Document of The World Bank FOR OFFICIAL USE ONLY Report No. 64699-DO INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT OF US$70 MILLION TO THE DOMINICAN REPUBLIC FOR A THIRD DEVELOPMENT POLICY LOAN ON PERFORMANCE AND ACCOUNTABILITY OF SOCIAL SECTORS (PASS) October 4, 2011 Human Development Sector Management Unit Caribbean Country Management Unit Latin America and the 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. GOVERNMENT FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of September 27, 2011) Currency Unit = Dominican Pesos US$1.00 38.15 Weights and Measures Metric System ABBREVIATION AND ACRONYMS ADESS Administrator of Social Subsidies APL Adaptable Program Loan BCRD The Central Bank of the Dominican Republic CCSC Civil Society Consultative Council (Consejo Consultivo de la Sociedad Civil) CCT Conditional Cash Transfers CDC Chamber of Accounts CDEEE Dominican Corporation of State Electrical Enterprises CMS Clinic Management System CMU Country Management Unit CPI Consumer Price Index CPS Country Program Strategy CSOs Civil Society Organizations CRI Cost Recovery Index DGII General Tax Directorate DPL Development Policy Loan DSA Debt Sustainability Analysis FDI Foreign Direct Investment FINCR Credit Risk Department in Finance FTZ Free Trade Zones GCPS Office for the Coordination of Social Policy (Gabinete de Coordinación de Política Social) GDP Gross Domestic Product GNP Gross National Product GPRF Governance and Partnership Facility Grant HIS Health Information System IADB Inter-American Development Bank IMF International Monetary Fund IPAC Participatory Government-Private Sector-Civil Society Anti-Corruption Initiative (Iniciativa Participativa Anti-Corrupción) LAC Latin America and the Caribbean LGP Liquefied Petroleum Gas MEPD Ministry of Economy, Planning and Development (Ministerio de Economía, Planificación y Desarrollo) i MINERD Ministry of Education (Ministerio de Educación de la República Dominicana) MIS Management Information System MoF Ministry of Finance (Ministerio de Hacienda) MoPH Ministry of Public Health (Ministerio de Salud Pública) MPA Ministry of Public Administration (Ministerio de Administración Pública) NDS National Development Strategy NLTA Non-Lending Technical Assistance OECD Organization for Economic Cooperation and Development PASS Performance & Accountability for Social Sectors Program PARSS2 Health Sector Reform Adaptable Program Loan II PEFA Performance Expenditures and Financial Accountability PFM Public Finance Management PROMESE/CAL Essential Medicines Program/National Procurement and Distribution Agency PSIA Poverty and Social Impact Assessment SBA Stand-By Agreement SENASA National Health Insurance SERCE Second Regional Comparative and Explanatory Study SGCE School Management System (Sistema de Gestión Escolar) SIFMUN Municipal Financial Information System (Sistema de Información Financiera Municipal) SIGEF Financial Management Information System SIUBEN Single Beneficiary Selection System (Sistema Único de Beneficiarios) SPIL Social Protection Investment Loan SPIP Social Protection Investment Project SPS Social Protection System UNAP Primary Attention Units (Unidades de Atención Primaria) UNICEF United Nations Children‘s Fund VAT Value Added Tax WB World Bank Vice President: Pamela Cox Country Director: Françoise Clottes Sector Manager: Mansoora Rashid Sector Leader: David Warren Task Team Leader: Aline Coudouel ii DOMINICAN REPUBLIC THIRD DEVELOPMENT POLICY LOAN ON PERFORMANCE AND ACCOUNTABILITY OF SOCIAL SECTORS CONTENTS LOAN AND PROGRAM SUMMARY ...................................................................................................................... v I. INTRODUCTION ......................................................................................................................................... 1 II. COUNTRY CONTEXT ................................................................................................................................ 1 RECENT ECONOMIC DEVELOPMENTS ........................................................................................................... 1 MACROECONOMIC OUTLOOK AND RISKS .................................................................................................... 4 POVERTY AND HUMAN DEVELOPMENT ....................................................................................................... 7 POLITICAL CONTEXT ................................................................................................................................... 9 III. THE GOVERNMENT’S PROGRAM ........................................................................................................ 9 IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ................................................................ 12 LINK TO THE CPS ..................................................................................................................................... 12 COLLABORATION WITH THE IMF AND OTHER DONORS ............................................................................. 12 RELATIONSHIP TO OTHER BANK OPERATIONS ........................................................................................... 13 ANALYTICAL UNDERPINNINGS .................................................................................................................. 14 LESSONS LEARNED ................................................................................................................................... 15 V. THE PROPOSED OPERATION ............................................................................................................... 16 OPERATION DESCRIPTION ......................................................................................................................... 16 POLICY AREA I. ENHANCING THE PERFORMANCE OF SOCIAL SECTOR AGENCIES ...................................... 18 POLICY AREA II. IMPROVING BUDGET MANAGEMENT TO SUPPORT THE CCT PROGRAM .......................... 27 POLICY AREA III. INTRODUCING PERFORMANCE AGREEMENTS IN THE SOCIAL SECTORS ......................... 28 POLICY AREA IV. IMPROVING TRANSPARENCY AND ACCOUNTABILITY ................................................... 31 VI. OPERATION IMPLEMENTATION ........................................................................................................ 33 POVERTY AND SOCIAL IMPACTS ............................................................................................................... 33 ENVIRONMENTAL ASPECTS ....................................................................................................................... 34 PARTICIPATORY PROCESSES ..................................................................................................................... 34 MONITORING AND EVALUATION ............................................................................................................... 35 FIDUCIARY ASPECTS ................................................................................................................................. 36 DISBURSEMENT AND AUDITING ................................................................................................................ 36 RISKS AND RISK MITIGATION .................................................................................................................... 36 ANNEXES Annex 1: Status of Triggers for DPL 3 ........................................................................................................................ 40 Annex 2: PASS DPL Series – Overall Policy Matrix .................................................................................................. 44 Annex 3: Results framework for the PASS program ................................................................................................... 50 Annex 4: Development Policy Letter .......................................................................................................................... 53 Annex 5: Funds Relations Note ................................................................................................................................... 76 Annex 6: Debt sustainability analysis .......................................................................................................................... 80 Annex 7: Macroeconomic outlook: Recent fiscal developments ................................................................................. 84 Annex 8: The Government‘s response to food and fuel price volatility ...................................................................... 87 Annex 9: Challenges and policies in the education sector ........................................................................................... 88 Annex 10: Poverty and social impact analysis (PSIA) ................................................................................................ 91 Annex 11: Fiduciary aspects ........................................................................................................................................ 94 Annex 12: MAP IBRD 33398 ..................................................................................................................................... 97 iii The Third Development Policy Loan of the PASS series was prepared by a team consisting of Aline Coudouel (Task Team Leader, Sr. Economist, LCSHS), Catherine Abreu Rojas (Procurement Specialist, LCSPE), Fabiola Altimari (Senior Counsel, LEGLA), Pedro Arizti (Public Sector Specialist, LCSPS), Jasmin Chakeri (Sr. Country Economist, LCSPE), Timothy Cheston (Jr. Professional Associate, LCSHS), Carine Clert (Sr. Social Protection Specialist, LCSHS), Christian Contin (Consultant, LCCDO), Andrea Gallina (Civil Society/Transparency Specialist, LCSOS), Cynthia Hobbs (Sr. Education Specialist, LCSHE), Christine Lao Pena (Sr. Human Development Economist, LCSHH), Javier Luque (Sr. Education Economist, LCSHE), Patricia Orna (Program Assistant, LCSHD), Maritza Rodriguez de Pichardo (Financial Management Specialist, LCSFM), Miguel Eduardo Sanchez Martin (Jr. Professional Officer, LCSPE), Maria Concepción Steta (Sr. Social Protection Specialist, LCSHS), Ludovic Subran (Economist, LCSHD), and David Warren, Sector Leader (LCSHD). iv LOAN AND PROGRAM SUMMARY DOMINICAN REPUBLIC THIRD DEVELOPMENT POLICY LOAN ON PERFORMANCE AND ACCOUNTABILITY OF SOCIAL SECTORS Borrower Dominican Republic Implementing Agency Ministry of Finance Financing Data IBRD Loan Amount: US$70.0 million. Terms: US Dollar. Commitment-linked Fixed-Spread Loan (FSL) with all the conversion options including automatic Rate Fixing (ARF) by threshold US$7 million, payable in 30 years, including a 4.5 years grace period, with a custom repayment schedule with repayments on each March 15th and September 15th respectively. Operation Type Third operation of a series of Programmatic Development Policy Loans. Main Policy Areas  Social protection  Primary health care  Education  Quality and efficiency of public spending Key Outcome 1. Enhanced performance of social sectors to promote human capital for the poor Indicators  Increase in the share of CCT beneficiary households whose compliance with co- responsibilities in health, nutrition and education are verified.  Increase in the share of CCT beneficiary households who comply with health and nutrition co-responsibilities.  Increase in the share of students from CCT beneficiary households who are enrolled in and attending basic and secondary education, and/or who are enrolled in and attending pre-primary education. 2. Improved budget management for enhanced performance of the social sectors linked to the CCT Solidaridad. Specifically:  Reduction in the deviation between proposed and actual budget for programs to close supply gaps in health, nutrition, and education services, relative to the deviation for the overall budget.  Increase in the average annual ratio between quarterly disbursement to, and planned quarterly budget allocation for, programs aimed at closing the supply gaps in health, nutrition, and education services. 3. Gradual introduction of Performance Agreements in social sectors  Increase in the number of priority programs in health, nutrition, and education related to the CCT program that have strategic plans that include multi-year objectives and projections of expenditures, budget structures, goals, and monitoring indicators 4. Enhanced transparency and civil society oversight  Increase in the number of independent users for the Portal del Ciudadano budget information portal, and in the number of annual hits.  Increase in the share of community scorecards completed by the CCT beneficiary committees. v Program Development The PASS has four objectives: Objective(s) and (i) to enhance the performance of social sectors to promote human capital (health, Contribution to nutrition, education) for the poorest citizens, through a fundamental redesign of Country Partnership the Government‘s CCT program, Solidaridad, and its articulation with critical Strategy actions in health and education; (ii) to improve budget management to support the performance of these social sectors within the CCT program; (iii) to support the gradual introduction of Performance Agreements in social sectors; and (iv) to enhance transparency and accountability to users by strengthening the enabling environment for a better informed demand for improved public sector performance in the social domain. The PASS is consistent with the central pillar of the CPS which calls for ―reducing vulnerability while producing results for all.‖ Specifically, it helps preserve and enhance the human assets of the poor (health and education) by supporting a meaningful shift in social policy from social assistance to the protection and promotion of human capital. It also enhances accountability both within Government agencies, and between Government agencies and the public. Risks and Risk Macroeconomic risks: The global outlook remains highly uncertain, in light of the Mitigation economic woes in Europe and the United States. This could dampen growth prospects for the Dominican Republic through a fall in tourist arrivals, lower commodity prices for mining products, and a collapse in demand for exports. A higher than expected deficit in the electricity sector could potentially affect Government solvency and contribute to a financing gap. Mitigation: Mitigating factors include strong macroeconomic management, including growth in the size and sophistication of the domestic debt market and improved financial and bank supervision. The financial problems in the public electricity sector remain the principal fiscal risk. A fall in international oil prices would help improve the sector’s deficit. In addition, the Government is taking measures to address the financial viability of the public electricity sector, including an increase in tariffs and changes in the management of the distribution companies. The transition from universal electricity and gas subsidies to targeted subsidies (which use the SIUBEN beneficiary database and the CCT program) is also part of the solution to energy-related fiscal constraints. Political/transition risks: The national elections, set for May 2012, could result in shifts in priorities and/or in clientelism in the administration of social programs. Mitigation: Reforms benefit from strong Government and civil society ownership. Many of the reforms themselves are also part of the mitigating strategy, as they aim at institutionalizing key information and management systems, decision-making processes, and roles and rules. The Government is also updating its registry of beneficiaries, which uses a transparent proxy-means test to determine households’ eligibility. The Bank and the Inter-American Development Bank (IADB) will continue to support measures to strengthen the targeting mechanism and ensure that transfers are progressively made against verification of co-responsibilities. Implementation risks: The Government faces capacity constraints and coordination could slow down some reforms. There are also risks of slow execution and vi procurement for some reforms. Mitigation: The capacity constraints are largely mitigated by the Bank’s NLTA as well as resources from other Bank and IADB operations. Risks of lack of coordination have been mitigated by: (i) the institutionalization of the CCT Intersectoral and Interagency Committees at the central level, and of local level pluri-sectoral commissions which address issues at the local level; (ii) reforms to budget management processes, with budget requests to meet results targets for the CCT program being jointly formulated by the social protection, health and education sectors; (iii) the anchoring of the intersectoral coordination of the CCT around the tools and management of each sector (e.g. education and health Management Information Systems), rather than creating parallel tools and capacity within the CCT program management team, and (iv) continued active donor coordination efforts by the Bank and the IADB in particular. The Government’s commitment to protect programs aimed at bridging supply-gaps is likely to remain firm, in part thanks to the institutionalized pluri-annual planning exercise. The publication of budget data and the strengthening of civil society’s capacity to monitor it are expected to promote budgetary discipline. Stakeholder opposition risks: Unions representing teachers or doctors and associations of neighborhood shop owners may oppose some interventions. Mitigation: Intensive training on the use and usefulness of the information systems are expected to mitigate resistance by health and education staff. Also, the Government is in the process of scaling up the community scorecards (with a section on such mechanisms) and has agreed to let a consumers’ advocacy institution supervise such services. Natural disasters risks: The Dominican Republic remains vulnerable to multiple types of natural disasters, which can affect the poor and have large fiscal impacts. Mitigation: The CCT program supported by this operation is a key instrument to help the poorest mitigate impacts of shocks on their consumption and human capital. At the firm and Government levels, damage to the major private sector enterprises is partly covered by their own insurance and the Bank’s assistance covers natural disaster risk mitigation (Emergency Recovery and Disaster Management Loan). Operation ID P125806 vii IBRD PROGRAM DOCUMENT FOR A PROPOSED THIRD DEVELOPMENT POLICY LOAN ON PERFORMANCE AND ACCOUNTABILITY OF SOCIAL SECTORS TO THE DOMINICAN REPUBLIC I. INTRODUCTION 1. This document describes the proposed program for a Third Development Policy Loan on the Performance and Accountability of Social Sectors (PASS) in the Dominican Republic. This operation is being proposed as the third of a series of three sequential programmatic operations. Its overall objective is to improve results in social sectors in order to preserve the human capital of the poorest citizens in the short term and enhance it the medium term. Consistent with this vision, the PASS has four objectives: (i) enhance the performance of social sectors to promote human capital for the poorest citizens, through a fundamental redesign of the Government‘s Conditional Cash Transfers (CCT) program, Solidaridad, and its articulation with critical actions in health and education; (ii) improve budget management to support the performance of social sectors, protect critical social spending and support the required improvements in the supply of health, nutrition and education services; (iii) support the gradual introduction of performance agreements in key social sector agencies; and (iv) enhance transparency and oversight in social sectors. II. COUNTRY CONTEXT RECENT ECONOMIC DEVELOPMENTS 2. The Dominican Republic experienced a significant economic slowdown during the global economic crisis, but growth quickly recovered. Following a period of high growth averaging 9.5 percent (2005-07), economic activity slowed to 5.3 percent in 2008, decelerating further to 3.5 percent in 2009. However, these rates were still well above the average for Latin America and the Caribbean. Growth began accelerating again in the third quarter of 2009, and in 2010 the country experienced one of the highest growth rates in the region, reaching 7.8 percent. Per capita GNI increased from US$4,330 in 2008 to US$4,880 in 2010.1 The Dominican Republic remains one of the best economic performers in the region. 3. The recent growth spurt was fueled by a recovery in consumption. Private sector consumption, which accounted for 90 percent of GDP in 2010, grew 7.7 percent, while investment increased by 17.5 percent, driven by higher public capital spending. Exports, which had fallen 11 percent between 2007 and 2009, began to recover again in 2010. This was in part a result of the earthquake in Haiti, which increased demand for building materials and food products from the Dominican Republic.2 Imports fell slightly in 2009 as domestic demand slowed down and oil prices fell from their 2008 peak, but boomed in 2010 on the back of the recovery in consumption and higher commodity prices. On the supply side, all main sectors of the economy experienced an expansion in 2010. Growth was particularly high in commerce 1 Atlas methodology, updated April 2011. 2 Even prior to the earthquake, exports to Haiti had been growing, making it the Dominican Republic‘s second trading partner. 1 (13.6 percent), financial services (12.5 percent) and construction (11 percent). Local manufacturing, especially of food products, also registered healthy growth (7.7 percent), driven by the strong demand for Dominican products following the January 2010 earthquake in Haiti. Figure 1: Quarterly GDP Growth (%) 11 9 7 5 3 1 -1 -3 -5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2008 2009 2010 2011 Private Consumption Public Consumption Investment Net Exports GDP Source: Central Bank of the Dominican Republic 4. External factors were also instrumental for the strong economic performance. The fall in remittances due to the global economic crisis was relatively mild, as expatriate Dominican workers tend to be employed in the service sector rather than in construction, which was among the worst hit sectors in the United States. In 2010, remittances remained below their pre-crisis high, but increases at the end of the year suggest a turnaround. Tourist arrivals began to pick up again in the third quarter of 2009, and an increasing share of tourists now come from new markets, including Eastern Europe and South America. Figure 2: External sector and current account 60% 10% 8% 40% 6% Current account balance, %GDP 4% 20% growth rates % 2% 0% 0% 2006 2007 2008 2009 2010 2011 Q1 z -2% -20% -4% -6% -40% -8% -60% -10% Current account National exports FTZ exports Imports Remittances Source: Central Bank of the Dominican Republic. 2 5. However, the current account deteriorated sharply in 2010 mainly due to the worsening in the trade balance. Whereas non-Free Trade Zone exports grew by 49.1 percent in 2010, the recovery in Free Trade Zones exports was relatively mild (7.5 percent). Total exports thus grew by 20.3 percent in 2010. The sharp increase in imports pushed the trade balance into a deficit of 16.6 percent of GDP. This was counterbalanced by the recovery in tourism receipts. As a result, the current account deficit reached 8.5 percent, compared to 5 percent in 2009. Foreign direct investment (FDI) fell to US$1.6 billion from US$2.2 billion in 2009, with the bulk of it going to manufacturing, telecommunications, mining and real estate. With the slump in foreign direct investment, external borrowing increased to finance the current account deficit. Foreign exchange reserves – while at historically high levels by Dominican standards – remained low by international standards, reaching 1.9 months of imports. 6. Inflation began to accelerate in 2010. Following an average increase in the consumer price index (CPI) of 1.5 percent in 2009, inflation edged up sharply in 2010, to 6.3 percent. This reflected to a large extent the impact of rising food and oil prices, with core inflation (which excludes food and fuel prices) remaining at 3.5 percent. Despite the increase, CPI inflation remained well below the crisis levels of 2008 and within the Central Bank target of 6-7 percent. 7. The fiscal balance improved in 2010 thanks to the gradual withdrawal of the fiscal stimulus. The authorities began a fiscal tightening in the second half of 2010 in line with the IMF Stand-By Agreement. As a result, the overall deficit improved from 3.2 percent in 2009 to 2.7 percent in 2010. This outturn was, however, above the target of 2.5 percent due to two main factors: (i) weak tax performance, which fell from 14.9 percent of GDP in 2008 to 12.7 percent in 2010; and (ii) larger than expected transfers to the electricity sector due to high oil prices. 8. The fiscal expansion did, however, result in a modest increase in the public debt-to-GDP 3 ratio. According to the Ministry of Finance (MoF), consolidated public sector debt increased from 33.1 percent in 2007 to 37.4 percent in 2010. However, this share is below previous projections, which foresaw an increase to 39.8 percent. Domestic debt increased from US$1 billion in 2007 to US$5 billion in 2009 with the issuance of Treasury and Central Bank bonds.4 Whereas private external debt has remained relatively stable, official external debt expanded at an average of 18 percent in 2008-2010, mainly due to the PetroCaribe agreement with Venezuela and the injection of funds by multilateral institutions in the context of the global crisis. 9. There are no signs of stress in the banking system. Non-performing loans have remained low. Many banks are reporting a rebound in their profitability and the system remains well capitalized. Moreover, there is still plenty of liquidity in the system due to the banks‘ previous prudence in credit extension. The cut in reserve requirements translated into a reduction in actual reserves, but banks continue to maintain large liquidity buffers at the central bank. 3 Unless otherwise indicated, public debt refers to gross public debt, i.e. including financial assets held by the Government. On the other hand, intra-Government debt is subtracted, following the approach used by the authorities. 4 The main reason for the increase in domestic debt has been the issuance of bonds in the context of the Central Bank recapitalization plan. This plan is embedded in law 167-07, adopted following recommendations from the Technical Commission of the Central Bank, the IMF and other Government bodies. Central Bank bonds (inexistent prior to the mentioned law) represented US$2.2 billion in 2008-2011. 3 MACROECONOMIC OUTLOOK AND RISKS 10. The overall economic outlook for the Dominican Republic remains positive. First quarter growth in 2011 reached 4.3 percent, indicating a gradual deceleration with the end of the fiscal and monetary stimulus. Growth projections for end-2011 have been revised downwards by half a point to the 5.0-5.5 percent range (IMF and Central Bank); in the medium term, a convergence towards 6 percent growth per year is projected. Underpinning these growth rates are the increasing diversification in FDI, exports and tourism receipts, which have contributed to the Dominican Republic‘s economic resilience. 