ICRR 13383 Report Number : ICRR13383 IEG ICR Review Independent Evaluation Group 1. Project Data: Date Posted : 05/17/2010 PROJ ID : P105710 Appraisal Actual Project Name : First Competitiveness Project Costs (US$M): US$M ): 75 75 And Public Financial Management Dpl Country : Panama Loan/ US$M): Loan /Credit (US$M): 75 75 Sector Board : FM US$M): Cofinancing (US$M ): Sector (s): General industry and trade sector (50%) Central government administration (50%) Theme (s): Public expenditure financial management and procurement (29% - P) Regulation and competition policy (29% - P) Improving labor markets (14% - S) Tax policy and administration (14% - S) Other financial and private sector development (14% - S) L/C Number : L7493 Board Approval Date : 11/29/2007 Partners involved : Closing Date : 06/30/2008 06/30/2008 Evaluator : Panel Reviewer : Group Manager : Group : Michael R. Lav Gita Gopal Ismail Arslan IEGCR 2. Project Objectives and Components: a. Objectives: The objective of the two operations of this Competitiveness and Public Financial Management DPL series as presented in each of the PADs for the First and Second Programmatic Loans were to support the Government's development program as described in its Strategic Vision document, focussing on actions aimed at : (1) promoting broad-based growth through the enhancement of private sector competitiveness, and (2) consolidating fiscal sustainability, transparency and efficiency . b.Were the project objectives/key associated outcome targets revised during implementation? No c. Components (or Key Conditions in the case of DPLs, as appropriate): The prior actions for the Competitiveness and Public Financial Management DPL series were well defined and supported the focus of each of the operations . These were under the headings of : I. Promote broad-based growth by enhancing private sector competitiveness reduce bureaucratic red tape . improve worker training policies. increase investments in innovation II. Consolidate fiscal sustainability and public sector transparency and efficiency . consolidate fiscal reform through improved revenue and debt management . enhance fiscal transparency and financial management governance . improve expenditure efficiency and transparency through public procurement . DPL I had eight prior actions all of which were completed, while DPL II had nine prior actions, all of which were completed. The main policy areas paralleled the prior action headings : I. Promote Broad-Based growth by enhancing private sector competitiveness (a) Increase business competitiveness by reducing transaction costs, reduce red tape . increased coverage of Panama Tramita internet portal from 75 transactions in June 2007 to 200 by end 2008. Reduced costs of Doing Business - time needed to start a business reduced from 19 days to 5 days, time for exporting reduced from 16 to 12 days. (b) Improve labor productivity by upgrading workers' skills' . increase in number of courses completed workers (a worker might take several courses ) completing training each year at INADEH from 42,000 in 2006 to 200,000 in 2008. training programs for certifying labor competencies to be offered by accredited providers in at least 9 occupations (c) Increase business productivity by fostering innovation . Increase in Panama's R&D from $11.8 million in 2005 to $20 million in 2008 (excl. Smithsonian). Increase in number of full time researchers from 312 in 2005 to 410 in 2008. Increase in the share of R&D personnel with masters of Ph .D. degrees from 23.5 percent in 2005 to 33.3 percent in 2008. II. Consolidate fiscal sustainability, transparency and efficiency through modernized public financial management systems. (a) Consolidate fiscal reform through improved revenue and debt policy and management . improved debt sustainability--total consolidated NFPS debt reduced to fifty four percent of GDP or less . enhanced performance of tax administration resulting from improved filing, audit and collection procedures - progress in PEFA indicator No. 14 (effectiveness of measures for taxpayer registration and tax assessment). reduction in Doing Business Indicators for time spent filing and paying taxes . improved capacity to manage debt --formal debt management strategy and consolidated system for public debt management in the MEF. (b) Improved fiscal transparency, management of payment arrears, efficiency of controls, and audits . public availability of medium-term fiscal framework and fiscal information closer to international standards - progress in PEFA indicators Nos . 