Report No. PIC1062 Project Name Uruguay-Public Administration Reform Project (@) Region Latin America Caribbean Sector Public Sector Management Project ID UYPA8172 Borrower Republic of Uruguay Beneficiary Ministry of Economy Financing Plan IBRD US$23 million Government US$ 7 million Tentative Appraisal Date TBD Projected Board Date August 11, 1997 1. Background. Breaking with its traditional statim, Uruguay began some time ago to reform the public sector. Its problems with public enterprises revolve around inefficient monopolistic systems. The public sector is generally overexpanded, outdated, and needs to be rationalized. In addition to off-loading public enterprises and downsizing the Central Government, there is a need to modernize core government functions, including financial management, tax collections, and customs and social security administration. The 1985-89 administration began important reforms, including: elimination of passenger service and reduction of uneconomic cargo operations of the state railway; the introduction of performance contracts and tightened financial discipline and Central Government regulation in state enterprises; re-privatization of insolvent commercial banks; freezing of new civil service hires and repeated cuts in public employee salaries. The present Administration has set more ambitious goals, including: private sector participation in state monopolies in telecommunications, aviation, ports, natural gas and electric power services; and reductions in regulatory and reporting requirements. To complement these accomplishments, the Government's economic team has requested Bank assistance for public administration reform and core agency modernization. Considerable groundwork has already been laid by the Government toward the twin aims of improving the performance of the Central Government and its Ministries and reducing impediments to private markets. The proposed project is designed to build on and strengthen these previous efforts. 2. Project Objectives. The proposed project aims to assist the government by: (i) providing studies on how to modernize and reduce the size of government agencies efficiently and effectively; (ii) introducing modern integrated financial management systems; and (iii) implementing an integrated approach to regulatory activities focused on eliminating impediments to private market efficiency. 3. Project Description. The proposed project includes three basic components: (1) studies to develop programs for downsizing and modernizing Central Government agencies and implementation of selected modernization programs, (US$5 million); (2) reform of the public financial management (PFM) system, (US$16 million); and (3) deregulation to improve economic competitiveness (US$2 million). a. Downsizing and agency modernization is to be advanced through: (i) detailed reviews of each of the twelve Central Government Ministries, and (ii) modernization of select agency functions, such as personnel management, payroll, and materials and space management. The reviews will: (a) document problems, (b) propose strategies for solving those problems, including implementation plans, and (c) include feasibility of those strategies. b. Reform of the PFM system will be advanced through: (i) detailed review of the existing budgeting and financial management systems; (ii) design and first phase implementation in budget and treasury operations of a comprehensive budgeting and financial management system; and (iii) modernization of three key revenue agencies based on prior Bank-sponsored reviews: Direccion General Impositiva (DGI), Direccion Nacional de Aduanas (DNA) and Banco de Prevision Social (BPS). c. Deregulation to improve economic competitiveness activities to be supported by this loan include (i) technical assistance to formulate a regulatory reform strategy aimed at significantly improving competitiveness in Uruguay's private markets, and (ii) technical assistance to identify an effective strategy for implementing desired deregulatory changes once they have been identified. 4. Activities eligible for external financing include investment costs required for the streamlining the DGI, DNA and BPS, including equipment and training for these reforms; and technical assistance and consultants required to execute the Ministry-specific reviews and privatization plans, the PFM system review and implementation design, and the deregulation strategy review and design. 5. Project Financing. Project financing consists entirely of IBRD TAL assistance and Government funding. No cofinancing arrangements are planned. 6. Project Implementation. The project will be implemented by the Ministry of Economy through a Project Implementation Unit (PIU) that will include, in addition to the Ministry of Economy, representatives from PRONADE (Programa Nacional de Desburocratizacion), OPP (Oficina de Planeamiento y Presupuestos), and ONSC (Oficina Nacional del Servicio Civil). A member of the Ministry of Economy will serve as Project Coordinator with overall implementation responsibility. All studies and implementation plans undertaken within the project will be supervised by the PIU, with ultimate responsibility for their proper execution resting with the Project Coordinator. 7. Project Sustainability. Studies: Studies and implementation plans to be financed under this project will provide the information base required to make significant public sector reform possible. Terms of -2 - reference (TORs) will require that each study focus not only on assessment of existing problems, but also provide a blueprint for implementation of its recommendations. High-level representatives of concerned Ministries will play important roles in the execution and final approval of these studies to assure commitment to both the assessment and implementation of recommendations. Agency-specific reforms: Reforms of the budgetary and treasury systems in the Ministry of Economy and within the DGI, DNA and BPS will include installation of appropriate hardware and software and implementation of changes in their daily operating procedures and organizational frameworks. Once in place, these changes are intended to be self-sustaining. 8. Lessons from Previous Bank Involvement. The proposed project design reflects lessons learned from related Regional and Bank experience (see Annex 1). Components have been limited in number and scope, while objectives are limited to those deemed achievable. In this regard, rather than dramatically reducing the size of the civil service and undertaking a full-scale restructuring of the public administration, the project aims at the narrower objectives of building the knowledge base required to support such a restructuring and downsizing plus installing sustainable improvements in several public management systems -- including budgeting, personnel, materials and space management, and cost accounting -- which will provide management capacities necessary for future implementation of required civil service reform efforts identified in this project. Performance indicators will be included for all major project components. Carefully structured Terms of Reference (TORs) for all studies should assure their results contribute to future implementation of their recommendations. Unallocated funds will be kept to a minimum. Considerable effort will be devoted to assuring adequate and sustainable borrower commitment. Furthermore, project activities that introduce routinized methodologies and systems are meant to assure sustainability of borrower commitment even beyond the duration of the project. A full-time Project Coordinator is intended to assure adequate borrower capacity to execute the project. Monitoring of performance indicators, inclusion of a mid-term review, and devotion of adequate Bank resources to supervision will assure effective supervision. Finally, deregulation activities will focus on a comprehensive strategy for reducing all types of government-created obstacles to the smooth functioning of private markets, as well as reducing, rather than augmenting, the number of regulatory bodies and the scope of their activities. 9. Rationale for Bank Involvement. The country strategy for Uruguay calls for helping the current Government to arrest the loss of structural adjustment momentum until inflation is contained, and then to resume its attack on the still significant development agenda. In support of this overall strategy, the Bank's public sector strategy in Uruguay calls for improvements in the administration of general taxes and customs; help in reducing social security tax evasion and improving accounting of social security contributions; reductions in the public sector deficit; and improvements in public sector management. The downsizing and agency modernization component and the PFM system reform component of this project address these elements of the Bank's public sector strategy in Uruguay. In addition, Uruguay's legal framework for productive activities is singled out for attention in the Bank's most - 3 - recent Country Strategy Paper. The deregulation component of this project addresses that concern. 10. Environmental Aspects. As this is a technical assistance project, it is recommended that it be classified as Type C. 11. Program Objective Categories. Public Sector Management (PB) is the primary program objective category applicable to this project. This project will also support the country's antipoverty strategy by increasing the efficiency with which the Government employs resources and by enhancing the competitiveness of Uruguay's private sector. 12. Project Benefits. Primary project benefits include enhancing the efficiency of the public sector and fostering more efficient private sector. Contact Point Public Information Center The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending March 21, 1997 - 4 -