11. Inflation is picking up in 2011 due to higher food and commodity prices. CPI inflation increased to 9.3 percent year-on-year (yoy) in June, while core inflation accelerated to 6.1 percent (yoy) as the output gap is closing. Cumulative CPI inflation in the first half of the year reached 5.9 percent. In order to counter inflationary pressures, the Central Bank has raised the overnight policy rate five times between September 2010 and May 2011, from 4 percent to 6.75 percent. Inflationary pressures are also expected to be lessened by a slowdown in domestic demand. Consequently, inflation is projected to fall to 6.8 percent by the end of 2011. Fiscal accounts 12. Tax revenues are expected to recover gradually thanks to increased economic activity and the recently approved tax reforms. The tax reforms approved in June 2011 (see Annex 7) are expected to increase tax collections by 0.4 percent of GDP in 2011 and 0.3 percent in 2012. On the tax administration side, efficiency gains are expected to be derived from measures taken by the Government in recent months, such as: (i) the collection of VAT on imports for all companies under the Proindustria regime; (ii) withholding of the income tax on casino and lottery prize gains; and (iii) VAT and customs duties collection from public administration agencies that were previously exempted. However, a number of weaknesses remain in the country‘s tax system, including a large number of tax exemptions, which are estimated to amount to almost 6 percent of GDP. As a consequence, tax revenues are expected to increase only gradually, from 12.7 percent of GDP in 2010 to 14.4 percent in 2014. 13. The Government‘s recent actions are expected to ease expenditure pressures. The Government announced an 8 percent increase in electricity tariffs in June 2011, which will help stabilize the deficit of the public electricity sector. In the short run, however, the sector‘s deficit continues to limit the Government‘s fiscal space: in mid-July, Congress adopted a supplemental budget that includes across-the-board cuts in spending (protecting social expenditure in education but not fully in health) to finance larger than expected transfers to the electricity sector. Despite this, the fiscal balance is expected to improve, from -2.7 percent of GDP in 2010 to -1.5 percent in 2011. In the medium term, improvements in the management of the electricity distribution companies through increased billing and collection, as well as the adoption of the technical tariff, are expected to help gradually reduce budgetary transfers to the sector and thus reduce fiscal risk (see Annex 7). These measures will free up resources for priority spending in the social sectors. The overall fiscal deficit is projected to stabilize around 1 percent of GDP in the medium term. 4 Table 1: Dominican Republic Key Economic Indicators 2006-2014 (Percentage of GDP, unless otherwise indicated) 2006 2007 2008 2009* 2010* 2011 2012 2013 2014 Actuals Projections Income and prices GDP growth (% change) 10.7 8.5 5.3 3.5 7.8 5.3 5.5 6.0 6.0 Inflation, end of period 5.0 8.9 4.5 5.8 6.2 6.8 5.0 5.0 4.5 Exchange rate (% appreciation - or depr. +) 11.8 0.0 4.2 4.3 2.4 3.8 2.3 3.1 2.9 Investment and savings Gross domestic investment (current prices) 18.4 18.9 18.2 14.8 16.3 16.5 16.7 16.6 16.5 Gross domestic savings 10.4 9.8 4.6 6.6 5.3 5.7 8.7 8.3 8.0 Non Financial Public sector Total revenues and grants 16.2 17.7 15.9 13.7 13.5 13.8 14.3 14.8 14.8 Total tax revenues 14.8 16.0 14.9 13.1 12.7 13.2 13.8 14.2 14.4 Total expenditures (incl. interest) 16.1 17.1 19.6 16.9 16.1 15.3 15.5 16.2 16.0 Current expenditures 12.9 12. 14.5 13.3 12.5 11.9 11.7 11.8 11.8 Capital expenditures 3.3 4.1 5.1 3.6 3.7 3.4 3.8 4.4 4.2 Primary balance (after grants) 1.2 2.2 -2.1 -1.4 -0.7 0.7 1.0 1.1 1.2 Interest 1.4 1.6 1.7 1.8 1.9 2.2 2.2 2.4 2.3 Overall balance -0.2 0.6 -3.8 -3.2 -2.7 -1.5 -1.2 -1.3 -1.1 Public debt Total debt ** 36.1 33.1 33.5 36.6 37.4 36.6 35.3 33.2 31.4 Balance of payments Current account balance -3.7 -5.3 -9.9 -5.0 -8.5 -8.3 -6.6 -5.7 -5.9 Trade balance -15.6 -15.6 -20.3 -14.6 -16.6 -16.3 -13.8 -14.0 -14.2 Exports of goods and services (including FTZ) 31.3 28.9 25.6 22.0 22.3 24.4 26.6 26.3 26.6 Imports of goods and services (including FTZ) 38.5 37.1 39.1 30.2 33.3 35.1 34.6 34.6 35.1 Foreign direct investment 4.3 3.8 6.3 4.6 3.1 3.4 3.7 3.5 3.4 Remittances 7.7 7.3 7.1 6.5 5.7 5.4 5.1 4.9 4.8 Memorandum item: Nominal GDP (billions of US dollars) 35.2 39.8 45.6 46.8 52.3 56.7 61.3 66.2 71.3 Nominal GDP (billions of Dominican $) 1189.8 1364.2 1576.2 1678.8 1921.9 2161.4 2394.3 2664.8 2951.8 Source: Actual figures according to the Central Bank of the Dominican Republic. Projections based on World Bank staff estimates. *Note: (1) Authorities are still in a process of revision of some data for 2009 and 2010; (2) they are considering alternative ways of reaching the overall fiscal deficit for the projection years, and this table may thus be subject to revisions; (3) statistics consider public debt as gross debt, i.e., they do not net out bonds owned by agencies within the Government. ** Consolidated public debt including debt of the Central Bank of the Dominican Republic. Actual data and projections based on debt sustainability analysis (Annex 6) 5 14. There are a number of important downside risks to the macroeconomic and fiscal outlook. Overall economic prospects remain dependent on the continued global economic recovery and stabilization (or fall) in oil prices. In particular, a deepening of the economic woes in Europe or the United States could depress growth in the Dominican Republic, make fiscal tightening more difficult and stall the reform momentum, especially if the IMF program is not renewed beyond the first quarter of 2012. In addition, presidential elections in 2012 may lead to increases in expenditures during the campaign and to the postponement or reversal of unpopular measures, such as electricity tariff increases. Public debt and financing needs 15. The Government‘s financing needs for 2011 are expected to be met through a combination of investment and budget support loans, as well as the issuance of domestic and international bonds. Total gross financing requirements are estimated to reach US$2.5 billion (equivalent to 4.4 percent of GDP) in 2011. This gap is expected to be filled by the issuance of domestic (US$384 million), and international (US$500 million) bonds, and by borrowing from bilateral and multilateral creditors (US$1.7 billion). As the fiscal balance improves and amortization payments decrease gradually, financing requirements are expected to fall to US$2.1 billion in 2012 (equivalent to 3.5 percent of GDP). 16. An updated Debt Sustainability Analysis shows that the Dominican Republic‘s public debt appears to be on a sustainable path.5 The counter-cyclical fiscal stance in response to the global economic crisis led to a slight increase in the public debt to GDP ratio from 33.1 percent in 2007 to 37.4 percent in 2010. Beginning in 2011, as global external conditions improve, the Government would begin reducing this ratio by generating primary surpluses. Under this scenario, consolidated public debt would fall to 29.7 percent in 2015. Sensitivity analyses shows that debt sustainability remains particularly vulnerable to sharp exchange rate movements (see Annex 6). 17. The Government is committed to sound macroeconomic management in the context of the IMF Stand-By Agreement (SBA). Following a delay in the completion of the fifth review,6 the Fund‘s Executive Board completed the fifth and sixth reviews under the SBA in mid-July 2011. The review noted that macroeconomic performance was better than expected and that the authorities had begun focusing on implementing the tightening phase of the program. However, there were deviations from the fiscal performance criteria for December 2010 and March 2011, including the central Government and public electricity sector deficits, reflecting the delay in tax reforms and increase in international oil prices. The end-2011 target for the deficit of the electricity sector was revised from US$350 million to US$690 million, and structural benchmarks on the reform of the electricity sector by September 2011 were added, including the adoption by law of the technical tariff and the implementation of a flexible pricing mechanism. The authorities remain committed to meeting the program targets for 2011, as demonstrated by the measures taken in recent months, including the increase in electricity tariffs, adoption of tax reforms and reduction in expenditures. 5 The DSA is based on the definition of gross debt. 6 The fifth review could not be concluded as scheduled because the authorities needed more time to articulate policies to redress small program deviations for end-2010 and to react to the oil price shock of early 2011. 6 18. In light of this commitment and the continued implementation of the IMF SBA, the macroeconomic policy framework is deemed adequate. POVERTY AND HUMAN DEVELOPMENT 19. The Dominican Republic has learned from previous crises about the importance of protecting human capital gains in adverse economic conditions. The 2003 domestic banking crisis pushed 1.3 million people into poverty, resulting in an increase in poverty of 15 percentage points, and resulted in an increase in unemployment by four percentage points. Poverty, and in particular extreme poverty, has slightly declined since 2007, though these positive trends are still fragile. In April 2010, the poverty rate was 33.2 percent and extreme poverty rate was 9.6 percent, below 2007 levels. However, official Government figures indicate a slight increase in both moderate and extreme poverty in October 2010 (See Figure 3). Unemployment decreased by 6 percent in 2010 to reach 14 percent, though this number masks large disparities across population groups. Figure 3: Poverty and Unemployment in the Dominican Republic: 2000-2010 50 45 40 35 30 25 20 15 10 5 0 Apr. Apr. Apr. Apr. Apr. Apr. Apr. Apr. Apr. Apr. Apr. Oct. Oct. Oct. Oct. Oct. Oct. Oct. Oct. Oct. Oct. Oct. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Extreme poverty Moderate poverty Unemployment Source: poverty: SEDLAC, from Ministry of Economy, Planning and Development (MEPD), using World Bank methodology for individual headcount; inequality: figures from the Central Bank of the Dominican Republic. 20. Previous crisis resulted in sharp declines in terms of social spending: health spending declined by 36 percent in 2003, while education spending fell 34 percent (Figure 4). Public spending on education and health is still low compared to regional standards but has been protected and prioritized in the aftermath of the 2003 crisis. Education spending has increased from 2.24 percent of GDP in 2008 to around 2.3 percent in 2009 and 2010 and is projected to remain at this level in 2011. Education spending is planned to increase to 3 percent in the 2012 budget. Similarly, health spending increased from 1.40 percent in 2009 to 1.70 percent of GDP in 2010 and is projected to remain at similar levels in 2011.7 7 The figure for budgeted health expenditure as a share of GDP remains constant in 2011 despite a 5 percent reduction in allocations to the Ministry of Health in July 2011. This is explained by an initial nominal allocation to 7 Figure 4: Public Spending on Health and Education: 2000-2011 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* Public expenditure on education, as a % of GDP Public expenditure on health, as a % of GDP Source: MEPD 2011. Note: * Preliminary 2011 figures. 21. The impact of the 2003 crisis on social spending and poverty resulted in renewed emphasis on the importance of safety nets to mitigate risks and address the causes of poverty. The Government responded to the crisis by establishing the Solidaridad program in 2005, a conditional cash transfer program aimed at ensuring investments in the human capital of poor households, and in particular the health, nutrition and education of their children while increasing their consumption. The Solidaridad program selects its beneficiaries using the Single Beneficiary Selection System (SIUBEN) established in 2004-05. The coalescence of Solidaridad and SIUBEN represented an important shift from universal, unconditional subsidies to targeted transfers based on investments in human capital. 22. Since 2008/2009, higher food and oil prices and the global financial crisis are likely to have affected poverty rates. The Government took significant mitigation measures to address the crisis, including the expansion in coverage of social protection programs (60,000 new beneficiaries of the Solidaridad program for a total of about 590,000 beneficiaries), the expansion of the subsidized health insurance regime (SENASA, which now covers 59.2 percent of the poor), and the implementation of food-related policies, financing grain depots to improve the regulation of bulk purchases and to control grain prices, increasing the number of agricultural markets providing subsidized, fortified food baskets, and reestablishing the school breakfast program (see Annex 8). Also, increases in social spending in 2009 were the result of the Government‘s counter-cyclical measures and the coordinated actions of the MoF, MEPD and social ministries to reduce gaps in the supply of health and education services. As a result, this crisis has not translated into a major contraction of social spending, as had occurred in 2003. 23. In the Dominican Republic, the quality of health care and access to some basic health services need to be further strengthened, especially at the first level of care. The 2007 Demographic and Health Survey shows that more than 95 percent of women received at least 4 prenatal check-ups and 97 percent of births were attended by physicians. Yet the maternal health expenditure for 2011 that was higher than that of 2010, as well as by a decrease in GDP estimates for 2011. Increases in the education budget in August 2011 (in the context of significant budget cuts) have not been reflected in the data. Data for 2010 and 2011 are based on the "economic classification of expenditures by function." 8 mortality rate remained high at 159 per 100,000 births, a level observed in countries in the region with similar incomes but much lower rates of institutional births (DHS 2007). 8 Although, in general, access to health services is not an issue, vaccination coverage was notably low in 2007: only 39 percent of children between 18-59 months of age were fully immunized in their first 18 months of life. Quality is an issue at the first level of care. A 2010 survey of 1,271 primary health care facilities indicated gaps in equipment, supplies, and staffing with respect to the guidelines established by the Directorate of Accreditation (Dirección de Habilitación). All surveyed public primary care units managed by the Ministry of Health did not meet the minimum required equipment standards, while the majority of them did not have all the required personnel. 24. The quality of education is the main challenge for the education system. The Dominican Republic has one of the lowest levels of public spending on education in the region, as a share of GDP and the lowest performance on the SERCE test, the regional standardized exam measuring education quality. Poor performance affects all socioeconomic groups: on average, individuals from the wealthiest quintile perform similarly on the test to individuals in the poorest quintile in Nicaragua. But the issues are greater among poorer households. Though initial intake in primary education is high, with minimal differences across socio-economic groups, enrolment starts decreasing by age 14 for students from the poorest quintile (by age 16 for wealthier students), and the poor experience higher repetition and drop-out rates. Overall, students from the poorest quintile spend 12 years at school to accumulate 9.6 years of education, while the wealthiest quintile accumulate 11.8 years of education with 13 years of schooling (see Annex 9). POLITICAL CONTEXT 25. The current political context in the Dominican Republic is marked by stability, but the forthcoming presidential election in May 2012 provides an important pre-electoral context for this operation. The political system in the Dominican Republic has historically been defined by the strong concentration of power in the executive branch. President Fernandez served between 1996 and 2000 and since August 2004, and was re-elected in May 2008 by a significant margin. The ruling party also expanded its Congressional majority in May 2010 (holding 31 of 32 seats), setting the basis for continued policy reforms and initiatives, including a notable focus on strengthening social cohesion and transparency. Since the beginning of the PASS series, the Administration has maintained its commitment to social cohesion and poverty reduction, a commitment further reinforced by the global crisis. While the core social programs are not likely to be challenged by a new administration, the current Government is focusing in its last months on institutionalizing recent reforms, through the consolidation of systems and processes. III. THE GOVERNMENT’S PROGRAM 26. The Government‘s broad program of policy reforms to enhance the human capital of the poorest households focuses on enhancing the performance and accountability of key public sector agencies and improving investments in health, nutrition and education by poor families, 8 This is the latest DHS in the Dominican Republic; no other recent comparable data source is available. The next DHS will be conducted in 2012. 9 while ensuring that public resources are more effectively, efficiently, and transparently managed to provide for these investments. The strategy includes actions in four broad policy areas:  Improving the performance of social sector agencies, including reforms to the Solidaridad program to transform it into a CCT program focused on the promotion of human capital;  Improving the quality, accountability and efficiency of public social spending, specifically through enhanced budget management and planning;  Introducing performance-based social sector budgeting and management; and  Enhancing the transparency and oversight of public spending. 27. These efforts have been integrated into the first-ever National Development Strategy 2030 (NDS) that is pending Congressional approval. The NDS covers the period 2010-2030 and aims to create dynamic, sustained economic growth and distribute its benefits to all Dominicans, emphasizing poverty reduction, equity, sustainable development, and efficient, transparent institutions. Table 2 summarizes the strategic axes of the NDS and selected specific objectives that relate to the Government‘s approach to the PASS series. Table 2: Strategic Axes and Objectives of the National Development Strategy 2010-2030 Strategic Axis (all) Specific objectives (selected) 1. A democratic and social state of law with  To structure an efficient public administration that acts with honesty, ethics, ethical, transparent and efficient institutions accountability and transparency, is results-oriented, and serves its citizens and serving a responsible and participatory citizenry, the local and national development. guaranteeing security and promoting equity, and  To promote the quality of democracy, it‘s principles, institutions, procedures peaceful co-existence and both local and national facilitating the institutional and organised participation of the citizenry and the development responsible exercises of citizens‘ rights and responsibilities. 2. A society with equality of rights and  To establish a quality national education system that prepares for lifelong opportunities that guarantees for all the learning, promotes human development, and the exercise of responsible population education, health and basics services citizenship in the framework of moral values and ethical principles consistent of quality and promotes the progressive with sustainable development and gender equity. reduction of poverty as well as social and  To universalize access from preschool to secondary education. territorial inequality.  To guarantee access to integral quality health care services, with focus on health promotion and prevention of disease, through a consolidated National Health System.  To increase human and social capital, as well as economic opportunities for the poor as a way to improve their employability, income generation capacities and living conditions.  Reduce poverty through and efficient and effective system for social protection that considers necessities and vulnerabilities throughout the life cycle  To protect children and adolescents specially that in a situation of vulnerability and promote their social inclusion.  To protect the adult population specially that in a situation of vulnerability and promote their social inclusion.  To protect the population with disabilities specially that in a situation of vulnerability and promote their social inclusion. 3. A plural, innovative, diversified and  To consolidate the management of public finances to assign resources along the sustainable economy with sector and territorial national development priorities and to ensure a fair distribution of national cohesion, oriented towards quality and income. environmental sustainability, which generates high sustainable growth with equity and decent employment and is globally competitive. 4. A society with sustainable production and  To develop an efficient national system for integrated risk management, with consumption that, with equity and efficacy, active community and local government‘s participation, manages risks, environment and natural which minimizes damage and allows for the rapid recovery of affected resources, and that adapts adequately to climate populations and areas change. 10 28. Since the beginning of the PASS series, the Administration has maintained strong political will for social cohesion and poverty reduction. In some ways, the global economic crisis has reinforced its commitment to its reform agenda vis-à-vis the improved performance of social sectors. Furthermore, strengthened budget planning itself, including the introduction of the Multi-Annual National Plan for the Public Sector which is prioritized centrally and coordinated across both central and line ministries, have helped prioritize critical social sector and preserve social spending levels. This commitment is reflected in the efforts of the Government to increase social spending and maintain it in times of crisis, as discussed in the previous section. 29. The National Development Strategy benefited from extensive nationwide consultations led by the Government in 2010 and reflecting the main concerns expressed by civil society organizations during these consultations. The consultations involved around 7,700 individuals and 1,425 political, economic, social, private or civil society organizations in more than 50 meetings. During these consultations, over 80 percent of the participants highlighted the importance of increasing access to education and health services of quality by promoting access to all, increasing the efficiency and transparency of public spending. 30. The Government has also continued to seek civil society inputs under the Participatory Government-Private Sector-Civil Society Anti-Corruption Initiative (IPAC). IPAC has been facilitated by twelve international development agencies and jointly led by the MEPD, the Ministry of the Presidency, and the National Commission on Ethics and the Fight against Corruption. In March 2011, the first public audit on the degree of achievements of sectoral transparency and accountability action plans (including in health, education, access to information, and water) was performed by the 16 anti-corruption Government Focal Points. Areas supported by the PASS, such as improved Civil Society oversight of the budget and specific recommendations in the education and health sectors have been reported to be on track. 9 The Portal del Ciudadano (“Consulta Amigable�) supported by this operation is a milestone for the monitoring framework of the IPAC Working Group on Public Finance Management. 31. Finally, coalitions have recently been formed aimed at strengthening civil society voice and influence in public affairs. In particular, the Civil Society Consultative Council – representing a wide range of CSOs – is currently monitoring social policies, which account for 44 percent of the country‘s expenditures, and regularly interacts with the Social Cabinet. These organizations are also part of the ―Citizen Forum‖ (Foro Ciudadano) which comprises more than 200 CSOs spread out through the country. Some CSOs have also started to focus on monitoring the public budget, particularly the national budget and the allocations to social expenditures. 9 The IPAC Education Working Group identified a series of recommendations, including: (i) the design of a monitoring and evaluation system for schools performance, (ii) the support to the decentralization of education management and the introduction of results agreements, and (iii) the civil society monitoring of school performance through the strengthening of Parent-Teacher Associations. The IPAC Health Working Group‘s recommendations focused on the creation of a unified procurement system for the purchase of drugs and medical supplies. 11 IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM LINK TO THE CPS 32. The PASS program, including this third proposed operation, is fully consistent with the CPS, which calls for ―reducing vulnerability while producing results for all.‖ The PASS helps to preserve and enhance the human capital of the poor through a major shift in social assistance to include the protection and promotion of human capital. Accountability is also central to the PASS and the CPS, both within Government agencies and between the Government and the public. Specifically, the reforms targeted by the PASS align with the following CPS pillars:  Pillar on Social Cohesion and Services: benefits from the reform of the social protection system, which results in better results across social protection, education, and health;  Pillar on the Quality of Public Expenditures and Institutional Development: benefits from (i) measures to improve budget management to support the performance of social sectors in delivering the CCT performance targets and (ii) the program‘s performance orientation;  Pillar on capacity-building of non-traditional actors (including civil society): benefits from a better informed demand for improved public budget performance as well as from a strengthened demand for better quality and more effective social service delivery. COLLABORATION WITH THE IMF AND OTHER DONORS 33. In November 2009, the IMF approved a 28-month Stand-By Agreement (SBA) in the amount of SDR1,094.5 million (about US$1,700 million). The SBA included two phases: the first, through mid-2010, supported a fiscal impulse to limit the pro-cyclical policy bias; the second, from mid-2010 to early 2012, foresees a fiscal consolidation and structural reforms. The program includes quantitative performance criteria on the overall fiscal balance, the deficit of the public electricity sector, net international reserves and net domestic assets, and accumulation of public debt arrears. Structural benchmarks target public and financial sector reforms, policies to enhance the economic recovery and growth, and the expansion of the coverage of social safety net programs, including the CCT Solidaridad.10 The Bank and Fund teams have collaborated closely, meeting regularly to discuss macroeconomic developments and prospects; assess risks; and coordinate on key sectors, including electricity and social safety net sectors. As mentioned earlier, the Fund‘s Executive Board completed the fifth and sixth reviews under the SBA in mid- July 2011, in light of which, the macroeconomic policy framework is deemed adequate. 