6 (Comprehensiveness of information included in budget documentation ), 12 (Multi-year perspective in fiscal planning, expenditure policy and budgeting ), and 25 (quality and timeliness of annual financial statements ). reduced payment arrears--outstanding accruals not to surpass ten percent of central government expenditures. increased efficiency of internal controls -Decreases in CGRs average processing times for expenditure operations-use of Computer Assisted Auditing Techniques (CAATs) in at least five audit engagements . (c) Improve expenditure efficiency and transparency through public procurement reform . improved participation of enterprises in public procurement -increases in registered bidders in the public e-procurement system (PanamaCompra). improved public procurement management with a view to reducing transaction costs --Issuance of standard documents. increased savings in publicly procured goods and services -- reduction in average unit cost of key items . d. Comments on Project Cost, Financing, Borrower Contribution, and Dates: DPL I was approved on November 29, 2007, disbursed on effectiveness, and closed on schedule on June 30, 2008. DPL I cost $75 million, financed by an IBRD loan in that amount . 3. Relevance of Objectives & Design: The project was substantially relevant to Panama's development needs . The objective was to broaden the base of Panama's comparative advantage beyond the internationally competitive service sectors to the industry and agricultural sectors which were protected, oriented to the domestic market, and lagging in development . The Free Trade Agreement negotiated with the United States in 2006 addresses much of the protection issue . The DPL is an integral part of the Bank's Country Partnership Strategy, which, in turn, was designed to support Panama's 2004-2009 Strategic Vision. The DPL is aimed to complement this by upgrading worker skills and reducing government red tape, which should improve Panama's supply response to the reduction in trade barriers. In addition, the improved fiscal management supported by the DPL should help solidify Panama's already strong fiscal position . The project's design was appropriate to these objectives, supporting worker training programs, reduction in time needed to comply with government regulations, and supporting increased investment in R&D, which in Panama were a small fraction of those in other LAC countries . The fiscal strengthening reforms were well designed to facilitate improved tax collection, debt management, and fiscal transparency. The results framework (see Annex 2 of the PAD) shows a clear connection between policy reforms and outputs, though it was not developed as fully as it might have been to show the relationship to intended outcomes, although shortcomings in the system of national statistics were an impediment . Finally, while not targeted directly to poverty reduction and an improved income distribution, the worker training programs should facilitate migration of workers from lower -paying jobs in lagging sectors to higher paying jobs . While all of this would lead to a relevance rating of "high", missing from all of this is a more direct analysis of and program to address corruption, beyond the improvements in procurement supported by the DPL . This is important since corruption appears to be a serious issue in Panama, according to some indicators, among the worst in Latin America (see section 6 below). 4. Achievement of Objectives (Efficacy): All of the prior actions were complied with . While sole credit for good macroeconomic performance cannot be assigned to the DPLs, it's important to note that real GDP grew by 11.5 percent in 2007 and 9.2 percent in 2008, and is projected at 3.0 in 2009, still a good record given international conditions . The nonfinancial public sector (NFPS) surplus, excluding the Panama Canal Authority (ACP), declined from 3.5 percent of GDP in 2007 to 0.4 percent of GDP in 2008, largely due to increased public investment and government expenditures to mitigate the impact of higher international food and petroleum prices . The 2008 Social and Fiscal Responsibility Law sets limits on the NFPS deficit at 1 percent of GDP (excluding the ACP), unless GDP growth falls to or below 1 percent, and 2 percent in the following year. This gives a firm anchor to Panama's fiscal stance, within which the policy reforms supported by the DPL play a role . I. Promote Broad-Based growth by enhancing private sector competitiveness - Substantial Achievement (a) Increase business competitiveness by reducing transaction costs, reduce red tape - Substantial Achievement . increased coverage of Panama Tramita internet portals from seventy five transactions in June 2007 to ninety by end of 2008, short of the target of 200 by end 2008. Modest Achievement. reduced costs of Doing Business - time needed to start a business was reduced from nineteen days to thirteen days (but note that the OECD average is also thirteen days ), short of the target of five days, while the time for exporting reduced from sixteen to nine days, surpassing the target . In view of the very ambitious target for time needed to start a business, and the time needed to export surpassing the target, this still merits a rating of Substantial Achievement. (b) Improve labor productivity by upgrading workers' skills' - Substantial Achievement. the number of workers completing training each year at INADEH increased from 42,000 in 2006 to 211,000 in 2008, exceeding the target of 200,000. However, the number declined to 50,000 in 2009 due to budget cutbacks. Modest Achievement. accredited training programs are available in 23 occupations, far exceeding the target of at