Bank supervision team for the preparation of M&E reports, regular progress reports for the Reform Steering Committee and the World Bank. Resources under component 4 have been established to strengthen the capacity of the unit to carry out these duties.

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74. Role of Partners. These implementation arrangements were discussed with the IADB’s team that would use same arrangements to support the implementation of complementary activities and support to the country. 75. These implementation arrangements were discussed by all parties mentioned and were endorsed by the Minister of Finance, both Vice-Ministers of Finance, the Comptroller General and the Director of the DGCP.

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Annex 4: Operational Risk Assessment Framework (ORAF)

Project Development Objective(s)

The objective of the Project is to assist public agencies of the Borrower in producing, using and disseminating timely and quality performance information, thereby allowing a more efficient, transparent and accountable use of the Borrower’s public budget funds

PDO Level Results Indicators:

1. Performance orientation of the budget. The budget document is presented to Congress using program classifications and financial and non- financial performance information in the 2014 budget

2. Quality of financial information. A consolidated Government statement is prepared annually with few omissions, a consistent format over time and disclosure of accounting standards (IPSAS or national).

3. Efficacy of Internal Audit Function. A new internal audit framework is in place that attempts to show progress in the internal audit function that aims at following professional standards with quality and its recommendations followed by authorities by the end of the Project.

4. OECD procurement benchmark index. Increase in ratings of the OECD benchmark methodology to assess national procurement systems.

5. Perception of transparency and efficiency in Panama’s procurement system. Improved private sector perception of transparency and efficiency in Panama’s public procurement system

Risk Category Risk Rating Risk Description Proposed Mitigation Measure

1. Project Stakeholder Risks

Stakeholder

Medium-I Conflicting views within the Ministry of Finance, President’s Office and Comptroller’s Office. Resistance to change in sector Ministries.

• The design of the Project involves full participation of actors that are sometimes not that used to working together. One key asset of the operations is creating a forum for inter-agency collaboration

• Coordination arrangements from the previous operation would be used as appropriate to promote adoption of a single, common view. Implementation arrangements also consider a Reform Steering Committee that would provide coordinated political and technical support.

• One of the key deliverables of the Project would be a strategic plan document for the reform making sure these are developed in a participatory manner. This would underpin one single and official view of the reforms (covering procurement, IFMS, performance budgeting etc) that has consensus among key actors.

The Project considers three critical actions to involve and get sector Ministries

ownership. • The use of sector pilots for the implementation of some of the reforms that affect the

budget.

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Risk Category Risk Rating Risk Description Proposed Mitigation Measure • The Project would include a communication and training strategy that would target

sectors from the beginning of the operation. • The new Reform Steering Committee that would provide coordinated political and

technical support. 2. Implementing Agency Risks (including FM & PR Risks)

Capacity

High Fiduciary capacities can be a limiting factor and remain low. Effective project management experts in key counterpart units are scarce.

• Training. Fiduciary experts have visited the client and plan targeted FM and procurement staff training sessions, particularly for the new units.

• Using prior capacities and coordination. The Project is making sure that capacities created through the previous TAL can be used by the Government as expressed in the implementation arrangements in Annex 3. MEF, CGR and DGCP have prior experience and some key personnel would be retained. Additionally, MEF would perform a coordinating function, would create an administrative support unit and would identify or contract dedicated staff for the Project, with appropriate skills and experience, to manage the Accounting and Disbursement aspects of the proposed project.

• Use of SIAFPA PRO. SIAFPA PRO would be implemented in the implementing entities to monitor project expenditures.

• Fiduciary plans. FM assessment of implementing entities have identified appropriate mitigation measures to be included in the Project design in accordance with the findings and an action plan to strengthen administration and monitoring of project funds (see Annex 3).

• Close supervision. The Bank would continue to monitor and provide technical assistance to the Panamanian Government to reduce the delays in payments to vendors. Also, auditors for the Project audit would be hired 4 months after the effectiveness date to ensure timely submission of the audit and compliance with financial covenants. Finally, specific FM processes and procedures are being designed in order to guarantee that project funds are used economically and efficiently. These processes and procedures would be reflected in the Operational Manual.