34. Throughout the implementation of the PASS series, the Bank has maintained close donor collaboration to strengthen the resolve and coordination of reforms. Coordination and dialogue with the IADB have been continuous on the redesign of the CCT program, on reforms to the health sector (an IADB investment loan focuses on health aspects of the reform of the CCT program reform and is complementary to the Bank‘s Second APL on Health Sector Reform, PARSS2), on reforms in the education sector (the IADB provides technical assistance to the Ministry of Education), and more generally on elements of the Government‘s agenda of modernization of financial management (the IADB provides funding to the Portal del Ciudadano tool, and the two institutions have shared analysis and joined in providing technical assistance). 10 Following the fifth and sixth review, structural benchmarks on new legislation for the adoption of the technical tariff and a flexible pricing mechanism for the electricity sector were added. 12 35. The Bank has continued communication with the European Union and the International Development Agency of Spain, particularly in areas of education and transparency. The Bank team has also received important support from the Spanish Fund for Latin America and the Caribbean (SFLAC) to advance analytical work to complement areas related to the PASS program. UNICEF has also been an important partner in its efforts to complement the performance and accountability approach by strengthening the legislative function of the congressional budget oversight office. RELATIONSHIP TO OTHER BANK OPERATIONS 36. This third operation of the PASS program continues to exploit important synergies with a number of existing operations in the Dominican Republic. It is particularly important to note that the reforms supported by this operation were promoted through a broad range of instruments, highlighting the potential synergies between instruments and across sectors. These instruments combined a multitude of sectors – Social protection, health, education, public sector, economic management, and social development – and a multitude of types of instruments – SILs (Sector Investment Loans), DPL (Development Policy Loans), NLTA (Non-Lending Technical Assistance), Trust Fund, and partnerships with other donors. This breadth of support was critical in ensuring the successful implementation of an ambitious set of reforms and in ensuring the Bank was able to effectively monitor progress and provide technical assistance as required. 37. First, it complements the Social Protection Investment Project (SPIP) and its Additional Financing, which provide critical support for targeting, documentation, and social accountability mechanisms. The SPIP assists poor, undocumented Dominicans in obtaining national identity documents as an essential first step to enroll in social protection programs. It also supports the institutional strengthening of the targeting mechanism for social programs, which will improve the coverage and effectiveness of the CCT program. Finally, the SPIP strengthens the capacity of the CCT program itself to implement the redesign of the program and develop a comprehensive monitoring and evaluation system. The SPIP does not finance transfers to beneficiaries. 38. Second, the PASS also complements efforts in health and education. In health, the second phase of the Adaptable Program Loan to support the Health Sector Reform (PARSS2) focuses on improving the delivery of basic health services by introducing results-based financing mechanisms and improvements in the quality of spending. The health-related co-responsibilities of the CCT program rely on the supply of health services at the first level of care. The PASS also complements the Early Childhood Education Project which supported important increases in access to early childhood education services, and the Youth Development Project which provides poor and vulnerable youth with a second chance to complete their secondary education. 39. Third, the PASS complements a series of Non-Lending Technical Assistance (NLTA) activities undertaken in the social sectors, in the broader area of public expenditure management, and with civil society. As described in the following section, the PASS has been accompanied by a Programmatic Social Sector NLTA that has helped prepare the reforms, simulate their potential impacts ex-ante, and analyze various options, as well as built the capacity of the Government in policy design and analysis. In addition, the Programmatic NLTA on the Quality of Public Expenditure has provided important inputs for the design of this operation, through its broader 13 range of activities in terms of transparency, governance, and budget management. Finally, the PASS is complemented by Bank activities which aim at strengthening civil society. Through a series of Trust Funds and NLTA, the Bank has helped strengthen the capacity of Civil Society Organizations (CSOs), in particular their ability to monitor and analyze budget information. The three NLTA teams and the DPL team were fully integrated, ensuring timely inputs and synergies. ANALYTICAL UNDERPINNINGS 40. The PASS program builds on a series of analytical and advisory services from within and outside the Bank, in particular the programmatic Social Sectors NLTA. The NLTA provides specific knowledge required for the design and implementation of key reforms supported by this series of DPLs. It also aims at providing broader knowledge on options to strengthen the performance and quality of social services and build resiliency to crises, with a focus on options to consolidate the social protection system by integrating social insurance, social assistance and active labor market policies. In education, the NLTA resulted in two major reports analyzing the determinants of enrollment and education quality and the sector‘s resource and information flows. These reports provided important analytical underpinnings for the education prior actions of this third operation. The NLTA also facilitated important knowledge exchange with international experts on the Portal del Ciudadano tool, the SIUBEN targeting instrument, and the Community Scorecards. The NLTA and additional PSIA Trust Fund also supported the assessment and monitoring of the social impacts of the PASS-supported reforms (see Annex 10). In January 2011, at the request of the Vice-President of the Dominican Republic, the Bank and the Social Cabinet jointly organized a high-level Technical Seminar to disseminate the NLTA results and engage in a discussion of the achievements and pending challenges in social sectors in the Dominican Republic.11 The summary report, which includes specific recommendations, has been posted on the Social Cabinet website and has provided inputs which informed the National Development Strategy. 41. Important complementary analytical support is also provided by a SFLAC grant to support innovations in accountability in the Dominican Republic. In health, this advisory work will support the review of the preliminary experiences of the results-based financing in two pilot regions, as well as the implementation of the initial performance agreements between the Ministry of Health and the Ministries of Economy, Finance and Public administration. The Second Phase of the Health Reform Project (PARSS2) will also support the Ministry of Health in its internal reorganization to improve its stewardship and essential public health functions. This work in health has built on the analytical underpinnings of the First and Second PARSS projects, including the 2008 report, ―Analysis of the Regional Health Services, in the Framework of the Social Security Reform in Health in the Dominican Republic.‖ 42. The program also benefited from analytical work undertaken under the NLTA on the quality of public expenditure.12 This NLTA supports Government efforts to address, among other problems, the weak strategic orientation of resource allocation processes, the lack of integration 11 This seminar followed the participation of the Government in the Bank-sponsored Second Rio de Janeiro Human Development Conference entitled ―From Right to Reality: Achieving Effective Social Protection for All in Latin America and the Caribbean.� http://www.right2reality.org/. 12 Programmatic NLTA on Improving the Quality of Public Expenditure in the Dominican Republic (P119206). 14 and harmonization between budgeting and planning exercises, and the absence of capacities and tools to measure and report on both financial and physical results. The Government has advanced several new (and strengthened) planning instruments, information systems, and other initiatives, including the National Development Strategy, the Multi-Annual National Plan for the Public Sector, the Education Decennial Plan, the Health Decennial Plan, the Project Portfolio Monitoring System, Performance Agreements, and the Integrated Financial Management System (SIGEF). This PREM-led NLTA has combined its advisory services with the human development team to best support cross-sectoral working group discussions and bilateral meetings in the development of performance agreements, aligning efforts, and defining mutual understanding on a common agenda. The Participatory Government-Private Sector-Civil Society Anti-Corruption Initiative (Iniciativa Participativa Anti-Corrupción, IPAC), also benefited from a cross-sectoral approach to identify critical areas of improvement for the implementation of performance agreements and improvements in resource allocation and accountability, also to be supported by the a WB-European Union Trust Fund Technical Assistance program.13 LESSONS LEARNED 43. Arguably the most important factor that has contributed to the success of the program is the high level of Government ownership of the policy reforms supported by the program. The Fernandez administration strongly endorsed a political agenda of greater transparency and social cohesion, which was only reinforced by the global economic crisis. This high-level political mandate and sustained support in the crisis context helped counteract interest group resistance to reforms (such as Solidaridad and health sector staff resistance to institutional restructuring and personnel changes). Support has been sustained across a broad range of institutions, including the Finance, Planning and sectoral Ministries. 44. The PASS DPL series has been at once responsive, sustained, and flexible, and has proven that Bank lending can effectively combine supporting short-term crisis alleviation with medium-term policy actions. The PASS DPL series provided a rapid response instrument to address the immediate needs of the Government with the then-impending impact of the global food, fuel, and financial crisis, while also building-in an important degree of flexibility to incorporate new Government priorities. 45. The series has shown how multi-sectoral interventions can work effectively with other Bank and donors‘ interventions. The design of the PASS program bridges traditional institutional structures and sectoral divisions to address many of the cross-cutting issues hindering the joint performance and accountability of social sectors. While this required additional efforts both within the Bank and within the Government, the resulting reforms were more effective in reaching its results than isolated sector-specific interventions would have been. 46. The team had initially underestimated the time and efforts required to design and implement certain reforms. In particular, the decision to strengthen sectoral Management Information Systems (MISs) to verify co-responsibilities (rather than creating parallel systems managed by the CCT program) was initially thought to only require cross-referencing identification numbers. When issues of incompatibility of the identification variables across 13 See www.ipacrd.com. 15 databases were discovered, the Government launched a special emergency operation to produce the necessary adjustments. In parallel, the sectors used this opportunity to overhaul their systems and adopt electronic MISs that can help improve sectoral supervision, accountability, and management. Nevertheless, the development of new MISs took longer than expected, because of administrative issues as well as the cultural changes required to adopt the new tool. To address this delay, the team has worked closely with the Government to develop a short-term solution (to avoid delays in the CCT program‘s full implementation) while continuing with the implementation of the steps required to build the medium-term solution. Also, as the sectoral ministries started using the MISs for broader management decisions, these efforts gained additional momentum. 47. Just-in time knowledge and advisory services through the corresponding programmatic AAAs in social sectors and public expenditures management have been critical in strengthening the technical approaches of these multi-faceted reforms. V. THE PROPOSED OPERATION OPERATION DESCRIPTION 48. This proposed DPL of an amount of US$70 million is the last operation of a programmatic series of three DPLs developed to improve results in social sectors, preserving in the short-term and enhancing in the medium-term the human capital of the poorest citizens (the first two operations were approved in November 2009 and November 2010 respectively). 49. The overall PASS program‘s four objectives are:  to enhance the performance of social sectors to promote human capital (health, nutrition, education) for the poorest citizens, through a fundamental redesign of the Government‘s CCT) program, Solidaridad, and its articulation with critical actions in health and education;  to improve budget management to support the joint performance of social sector agencies, as part of the interim measures to protect critical aspects of social spending and support the required improvements in the supply of health, nutrition and education services;  to support the gradual introduction of Performance Agreements in the key social sector agencies; and  to enhance transparency and oversight in social sectors. 50. The first operation (PASS1) established the conceptual, institutional, and operative revamp of the safety net framework, particularly the Solidaridad program, to focus on promoting human capital investments by poor households. PASS1 also explored synergies between the safety net revamp and the creation of new budget planning mechanisms to improve the targeting of the fiscal resources dedicated to social transfers and the progressive coverage of supply-gaps in education, health and nutrition. Critical steps were also taken to initiate results-oriented regional management agreements in health. The second operation (PASS2) further strengthened the institutionalization of reforms. It supported the governance arrangements and institutional strengthening necessary to effectively administer the redesigned CCT Solidaridad across social sector ministries and agencies and to gradually introduce performance agreements to orient an institutional focus on results. PASS2 also supported the creation of the first Medium-Term 16 Public Expenditure Framework to increase predictability, transparency, and rationalization of the budget, and initiated the implementation of community scorecards for social accountability. This third operation further deepens reforms, providing for the effective verification of CCT co- responsibilities, while deconcentrating the operations and strengthening the monitoring and evaluation framework. It also supports the introduction of the first performance agreements for social programs and improvements in the Solidaridad payment network, as well as broader efficiency and quality improvements in education and health services and advances in transparency and oversight. Finally, PASS3 supports the introduction of landmark transparency and oversight policy measures, including the Portal del Ciudadano (“Consulta Amigable�) tool to provide a free, public web-based portal to access easy-to-use, national budget information. 51. The reforms supported by the PASS program are expected to generate improvements at four main levels: (i) institutional and policy improvements related to the reform of the governance and operative system of Solidaridad, including the verification of co-responsibilities and a better articulation with health and education actions (Policy Area 1) and to the gradual introduction of performance-informed budgeting and a stronger emphasis on results (Policy Area 3); (ii) improved budget management and execution to meet CCT results targets, including the progressive reduction of supply-gaps in health, nutrition, and education services (Policy Area 2); (iii) improvements in transparency and accountability to users, with respect to the national budget and the redesigned CCT Program (Policy Area 4), and (iv) improvements in human development outcomes for the CCT beneficiaries who comply with their co-responsibilities and thereby invest in education, nutrition and health (Overall PASS Program‘s result). 52. There have been only minor changes in the formulation of the prior actions for this proposed PASS3 operation. Annex 1 provides a detailed comparison of the proposed prior actions with the initial formulation and the rationale for changes. Annex 2 provides an updated version of the operation‘s policy matrix for the three PASS operations. The minor changes are:  Following good practice, the number of prior actions has been reduced. However, while prior actions were limited to the most critical measures needed for reaching the full potential of the reforms, the team has continued to provide technical assistance and monitor progress across the broad program of reforms supported by this operation.  The 18 original triggers show significant advances, though in selecting prior actions, some triggers have been replaced by policy actions that are more central to the program objectives. For example, the original trigger in education (initially to adjust student learning outcome tests for the second cycle of basic education based on the newly validated student evaluation standards) was removed because the Government has embarked on a broader reform of its curriculum. It was replaced by a series of key policy actions to improve the efficiency of education spending, which had been identified as key constraints for improved results.  Finally, certain actions were reformulated to reflect achievements beyond expectations. For example, the action related to the establishment of Regional Inter-Sectoral Committees in at least half of the regions was transformed to reflect the fact that the Government has established these committees in all regions, as well as Regional Joint Working Committees to improve coordination with sectors in all 136 health zones and 103 school districts. 17 53. The following sections discuss the situation in each of the policy areas supported by the series of DPLs. They also present the prior actions for this operation, and discuss future policy actions which would be critical for deepening the reforms supported by this series of DPLs. POLICY AREA I. ENHANCING THE PERFORMANCE OF SOCIAL SECTOR AGENCIES 54. The first area of policy reform involves the consolidation of the shift in the social assistance model of the Solidaridad program into a full-fledged CCT program focused on promotion of the poor‘s human capital. This involves the institutional and operational redesign of the Solidaridad program and its articulation with critical health and education actions. The overall service quality and targeting issues related to the Solidaridad program are also addressed to improve the accuracy of beneficiary selection, while enhancing the competition and transparency of the use of the payment mechanism. Finally, reforms aimed at ensuring that the Solidaridad program, which initially operated as a de facto unconditional program, would start verifying and enforcing co-responsibilities. Policy Area I.1: Conceptual, institutional and operative reform of the CCT program 55. Since the second PASS in November 2010, the Government has continued to develop and/or consolidate institutional features and systems consistent with best practice from mature CCT programs, such as those of Mexico or Jamaica, as described below. 56. First, from an institutional standpoint, the Government has now established the CCT Solidaridad program as the primary axis of the national Social Protection System (SPS). The fundamental redesign of Solidaridad began with a Presidential Decree establishing the legal and regulatory framework for the restructuring and strengthening of the SPS, including its mandated reorganization into non-conditional cash transfers, targeted subsidies, and cash transfers conditioned to the investment in human capital by poor families. The Government also adjusted the organizational structure and staff profiles of the Solidaridad program to align them with the new goals and operating rules. Efforts have also been made to strengthen the program‘s capacity by training all actors in the use of the revised operations manual; the functions of each body; and the processes and procedures for customer service and the verification of co-responsibilities. 57. Second, the Government created a new institutional framework, fostering collaborative interinstitutional and intersectoral decision-making, in contrast with the previous fragmentation of social policy in the country. The operating rules of the redesigned CCT program approved in 2010 include the creation of two important committees: the CCT Intersectoral Committee – which brings together the Solidaridad program with the Ministries of Health, Education, Planning and Finance – and the CCT Interinstitutional Committee, which brings together the agencies in charge of targeting (SIUBEN), operations (Solidaridad Program), and payment of transfers (ADESS), as summarized in Box 1. 58. Third, institutional strengthening has allowed the Government to meet its strategic objective of deconcentrating program operations. Over the past year, Solidaridad has formed 9 Regional Technical Intersectoral Subcommittees (RTISSC) corresponding to the regions of the country where the program is present, which are integrated by the Regional Managers of the 18 Ministries of Health and Education, the public health insurance system (SENASA) and the Solidaridad program. Each RTISSC defines its own rules and focuses on improving the efficiency of services delivery and on resolving in a timely manner issues related to service provision and the verification of co-responsibilities. Additional sectoral Commissions were developed at the local level, to ensure close coordination of Solidaridad with each sector, establishing 136 Mixed Commissions in Health and 103 Mixed Commissions in Education. These commissions are responsible for following-up with families registered at a specific health center or school to ensure access and effective verification of co-responsibilities. Box 1: From Fragmented Decision-making toward Intersectoral and Interinstitutional Collaboration: The New CCT Institutional Framework in the Dominican Republic. The CCT Intersectoral Committee provides a platform to improve service provision in health and education for Solidaridad beneficiaries, to improve the process of verification of co-responsibilities, to foster the deconcentration of operations at the regional level. The Committee is the primary body of the Solidaridad program, where all collective decisions are made and responsibilities attributed. This committee is in charge of, among others: (i) the implementation of education and health information systems for the verification of co- responsibilities; (ii) the updating of processes and procedures for the verification of co-responsibilities; (iii) the programming, budgeting, bidding, and monitoring of execution of the actions necessary to close the supply gaps in education, health, and nutrition; and (iv) the strengthening of the decentralization of the program at regional and local levels. The CCT Interinstitutional Committee guarantees a closer coordination of central activities of the Solidaridad program. It comprises the Solidaridad program, the targeting agency SIUBEN, and the payment agency ADESS. The committee has strengthened the capacity of each body to address beneficiaries‘ requests and has developed the capacity to generate and analyze information required for the program management. A 2010 operational evaluation found significant progress in the coordination of the updating of the beneficiary registry, the verification of co-responsibilities and the generation of payments. 59. Fourth, one of the results of the strengthening of the operational capacity of the Solidaridad program at central, regional, and local levels was the first-ever verification of CCT co-responsibilities in October 2010 (co-responsibilities measured only in terms of registration of families at their primary health centers and of school-age children in school at this stage). This first verification in education was able to reach 80 percent of Solidaridad beneficiary students to validate enrollment. The verification found, as validated through an external IADB evaluation, the successful registration of 92 percent of these children. In health, the verification of co- responsibilities for health covered 70 percent of beneficiaries (as of April 2011). The verification found that 90 percent of these were registered at a primary health clinic. Overall, Solidaridad households accounted for approximately 50 percent of the consultations registered in the Clinic Management System (CMS). The re-designed Solidaridad program has begun making transfers based on the verification of co-responsibilities in education, health and nutrition. 