least 9 occupations. Substantial Achievement. (c) Increase business productivity by fostering innovation - Modest Achievement. Panama's R&D expenditures decreased from $ 11.8 in 2005 to $7.8 million in 2008, as opposed to the targeted increase to $20 million 2008 (excl. Smithsonian). Modest Achievement. It is likely that the number of full time researchers increased from 312 in 2005 to 410 in 2008, based on the number of new recruits, but the ICR does not have a definitive number regarding possible attrition so this is an inference. Substantial Achievement . The share of R&D personnel with masters of Ph .D. degrees was projected to increase from 23.5 percent in 2005 to 33.3 percent in 2008, but data on this is not yet available . II. Consolidate fiscal sustainability, transparency and efficiency through modernized public financial management systems - Substantial Achievement (a) Improved debt sustainability, tax administration, and debt management -Substantial Achievement total consolidated NFPS debt was targeted to be reduced from 65.9 percent of GDP to 54 percent of GDP or less by end 2008, and the actual surpassed this objective at 37.6 percent of GDP. High Achievement . enhanced performance of tax administration resulting from improved filing, audit and collection procedures - Progress in PEFA indicator No. 14 (Effectiveness of measures for taxpayer registration and tax assessment), This indicator improved from D+ to C, which was the target. Substantial Achievement. reduction in Doing Business Indicators for time spent filing and paying taxes . The Doing Business indicator for paying taxes was 560 hours in 2006, 482 hours in 2008, which is an improvement as projected, but still far above the LAC average of 385 hours and the OECD average of 194 hours. Substantial Achievement . improved capacity to manage debt -- formal debt management strategy and consolidated system for public debt management in the MEF. Government has approved of a formal strategy and consolidated system . Substantial Achievement . (b) Improved fiscal information, management of payment arrears, efficiency of controls, and audits - Substantial Achievement. public availability of medium-term fiscal framework and fiscal information closer to international standards - progress in PEFA Indicator No. 6 (Comprehensiveness of information included in budget documentation ), PEFA Indicator 12 (Multi-year perspective in fiscal planning, expenditure policy and budgeting ), and PEFA Indicator 25 (quality and timeliness of annual financial statements ). PEFA Indicator No 6 was unchanged at C, short of the target of B, PEFA Indicator No . 12 improved from D+ to C, thereby meeting the target, while PEFA indicator No. 25 was unchanged at D+, falling short of the target of C. Modest Achievement . reduced payment arrears -- outstanding accruals not to surpass 10 percent of central government expenditures. Because during implementation difficulties arose in accurately calculating outstanding accruals, this target was changed in DPL 2 from a percentage to the number of days needed to process providers, from 175 days in 2004 to at most 90 days in 2008. The actual average was 58 days in 2008. Substantial Achievement. increased efficiency of internal controls - Decreases in CGRs average processing times for expenditure operations - there is no baseline available, but ninety seven percent of documents are now processed within 15 days. Regarding audits and the use of CAATs, none were used in 2006, the target was 5, and the actual was 20 as of December, 2008. High Achievement. (c) Improve expenditure efficiency and transparency through public procurement reform . Improved participation of enterprises in public procurement - increments in registered bidders in PanamaCompra. There were no registered users in 2005, the target was 10,000, and actual was over 13,000 as of April 2009. Substantial Achievement. Improved public procurement management with a view to reducing transaction costs -- issuance of standard documents - there were no documents available in 2005, the target was for full availability . However, with the huge increase in electronic bidding and with documents available through PanamaCompra, this target became irrelevant. Increased savings in publicly procured goods and services -- reduction in average unit cost of key items The target was at least a 10 percent reduction in unit costs . Unit cost reductions were achieved of thirty six percent in computer equipment, fourteen percent in office supplies, and thirteen percent in vehicle purchases. 5. Efficiency (not applicable to DPLs): Not applicable for DPLs. ERR )/Financial Rate of Return (FRR) a. If available, enter the Economic Rate of Return (ERR) FRR ) at appraisal and the re -estimated value at evaluation : re- Rate Available? Point Value Coverage/Scope* Appraisal % % ICR estimate % % * Refers to percent of total project cost for which ERR/FRR was calculated. 