PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: 64844 Operation Name Paraguay Second Public Sector Programmatic Development Policy Loan Region LATIN AMERICA AND CARIBBEAN Sector Central government administration (100%) Project ID P117043 Borrower(s) REPUBLIC OF PARAGUAY Implementing Agency MINISTRY OF FINANCE Date PID Prepared September 20, 2011 Estimated Date of October 25, 2011 Appraisal Authorization Estimated Date of Board December 13, 2011 Approval Concept Review Decision Continuation of Project Preparation 1. Key development issues and rationale for Bank involvement Paraguay’s economic turn-around has started in 2003, based on favorable external conditions and an economic stabilization program. The country’s economy stagnated in the late 1990s and early 2000s as a result from a domestic banking crisis and the negative fallout from the economic turbulence experienced by the Southern Cone. Since 2003, strong external demand resulted in fast export growth which in turn translated into a strong recovery of private consumption and investment. At the core of the government’s stabilization program was a fiscal consolidation that allowed to reduce the debt-to-GDP ratio and to keep inflation in checks. The government engaged in a tax and customs reforms in 2004 with the aim of formalizing the economy. Since then, the government generated continuous and increasing primary fiscal surpluses, averaging 2 percent of GDP between 2003 and 2008. State-owned enterprises still pose a contingent fiscal risk, although reduced by the policy program of the proposed operation. The nine enterprises, which account for approximately 30 percent of total central government expenditure, operate inefficiently and in some cases make significant losses. In the past, comprehensive financial information on SOEs was not publicly available; recent improvements in the monitoring of SOEs, including through annual audits, have revealed serious financial challenges. Low expenditure execution remains a major obstacle for sustainable economic growth in Paraguay, in particular of capital expenditure. Total expenditure execution in Paraguay is low in international comparison. It amounted to 84.8 percent in 2010, compared to 86.9 percent in 2009 Finally, reducing poverty and inequality remain a top priority and challenge. Moderate and extreme poverty levels fell significantly during recent years, yet remaining at comparatively high levels. Moderate poverty fell from 49.7 percent in 2002 to 35.1 percent in 2009. The reduction of extreme poverty has been more volatile, falling from 24.4 percent in 2002 to 16.5 percent in 2005, rising again to 23.7 percent in 2006 and then dropping to 18.8 percent in 2009. Paraguay’s relatively weak public sector performance remains a key challenge. Traditionally, service delivery by State-Owned Enterprises, such as water, electricity and communications has been inadequate. The current administration has improved the prospects for provision of basic services. This was most notable after the introduction of a new SOE oversight institutional framework, which has led to more effective financial and performance supervision by the Government of the SOE portfolio. However, there remain significant opportunities for improvement in such areas as financial control; institutional reorganization and development; introducing basics for result-based management frameworks; and tax administration. Beyond addressing high levels of inefficiency and ineffectiveness, there is also a need to continue mitigating high politicization, discretionary practices, and lack of transparency within the public sector. At the same time, there is a need to ensure the sustainability of the public sector reforms initiated with the new reformist administration, by strengthening their legal foundations and deepening the reforms. The challenges related to reforming the public sector go well beyond sheer political will and external assistance as they are deeply seated in a number of structural institutional constraints. 2. Proposed objective(s) The overall development objective of the proposed project is to contribute to the effectiveness and efficiency of the public sector. This is expected to be reached via the following specific objectives: (i) exerting effective SOE oversight; (ii) improving Central Administration’s internal financial control; and (iii) strengthening the tax system. 3. Preliminary description The proposed project is a stand-alone DPL expected to be executed in FY12. It includes three components: SOEs oversight; public sector financial control in the Central Administration; and tax system. Policy Area Supported Key Outcome Indicators 1. SOE Oversight • SOEs financial operations are carried out in a transparent manner and are subject to scrutiny by the Government and civil society. • Recovery of 50% of past-due debt accumulated by Central Administration entities with SOEs. • Rate of timely payments has reached 40% for basic services provided to the State by SOEs (Electricity, Telecommunication, and Water). • The number of hours of power outage as measured by hs/year per user has declined. • The coverage of ESSAP water access as measured by the percentage of covered households in urban areas has increased. • The percentage of user complaints to ESSAP has decreased. 2. Central • The PEFA indicators for internal control and internal audit (PI-20 and PI-21) for 50 Administration Internal percent of the ministries and Secretariats are rated C. Control 3. Tax System • Tax/GDP ratio remains above 12%. The proposed project is supporting the governance and equitable growth objectives of the 2009-2013 Country Partnership Strategy (CPS). Two out of the three cross-cutting themes addressed by the CPS program – governance, poverty reduction, and equitable growth – are supported by the project. On the one hand, this project serves as a central instrument through which the CPS provides direct support to the governance theme. On the other hand, the project contributes to the sustainable growth objectives of the CPS by supporting tax revenue objectives. There are also strong synergies between this DPL and several other Bank operations in Paraguay. Finally, the DPL is expected to continue playing a key role in donor coordination, as evidenced in the cooperation for the preparation of the previous Public Sector Programmatic DPL. Link between the DPL Components and CPS Outcomes Project Components Corresponding CPS Outcome 1. State-Owned Enterprises Oversight • Finances and operations of SOEs are transparent and subject to greater scrutiny by Government and civil society. 2. Central Administration Public Sector • Increased effectiveness of internal control and internal Financial Control audit function (upgrade PEFA indicators for internal control and internal audit, PI-20 and PI-21). 3. Tax System • Increased tax-to-GDP ratio (Baseline: 11.8% (avg 2004- 08) Target: 12.7% (2013)) 4. Environment Aspects Not Applicable 5. Tentative financing Source: ($m.) Borrower 0 International Bank for Reconstruction and Development 100 Total 100 6. Contact point Contact: Alexandre Arrobbio Title: Sr. Public Sector Mgmt. Spec. Tel: 202- 458-7414 Email: aarrobbio@worldbank.org