60. In addition, with a view to complete and improve the system of verification, the Government has taken significant steps to strengthen sectoral Management Information Systems (MIS) in health and education. Initially, the plan for verification was to mainstream the use of a manual system in all schools and health clinics and to provide each beneficiary with a personal identification number for the CCT program (one that could be cross-referenced across sectors). However, in early 2011, enough momentum was gained in the sectors to establish sector-wide MISs and the Government decided to use these newly defined MISs for the verification of CCT 19 co-responsibilities. These new MISs serve a series of purposes beyond the verification for the CCT program, and are expected to play a central role in most management decisions aimed at improving the quality and efficiency of sectoral spending and the sectors‘ performance. Shifting to these new MISs requires lengthy procurement, dissemination, and training processes, in addition to the initial uploading of basic information on each individual, as well as an important shift in culture. So, while sectoral ministries, with support from the Bank and the IADB, are supporting the process of development of these MISs, including with a review of incentive mechanisms to ensure their use, they are also continuing with their efforts to ensure complete verification in the short term. To this end, the Government has put in place measures to strengthen the capacity of all actors (beneficiaries, health and education providers, and CCT staff) with regard to the verification mechanisms, developed a series of booklets (cartillas de asistencia a salud y de asistencia a la escuela)¸ and developed guidance for supervision based on the information systems and visits on the ground. 61. Fifth, the Government has progressed in the development of a comprehensive Monitoring and Evaluation (M&E) System for the Social Protection System. The initial step consisted in the adoption of a results framework defined by the CCT Intersectoral Committee and shared by core actors – the Solidaridad program, the Ministries of Education and Health, ADESS, and SIUBEN. The Government has also designed and adopted a common M&E system, which is to be articulated with the national monitoring and evaluation system under the leadership of MEPD. 62. In this area, the prior actions for this operation focus on consolidating progress in three key dimensions of reform – verification of co-responsibilities, deconcentration of part of the operations, and systematic monitoring – through the formalization of the mechanisms to verify co-responsibilities, the formal establishment of Regional Intersectoral Committees, and the adoption of an integrated monitoring and evaluation system for the sector which coordinates and complements existing monitoring and evaluation activities. The specific prior actions are:  The Government, through the CCT Intersectoral Committee, has: (i) adopted procedures and mechanisms to allow for the verification of compliance with health and education co- responsibilities under the CCT Solidaridad Program; and (ii) established regional intersectoral committees in all regions covered by the CCT Solidaridad Program, as evidenced by Disposición issued by the CCT Intersectoral Committee, dated August 26, 2011.  The Government has designed and mandated the establishment of an integral monitoring and evaluation system for purposes of sharing technical information amongst: (i) the CCT Solidaridad Program; (ii) the Borrower‘s Ministries of Education and Health; (iii) ADESS; and (iv) SIUBEN, as evidenced by Disposición issued jointly by the CCT Intersectoral Committee and the CCT Interagency Committee, dated August 25, 2011. 63. Expected results from the PASS DPL series in this reform area include improvements in governance and operative rules of the CCT program that allow for increased use of education and health services by CCT beneficiaries, as well as the more systematic verification of compliance of CCT beneficiaries with their co-responsibilities. Annex 3 presents the indicators used to monitor progress (indicators 1.1.1 to 1.4.6). Overall, the targets in terms of verification of co-responsibilities (indicators 1.1.1 and 1.1.2) were met. For indicators of access to health, 20 education and nutrition services (indicators 1.2.1 to 1.4.6), the baseline was recently released (Social Protection Evaluation Study data for July 2010, see section on monitoring and evaluation) and the targets subsequently adjusted. 64. In the coming months, the Government will continue to consolidate the MISs in the Ministries of Health and Education to allow for the systematic and automatic verification of CCT co-responsibilities, and ensure the operationalization of the integrated M&E system to inform CCT programming and greater results-orientation in social sectors. The decentralization of Solidaridad operations will also begin integrating new supervision and training processes. Beyond the consolidation of CCT processes, the Government also focuses on the integration of the Social Protection System, in particular with the articulation between the CCT program and the national health insurance, active labor market programs and other social insurance programs. Policy Area I.2: Strengthening health services for CCT beneficiaries 65. In the health sector, the Government has put in place a series of reforms to strengthen service delivery. In particular, the Government has increased the demand for health care services by introducing co-responsibilities that promote the use of preventive health services (these co- responsibilities correspond to the Basic Health Plan and include prenatal and puerperal consultations, infant and child check-ups and immunizations, quarterly health education trainings for adolescents, and preventative health check-ups for the elderly). Also, the Ministry of Public Health (MoPH) undertook an assessment of 1,298 primary health care families, their equipment and staffing, and is progressively addressing equipment and staffing limitations based on WHO (World Health Organization) guidelines.14 Another reform consisted of the introduction of results-based agreements between the MoPH and all Regional Health Services to foster incentives for health care providers to improve the timeliness and quality of primary care,15 as well as the piloting of results-adjusted financing for the first level of care in two regions, with support from the current Bank Health APL (PARSS2). Finally, the MoPH has developed new manuals and training materials for the first level of care. 66. The Government is also making progress in the reorganization of the MoPH in order to separate the functions of service provision and stewardship.16 This institutional restructuring, initially envisioned in the General Health Law and Social Security Law in 2001, had lagged for lack of political will and leadership. The increased demand for timeliness and quality of health services from the reform of the CCT program has resurfaced the need for restructuring. The Government has decided to establish an autonomous management agency that would be responsible for the delivery of health services through the network of public health care providers, while the MoPH maintains its stewardship role. In order to move forward with this proposed institutional reform, the Government has: (a) drafted a law establishing this management agency after in-country consultations, that is currently being reviewed by the 14 As of May 2011, equipment has been purchased for 1,298 primary health centers (delivery is expected to be completed by November 2011). Construction of new primary health facilities is programmed for the following year. 15 Reform supported by the first and second PASS under the Pillar III on performance agreements. 16 Stewardship is used here to reflect the WHO (2003) definition: "involves setting, implementing and monitoring the rules of the game for the health system; assuring a level playing field among all actors in the system (particularly purchasers, providers, and patients); and identifying strategic directions for the health system as a whole." 21 Judicial Counsel of the Executive Office before presentation to the National Congress; and (b) prepared an action plan to operationalize this agency, and is in the process of defining an action plan to strengthen the MoPH‘s stewardship role. 67. The Government has made a concerted effort to develop the Clinic Management System (CMS) as the new MIS and an integral component of the Health Information System (HIS). The CMS provides a platform for the electronic registration of medical visits that aims to improve the quality, accountability, and management of primary health services. The delivery of laptops to each health center and training on the use of computers and CMS has been recently completed. The verification of CCT co-responsibilities has begun utilizing this CMS by: updating the registration of Solidaridad beneficiary households at the primary health centers; registering the consults provided to at least one member of each household; and following up on those families that have not complied. The CMS represents a fundamental change in the data collected and reported by physicians, providing electronic medical records and instantaneous reporting to central and regional administrators. The new system also requires physicians to follow protocols of care during consultations with new procedures for inputting information to the HIS. The cultural change, of getting doctors and/or staffs to register primary health care consults on a daily basis, is not without difficulties. Early issues include software problems; frequent power interruptions; and the need for more training on the use of computers and the CMS for health staff, as well as zonal and area level supervisors. The Government has demonstrated notable progress in addressing these issues through: a Ministerial Resolution establishing the mandatory use of the CMS; a new ministerial incentive scheme to improve uptake; and the provision of additional training and small generators. 68. In this area, the prior action for this operation focuses on the formalization and institutionalization of the core mechanism that has been put in place verify and certify households‘ co-responsibilities in health are met, namely the Ministry‘s Clinic Management System. In particular, the focus is on making the use of the system compulsory while providing incentives for such use and ensuring all personnel are adequately trained and equipped. In particular, the specific prior action is:  The Government, through its Ministry of Health, has: (i) mandated the daily registration of primary health care services through the Clinic Management System, as evidenced by Disposicion No. 0000016, dated July 26, 2011, issued by the Borrower‘s Ministry of Health; and (ii) issued an action plan (Plan de Acción para Apoyar e Incentivar la Aplicación de Protocolos y Uso del Sistema de Registro de Atenciones en los Centros de Primer Nivel), for the institutional strengthening of entities within the Borrower‘s health sector, training, and the establishment of performance incentives for physicians, nurses and administrative staff of primary health care centers related to the use of the Clinic Management System. 69. Expected results for this area include an increase in the share of CCT beneficiary households whose compliance with health co-responsibilities can be verified (see indicators 1.1.1 and 1.1.2 in Annex 3). More broadly, advances in this area over the entire span of the DPL series are reflected in indicators of access to health and nutrition services by the CCT beneficiaries and indicators of quality of such services (including indicators related to the application of the 22 protocol of attention, 1.2.1-1.3.3). As mentioned earlier, targets have been met for verification, and data is not yet available to fully assess progress on access. 70. In the coming months, the Government will ensure the universal use of the CMS, as well as implement regular reviews of its use in order to address key bottlenecks that affect the registration of information. The Government is also planning to implement the various steps required for the operationalization of the sectoral reorganization, particularly the definition of clear institutional arrangements. In the medium term, to improve the quality of care, the Government is planning to develop and implement a system to regularly monitor and evaluate the competencies and practices of health personnel who work in the first level of care and to provide supportive supervision. The idea is to have a system of periodic tests of personnel knowledge and application of protocols to complement the information provided by the Clinical Management System and, based on these results, to provide personnel with refresher and/or additional training. Policy Area I.3: Strengthening education services for CCT beneficiaries 71. The quality of learning and efficiency of service delivery remain important inter-related challenges for the sector to enhance its performance, as described in Annex 9. To address these, the Government has continued to improve its capacity to monitor student learning outcomes. Over the past years, MINERD validated student learning standards for basic education and is now implementing annual examinations at the end of fourth grade, primary and secondary education. Initially, the equivalent test at eighth grade was to be adjusted this past year, but the Government deferred this action as it embarked on a broader process of curriculum reform. Additional measures to enhance the quality of education have included efforts to improve leadership and management capacity at the school level, in particular through the establishment of a School Principal Academy, as well as the introduction of a school monitoring and supervision system (Sistema de Acompañamiento y Supervision, SAS), which provides standardized instruments for school supervisors to verify and guide the realization of school- level pedagogical and administrative objectives. As of May 2011, data collected is available to more than 700 users, allowing them to identify schools facing challenges and requiring targeted support. The formal adoption of the system is expected by the end of 2011. 72. To enhance efficiency and effectiveness, the Government is also rolling out its School Management System (Sistema de Gestión de Centros Escolares, SGCE), a web-based MIS to manage school administration at all levels and allow for the verification of CCT co- responsibilities. Laptops and internet connections have recently completed delivery and the platform is fully operational, with information uploaded regularly by school principals. The SGCE provides timely collection and exchange of information on key variables, including enrolment and attendance, to allow for the timely verification of CCT co-responsibilities. The Mixed Commissions in Education, between local education and Solidaridad administrators, conducted a validation exercise to guarantee that each Solidaridad beneficiary student is enrolled in school and is assigned their proper identification code in the SGCE to allow for its cross- referencing with Solidaridad. 73. MINERD has taken additional steps to strengthen its articulation with the CCT, by investing in bridging supply-gaps, effectively executing 75 percent of the available resources. 23 Solidaridad and MINERD also initiated a pilot to assess alternative transfer structures to best compensate for different opportunity costs of schooling for different age groups. Results are expected in early 2012. 74. The Government has also improved the Annual Operations Plan for 2011 (Plan Operativo Annual 2011), in line with the analysis of resource and information flows undertaken by the World Bank (see Annex 9) in order to eliminate overlaps in roles across the central, regional and district levels. The Organic Rules and Operational Manual will be modified following the same model in the coming months. Finally, the Government is taking steps to increase the deconcentration of financial resources from the center to the district level, as established in the Education Law (Ley de Educación 66-97).17 75. In this area, the focus of the DPL series has been on setting up mechanisms to verify compliance of CCT beneficiaries with their co-responsibilities and on improving the quality of education services through two sets of actions. The first set of actions defines standards, design tests to measure learning outcomes and institutionalize their application. The second set of actions aim at increasing the efficiency of education expenditure through improved planning and management processes, including through the partial deconcentration of non-salary expenditure. This operation focuses on the final step in the institutionalization of the deconcentration measure (which was recently piloted and endorsed in light of the resulting improvements) and the final step in the process of revision of curriculum and evaluation standards and processes. In particular, the prior action is:  The Government, through its Ministry of Education, has: (i) approved a mechanism for the transfer of financial resources to District Offices for the purchase of didactic materials, financing of non-personnel services and non-financial assets; and (ii) validated student evaluation standards for secondary education, as evidenced by Resolution No. 668-2011, dated September 7, 2011 and Resolution No. 605-2011, dated September 2, 2011. 76. Expected results in this area of the series of DPLs include an increase in the share of CCT beneficiary households whose compliance with CCT co-responsibilities are verified (indicators 1.1.1 and 1.1.2), as well as an increase in the share of children from CCT beneficiary families who are enrolled in and attending early childhood programs, as well as basic and secondary education (indicators 1.4.1-1.4.6). As discussed earlier, the program is on track in terms of verification, but data to judge progress on access and use of services is not currently available. 77. In the coming months, the Government plans to implement key measures to increase the quality of its education. In particular, this will mean finalizing the revisions to the national curriculum and updating evaluation standards and tests accordingly, effectively establishing a specialized school for school principals (focused on managing for results), and implementing the Accompaniment and Supervision System (Sistema de Acompañamiento y Supervisión, SAS), which provides standardized instruments for supervisors to verify the realization of administrative and pedagogical goals at the level of each school. 17 In 2010, circa 20 percent of non-salary education resources were deconcentrated. 24 Policy Area I.4: Enhanced payment mechanisms for CCT beneficiaries 78. The Government has improved the payment mechanism through which transfers are paid to beneficiaries (through a debit card, which can be used at participating corner grocery stores, or colmados). Unlike other CCTs, the Solidaridad card is not linked to a savings account or other financial services, nor can transfers be withdrawn as cash. Beneficiaries also have limited access to basic information about their accounts. Some issues have arisen regarding access to, and the performance of, colmados. In some cases, CCT beneficiaries have had difficulties in accessing colmados, while others have complained about issues regarding prices, quality and transparency.18 79. In this area, the DPL series has supported a series of reforms aimed at improving the quality of the payment mechanisms. In particular, the payment agency, ADESS, has implemented a series of reforms to improve the payment mechanisms. These include an expansion in the number of colmados in the Red de Abastecimiento Social (RAS) by over 50 percent since July 2009 (to reach over 3,000 locations), which is expected to increase competition and reduce prices. It also includes a mapping of existing affiliated colmados to target the expansion to areas where access is limited. The Government is working to improve beneficiary access to account information through a new Integrated System for the Administration of Social Subsidies. These advances will allow beneficiaries to access same-day account information at any ADESS office or online.19 Finally, the Government has decided to work with a pro-consumer organization, Pro-Consumidor, which would be responsible for monitoring the quality of services from a user‘s perspective and to empower users by providing them greater information on the services and their rights as consumers. In this area, the prior action for this operation focuses on the final element of formalization of the expanded RAS (through its bylaws) and of the supervision mechanism. Specifically, the prior action is:  The Government, through its Social Cabinet, has: (i) expanded the number of institutions affiliated to the Red de Abastecimiento Social (RAS) to a total of 3,067 institutions as of September 30, 2011 (from a baseline of 1,988 institutions as of June 30, 2009); (ii) approved the bylaws of the RAS; and (iii) entered into an agreement with Pro-Consumidor, dated August 10, 2011 to: (A) supervise the institutions of the RAS; and (B) inform beneficiaries of CCT Solidaridad Program of their rights and the functioning of the RAS, as evidenced by Resolution No. 001-2011, dated August 25, 2011, issued by the President of the Board of ADESS. 80. For this area, expected results include an increase in the number affiliated institutions, from 1,988 in 2009 to 3,067 in 2011, as the establishment of monitoring mechanism to identify and address issues related to payment mechanisms. These results have been added to Annex 3 (Indicators 1.5.1 and 1.5.2). 81. In the coming months, the Government will enter in new contracts with financial institutions for the payments of the CCT transfers and ensure they promote a diversification of 18 Vargas Garcia, T. 2011. ―Evaluación Cualitativa: Programa Solidaridad‖. Working Paper 2011, and Transparency International (2008) ―Informe Monitoreo Ciudadano al Programa Solidaridad‖. 19 They will also streamline the replacement of lost cards within 15 days (versus current timeframe of two months). 25 services, improvements in its quality, and improvements in access to account information. The Government is also planning a number of pilots to examine the possibility of different payment modalities – including modalities which promote financial literacy and access to financial services more generally – and evaluate their impacts. Policy Area I.5: Improved targeting performance. 82. Finally, a critical component of the modernization of the CCT and the broader social protection framework includes the updating of the SIUBEN targeting instrument through the Second Socioeconomic Household Census. This census has been launched in August 2011. Initial procurement and financing delays allowed for an improved sampling strategy and an expansion of coverage to 1.81 million households, an increase by more than 300,000 households from the initial design.20 Also, the new census will take advantage of innovative technology, using PDAs, GPS, and data transfer services for areas where these are cost-effective. They are expected to allow for greater quality control and a shorter data collection period. In this area, the prior action for this operation is:  The Government, through its Social Cabinet, has launched a new census to update the SIUBEN and improve the targeting of its social programs, including an update of the information on households and individuals, an increase of census coverage in geographic areas already covered by the last census carried out in 2004-2005, and an expansion of the census coverage to geographic areas with high poverty levels not previously included, as evidenced by Resolution No. GS-02-11, dated September 13, 2011 issued by the coordinator of the Social Cabinet. 83. In this area, the expected short term result is the completion of the SIUBEN, as well as the updating of the database which will be used for the targeting of the CCT program (added to Annex 3, as indicator 1.6.1). In the medium-term, beyond the completion of the DPL series, the SIUBEN socioeconomic census is expected to improve the accuracy of inclusion and exclusion by updating the information of families currently in the SIUBEN and expanding the database to new geographic zones of high poverty not covered in 2004-05. This will result in an improvement in the targeting accuracy of the CCT program, as well as other social programs which use the SIUBEN to identify their beneficiaries. 84. In the coming year, the Government will complete the census and validate its information. Each program which uses the SIUBEN will then identify their beneficiaries and update their beneficiary registries. 20 The survey requires more than a dozen procurement processes that faced difficulties. Many international competitive biddings had low levels of response and required multiple bidding cycles. Also, political hurdles during congressional elections in May 2010 delayed the approval of the Additional Financing to the Social Protection Investment Loan which delayed some bidding processes. Finally, in September 2010, the Ministry of Finance issued a mandate to all Government agencies to suspend disbursements until the end of the calendar year. 26 POLICY AREA II. IMPROVING BUDGET MANAGEMENT TO SUPPORT THE CCT PROGRAM 85. As part of the national strategy to move towards Results-Based Management (RBM), the Government has made progress in critical areas.21 This includes improvement in planning and budget management of the CCT and the associated health, nutrition and education services. In particular, to respond to the dramatic reductions in social sector spending in past crises and to ensure CCT beneficiaries can comply with their co-responsibility in health and education, the Government put efforts in place to close gaps in the supply of basic services. The program was developed on the basis of sectoral assessments led by the CCT Intersectoral Committee, which quantified the investments required to cover supply-gaps in three years. The Ministry of Finance ensured that sufficient funds were available to cover the identified gaps for the first two years. 86. More broadly, the Government started to institutionalize these planning and budget improvements. In particular, in September 2010, the Council of Ministers approved the first-ever Multi-Annual National Plan for the Public Sector 2010-2013, which contains medium-term guidelines, including provisions for social protection policy with projections in terms of coverage and budget, and appropriation for the programs aimed at closing gaps in the supply of social services. The plan represents a significant advance to increase predictability of the budget and is a first step to developing a Medium-Term Expenditure Framework. With regard to the programs which aim at closing supply gaps, during the first year, the assignation of resources by the Ministry of Finance was fully met. The plan is to be revised every year on a rolling basis. The first revision (the revised plan covers the period 2011-2014) continues to protect the budget required to close gaps in supply in education, health and nutrition over the rolling three-year period. 