• A new model based on past practice. The current implementation arrangement model

(see Annex 3) has been developed in conjunction with the Government taking into account the scope and depth of the changes proposed as well as the strengths and weaknesses of current Central Government and MEF’s institutional architectures.

• Autonomy with coordination. The implementation arrangements have been designed to balance autonomy with coordination needs, to separate administrative from

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Risk Category Risk Rating Risk Description Proposed Mitigation Measure technical functions and to provide highest political support.

• Detailed arrangements and political support. The implementation arrangements model contains three main features: (i) inter-institutional arrangements, (ii) MEF intra-institutional arrangements, and (iii) a mechanism to provide the reform with the highest political and technical profile.

• Monitoring performance. The administrative units’ performance in MEF, CGR and DGCP would be assessed on a regular basis and reported to the Steering Committee to provide accountability in the quality of service provision. Lack of performance would be reported to the Steering Committee that would execute necessary actions within agencies and the Project execution team to steer the course of the reform and the Project.Training and resources. To complement this, the Bank team together with the main counterparts has contemplated funding (see component 4) in order to hire, train and retain officials that have capacities to carry out the Project management duties with the sufficient skills.

3. Project Risks

Design

Medium-I Multiplicity of actors/implementing agencies

• At the design stage, the Project team has dedicated time and efforts to connect counterparts that are sometimes not used to working together. For example, the Bank and the IADB are supporting the participation of several different counterparts in the Mexico regional M&E conference. Also, fiduciary training sessions are being held together.

• For a successful implementation, the team has reviewed in detail the past experience using the TAL ICR. With these findings (see lessons learned section) the Bank team held specific workshop with all counterparts to discuss the best possible solution and reach an agreement among all actors. The model described in Annex 3 is the result of this.

• • During preparation, the team has designed appropriate coordination

mechanisms. The three main features contained in Annex 3 include (i) inter-institutional arrangements (MEF-CGR-DGCP)), (ii) MEF intra-institutional arrangements, and (iii) a Reform Steering Committee to provide the reform with the highest political and technical engagement.

Overall Risk Rating at Preparation Overall Risk Rating During Implementation Comments

Medium-I High

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Annex 5: Implementation Support Plan 1. The implementation support plan (ISP) concentrates on the two key risks that have been identified as high and the Project concept note review considered as critical. They are reviewed in detail as follows and complemented by the following tables that include the resources needed to ensure due diligence, as well as technical support. 2. Fiduciary requirements and inputs. Given the risks identified and the design of the Project, FM requirements would include annual financial audits, semi-annual FMRs, FM training and supervision. In addition, as part of the FM arrangements of the proposed project, the entity would prepare a Project Operational Manual and identify or contract dedicated FM staff for the proposed project, which would be reviewed during the annual supervision missions. FM supervision would consist of a possible mission at the time of effectiveness (to ensure successful implementation of FM arrangements), review of annual audit reports (to provide assurance regarding the proper use of funds), review of semi-annual financial reports (to monitor the implementation of the Project) and at least one FM supervision missions (to review the continuing acceptability of FM arrangements). 3. Fiduciary capacities to implement the Project. As experienced in the previous Public Policy Reform Technical Assistance Loans shows, fiduciary teams in some of the key counterparts can limit the advancement of project execution and overall implementation. The following mitigations actions have been identified:

• Carry out training sessions and workshops. Fiduciary experts have visited the client to carry

out the individual fiduciary assessment and actions contained Annex 3. Additionally, they are planning targeted financial management and procurement staff training sessions, particularly for the new units in MEF, CGR and DGCP prior to the effectiveness of the loan and afterwards on a regular basis.

• Using capacities from personnel in place. The Project is making sure that capacities created through the previous TAL can be used by the Government as expressed in the implementation arrangements in Annex 3. MEF, CGR and DGCP have prior experience and some key personnel would be retained.

• Preparation of detailed fiduciary plans. FM assessment of implementing entities have identified appropriate mitigation measures to be included in the Project design in accordance with the findings and an action plan to strengthen administration and monitoring of project funds (see Annex 3).

• Provision for staff resources. To complement the previous actions, the Bank together with the main counterparts have contemplated funding (see the Project component 4) in order to hire, train and retain officials that have capacities to carry out the Project management duties with the sufficient skills.