6. Outcome: The DPL program had substantial relevance for Panama's development challenges . It addressed key issues in labor productivity, and public financial management . Program implementation merited a rating of substantial achievement, based on reforms to improve business competitiveness, labor skills, and government financial management. GDP growth during DPL I was high at 11.5 percent in 2007 and 9.2 percent in 2008, with a decline to about 3 percent in 2009 related largely to world market conditions . Poverty rates declined from 36.8 percent in 2003 to 32.4 percent in 2008, with severe poverty rates also declining . a. Outcome Rating : Satisfactory 7. Rationale for Risk to Development Outcome Rating: There are some risks that the new government, while supporting the DPL program in principle, is not supporting all of the components to the extent enjoyed under the previous government . Part of this is due to changes circumstances, where a tighter fiscal position may lead to a reduction in funding of the training agency . In addition, staffing changes in the ministries are likely leading to a loss of institutional memory, with a consequent slowdown in some processes. a. Risk to Development Outcome Rating : Moderate 8. Assessment of Bank Performance: The Bank ensured government ownership of the program by fully aligning the DPL program with the Government's 2004-2009 Strategic Vision. Bank staff involved in analytical work shared their expertise by working as part of the DPL team. The Team leader and the core team of the DPL were also involved in TA lending and analytical work, which enhanced capacity to deliver and implement a relevant and well - designed program. at -Entry :Satisfactory a. Ensuring Quality -at- b. Quality of Supervision :Satisfactory c. Overall Bank Performance :Satisfactory 9. Assessment of Borrower Performance: The government fully supported and owned the reform program supported by the DPLs, it did not translate this stance into concrete action plans, and lacked institutional capacity to implement action plans as they were developed. While the prior government fully supported the INADEH's training program, the ICR notes that the new government cut last year's budget resources for INADEH and its training program in half and that an increased allocation will be needed for it to maintain its program . However, this appears to be an exception and government is fully pursuing other aspects of the program, Therefore, on balance , weighing the prior government and the current government performance as well as the full continuation of the remainder of the program, government performance merits a performance rating of "Satisfactory". a. Government Performance :Satisfactory b. Implementing Agency Performance :Satisfactory c. Overall Borrower Performance :Satisfactory 10. M&E Design, Implementation, & Utilization: The design of Monitoring and Evaluation was presented in general terms in the PAD as the responsibility of the Ministry of Economy and Finance, but no unit or individual within the MEF is identified as responsible for this activity. The PAD does specify semi-annual reviews by Bank Staff and MEF, and a mid -term review in the context of the CPS Progress Report . However, little is specified in the way of impact evaluation and monitoring, for example, assessment of the quality of the worker training programs, or how these programs are enabling graduates to obtain better jobs, so that M&E is not oriented towards identifying the need for mid -course corrections. Similarly, utilization appears to have been minimal . a. M&E Quality Rating : Modest 11. Other Issues (Safeguards, Fiduciary, Unintended Positive and Negative Impacts): There were no safeguards or fiduciary issues raised by this operation, and the impacts have been in line with expectations. 12. Ratings : 12. ICR IEG Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Risk to Development Moderate Moderate Outcome : Bank Performance : Satisfactory Satisfactory Borrower Performance : Satisfactory Satisfactory Quality of ICR : Satisfactory NOTES: NOTES - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006. - The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate . 13. Lessons: The ICR offers thoughtful lessons with which IEG is in agreement . (1) Strategic plans need to be translated into clear action plans, which include monitorable output indicators to track progress . Without these, there is a lack of coordination and prioritization which leads to inefficiencies and slows down implementation . Beyond this ICR lesson, however, IEG suggests that not only output but also impact indicators are important, since this are important in identifying any needed mid -course corrections. (2) A good M&E framework can be important in developing a case for maintaining a program in shifting political conditions . (3) Adequate Bank Budget resources are important in sustaining a fruitful dialogue with the government . 14. Assessment Recommended? Yes No 15. Comments on Quality of ICR: The ICR is concise and readable, and presents a frank evaluation of the DPL . While some of the charts could have had more up to date information (such as Chart 1, GDP growth rates), the ICR presents more than enough information to make a clear case for its evaluation . a.Quality of ICR Rating : Satisfactory