87. The Government has also worked to increase transparency, in particular through the CCT Intersectoral Committee‘s efforts to monitor the execution of resources on a quarterly basis and publish the findings. Reports on the execution of the 2010 program provide a detailed breakdown of capital investments across sectors, along with detailed overviews of the timelines for planned investments. To complement these rather technical reports (focused on procurement and execution rather than on results), the CCT Intersectoral Committee is planning evaluation reports that would also present the contribution of the new investments to improvements in results indicators (e.g. reduction in overcrowding, increased micronutrient intake). This focus on results will also help sectoral ministries justify the timely allocation of the resources with the Ministries of Finance and Economy. The reports will be published on the Government‘s websites to inform the public of progress. They will also be an important input in the design of Performance Agreements in health and education, as discussed below. 88. In this area, the PASS series has supported reforms in this policy area by supporting the diagnostic by the CCT Intersectoral Committee of the gaps in supply of basic services to meet 21 See the 2006 Organic Law on the Public Sector Budget; 2006 Creation of State Secretariats for Treasury and Economy, Planning, and Development; 2006 Creation of the State Secretariat of Hacienda; 2008 Creation of the State Secretariat of Public Administration; 2007 Financial Administration System of the State Law; 2006 Public Credit Law; 2006 Planning and Investment Law; 2006 Government Procurement and Contracting Law; 2007 Establishment of the Internal Control System Law; 2009 Launch of National Procurement Strategy; 2007 Law of Participative Budget for Municipalities; 2004 Dominican Republic Chamber of Accounts Law; and 2004 Access to Public Information Law. 27 the needs of the CCT beneficiaries and promoting the strengthening of the CCT Intersectoral Committee in its joint budget planning and monitoring capacities and coordination to ensure resources are available to meet the results targets of the CCT program. This operation supports the final element of consolidation of these reforms – namely the integration of the elements necessary to meet the results of the CCT program in the budget and their effective monitoring. Specifically, the prior action is:  The Government has established budget planning and coordination mechanisms that will ensure the availability of sufficient resources to meet the results targets of the CCT Solidaridad Program, as evidenced by the approval of: (i) the Multi-Annual National Plan for the Public Sector 2011-2014, by the Government‘s Council of Ministers on September 15, 2011; (ii) the Budget Law of 2011; and (iii) Disposicion dated September 1, 2011, issued by the CCT Intersectoral Committee. 89. As a result, it is expected that the difference between the allocated and actual budget for the programs aimed at closing gaps in supply of social services for CCT beneficiaries will be smaller than the difference observed in other sectors of the budget (reflecting the priority given to these activities in the budget), as reflected in indicator 2.1.1. in Annex 3. Also, the policy reform is expected to result in a reduction in the difference between quarterly scheduled quotas and actual allocated quotas (see indicator 2.1.2 in Annex 3). Both targets have been exceeded. 90. In the coming months, the Government has committed to continue to consolidate the gains in budget planning and resource allocation in the social sectors through continued commitment to the sectors‘ priority programs, updating of the assessment of supply gaps to propose a three-year investment plan for 2013-2016 and ensuring its funding under the Pluri- Annual National Plan for the Public Sector. This will establish important linkages with advances in results-oriented budgeting, particularly given the signing of performance agreements between MoF, MEPD, MPA, and the social sector ministries. POLICY AREA III. INTRODUCING PERFORMANCE AGREEMENTS IN THE SOCIAL SECTORS 91. To strengthen institutional budget management and accountability, the Government introduced performance-based budgeting in social sectors through a series of Performance Agreements for priority health and education programs.22 These Performance Agreements (Contratos por Resultado y Desempeño) are intended to provide a flexible managerial link between the provision of budget resources and the desired improvements in the social sector‘s performance, as reflected in baselines, indicators and targets for outputs and outcomes. Table 3 summarizes the phases and main achievements in the introduction of Performance Agreements.23 22 Organized by the Ministry of Economy, Planning and Development, Ministry of Finance, Ministry of Public Administration and Ministries of Health and Education following the guidelines established in the 2006 Budget Act. This reform is supported by the PASS series, the 2009 Public Finance and Social Sector DPL and the NLTA on improving the quality of public expenditure, as well as by the IADB PRODEV program. 23 For more details see the Government document ―Gestión Orientada a Resultados y Contratos por Resultados y Desempeño‖, technical annex, November 2009 on http://www.stp.gov.do/. 28 Table 3: Phases in the Introduction of Performance Agreements and Achievements Phase Planned activities Achievements to date Phase I. Signing of the agreement to initiate the process (Acta Acuerdo) by Identification of Completed. MEPD, MoF, MPA and the sector agencies. institutions Phase II Evalua- Diagnostic to assess the status of key functions (strategic and Completed in health tion of basic operational planning, budget, management and monitoring). and education.24 pre-conditions Signing of technical assistance agreements (Convenio Marco de Phase III. Asistencia Técnica para el Desarrollo de Capacidades Completed in health Institutional Institucionales para la Gestión Orientada a Resultados) and and education Strengthening implementation of capacity building plan. Phase IV. Development of performance indicators, baselines and targets at Completed for health Establishment of institutional and program levels, and signing of Performance and education priority Performance Agreements. programs Agreements Phase V. Monitoring of progress on technical assistance and Performance Monitoring, self To be consolidated in Agreements, presentation of self evaluation reports, and preparation evaluation and 2012. of a validation report. validation Phase VI. Presentation of self evaluations and validation report to the Cabinet To be consolidated in Dissemination and the public at large, identification of lessons learned for 2012. of findings improving future Performance Agreements. 92. Performance Agreements cover both institutional and program performance. They include commitments regarding: (i) institutional objectives and goals verifiable by performance indicators, involving managerial and institutional processes and systems, including planning, procurement, monitoring, personnel, statistics and organizational structure, among others; and (ii) objectives and goals of priority programs, involving elements related to the volume and quality of goods and services delivered by the program. In the case of the education sector, for instance, the Performance Agreement includes a series of institutional objectives and targets – such as for instance the publication of manuals that define all functions in the Ministry and guide the classification of each existing position and the development of a platform for the monitoring of the sector, the training of 109 technicians in the use of the platform, and the actual monitoring of 19 central, 104 local and 18 regional institutions – as well as a series of goals in terms of results – such as the training of around 3,500 teachers identified in the context of a diagnostic of capacity. This is a significant departure from traditional budgeting practices that focus on inputs (and not on results). Additionally, the process of implementation includes self-evaluation, validation of the results and the dissemination to internal users such as the Cabinet, and to external users, including Congress and citizens at large. 93. The PASS series supported a series of actions. First, a series of diagnostics of basic conditions for the implementation of Performance Agreements were used to prepare institutional strengthening plans to help the Ministries of Health and Education improve planning and management systems, a prerequisite for the implementation of Performance Agreements. These plans also helped identify the programs that were better suited for implementing the first 24 Since 2005, the Ministry of Public Administration has led the implementation of the Common Assessment Framework to assess institutional quality through self-evaluation. More than 90 agencies have used this approach. 29 Performance Agreements. In 2011, the Government has set up a dedicated coordination unit in MEPD. The Government also approved a Decree regulating Article 14 of the Budget Law that mandates the design and implementation of performance agreements. The central Ministries also signed Performance Agreements with the Ministries of Health and Education for their priority investment programs. In the health sector, for example, the main focus of the current Performance Agreement is on improving the coverage and efficiency of vaccination, as well as strengthening the logistical capacity of health centers to provide these vaccinations. The contracts contemplate an initial phase of implementation until December 2012, covering the remainder of the 2011 budget cycle and the subsequent cycle in 2012. Also, the design of the contracts includes a self-assessment period by the sectors and a validation by the Ministries of the Economy, Finance and Public Administration, which findings will be presented to the Cabinet. This operation focuses on the last stage of the reform, namely the signing of the Performance Agreements for priority programs in health and education. In this area, the prior action is:  The Government, through its Ministries of Finance, Economy and Public Administration, has: (i) signed a separate performance agreement with each of the following Government‘s Ministries: Health and Education, to strengthen the institutional budget management and accountability of the Government‘s priority programs in health and education, through performance-based budgeting, as evidenced by the performance agreements dated August 31, 2011; and (ii) approved the Presidential Decree No. 522-11, dated August 31, 2011, which regulates Article 14 of the Government‘s Law No. 423-06 (Ley Orgánica de Presupuesto para el Sector Público), that establishes a results-oriented management model through the use of performance agreements. 94. The expected result in this area is an increase in the number of programs which have developed their log-frame in order to transition towards results-based management (see indicator 3.1.1. in Annex 3). The targets set for this indicator have been met, with five priority programs covered by the performance agreements (target for November 2011 was 4 programs). In the medium-term, the policy reforms are expected to generate gains in efficiency within the sectors, which will be partly reflected in the increase take up of social services by CCT beneficiaries (measured through indicators 1.2.1 to 1.4.6). 95. In the coming months, the Government will ensure consolidation of the Performance Agreements through the close monitoring of their commitments, their validation, and the presentation of the finding to the Cabinet. Once the lessons from this first set of programs have been learned, the Government will also develop a plan for the expansion of Performance Agreements to other programs and agencies. Finally, the Government is working to ensure the institutionalization of the link between the Budget Division in the Ministry of Finance and the Planning Division of MEPD.25 25 The Bank will provide technical assistance on these and areas identified in the PEFA 2010 report, in collaboration with the European Union and the IADB. Efforts are also promoted under the IPAC initiative (see www.ipacrd.com) 30 POLICY AREA IV. IMPROVING TRANSPARENCY AND ACCOUNTABILITY 96. This area of reform has focused on establishing mechanisms for improved transparency and oversight by addressing three critical challenges: first, granting the public with access to timely and comprehensive budget information from the Financial Management Information System (SIGEF) through the development of the Portal del Ciudadano (Citizens‘ Portal, “Consulta Amigable�); second, ensuring that the Solidaridad program counts with an effective social auditing scheme through the implementation of Reportes Comunitarios (Community Scorecards); and third, ensuring that complaints are directed to their respective sectoral institutions through a centralized system of complaints. 97. Portal del Ciudadano (“Consulta Amigable�). With knowledge exchange and technical assistance from the World Bank, the Government has developed Portal del Ciudadano, a web- based, user-friendly tool that provides the public with information on budget revenues, allocation and execution from the Financial Management Information System.26 The objective is to promote greater transparency and accountability, and the effort is accompanied by efforts to strengthen the capacity of civil society organizations to effectively access and analyze the budget information, convey it to local communities, and help channel communities‘ concerns and suggestions (see earlier section on relationship to other Bank operations). The MoF and MEPD have also signed an administrative agreement to collaborate on the inclusion of a module within the Portal that will enable users to link budget expenditures to performance indicators. The Government has also prepared easy-to-access budget execution reports which are posted on the MoF‘s website, as well as a short note on ‗Presupuesto Ciudadano’ (Citizens‘ Budget) that provides an easy-to-understand overview of the composition of the budget incomes and expenses. The success and credibility of the Portal del Ciudadano as a mechanism for budget analysis and monitoring will depend on the Government‘s commitment to ensuring that: (i) coverage applies to all centralized agencies using SIGEF; (ii) coverage is gradually expanded to other decentralized agencies; and (iii) open discussions take place with civil society organizations. 98. Reportes Comunitarios. The CCT program has piloted one of the first social auditing schemes in the country, where Solidaridad beneficiaries have formal mechanisms to voice their opinion. The community scorecards focus on the quality of CCT services (timely payments, training delivered, etc.) and the provision of the basic social services (teachers present, micronutrients available, etc.). A feedback mechanism is being developed, involving direct service providers and district, regional and national administrators. The scorecards have been piloted. The pilot showed that beneficiaries are highly satisfied with many aspects of the programs, but highlight a few areas for improvements, including issues of availability of vaccination, medication and didactic material, and issues with the quality of services in Colmados. An important lesson from the pilots was that many of the issues were immediately addressed by the local committees in charge of the CCT program (who put in place immediate action plans), suggesting an immediate feedback mechanism can ensure most grievances are effectively and swiftly addressed. In the coming months, the Government will undertake a 26 This automated interface will be linked to performance indicators through the administrative agreement signed between MoF and MEPyD to develop a pilot to define performance indicators in health, education, and social protection that will be linked to budget line execution, as supported by PASS2. 31 process evaluation of the pilots, to inform the expansion plan (currently planned in 4 regions which exhibit large socio-economic differences, with a view to test the tool in contrasting contexts). The Bank will also support the evaluation of the impact of the Reportes Comunitarios during the scaling up phase (the baseline data will be collected during the first trimester of 2012). 99. Complaint mechanisms. With a view to strengthen transparency in its operation, the CCT program has taken significant steps to disclose key information – including a list of beneficiaries – to reduce risks of political clientelism. It has also enhanced the mechanisms for service providers to address beneficiaries‘ complaints or questions. Initially, the complaint mechanism did not allow for the CCT program to share or hand over complaints related to health or education services. To address this concern, the Government has developed a central complaint mechanism, called the integrated system for customer service (Sistema Integrado de Atención Ciudadano, SIAC) that utilizes the national System of Access to Government Information (AGIS) and the associated Access to Public Information Offices established in each Government institution. This system ensures that complaints are effectively directed to the agency responsible for the related services, irrespective of the institutions which initially received the complaint. 100. In this area, the PASS series has supported policy actions in the three spheres presented above – the publication of budget information, the monitoring of the CCT by beneficiaries, and the establishment of a complaint mechanism. This operation supports two prior actions, which mark the completion of the reform process – the launch of the online budget publication and the institutionalization of the community reporting mechanisms (which goes beyond the initial target of publication of results from these mechanisms). For this operation, the prior actions are:  The Government, through its Ministry of Finance, has launched an online budget transparency tool (Portal del Ciudadano Dominicano), which allows free public consultations on public revenues and expenditures of the Government‘s central agencies, including data on execution of the Government‘s national budget.  The Government has defined and mandated the implementation of the expansion plan of the ―community scorecards‖ (a social auditing scheme for the beneficiaries of the CCT Solidaridad Program to voice their opinion on the quality of the services provided under said program), as evidenced by a Disposición dated August 12, 2011, issued by the CCT Intersectoral Committee. 101. In this area, expected results include an increase in transparency and public oversight. Specifically, an increase in the public‘s access to comprehensive budget information is expected to be reflected in the launch of the tool, a gradual increase in number of users of the Portal del Ciudadano tool, and a gradual increase in the number of times this portal is accessed (indicators 4.1.1 and 4.1.2). The tool has been launched on September 30, 2011, and is accessible to the public at large (NGOs have participated in its development, by providing feedback on its content in the context of open consultations). The numbers of registered users and hits will be updated once the portal is launched. The expected result for the development of the community monitoring mechanism is an increase in the share of community scorecards that are effectively completed by beneficiary committees (see indicator 4.2.1. in Annex 3), which reflects the actual take up of the tool by beneficiaries. The target set for November 2011 has been exceeded, as 65 percent of the scorecards were effectively filled by communities. 32 102. In the coming months, the Government is planning to continue promoting an open dialogue with organization of the civil society to keep improving the Portal del Ciudadano tool and discuss budget information. In particular, the Government will integrate comments and recommendations from users into the portal. Also, in the coming year, the Government is planning to broaden the scope of the tool to include information on spending by decentralized and mixed agencies and to link budget execution information to performance indicators. In terms of the community scorecards for the CCT and its associated social services, the Government is planning to implement the expansion plan and institutionalize the processes. The Government is also setting up mechanisms, which ensure the issues raised are swiftly addressed by the relevant agencies. The rapid response to issues will also be an important element of the continued implementation of the national complaint mechanism. VI. OPERATION IMPLEMENTATION POVERTY AND SOCIAL IMPACTS 103. The policy actions supported by this operation and the PASS series in general are expected to generate significant positive poverty and social effects through improved management processes for the delivery of social services, which is expected to result in improvements in the performance of social sector agencies in serving the poor. The policy actions are not expected to generate significant negative poverty and social impacts. 104. In the context of the preparation of this series of DPLs, a PSIA was undertaken to examine and monitor the expected impacts of the policy actions supported by the series. The process was developed through a PSIA Committee formed by the Social Cabinet, MEPD, and MoF. Annex 10 provides more details on the approach, methodologies and results of the PSIA. 105. The PSIA undertook an ex-ante micro-simulation to assess the expected outcomes of the CCT redesign of demand-side incentives for social service use for education and health co- responsibilities. The results of an ex-ante micro-simulation estimate that the revamped CCT Solidaridad would increase school enrollment by 6 percentage points and decrease child labor by 9.2 percent due to the introduction of education co-responsibilities. In health, the same simulation found that attendance of children under-5 by a healthcare professional should double. 106. The PSIA also produced a benefit-incidence analysis to assess the progressivity of the programs aimed at closing gaps in supply of health and education services compared to larger public spending in each sector. Results suggest education spending is semi-progressive overall, whereas the targeting used for the program aimed at closing gaps may be a little less progressive in practice. The resources dedicated to the closing of supply gaps in health are shown to be very progressive, especially when spent on refurbishing existing health centers. 107. In the coming months, the Government has planned an analysis of the CCT program‘s actual targeting and incidence. An evaluation of the CCT‘s impacts on the poor‘s investments in human capital and poverty is also ongoing. 33 108. Beyond the scope of this series of operations, the Government has adopted a socially responsible approach to closing the gaps in the supply of basic social services, by anchoring the decisions on where to strengthen the supply of services in a combination of detailed maps (which identified geographic areas with limited access) and community-based discussions. In the past, following this approach has resulted in delays for school constructions in some areas, because it required lengthy processes of identification of needs for additional establishments, identification of appropriate locations for these establishments and purchase of the relevant land where applicable. However, the process was important to ensure the closing of supply gaps was realized in a socially-responsible manner. This process is now completed. ENVIRONMENTAL ASPECTS 109. The policy actions supported by this operation and the PASS series in general focus on improvements in processes and are not likely to generate significant positive or negative effects on the environment, forests, and other natural resources. 110. In the social sectors, beyond the scope of this series of operations, the Bank has worked with the health sector for several years on the question of biomedical waste management, most recently through a series of Adaptable Programmatic Loans in support of the Health Sector Reform (PARSS). The first loan supported a needs assessment, the strengthening of infrastructure, and training to improve waste management. In 2009, the Government adopted new regulations and related operational guidelines (Decree 126-09). Under the Second Phase of PARSS, the Bank will continue to provide support to the Government for the strengthening of its capacity to implement these procedures. With regard to rehabilitation or construction of social service facilities, any activity would fall under, and be mitigated through, the guidelines for construction already in place in the Ministries, with support from sectoral WB projects. In particular, the Ministry of Education‘s policies require any construction to conduct an environmental assessment following the Ministry-wide protocols, and obtain licenses from the Ministry of the Environment. PARTICIPATORY PROCESSES 111. In addition to the Government‘s own process of consultation described earlier (under the section ―The Government‘s Program‖), the Bank undertook specific consultations with civil society representatives on selected policy areas. During the identification mission in April 2011 and the preparation of the IPAC social audit workplan, the Bank held consultations with the Civil Society Consultative Council (Consejo Consultivo de la Sociedad Civil) and the Citizen‘s IPAC Observatory (Observatorio Ciudadano a la IPAC) a coalition of 12 CSOs specialized in budget transparency and quality of services advocacy. To strengthen the capacity of CSOs in monitoring public policies, a series of training workshops is also planned within the framework of the Bank- supported Dominican Republic Civil Society Strengthening Program. 