4. Effective project management personnel. The experience from the previous TAL implementation shows that even with clarity, ownership and guidance at the management level, operational teams that are needed to implement the Project are weak.

• Preparation of a new implementation arrangement model. The current implementation arrangement model (see Annex 3) has been developed in conjunction with the Government

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considering the scope and depth of the changes proposed as well as the strengths and weaknesses of current Central Government and MEF’s institutional architectures.

• Achieving project execution autonomy with coordination. The implementation arrangements have been designed to balance autonomy with coordination needs, to separate administrative from technical functions and to provide the highest political support.

• Comprehensive implementation arrangement model with highest political support. The implementation arrangements model has been designed to cover all aspects and currently contains three main features: (i) inter-institutional arrangements between MEF, CGR and DGCP, (ii) MEF intra-institutional arrangements, and (iii) the Reform Steering Committee, a mechanism to provide the reform with the highest political and technical engagement.

• Implementing a service provision agreement and monitoring unit’s performance. The administrative units’ performance in MEF, CGR and DGCP would be assessed on a regular basis and reported to the Steering Committee to provide accountability in the quality of service provision.

• Provision of training and resources. To complement this, the Bank together with the main counterparts has contemplated funding (see component 4) in order to hire, train and retain officials that have capacities to carry out the Project management duties with the sufficient skills.

Areas of focus:

Time Focus Skills Needed Resource Estimate US$ (1)

Partner Role

First twelve months

• Fiduciary capacities to implement the Project.

• Effective project management personnel.

• FM specialists • PS expert regular

presence from HQ

• Fixed cost: • US$ 56,000 • Variable cost:

US$ 40,000

Joint work with IADB through the Reform Steering Committee

12-48 months • Fiduciary capacities to implement the Project.

• PFM specialists PS expert regular presence from HQ

• Fixed cost: • US$ 24,500 • Variable cost:

US$ 17,500

Joint work with IADB through the Reform Steering Committee

(1) These costs are considered in addition to the regular supervision funds. Skills Mix Required:

Skills Needed Number of Staff Weeks (1) Number of Trips (1) Comments • FM specialist • PR specialist • PS field based or

regular presence from HQ

• FM specialist: 4 weeks/year during first year and 2 weeks/year during the second

• PR specialist: 4 weeks/year during first year and 2 weeks/year during the second

• PS specialists: 8 weeks/year during first year and 3 weeks/year during the second

• FM specialists: 4 missions during first year and 2 missions during the second

• PS specialists: 8 missions during first year and 3 missions during the second

(1) These missions are considered in addition to the regular supervision funds. Partners:

Name Institution/Country Role TBD IADB FM Specialist

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Annex 6: Team Composition

Name Role / Title Unit Pedro Arizti Task Team Leader LCSPS

Antonio Blasco Senior Financial Management Specialist

LCSFM

Manuel Fernando Castro Senior Evaluation Officer IEGCS Joao Veiga Malta Senior Procurement Specialist LCSPT Ximena Fernández Ordónez Project Management IEGCS Bertha M. Mburugu Project Management Support LCSPS Christian Yves González Country Economist LCSPE Henry Forero Senior Information Officer CITPO Mariana M. Montiel Senior Counsel LEGLA Patricia de la Fuente Hoyes Senior Finance Officer CTRFC Daniela Felcman ICR Consultant LCSPS

May Olalia Senior Operations Specialist & Quality Control LCSPS

Meilyn Gem Operations Analyst LCCPA Fabienne Mroczka Financial Management Specialist LCSFM Alexandre Borges de Oliveira Senior Procurement Specialist LCSPT

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Annex 7: Economic and Financial Analysis