112. The PASS team also held informal discussions with experts from CSOs, academia, citizens, and beneficiaries. These discussions reiterated the need to protect and increase critical social spending, increase transparency and fight corruption. A consultation was also held on May 15th, 2011 to discuss ways to improve governance. In coordination with the PASS-supported 34 budget transparency reform, a Civil Society NLTA targets improvements in four major areas: (i) civil society‘s budget analysis and monitoring capacities, funded by the Governance Partnership Facility; (ii) Congress‘ budget oversight functions, funded by the IDF for the Budget Planning Office; (iii) the capacity of local Governments to increase accountability, funding by the Korean TF managed by WBI; and (iv) civil society‘s capacity to audit public policies, through the IPAC Citizen Observatory funded by the SFLAC TF and the Civil Society Fund. MONITORING AND EVALUATION 113. The Government and the Bank team continue to endorse the monitoring indicators, and feel they constitute a robust framework for this series of DPLs. However, the collection of data to report on progress along these indicators has met important obstacles over the series‘ period. Indeed, The PASS series was initially prepared on an accelerated calendar, because of the need for accelerated support to help the Dominican Republic face the global crisis. As a result, some of the monitoring indicators, baselines and targets were set in the absence of strong data. In particular, many baseline data were contingent upon the results of an impact evaluation – the Social Protection Evaluation Study (Encuesta de Evaluación de la Protección Social, EEPS) – planned for the summer of 2010. In practice, the EEPS experienced significant delays, related to methodological issues in locating treatment groups, and the baseline indicators only became available in September 2011. This delay was already discussed in the program document for the second DPL (PASS2), which recognizes that the Government will need to adjust the baselines and associated targets for some of the indicators which depend on the EEPS. 114. Over the past year, the Government has continued to demonstrate its commitment to update the results framework of the PASS series, as part of larger efforts to develop an integral M&E system for Social Protection in the country, and the Government and Bank have found the indicators to be adequate in continuing to constitute a robust results framework for the PASS series. Overall, the PASS is expected to increase the share of CCT beneficiary households who invest in their human capital, as measured by: (i) an increase in the share of CCT beneficiary households who comply with health and nutrition co-responsibilities; and (ii) an increase in the share of students from CCT beneficiary families who are enrolled in, attending and completing basic education, and who are enrolled in and attending secondary school. 27 It is also expected to lead to improved budget management for enhanced performance of the social sectors, in particular through the reduction in the deviation between proposed and actual budgets and disbursement schedules. Finally, the reforms include the introduction of Performance Agreements in social sectors, resulting in enhanced transparency and civil society oversight. 115. Annex 3 presents an update of the results framework, which presents all the data available at the time of preparation of this program document and presents the data collection plan for the coming year which will allow for the evaluation of the success of these reforms in meeting their goals. The implementation and monitoring of PASS DPL3 will continue to rely on the close coordination of the Bank team with the Social Cabinet, the Ministry of Finance, the 27 Specific long-term results expected in education include increased educational attainment of extremely poor children, particularly in Early Childhood Development (ECD) (children 4-6 years old) enrollment, basic education completion, and secondary school enrollment. In health, key long-term results include better Government performance in the delivery of critical nutrition, child and prenatal health care services for the poorest citizens. 35 Ministry Economy, Planning and Development, the Ministry of Health, and the Ministry of Education. FIDUCIARY ASPECTS 116. While the fiduciary risk related to the Public Financial Management (PFM) environment in the Dominican Republic is considered moderately high, the Dominican Republic has continued to engage in reviewing, strengthening and reforming the way its public finances are planned and managed in the last few years, as detailed in Annex 11. The country has made good progress in passing important reforms that targeted the FM legal framework and redefined the role of the institutions involved on public financial management. Developing the reforms has involved not only the Ministries of Finance, Public administration, and Economy, Planning and Development, but also legislative and other oversight entities concerned with quality and efficiency of budget execution and control. Implementation has shown modest improvements as explicitly indicated in the 2007 Performance Expenditures and Financial Accountability (PEFA) Report, and the 2010 PEFA Update. Key PFM entities show notable progress in defining their strategic plans, aligned with the National Development Plan. Many joined activities - Government/civil society/private enterprises/donors to strengthen key FM and oversight entities are taking place. See Annex 11 for a more detailed discussion of fiduciary aspects. The team confirms that the Government publishes its annual budget in a timely fashion. DISBURSEMENT AND AUDITING 117. The administration of this loan will be the responsibility of the Ministry of Finance. The proposed loan will follow the Bank‘s disbursement procedures for development policy loans/credits. The untied balance of payments/budget support will be disbursed against satisfactory implementation of the development policy program, including the maintenance of a satisfactory macroeconomic policy framework, and not tied to any specific purchases. Furthermore, no procurement requirements will be needed. Once the loan is approved by the Board and becomes effective, the Borrower may submit a withdrawal application requesting the Bank deposit the proceeds of the loan into a dedicated account designated by the Borrower and acceptable to the World Bank at the Central Bank of Dominican Republic at the request of the Borrower. The Borrower shall ensure that upon deposit of the Loan into the account, an equivalent amount shall be credited in the Borrower‘s budget management system, in a manner acceptable to the Bank. The Borrower will report to the Bank on the amounts deposited in the foreign currency account and credited to the budget management system. If the proceeds of the loan are used for ineligible purposes as defined in the Development Policy Loan Agreement, IBRD will require the Borrower to promptly, upon notice from IBRD, refund an amount equal to the amount of the payment to IBRD. Amounts refunded to the Bank upon such request shall be cancelled. The Bank will retain the option to request an audit of the dedicated account. RISKS AND RISK MITIGATION 118. Table 4 below summarizes major risks identified since the first DPL of this series, discusses the extent to which they have materialized and identifies new risks and risk mitigation measures when applicable. 36 Table 4: Risks and risk mitigation measures Risks Analysis and mitigation Macroeconomic risks  The global economic crisis  The global economy has begun to recover, with global output expected to could place financial resource grow by 3.2 percent in 2011. However, the outlook remains highly constraints on the reform uncertain, in light of the economic woes in Europe and the United States. A agenda and force the spread in the crisis could dampen growth prospects for the Dominican Government to make difficult Republic through a fall in tourist arrivals, lower commodity prices for choices. While this risk started mining products, and a collapse in demand for exports. While risks in 2009, it has reemerged with stemming from the low reserve coverage are currently mitigated by the IMF the recent volatility of fuel program, by relatively favorable access to international markets and by and food prices in early 2011. important FDI inflows, an external shock could lead to a foreign exchange Growth prospects remain shortage. The risks could be amplified by the absence of a new IMF largely dependent on program28, which could also stall the reform momentum on the structural improvements in the volatile front. While these external risks remain substantial, mitigating factors external environment. include strong macroeconomic management, including growth in the size  Also, the January 2010 Haiti and sophistication of the domestic debt market and improved financial and earthquake could result in the bank supervision. contraction of demand from  The Haiti earthquake has actually resulted in increased demand for food Haiti, the second largest and construction products. destination market of  The financial problems in the public electricity sector remain the principal Dominican exports. fiscal risk. In 2011, the deficit in the electricity sector is expected to reach  A higher than expected deficit US$690 million, significantly above the previous target of US$350 million. in the electricity sector could The Government has cut spending elsewhere to help limit the overall fiscal potentially affect Government deficit. A fall in international oil prices would help improve the sector‘s solvency and contribute to a deficit. In addition, the Government has taken measures to address the fiscal financing gap. financial viability of the public electricity sector, including an increase in tariffs and changes in the management of the distribution companies. The Bank has an active engagement in the sector through a technical assistance project, which supports the structural reform agenda where important advances have been made (see Annex 7 for more information). In the short run, however, the implementation of the technical tariff in particular may be affected by the political environment, especially in light of the upcoming elections.  The Government has strengthened the institutionalization of new planning and allocation mechanisms aimed at protecting pro-poor social sector investments. The January 2011 Presidential Decree mandating ministerial budget cuts includes specific exemptions for education, health, and certain social protection programs, though proposed cuts in July 2011 were not able to fully protect all social sectors.  Finally, the Government has initiated a transition from universal subsidies to electricity and gas consumption, which were fiscally unsustainable, to targeting subsidies which benefit only those families that have been identified as poor by the national registry (SIUBEN) and the CCT program. The use of the targeted social protection program is hence part of the solution to the fiscal constraints stemming from the energy sector. Political/transition risks  The national elections, set for  Reforms supported by the PASS program continue to benefit from strong May 2012, could result in Government and societal ownership. In addition, many of the reforms 28 The current program ends in the first quarter of 2012. 37 shifts in priorities, which supported by this operation themselves are part of the mitigating strategy, could endanger the as they aim at institutionalizing key reforms – through the creation of strong implementation of the PASS- information and management systems, through the institutionalization of supported reforms. decision-making processes, and through the formalization of roles and  Challenges include the risk of rules, among others. clientelism in the  The Government is currently undertaking an update of the SIUBEN unique administration of the CCT registry of beneficiaries, which uses a transparent proxy-means test to Solidaridad and the SIUBEN determine households‘ eligibility for selected programs. The Social Cabinet socioeconomic census, a risk decided to involve independent NGOs in the revised strategy for the that could be heightened by implementation of the SIUBEN update. Through its DPL, investment loans, the pre-electoral context. and technical assistance, the Bank will continue to support measures to strengthen the targeting mechanism and verification of co-responsibilities, ensuring that payments of transfers are progressively made against verification of co-responsibilities. This supervision is done with the IADB, which also supports the program financially and technically. Implementation risks  Government faces  The capacity constraint has been largely mitigated by the activities of the institutional and Programmatic NLTAs on Social Sectors and Quality of Public administrative capacity Expenditures (capacity-building and just-in-time assistance), resources of constraints the Social Protection Investment Loan (SPIL) Project, IADB multi-phase  The reforms require close investment loan, and GPF grant financing. coordination within the  Risks of lack of coordination have been mitigated by: (i) the Government, across social institutionalization of the CCT Intersectoral and Interagency Committees at sectors, between social sector the central level, and of local level pluri-sectoral commissions which agencies and central address issues at the local level; (ii) reforms to budget management ministries, and between the processes, with budget requests to meet gaps in supply for CCT Ministries of Finance and beneficiaries being jointly formulated by the social protection, health and Economy. education sectors; (iii) the anchoring of the inter-sectoral coordination  Risk of low execution levels around the tools of each sectors (e.g. their Management Information in closing identified supply- Systems), rather than around additional tools which would need to be gaps in health, education, and developed separately, and (iv) continued active donor coordination efforts nutrition linked to the co- by the Bank and the IADB in particular. responsibilities of the  Coordination between central ministries has also improved, and the signing redesigned CCT Solidaridad. of the Performance Agreements provides a key first step in the  Risks of slow procurement are institutionalization of annual processes that provide a framework for likely to continue affecting the continued coordination. timely implementation of  The Government‘s commitment to continue allocating funds in the budget some reforms, as experienced to bridge supply-gaps is likely to remain firm, in part due to the pluri- by the SIUBEN annual planning exercise institutionalized by the reforms supported by this socioeconomic census; series of operations. Also, publishing information on allocation and execution of allocated execution for the public to consult, together with the strengthening of civil financial resources for priority society‘s capacity with a dedicated trust fund, are expected to result in social programs; and the sustained budgetary discipline. Portal del Ciudadano web-  The Government has managed these risks in the case of the SIUBEN census based tool for budget and Portal del Ciudadano during 2011. For the program to close gaps in the transparency. supply of basic social services, the CCT program will conduct quarterly reviews of execution progress, highlighting issues and identifying the units responsible for addressing them. Stakeholder opposition risks  Unions representing teachers  This operation supports policies which require teachers, school directors, or medical staff may oppose nurses and doctors to systematically report information on their services in some of the interventions in sectoral information systems. While this requires a change in culture, 38 the education and health intensive training and ability to understand how the system can be a useful sectors management tool at all levels are expected to mitigate resistance. In  Association of neighborhood education, the policy of greater decentralization of the purchasing of shops (colmados) affiliated instructional inputs usually has the support of teachers‘ unions. In health, with the CCT program may the MOH will also be implementing an incentive scheme to motivate staff oppose reform to the payment to use the CMS. mechanism which could  PASS-supported reforms have supported the expansion of the number reduce their involvement. affiliated colmados and are expected to result in improved access to account information. Also, the Government is already piloting alternative payment mechanisms which would reduce the colmado owners‘ power. The Government is also in the process of scaling up the community scorecards (Reportes Comunitarios) which provide beneficiary households with mechanisms to voice their concerns with any aspect of the CCT program, including the payment mechanisms. Finally, the Government has signed an agreement with a consumers‘ advocacy institution (ProConsumidor) to supervise the quality of the payment services. Natural disasters risks  The Dominican Republic  The CCT Solidaridad program and the provision of basic services to the remains vulnerable to multiple poor, supported through this operation, are key instruments to help the types of natural disasters, poorest mitigate the impact of disasters on their consumption and human particularly floods and capital. hurricanes. Natural disasters  At the level of firms and the Government, damage to the major private have the potential to affect the sector enterprises is partly covered by their own insurance and the World poor and threaten their human Bank‘s assistance covers natural disaster risk mitigation under the US$80 capital, as well as pose a million Emergency Recovery and Disaster Management Loan. heavy fiscal burden. 39 Annex 1: Status of Triggers for DPL 3 Triggers for PASS DPL3 Prior Actions PASS DPL3 Comments (as specified in PASS DPL2 PD) I. ENHANCED PERFORMANCE OF SOCIAL SECTORS TO PROMOTE HUMAN CAPITAL FOR THE POOR 1.1 Conceptual, institutional and operative revamp of the CCT Solidaridad program (*) Government uses procedures and mechanisms to (1) The Government, through the CCT Intersectoral Two triggers were combined into a prior action. allow for the verification of co-responsibilities of at Committee, has: (i) adopted procedures and The deconcentration of program operations exceeds least 80 percent of CCT families. mechanisms to allow for the verification of the initial trigger and covers all regions. Furthermore, (*) Establishment of Regional Inter-Sectoral compliance with health and education co- Joint Working Committees were created between the Committees in at least half of the regions covered by responsibilities under the CCT Solidaridad Program; CCT program and the health and education sectors at the program and (ii) established regional intersectoral committees the local levels. in all regions covered by the CCT Solidaridad Program, as evidenced by Disposición issued by the CCT Intersectoral Committee, dated August 26, 2011. (*) Integral System of Monitoring and Evaluation (2) The Government has designed and mandated the Unchanged, slightly clarified. shared by the CCT, Education, Health and the three establishment of an integral monitoring and agencies ADESS, SIUBEN and CCT Solidaridad. evaluation system for purposes of sharing technical information amongst: (i) the CCT Solidaridad Program; (ii) the Government‘s Ministries of Education and Health; (iii) ADESS; and (iv) SIUBEN, as evidenced by Disposición issued jointly by the CCT Intersectoral Committee and the CCT Interagency Committee, dated August 25, 2011. 1.2 Additional health policy measures (*) The Government implements an informational (3) The Government, through its Ministry of Health, Simplified, one trigger kept as a prior action. The tool for the daily registry of primary level care has: (i) mandated the daily registration of primary action incorporates the use of an electronic MIS to activities health care services through the Clinic Management enhance quality through the oversight of primary System, as evidenced by Disposicion No. 0000016, health services, strengthen the verification of CCT co- (*) Resolution of the Ministry of Health that launches dated July 26, 2011, issued by the Borrower‘s responsibilities, and increase accountability by mandatory training for health staff on various aspects Ministry of Health; and (ii) issued an action plan monitoring compliance of health personnel to health of primary health care including the new protocols for (Plan de Acción para Apoyar e Incentivar la care protocols. Other triggers have been met with the maternal-infant care starting October 1st, 2010. Aplicación de Protocolos y Uso del Sistema de Government launching the systems for training and Registro de Atenciones en los Centros de Primer monitoring adherence through the Clinical (*) The Ministry of Health develops and implements Nivel), for the institutional strengthening of entities Management System. The IADB also supports quality a national evaluation system to evaluate the adherence within the Borrower‘s health sector, training, and the assessment to monitor adherence to care protocols. To of health staff to training on the new manuals for establishment of performance incentives for improve quality, the Government has also initiated the maternal-infant care physicians, nurses and administrative staff of primary process of creating a management entity for the health care centers related to the use of the Clinic delivery of health services, and prepared an action Management System. plan for its operationalization and the strengthening of the Ministry of Health to perform its stewardship role 40 Triggers for PASS DPL3 Prior Actions PASS DPL3 Comments (as specified in PASS DPL2 PD) and essential public health functions. 1.3 Additional education policy measures (*) Government administrates the adjusted student (4) The Government, through its Ministry of New prior action reflecting a series of actions learning outcome tests for the second cycle of Basic Education, has: (i) approved a mechanism for the identified as critical in the analytical work undertaken Education (8th grade). transfer of financial resources to District Offices for as part of the Social Sectors NLTA on education (*) Government validates student evaluation the purchase of didactic materials, financing of non- quality. Among the previous triggers: (1) the tests are standards for secondary education (2nd and 4th grade). personnel services and non-financial assets; and (ii) regularly administered, (2) the adjustment to student (*) Based on the results of the pilot to be validated student evaluation standards for secondary learning outcome tests for the second cycle of basic implemented in 2010-11, definition of a new structure education, as evidenced by Resolution No. 668-2011, education has been temporarily deferred as the and amounts of transfers will occur to improve the dated September 7, 2011 and Resolution No. 605- Government has embarked on a broader program of educational indicators of access, retention, promotion 2011, dated September 2, 2011. curriculum reform, and (3) the pilot is under and completion rates by education level implementation. 1.4 Improved quality of service to beneficiaries (*) Government expands the network of institutions (5) The Government, through its Social Cabinet, has: Strengthened, to include the new supervision affiliated to Solidarity program (Red de (i) expanded the number of institutions affiliated to agreement. Abastecimiento Social) according to the target set for the Red de Abastecimiento Social (RAS) to a total of the second year. 3,067 institutions as of September 30, 2011 (from a baseline of 1,988 institutions as of June 30, 2009); (ii) approved the bylaws of the RAS; and (iii) entered into an agreement with Pro-Consumidor, dated August 10, 2011 to: (A) supervise the institutions of the RAS; and (B) inform beneficiaries of CCT Solidaridad Program of their rights and the functioning of the RAS, as evidenced by Resolution No. 001-2011, dated August 25, 2011, issued by the President of the Board of ADESS. 1.5 Improved Targeting Performance (6) The Government, through its Social Cabinet, has (*) Government will implement a new socioeconomic Unchanged. The new Socioeconomic Census will launched a new census to update the SIUBEN and targeting census with improved inclusion and reach 1.81 million households, beyond the initial 1.5 improve the targeting of its social programs, including million household estimates.0020 exclusion accuracy, compliance with eligibility an update of the information on households and criteria and expanded beneficiary identification into individuals, an increase of census coverage in new geographic zones with high poverty levels not geographic areas already covered by the last census considered in the 2004-2005 census, along with carried out in 2004-2005, and an expansion of the subsequent updating of program beneficiary databases. census coverage to geographic areas with high poverty levels not previously included, as evidenced by Resolution No. GS-02-11, dated September 13, 2011 issued by the coordinator of the Social Cabinet. II. IMPROVED BUDGET MANAGEMENT TO SUPPORT THE JOINT PERFORMANCE OF SOCIAL SECTOR AGENCIES WITHIN THE 41 Triggers for PASS DPL3 Prior Actions PASS DPL3 Comments (as specified in PASS DPL2 PD) REDESIGNED CCT PROGRAM (Social Cabinet, Health and Education Ministries) (*) Review of progress in closing supply-gaps in (7) The Government has established budget planning Consolidated multiple triggers into one strengthened educational provision, health and nutrition in and coordination mechanisms that will ensure the policy action that covers critical areas of the planning prioritized areas. availability of sufficient resources to meet the results process: (1) medium term investment planning, (2) targets of the CCT Solidaridad Program, as evidenced allocation in annual budget, and (3) monitoring and (*) Projections contained in the Policy Paper, linking by the approval of: (i) the Multi-Annual National Plan analysis of the results achieved by the program aimed program targets and resources, reflected in the multi- for the Public Sector 2011-2014, by the Government‘s at closing gaps in supply of basic services. annual plan and the medium-term budget framework. Council of Ministers on September 15, 2011; (ii) the Budget Law of 2011; and (iii) Disposicion dated September 1, 2011, issued by the CCT Intersectoral Committee. III. SUPPORTING THE GRADUAL INTRODUCTION OF PERFORMANCE AGREEMENTS IN THE SOCIAL SECTORS (*) Performance Agreements signed by the Health (8) The Government, through its Ministries of Simplified and clarified. Performance agreements and Education Ministries, establishing strategic plans, Finance, Economy and Public Administration, has: (i) covering priority programs in education and health are objectives, performance indicators and budgets, signed a separate performance agreement with each of the first pilots to prepare for performance agreements covering at least the priority social sector programs, the following Government‘s Ministries: Health and for other sectors and programs. The prior action also and will be included as an annex to the Budget. Education, to strengthen the institutional budget incorporates the Decree that defines institutional Potential trigger to be examined after completion of management and accountability of the Government‘s responsibilities concerning Performance Agreements, the revamp of Solidaridad. (*) Diagnostic and draft priority programs in health and education, through a key element for the operationalization of institutional strengthening plan for the introduction of performance-based budgeting, as evidenced by the performance agreements across Government. a performance agreement covering the CCT program. performance agreements dated August 31, 2011; and (ii) approved the Presidential Decree No. 522-11, dated August 31, 2011, which regulates Article 14 of the Government‘s Law No. 423-06 (Ley Orgánica de Presupuesto para el Sector Público), that establishes a results-oriented management model through the use of performance agreements. IV. ENHANCED TRANSPARENCY AND CIVIL SOCIETY OVERSIGHT IN SOCIAL SECTORS (*) Launch of the Portal del Ciudadano ―Consulta (9) The Government, through its Ministry of Finance, Unchanged. Amigable‖ online budget transparency tool. has launched an online budget transparency tool (Portal del Ciudadano Dominicano), which allows free public consultations on public revenues and expenditures of the Government‘s central agencies, including data on execution of the Government‘s national budget. (*) Publication of the community scorecards pilot (10) The Government has defined and mandated the Strengthened and simplified. The action focuses on results implementation of the expansion plan of the the expansion of scorecards. The other trigger was (*) Government enhances the complaint system of the ―community scorecards‖ (a social auditing scheme for dropped, but the complaint system advanced beyond CCT program so that it can include complaints the beneficiaries of the CCT Solidaridad Program to expectation, with the complaint system operational 42 Triggers for PASS DPL3 Prior Actions PASS DPL3 Comments (as specified in PASS DPL2 PD) associated with the provision of service in schools voice their opinion on the quality of the services and incorporated in the broader Access to and health facilities provided under said program), as evidenced by a Governmental Information System. Disposición dated August 12, 2011, issued by the v CCT Intersectoral Committee. 43 Annex 2: PASS DPL Series – Overall Policy Matrix Theme DPL 1 (Nov 2009) DPL 2 (Nov 2010) DPL 3 (Nov 2011) I. ENHANCED PERFORMANCE OF SOCIAL SECTORS TO PROMOTE HUMAN CAPITAL FOR THE POOR 1.1 Conceptual, institutional and operative revamp of the CCT Solidaridad program (i) Human capital function of the CCT (*) Presidential Decree establishing the (*) Resolution of the Social Cabinet (*)The Government, through the CCT has been confused over the years legal and regulatory framework for the Coordinator (Vice-President) approving: Intersectoral Committee, has: (i) adopted because of the inclusion of non- restructuring and strengthening of the (i) the regulations governing the function procedures and mechanisms to allow for conditional cash transfers in the Government‘s social protection system of the CCT Interagency Committee the verification of compliance with Solidaridad operative realm. as well as mandating social protection (composed of ADESS, SIUBEN, and health and education co-responsibilities (ii) Unclear/inefficient division of roles programs to be organized as non- Solidaridad) and CCT Intersectoral under the CCT Solidaridad Program; and responsibilities within agencies of conditional cash transfers, targeted Committee (Solidaridad, Health and and (ii) established regional intersectoral Social Cabinet (targeting: SIUBEN, subsidies, and cash transfers Education); and (ii) the implementation, committees in all regions covered by the payment: ADESS, CCT: Solidaridad). conditioned to the investment in human by November 2011, of the organizational CCT Solidaridad Program, as evidenced capital by poor families. development plan for Solidaridad, by Disposición issued by the CCT (iii) Poor coordination between Social (*) Resolutions of the Social Cabinet including the updating of the Intersectoral Committee, dated August Cabinet agencies and Education and Coordinator (Vice-President) organizational structure and personnel 26, 2011. Health Ministries. revamping the institutional framework roles in line with the mission goals and (*)The Government has designed and (iv) Lack of a clear results framework operational rules of the redesigned CCT and operative rules of the CCT program mandated the establishment of an for the CCT program and the related Solidaridad Program. Solidaridad (i) ensuring the compliance integral monitoring and evaluation performance of health and education with and verification of co- (*) Communication of the Vice- system for purposes of sharing technical services. responsibilities; and (ii) including President on the process of verification of information amongst: (i) the CCT indicators of management and impact, co-responsibilities, presenting the Act of Solidaridad Program; (ii) the through: (i) the creation of an inter- Agreement from the CCT Intersectoral Government‘s Ministries of Education institutional Committee (Solidaridad- Committee of the CCT Solidaridad and Health; (iii) ADESS; and (iv) ADESS-SIUBEN) for the coordination Action Plan 2010-2011, stating that: (i) SIUBEN, as evidenced by Disposición of all policy actions to be developed in by December 2010, 90 percent of issued jointly by the CCT Intersectoral the social protection sector; (ii) the beneficiary households receiving Committee and the CCT Interagency creation of an Inter-agency Committee transfers will be registered in a Primary Committee, dated August 25, 2011. (Solidaridad, Health and Education), Care Unit and/or school or have received for the coordination of all policy actions a letter warning of potential suspension to be developed for the health, due to incompliance; and (ii) defining the education and nutrition sectors; and (iii) procedures and timeline (beginning in the approval of two new manuals: the January 2011) for the systematic first on cross-cutting processes to be verification of co-responsibilities in applied to all social programs, and the education and health, with the objective second on the operative rules applicable of linking at least 80 percent of the to the redesigned CCT Solidaridad transfers to the beneficiaries of the CCT Program. Program based on the verification of co- responsibilities. 44 Theme DPL 1 (Nov 2009) DPL 2 (Nov 2010) DPL 3 (Nov 2011) 1.2 Additional health policy measures (i) Low quality of maternal and child (*)The Government, through its healthcare services at the first level of Ministry of Health, has: (i) mandated the care. daily registration of primary health care (ii) Poor maternal and child health services through the Clinic Management outcomes: high rates of maternal and System, as evidenced by Disposicion child mortality and lack of protection No. 0000016, dated July 26, 2011, against immune-preventable diseases. issued by the Borrower‘s Ministry of Health; and (ii) issued an action plan (Plan de Acción para Apoyar e Incentivar la Aplicación de Protocolos y Uso del Sistema de Registro de Atenciones en los Centros de Primer Nivel), for the institutional strengthening of entities within the Borrower‘s health sector, training, and the establishment of performance incentives for physicians, nurses and administrative staff of primary health care centers related to the use of the Clinic Management System. 1.3 Additional education policy measures (i) Lack of information system in the (*) Resolution of the Ministry of (*) Resolutions of the Ministry of (*)The Government, through its Ministry of Education, to verify co- Education validating student evaluation Education: (i) formalizing the Ministry of Education, has: (i) approved responsibility compliance and monitor standards for pre-primary education and introduction of the student learning a mechanism for the transfer of financial basic quality factors. the first cycle of Basic Education. outcome tests (with reference to resources to District Offices for the (ii) Lack of differentiated education Mathematics and Spanish) for students in purchase of didactic materials, financing financial incentives offsetting the first cycle of basic education; and (ii) of non-personnel services and non- opportunity costs within the CCT validating the evaluation standards to be financial assets; and (ii) validated Program. used both in public and private schools student evaluation standards for for students in the second cycle of basic secondary education, as evidenced by (iii) Poor ability of the Ministry of education. Resolution No. 668-2011, dated Education to monitor student learning September 7, 2011 and Resolution No. outcomes, including students from CCT 605-2011, dated September 2, 2011. families. 45 Theme DPL 1 (Nov 2009) DPL 2 (Nov 2010) DPL 3 (Nov 2011) 1.4 Improved quality of service to beneficiaries (i) Current payment mechanism offers (*) Resolution of the Head of the Social (*) Resolution of the Coordinator of the (*)The Government, through its Social limited competition in services, prices, Cabinet (Vice-President) approving a Social Cabinet (Vice-President) Cabinet, has: (i) expanded the number of and products. plan to expand the network of instructing the implementation of greater institutions affiliated to the Red de (ii) Beneficiaries are not able to access institutions affiliated to Solidarity access to information on the CCT Abastecimiento Social (RAS) to a total basic information about CCT benefits, program (Red de Abastecimineto Solidaridad payment card to allow of 3,067 institutions as of September 30, including transfer amount or account Social, including colmados or corner beneficiaries to be informed of: (i) the 2011 (from a baseline of 1,988 balance. grocery shops, as well as small total amount of the cash transferred to institutions as of June 30, 2009); (ii) supermarkets-pequeños comercios) said beneficiaries; and (ii) the available approved the bylaws of the RAS; and with a view to achieve three main balance on their cards through the use of (iii) entered into an agreement with Pro- objectives: (i) to promote competition a toll-free telephone line by December Consumidor, dated August 10, 2011 to: among affiliated shops; (ii) to expand 1st, 2010. (A) supervise the institutions of the the supply and types of products that RAS; and (B) inform beneficiaries of can be purchased with the Solidaridad CCT Solidaridad Program of their rights debit card; and (iii) reduce transaction and the functioning of the RAS, as time and costs for Solidaridad evidenced by Resolution No. 001-2011, beneficiaries. dated August 25, 2011, issued by the President of the Board of ADESS. 1.5 Improved targeting performance (*)The Government, through its Social Cabinet, has launched a new census to update the SIUBEN and improve the targeting of its social programs, including an update of the information on households and individuals, an increase of census coverage in geographic areas already covered by the last census carried out in 2004-2005, and an expansion of the census coverage to geographic areas with high poverty levels not previously included, as evidenced by Resolution No. GS-02-11, dated September 13, 2011 issued by the coordinator of the Social Cabinet. 46 Theme DPL 1 (Nov 2009) DPL 2 (Nov 2010) DPL 3 (Nov 2011) II. IMPROVED BUDGET MANAGEMENT TO SUPPORT THE JOINT PERFORMANCE OF SOCIAL SECTOR AGENCIES WITHIN THE REDESIGNED CCT PROGRAM (S6ocial Cabinet, Health and Education Ministries) (i) Budget allocations are inadequate to (*) Communication of the Head of (*) The Government, through its Council meet entitlements under the CCT Social Cabinet (Vice-President) to the of Ministries, has: (a) approved the program. Ministry of Finance providing an Multi-Annual National Plan for the assessment quantifying and estimating Public Sector 2010-2013, which contains the costs of supply-gaps linked to the medium-term guidelines for social redesigned CCT program, covering the protection policy with projections as to provision of: (i) education services and the coverage, estimated budget, and related inputs (didactic materials); (ii) financing bases, including the primary health care services including quantification of the service coverage access to essential medicines; and (iii) gaps in education and health linked to the micronutrients prioritizing Solidaridad Solidaridad program including: (i) initial, pregnant women and children under basic, and the first cycle of middle school two years old. education; (ii) primary health care and an increase in the enrollment in SENASA among Solidaridad beneficiaries not covered by any Social Security scheme; and (iii) nutrition, including the provision of micronutrients for pregnant women and children under two years of age; and (b) submitted the draft 2011 Budget Law to the Congress. (ii) The budget is not always executed as (*) The Ministry of Finance (MOF) has (*)The Government has made available: (*)The Government has established planned, which may further disrupt taken the necessary measures to ensure (a) sufficient resources to meet the output budget planning and coordination delivery of the CCT. that sufficient funds will be included in targets of the CCT Solidaridad Program mechanisms that will ensure the the Government‘s 2010 Budget Law to that had been calculated and agreed for availability of sufficient resources to cover the supply-gaps linked to the 2010 as reflected in Article 26 of the meet the results targets of the CCT redesign of the CCT Solidaridad 2010 National Budget Law and a Solidaridad Program, as evidenced by Program identified in the assessment technical note issued jointly by the the approval of: (i) the Multi-Annual described above, as well as special Ministry of Economy, the Social Cabinet National Plan for the Public Sector measures to ensure that those funds are and the Ministry of Finance in October 2011-2014, by the Government‘s disbursed in a timely fashion. 2010; (b) strengthened procedures to Council of Ministers on September 15, ensure the predictability in disbursement 2011; (ii) the Budget Law of 2011; and for budget users, as evidenced in Article (iii) Disposicion dated September 1, 26 of the 2010 National Budget Law; and 2011, issued by the CCT Intersectoral (c) adequate measures to monitor and Committee. publish the use of such resources, as evidenced by a resolution issued by the 47 Theme DPL 1 (Nov 2009) DPL 2 (Nov 2010) DPL 3 (Nov 2011) CCT Intersectoral Committee establishing that the results of the execution of said budget are presented to the CCT Intersectoral Committee on a quarterly basis and published on the web of the CCT Solidaridad Program or of the Ministries of Health and Education. III. SUPPORTING THE GRADUAL INTRODUCTION OF PERFORMANCE AGREEMENTS IN THE SOCIAL SECTORS (i) Budget management mainly focuses (*) The Ministry of Economy, (*) The Ministries of Health and (*)The Government, through its on inputs, hindering the prioritization of Planning and Development (MEPD) Education agree with the Ministry of Ministries of Finance, Economy and a results-based management of critical and the Ministry of Public Economy on the institutional Public Administration, has: (i) signed a social programs. Administration (MPA) have completed strengthening measures that are needed separate performance agreement with (ii) Weak performance and an institutional diagnostic to assess the to ensure preparedness for the each of the following Government‘s accountability of Regional Health preparedness and capacity building introduction of their respective Ministries: Health and Education, to Services, which are very centralized. needs for the introduction of performance agreements by October strengthen the institutional budget Performance Agreements in the 2011. management and accountability of the education and health sectors. (*) Internal management agreements Government‘s priority programs in (*) The Ministry of Public Health signs signed between the Ministry of Health health and education, through results-oriented internal management and the remaining Regional Health performance-based budgeting, as agreements with two Regional Health Services to introduce results-based evidenced by the performance Services. management. agreements dated August 31, 2011; and (ii) approved the Presidential Decree No. 522-11, dated August 31, 2011, which regulates Article 14 of the Government‘s Law No. 423-06 (Ley Orgánica de Presupuesto para el Sector Público), that establishes a results- oriented management model through the use of performance agreements. 48 Theme DPL 1 (Nov 2009) DPL 2 (Nov 2010) DPL 3 (Nov 2011) IV. ENHANCED TRANSPARENCY AND CIVIL SOCIETY OVERSIGHT IN SOCIAL SECTORS Overall Budget: (i) Very low level of CCT Program: (*) The CCT Overall budget: (*) The Ministry of Overall budget: (*)The Government, public access to timely and Solidaridad website publishes: (i) the Finance (i) confirms (a) the through its Ministry of Finance, has comprehensive budget information. list of CCT beneficiaries; and (ii) the implementation development of the launched an online budget transparency CCT Program: (ii) Lack of access to assessment defined above quantifying Consulta Amigable Project, which aims tool (Portal del Ciudadano information at the sector level (health and estimating the costs of covering at creating a web-based interface to make Dominicano), which allows free public and education) to allow for the proper supply gaps in health, education and available, over the internet, data on the consultations on public revenues and monitoring by civil society of supply nutrition. national budget contained in the expenditures of the Government‘s gaps. Government‘s integrated financial central agencies, including data on management system; and (b) the execution of the Government‘s national (iii) Lack of a social auditing program publication (beginning on September 30, budget. for the CCT program, including 2010) on the Minister of Finance‘s CCT Program: (*)The Government has verifiable and quantifiable feedback and website of monthly interim reports on the defined and mandated the adequate feedback loop. execution of the Government‘s national implementation of the expansion plan of budget; and (ii) signs an administrative the ―community scorecards‖ (a social agreement with the Minister of Economy auditing scheme for the beneficiaries of to establish a pilot system to link budget the CCT Solidaridad Program to voice information to performance indicators their opinion on the quality of the through the web-based interface services provided under said program), described in (i) herein. as evidenced by a Disposicin dated CCT Program: (*) Resolution of the CCT August 12, 2011, issued by the CCT Intersectoral Committee instructing the Intersectoral Committee. implementation of a Community Scorecards pilot to monitor availability and improve accountability of health and education inputs to be undertaken from September 2010 to April 2011, with the aim of gradual expansion to the entire CCT starting in June 2011. 49 Annex 3: Results framework for the PASS program Baseline Target Target Target Status or comments Indicator Nov. End End End 200929 DPL1 DPL2 DPL3 Nov. Nov. Dec. 2010 2011 2012 POLICY AREA 1: ENHANCED PERFORMANCE OF SOCIAL SECTORS TO PROMOTE HUMAN CAPITAL FOR THE POOR I.1 Overhaul of the CCT Solidaridad program Interim phase (September– December 2010): Nov 2011 target met (health): The indicator increased to 91.3% 1.1.1. Share of beneficiary households receiving transfers, who are 0% 92% 93% 95% in July 2010 (percentage of families registered in their UNAP, registered with their Primary Care Unit (UNAP) or school, or who EEPS data) and to 99.8% in August 2011 (share of families with received a letter warning of potential suspension due to incompliance information letters to signal compliance or warning). Targets with registrations were revised to reflect the new baseline.30 Starting January 2011: NA NA 65% 80% Nov 2011 target met (education): The indicator increased to 1.1.2. Share of CCT Solidaridad transfers paid based on the timely 81.3% by August 2011 (percentage of families for which the verification of compliance with co-responsibilities. verification ascertained that children were enrolled in schools). Targets were revised for education to reflect the new baseline.31 1.2 Improved articulation with health actions According to national health protocol and/or Basic Health Care Plan: 1.2.1. Share of pregnant women from CCT Solidaridad receive prenatal 91.7% 92% 93% 94% Note: For this section, the baseline was updated on the basis of checks the Social Protection Evaluation Study (EEPS), which was 1.2.2. Share of puerperal women from CCT Solidaridad attend postnatal 41.9% 42.5% 45% 50% conducted starting in July 2010 and released in September 2011. checks For many of these, the baseline value is significantly different 1.2.3. Children between 0 and 5 years old in the CCT program comply 54.4% 55% 60% 65% from the values initially estimated.33 As a result, the Government with the series of consults established by the national standards of revised its yearly targets.34 comprehensive care for children (growth and development check-ups) 1.2.4. Share of children between 18 and 23 months from CCT Solidaridad fulfilling the complete vaccination protocol32 49.3% 50% 60% 65% 1.2.5. Share of elderly aged over 65 years old from CCT Solidaridad receiving a health check visit once a year. 35.1% 37% 50% 60% 29 Baseline data reflect administrative data gathered for the period at the start of PASS DPL1 in Nov 2009; additional baseline data was gathered in July 2010 through the Social Protection Evaluation Study (EEPS). 30 Previously 80%, 90% and 95%. 31 Previously 80% for 2011 and 90% for 2012. 32 To ensure measurability, this indicator replaces the initial one which referred to children 0 to 5 years old. 33 Initial estimates for the baseline (made at the time of the DPL 1 preparation in November 2009) were respectively 94.5%, 73.2%, 0%, 79%, 1.1%. 34 Previously, 95%, 95% and 95% for indicator 1.2.1; 80%, 85%, and 90% for indicator 1.2.2; 30%, 50%, and 90% for indicator 1.2.3; 83%, 86%, 90% for indicator 1.2.4; and 30%, 50% and 90% for indicator 1.2.5. 50 Baseline Target Target Target Status or comments Indicator Nov. End End End 200929 DPL1 DPL2 DPL3 Nov. Nov. Dec. 2010 2011 2012 1.3 Nutrition 1.3.1. Share of pregnant women (first pregnancy) in the CCT program 68.3% 69% 70% 73% Note: For this section, the baseline was updated on the basis of receiving some vitamins or micronutrients during their pregnancy.35 the Social Protection Evaluation Study (EEPS), which was 1.3.2. Share of puerperal women from the CCT program receiving supply 63.3% 65% 66% 68% conducted in July 2010 and released in September 2011. For of micronutrients in accordance with the national protocol some of these, the baseline value is significantly different from 1.3.3. Share of children between 6 and 60 months from CCT Solidaridad 1.4% 5% 60% 80% the values initially estimated.37 As a result, the Government has receiving micronutrient sprinkles (iron and zinc).36 revised its yearly targets.38 For indicator 1.3.3, at the time of the data measurement, the program has only initiated in select municipalities of La Vega. This program has since expanded. 1.4 Improved articulation with education actions Enrollment (for CCT Solidaridad children) Note: For indicators 1.4.1-1.4.3, the baseline was updated on the 1.4.1. Early Childhood Development 14.1% 15% 16% 50% basis of the Social Protection Evaluation Study (EEPS), which 1.4.2. Basic Education 95.2% 80% 83% 85% was conducted in July 2010 and released in September 2011. For 1.4.3. Secondary Education (First Cycle) 42.2% 45% 48% 55% some of these, the baseline value is significantly different from the values initially estimated.39 As a result, the Government has School attendance (80 percent of school days) for CCT Solidaridad revised its yearly targets.40 Baseline data for indicators 1.4.4- children 1.4.6 come from administrative data, because the EEPS gathered 1.4.4. Early Childhood Development 48.8% 50% 60% 70% baseline data during the summer break. 1.4.5. Basic Education 93.7% 80% 85% 90% 1.4.6. Secondary Education 87.1% 70% 80% 85% 1.5 Payment mechanisms and targeting 1.5.1. Number of affiliated institutions in the Red de Abastecimiento Social 1,988 3,067 Target met. The RAS has been expanded according to the plan. (RAS) An agreement has been signed with Pro-Consumidor to monitor 1.5.2. Monitoring mechanism for issues with payment mechanisms Plan Actual the quality of payment services. 35 To ensure measurability, this replaces the initial indicator (share of pregnant women in the CCT program who receive micronutrients according to the national protocol). 36 To ensure measurability, this replaces the initial indicator by broadening the age range from 0 to 6 months to 0 to 60 months. 37 Initial estimates for the baseline (made at the time of the DPL 1 preparation in November 2009) were respectively 81%, 38%, and 0%. 38 Previously 83%, 86% and 90% for indicator 1.3.1; 50%, 70% and 90% for indicator 1.3.2; 5%, 50%, and 90% for indicator 1.3.3. 39 Initial estimates for the baseline (made at the time of the DPL 1 preparation in November 2009) were respectively 30.9%, 84.3%, and 46.9%. Indicator 1.4.2 is calculated for 7 to 14 years-old enrolled in basic education in the previous year, and indicator 1.4.3 is calculated for children aged 15 to 16 enrolled in basic education, technical- vocational, secondary education, or university. 40 Targets used to be 33%, 37%, and 50% for indicator 1.4.1; 86%, 88%, and 90% for indicator 1.4.2; 51%, 57% and 63% for indicator 1.4.3; 50%, 60% and 70% for indicator 1.4.4; 94%, 94%, and 94% for indicator 1.4.5; and 88%, 89% and 90% for indicator 1.4.6. 51 Baseline Target Target Target Status or comments Indicator Nov. End End End 200929 DPL1 DPL2 DPL3 Nov. Nov. Dec. 2010 2011 2012 1.6 improved targeting performance 1.6.1. Revision of the SIUBEN census Launch Database Target met. Census launched (material procured, personnel updated hired, implementation plan approved, launch decided). POLICY AREA 2: IMPROVED BUDGET MANAGEMENT FOR ENHANCED PERFORMANCE OF SOCIAL SECTORS 2.1.1. Deviation between proposed and actual budget for programs to NA 1.00 0.90 0.85 Target exceeded: close supply gaps in health, nutrition, and education services, relative to The value of indicator 2.1.1 was 0.0 in August 2010 and in the deviation for the overall budget. 41 August 2011 (the best value for this indicator), as all promised appropriations have been allocated. 2.1.2. Average annual ratio between quarterly disbursement to, and NA 0.50 0.65 0.85 planned quarterly budget allocation for, programs aimed at closing the Not available. supply gaps in health, nutrition, and education services. POLICY AREA 3: GRADUAL INTRODUCTION OF PERFORMANCE AGREEMENTS 3.1.1 Number of priority programs in education, nutrition, and health, 0 2 4 6 Target exceeded: Five priority programs are covered by the related to the Solidaridad CCT Program that have successfully developed Performance Agreements (pre-primary, basic, and secondary the log-frame methodology. education programs, as well as the immunization and the Maternal and Infant Health and Nutrition programs). POLICY AREA 4: ENHANCED TRANSPARENCY AND CIVIL SOCIETY OVERSIGHT 4.1 Enhanced Budget Transparency and Oversight 4.1.1. Number of independent users of the Portal del Ciudadano 0 Tool 15 60 Targets exceeded: After the unofficial launch of the Portal "Consulta Amigable" budget information portal. ready online, the site logged 50 independent users and 212,673 hits in 4.1.2. Number of times the portal website, where free information is 0 Tool in 50 1,500 the period of less than a month culminating at the end of available, is accessed (annual hits). progress September 2011. The Portal tool officially launched on September 30th, 2011. 