1. The proposed operation is a technical assistance project designed to enhance public sector efficiency in Panama. It would bolster important reforms related to the efficiency and effectiveness of expenditure management. However, given the nature of these reforms, it is difficult to conduct a precise cost-benefit analysis. Since many of the benefits are intangible -such as enhanced institutional performance- it is hard to conduct a rigorous quantitative assessment and translate them to monetary terms. Even when trying to take a qualitative approach, it is hard to assign attribution, given the interconnectedness of these reforms to each other, and with larger reforms that the Government of Panama is undertaking. 2. However, several of the activities would likely have clear fiscal, economic and social repercussions as described below. Overall, the main fiscal savings resulting from the proposed reforms would come from making both the administration and public expenditures more efficient and effective. 3. In terms of economic impact, the achievement of more efficient public expenditures, better service delivery and more transparent bureaucratic structures are key pillars in the Government’s agenda to inducing economic growth. 4. The potential for utilization of the performance information by a wider spectrum of stakeholders, including increased civil engagement should bring closer scrutiny to the use of public money and higher participation in decision making, reinforcing the quality of decision making, triggering a broader, more inclusive and transparent discussion on how the Government is using public resources to address the key challenges. 5. Increasing transparency, accountability and good governance, also have clear links with economic growth. The reforms would support a better environment for the public and the private sector and help build confidence in citizens and reducing risks. Markets, which are very sensitive to changes in trust, could respond with higher investments. On the social front, improved service delivery and more efficient use of public resources would better achieve poverty reduction and the Government’s development goals. 6. In the longer turn, increased trust in Government could also bring about increased tax collection and improved compliance with rules and regulations. Moreover, it could also help build political capital for further reforms in different areas related to social wellbeing.

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7. The fiscal, economic and social impact of each component is summarized as follows. Component 1: Strengthening performance-based budget management and evaluation 8. Expected fiscal impacts:

• Stronger strategic planning and budgeting capabilities should improve the

allocation of fiscal resources to priority areas and programs, strengthen policy design and coordination among different areas of Government. Sounder fiscal policy management also could result in reduced fiscal vulnerability.

• Monitoring and evaluation should bring further clarity on “what works, what doesn’t and the reasons why”. An enhanced capability to decide between alternative expenditures and strengthen programs would likely increase the quality of public expenditures.

• The focus on the generation, availability and use of credible, relevant and timely performance information, could have huge impacts in the quality of decision making.

• These strengthened capacities, along with the introduction of a results based management and budgeting approach would likely improve the quality of public management in Government entities and the programs they deliver. Better prioritization, better allocations, better targeted and more effective public service delivery, the design of programs that respond better to their stated objectives, the reduction in costs due to the potential for the elimination of duplicate programs, and the reduction of operational and administrative costs would result in more efficient and effective public expenditures.

9. Expected economic gains

• Better performance information and transparency, broader stakeholder participation in decision-making, and improvements in public expenditure quality would increase trust in Government which in turn could bring higher levels of investment and growth.

10. Expected social gains

• Better prioritization, allocation and quality of public expenditures would bring improved social services, with higher citizen’s satisfaction and better social impact.

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Component 2: New Financial Management Model: Strengthening budget execution, treasury, accounting and control 11. Expected fiscal impacts:

• The new financial management model would have all the functionalities to bring integration and interoperability to the system, bringing improved, transparent and efficient management of funds.

• An improved fiduciary framework and the modernization of the audit framework would improve transparency and the timeliness of budget execution.

• The new system has the potential to allow for more control over the leakage of public resources, conduct effective monitoring and control of financial flows and improve budget allocation, bringing efficiency gains and reduced administration costs.


• More transparent and efficient management of funds would increase the goods and services that the Government is able to deliver. This would also increase trust in Government which in turn could bring higher levels of investment and growth.


• More transparent and efficient management of funds would contribute to improved social services, with higher citizen’s satisfaction and better social impact.

Component 3: Strengthening public procurement and contracting 14. Expected fiscal impacts:

• Better administration, efficiency and transparency in the national procurement process would likely bring important reductions in the cost of public sector procurement and improve value for money of the budget.

• Modernizing the legal framework and increasing skills and capacities to address complex procurement activities (e.g.. infrastructure), as well as introducing saving strategies would likely bring about efficiency gains and reduced fiscal costs. Adequate procurement practices and a different nature of the internal controls would allow for improved budget strategic planning, improve the budgetary decision making in terms of prioritization and allocation, improving the quality of public expenditures.

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• A stronger procurement would also bring increased transparency and increased opportunities and reduced barriers for private sector participation in public procurement, therefore increasing the potential for economic gains and growth.


• Reductions in the cost of public procurement would facilitate increases in goods and services provided in the Government.

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