4.2 Enhanced Transparency and Oversight of the CCT Solidaridad 4.2.1. Number of community-scorecards completed by beneficiary 0% 0% 50% 70% Nov 2011 target exceeded: The actual value was 65% in August committees, as a share of total number of community-scorecards 2011, when 112 of the 172 scorecards distributed to beneficiary distributed. groups (covering 749 families, 14 social service providers, 8 colmados, 15 community organizations, and 10 program coordinators) were filled. 41 Percentage difference between the planned (B plan-supply) and the actual (Bactual-supply) budgets for programs to close the gaps in supply in health, nutrition, and education services, relative to the percentage difference between the planned (B plan-national) and the actual (Bactual-national) for the overall national budget: ((Bactual-supply – Bplan-supply)/Bplan-supply) / ((Bactual-national – Bplan-national)/Bplan-national). 52 Annex 4: Development Policy Letter 53 54 55 56 57 58 59 60 61 62 63 64 Development Policy Letter (Translated into English) Mr. Robert Zoellick President World Bank Washington, D.C. Ref: Letter of Development Policy — Performance and Accountability of Social Sectors Programmatic Loan Dear Mr. Zoellick: On behalf of the Government of the Dominican Republic, I am pleased to write to you to reiterate our interest in and commitment to forging ahead with public sector reform processes, strengthening macroeconomic stability, enhancing public policy performance in the social sectors, which develop human capital among the poorest, and continuing the process launched in 2006 to improve public financial administration. Clearly, the third disbursement of the above-mentioned programmatic loan, based on development policies related to performance and accountability in the social sectors, will support the implementation of key areas of these processes and priorities. In 2009, the international situation directly impacted the Dominican economy, as evidenced by the decline in tax revenue collected relative to the amount budgeted, and a marked slowdown in the main sectors or areas that generate foreign exchange earnings, namely, tourism, exports, and remittances. With a view to ensuring growth in output, the Government adopted the policy objective of reviving domestic demand in order to offset weaker external demand. In October 2009, the Dominican Government concluded a Stand-By Arrangement with the International Monetary Fund in order to compensate for the sharp drop in tax revenue and quickly jumpstart the productive base. This Stand- By Arrangement is expected to guarantee the implementation of short- and medium-term countercyclical measures. The Arrangement strengthened implementation of an expansive fiscal and monetary policy that resulted in a solid growth rate of 7.8 percent in 2010. In aggregate terms, the sectors that most contributed to growth were services (3.9 percent) and industry (2 percent). In the area of prices, inflation stood at 6.2 percent at end-2010, a rate consistent with the target inflation rate proposed in the Central Bank‘s Monetary Program and the Stand-By Arrangement with the IMF. To achieve this target, the monetary authorities guaranteed reversal of the inflationary expectations of the first five months of 2010, a period during which prices increased by 5.4 percent on average, 0.55 percentage points below the lower limit of the target inflation range. Since 2009, the Dominican Republic, with the assistance of multilateral organizations, has stepped up work aimed at coping with external difficulties, improving the efficiency and quality of public services, reducing the vulnerability of persons at the bottom of the social pyramid, and prioritizing 65 and accelerating public sector reforms. To achieve these goals, the Government obtained and secured the fiscal space needed to establish priority social programs and investment aimed at the continued development of the economy. The World Bank Group‘s Strategic Alliance with the Dominican Republic fits perfectly into this renewed collaborative work effort. The importance of sustaining this effort is heightened by the recent worsening of crisis conditions and the climate of uncertainty. Against this backdrop, and as set forth in the Strategic Alliance, priority should be given to maintaining the focus on protecting the most vulnerable sectors, while at the same time sustaining efforts to increase competitiveness and strengthen public institutions in the country in the areas of accountability and more effective management outcomes. 1. The Government’s Vision The Dominican Government is continuing to implement the most sweeping institutional reform agenda in 50 years, which culminated with the promulgation of the new Constitution of the Dominican Republic in February 2010. The new Constitution provides for meaningful change in political and administrative government management, to be carried out in a manner consistent with a long-term vision for the country. The Government is continuing to develop the National Planning and Public Investment System. After duly completing the drafting and consultative process involving the broadest social, political, academic, business, labor, church-based, and other civil society entities, the Executive submitted the draft National Development Strategy 2030 (NDS) to Congress in March 2011 for its passage into law. This draft has been sent forward for review and discussion by a bicameral legislative commission. The document is currently open for public review, prior to its submission for passage into law. It is expected to be adopted by the current legislature. The NDS articulates a vision, strategic thrusts, general and specific objectives, and lines of action that facilitate progress toward achievement of the development objectives. These strategic elements must lead to the investment programs, policies, and projects outlined in the Multi-Year Public Sector Plan for the production of public goods and services intended for the population, in order to achieve the development objectives. A system of indicators for monitoring their performance from an implementation standpoint and, possibly for assessing impact, is an integral part of the Multi-Year Plan. The aim is to move toward a country and public sector with greater and more effective planning, with the goal of achieving more effective results-based management. This objective is thus the focus of the draft NDS and the National Multi-Year Public Sector Plan, which ranks second in the National Planning System hierarchy, based on a medium-term perspective. Consistent with the guidelines of the Strategy, the National Multi-Year Plan contains programs and projects to be accorded priority in order to tackle the main obstacles to achievement of national development goals and objectives, the most pressing of which are the quality lag in public management, the poor quality of education, and deficiencies in the provision of health services. The Dominican Government is cognizant of these problems and is striving to correct them. It has devised a roadmap with established goals and indicators and identified the gaps in the process. Closing these gaps is an integral part of the objectives to be developed through the operations set forth in the framework of this Development Policy Loan (DPL) and is a key component of the public policy content of the most recent version of the aforementioned National Multi-Year Public Sector Plan (2011-2014). 66 II. Macroeconomic Developments In the years preceding the global financial crisis (2005-2008), the macroeconomic performance of the Dominican Republic served as a benchmark for Latin America and the Caribbean. Real GDP growth climbed to an annual rate of 8.4 percent on average, equivalent to a cumulative increase of 40 percent, marking one of the greatest periods of expansion in 25 years, while inflation remained below the double-digit range, averaging 6.5 percent on a year-on-year basis during that period. Revenue collected rose to historic highs, leading to a process of fiscal consolidation. The central government‘s primary surplus averaged 0.2 percent of GDP during that period, and the consolidated public sector global deficit fell from 7.4 percent of GDP in 2004 to 4.4 percent in 2008. The debt-to-GDP ratio fell by 4.6 percentage points, from 29.1 percent in 2004 to 24.5 percent in 2008. This period of macroeconomic stability was interrupted in 2009 when the global economy experienced the greatest contraction on record since the 1930s. The international economic crisis led to a slowdown in local activity, while the real GDP growth rate fell to its lowest level in four years in 2009. In terms of policy responses, the Government adopted various monetary and fiscal expansionary measures. In the monetary policy sphere, measures ranged from lowering the policy rate to direct cash infusions into vulnerable sectors of the economy. Expansionary fiscal policy took the form of fiscal stimulus programs. The Dominican Republic joined the consensus reached by most countries to implement expansionary fiscal policies through short-term implementation, during the second half of 2009 and the first half of 2010, of a countercyclical response in the form of a fiscal stimulus of roughly 1 percent of GDP, with priority being accorded to social spending in the vulnerable sectors and public investment being promoted with the aim of creating a multiplier effect in the rest of the economy. In the medium term, a fiscal consolidation process was implemented during the second half of 2010 by lowering expenditure in the non-social spheres, with indiscriminate subsidies being targeted, and strengthening the tax administration, thus ensuring fiscal sustainability. The swift and coordinated monetary and fiscal policy response averted a recession in the Dominican Republic. In 2009, the real year-on-year GDP growth rate stood at 3.5 percent and the recovery continued with growth peaking at 7.8 percent in 2010, making the Dominican economy among the best performing in the region. At end-2010, the inflation rate stood at approximately 6.2 percent, close to the lower limit of the 6 to 7 percent range set by the Central Bank‘s Monetary Program and the Stand-By Arrangement with the IMF. During the first quarter of 2011, the growth rate of the economy stood at 4.3 percent, a rate lower than the one posted for the same period in the previous year, owing to the implementation of more restrictive fiscal and monetary policies from end-2010, while the year-on-year inflation rate stood at 7.6 percent in March 2011. In 2010, effective average oil prices stood at US$79 per barrel. At the end of that year, oil prices started to trend upward, surpassing US$100 per barrel in early 2011 owing, among other things, to geopolitical factors that rocked the international markets against a backdrop of tensions in oil production, supply, and distribution. The cyclical increase in international commodity prices, particularly oil, impacted the country‘s macroeconomic and fiscal situation. However, the authorities once again mounted a swift and coordinated response to blunt the impact of this situation. The Central Bank, which was committed to the Monetary Program that sets a target inflation range of 5 to 6 percent for 2011, adopted a restrictive stance, while the Ministry of Finance, committed to fiscal consolidation, reallocated non-social expenditure, thus offsetting the higher oil expenditure and maintaining the projected consolidated primary surplus of 0.8 percent of GDP at end-2011. 67 In terms of the foreign sector, the current account deficit climbed to 8.6 percent of GDP in 2010, owing to the decline in public savings following the implementation of a countercyclical fiscal policy. This deficit has been financed by foreign investment and portfolio investment capital inflows, which in turn increased international reserves, with this figure climbing to US$2.5 billion in the first quarter of 2011. The current account deficit is expected to fall slightly toward end-2011 owing to the fact that the increase in oil prices will be offset to some degree by the weaker domestic demand and the increase in mining exports. III. Macroeconomic Program The fiscal stimulus implemented at end-2009 to boost economic activity was maintained in 2010. During this period, the role of fiscal policy as the stabilizer of cyclical effects was reestablished. In 2010, total revenue, including grants, amounted to RD$259.2 billion, equivalent to 13.6 percent of GDP, representing a nominal variation of 12.8 percent relative to 2009. Primary expenditure amounted to RD$271.4 billion, corresponding to 14.3 percent of GDP, a 5.9 percent increase relative to the previous year. As of end-2010, transfers to the electricity sector were double the originally programmed amount. The Government had to increase transfers by 0.6 percent of GDP which, by year-end, stood at 1.2 percent of GDP. The adjustment to offset greater subsidies to the sector was made by redistributing primary, non-social expenditure, in particular by decreasing government spending and keeping capital expenditure below the projected amount. In September 2010, Congress approved the first budget amendment aimed at restructuring total expenditure. As a result of this measure, capital expenditure stood at 3.8 percent of GDP, below the programmed amount in the Stand-By Arrangement with the IMF and close to the level posted in 2009. In addition, toward end-2010, a decision was made to increase electricity rates by 11 percent, thus mitigating the risk of further slippage in relation to the fiscal goals set forth in the Arrangement. As a result, the overall central government deficit was 2.5 percent of GDP in 2010, slightly above the target set in the Stand-By Arrangement with the IMF. This slippage indicates that the redistribution of primary expenditure, excluding transfers to the electricity sector, was inadequate to offset the effect of the subsidies to the sector, which were higher than the programmed amount, and the slow rebound in tax revenue. Tax revenue was below the amount stipulated in the Arrangement by roughly 1 percentage point of GDP. The second phase of the Stand-By Arrangement with the IMF, beginning in the second half of 2010, included a consolidation phase that began with the gradual phasing out of the monetary incentive and a slower increase in public expenditure. The consolidated public sector fiscal balance posted a deficit of 4.1 percent of GDP, 0.2 percentage points above the target set with the IMF, reflecting the slippage in the non-financial public sector. The 2011 budget made provisions for continuation of the fiscal consolidation process started in the first half of 2010, with a stipulation being made for an increase in the primary balance via a reduction in primary expenditure, consistent with medium- and long-term fiscal sustainability. However, beginning in early 2011, revenue collected fell below projected levels. Concomitantly, during the first quarter, international oil and commodity prices rose unexpectedly, in particular in the oil market where the projected price was US$83, a situation that exerted pressure on the primary balance as a result of higher transfers to the electricity sector. 68 This situation led to the proposal to amend the original budget through a reformulation that factors in the change in the macroeconomic and fiscal environment. The proposal provides for an increase in primary expenditure in the amount of RD$8.1 billion as a result, in part, of greater transfers to the electricity sector relative to the initially programmed amounts. To this end, the President announced an austerity program that includes a 12 percent cut in non-social primary expenditure. An additional offsetting measure was adopted in June in the form of another electricity rate increase of 9 percent, reflecting higher energy costs. To shore up the financial position of the electricity sector and thus reduce current transfers to the sector in 2012, the Government will implement a series of measures revolving around a ―technical rate,‖ which would cover a portion of the distribution losses and would contain an automatic adjustment mechanism that would reflect the changes in production, transmission, and distribution costs. In this regard, despite the inherent risks in oil price volatility, measures aimed at strengthening the electricity system will be continued given the significant proportion of thermal sources of energy, reflecting the Government‘s continuing commitment to the recovery of the sector, in line with the Stand-By Arrangement and loan conditionalities agreed upon with the World Bank and Inter- American Development Bank. Action has been taken with the aim of achieving this objective, which began with replacement of the directors of the three electricity companies [empresas de distribución eléctrica EDEs] with professionals possessing the relevant management experience. This has facilitated the ramping up of the administrative streamlining initiative being conducted in the sector, such as the conversion by the electricity companies of more than 70 percent of residents in former Blackout Reduction Program [Programa para la Reducción de Apagones PRA] areas into regular customers, the installation of meters, and effective measures to combat theft, among other things, with the aim of improving the medium-term outlook for the sector. In the area of tax revenue, in June 2011 Congress approved a tax reform measure by means of Law 139-11, aimed at boosting revenue. This reform attests to the commitment of the authorities to maintaining fiscal sustainability. The reform creates new taxes primarily targeting casinos and gambling institutions and well as the banking sector and corporations. In July 2011, the fifth and sixth reviews of the Stand-By Arrangement were completed, which determined that most of the quarterly fiscal and macroeconomic targets of the program had been satisfactorily met. Despite compliance with the target for the consolidated public sector, the central government deficit was slightly higher than the programmed amount as a result of the increase in the electricity subsidy and the collection of a moderate amount of revenues. Beginning in 2012, the consolidation of the fiscal accounts should reflect a primary surplus balance of 2 percent of GDP on a sustained basis in the years ahead, which should permit consolidated public debt to return to pre-crisis levels in the medium term, with this amount standing at 30 percent of GDP. IV. Government Program for the Social Sectors: Reforms for the Programmatic Loan The Dominican Republic is currently better equipped to protect its poorest citizens from the effects of the crisis. The Government has been developing and institutionalizing a targeted social protection system that protects low-income population groups, strengthens policy guidelines pertaining to education, health, and nutrition, and focuses on energy subsidy policies. This model involves three 69 entities that operate under the Office of Social Policy Coordination [Gabinete de Coordinación Política Social GCPS]. The Vice President of the Dominican Republic serves as the Coordinator of the GCPS, which is charged with the following specific and interrelated tasks: i) The Sistema Único de Beneficiarios (Single Beneficiary Selection System, SIUBEN). Implemented in 2004, SIUBEN is a mechanism that promotes transparent and objective targeting of social programs through the identification and socioeconomic assessment of potential beneficiaries. SIUBEN‘s database currently contains information on 1.7 million homes (almost 60 percent of the homes in the Dominican Republic), approximately 720,000 of which are classified as moderately and extremely poor households that meet the eligibility requirement to receive social protection program benefits under the Conditional Cash Transfer Program. Furthermore, in its register of eligible persons, SIUBEN has identified households eligible for targeted cooking gas (Bonogas) and electricity (BonoLUZ) subsidies, bringing the total number of households living in extreme and moderate poverty and lower middle class families to 830,000. With financial support from the World Bank, all logistical and operational planning tools were developed during the first half of 2011 so that the new census survey containing 2011 information could be conducted starting in August. ii) The Solidaridad Program. Established in late 2005, this program marks a shift in the focus of social assistance by explicitly orienting transfers toward investment in human capital investment by the beneficiaries. It seeks to help break the intergenerational transmission of the causes that generate and allow poverty to take root by boosting the investment that poor households can make in education, health, and nutrition, thereby increasing the human capital accumulation of their children. The program essentially has two components. First, the Health Component, with four basic lines of action: (a) Prevention: the provision, free of charge, of services outlined in the Basic Health Care Plan for (i) pregnant women between the ages of 15 and 49 years; (ii) boys and girls between the ages of 0 and 5 years; and (iii) adolescents between the ages of 10 and 15 years; (b) Support for Older Adults through the provision of a monthly cash transfer of RD$400.00 (US$11.14) and preventive medicine programs; (c) Food Support, through the Comer es Primero transfer for the provision of staple foods equivalent to RD$700.00 (US$19.50) per month and the distribution of powdered micronutrient supplements; and (d) Health Promotion and the Education Component. Looking ahead to the 2009-2010 school year, the Program redesigned the education intervention scheme to ensure that in addition to the current coverage for six to sixteen-year-olds, five- year-olds receive one year of preschool education, to expand access to the first cycle of secondary education and contribute to the reduction of the number of overage students, with a monthly per beneficiary transfer of RD$150.00 (US$4.20).42 iii) The Administradora de Subsidios Sociales (Administrator of Social Subsidies ADESS). With a view to separating the payment function from the beneficiary identification and selection function, this entity was established to manage the mechanism for the payment of transfers, namely, the Solidaridad card. This debit card, which is valid in the national financial system platform, is used by establishments belonging to the Red de Abasto Social (RAS)—the network of establishments affiliated with the Solidaridad program—comprised primarily of retail grocery stores known as colmados. 42 The program proposed gradually transitioning to a new transfer scheme where transfers are increased with each grade successfully completed. 70 However, owing to the turbulent international economic situation, in which the poorest tend to abandon investment in their human capital and, in so doing, reduce their chances of overcoming poverty using their own resources, the Government anticipated an increase in demand for interventions to protect the wellbeing of the population. Consequently, the prevailing economic context heightens the need to allocate expenditure on social protection in a more effective and efficient manner. In this regard, the Government‘s policy priority with respect to social protection is to protect the poor, while improving the performance of institutions and transparency in the allocation and use of resources earmarked for the social sectors. The key areas of progress with regard to the implementation of government programs, which are specifically linked to the objectives of the Programmatic Loan, are as follows: (i) improved results in the social sectors to enhance the human capital of the poorest; (ii) improved budget management to support the joint performance of the social sectors under the redesigned Conditional Cash Transfer (CCT) program; (iii) the gradual introduction of performance agreements in the social sectors; and (iv) greater transparency in national budget execution, with special emphasis on social programs such as Solidaridad, and enhanced civil society oversight in the social sectors. (i) Improved results in the social sectors to enhance the human capital of the poorest An important component of this first pillar is the use of public resources to provide a more equitable distribution of opportunities. The Dominican Republic has improved and continues to improve its social networks, with a view to insulating the poor against the effects of the recent exogenous shocks, including the food and oil crises of mid-2008 and the ongoing financial and economic global turmoil. With objectives similar to those found in other programs in the region, Solidaridad promotes investment in health, nutrition, and education (in human capital) for the poorest through a monthly cash incentive. Achievements in this respect have been substantial: (i) the Government moved away from its traditional clientelist model of social policy-making, developing and institutionalizing the SIUBEN as a mechanism for targeting eligible citizens; (ii) the authorities allocated social subsidies and transfers in a more efficient manner; (iii) this new social assistance plan enhanced transparency in the allocation and use of public resources, with clear identification of the beneficiaries and the amounts earmarked for each transfer or subsidy for each eligible household; (iv) the Government strengthened its capacity to respond in a timely manner to natural disasters or economic crises such as the oil and food price hikes; and (v) this mechanism led to substantial fiscal savings, through targeting of the liquefied petroleum gas (LPG) subsidy, for example; savings are also expected with the dismantling of the geography-based subsidy system (PRA) and implementation of the BonoLUZ subsidy through the Solidaridad card and program. The foregoing notwithstanding, the Government, by means of Decree No. 118-09, redesigned and strengthened the Social Protection System and its participating entities in order to enhance its efficiency, transparency, and coordination. To carry out this mandate, the Office of Social Policy Coordination established the Interinstitutional Technical Committee as a coordination forum for the three entities—Solidaridad, SIUBEN, and ADESS—which facilitated the development of the manual on crosscutting processes for the Conditional Cash Transfer (CCT) Program. These processes have clearly helped to conceptually redefine and strengthen Solidaridad’s role as a conditional cash transfer program, thus avoiding the risk of losing focus of the Program‘s original objective by including in its operational mandate unconditional subsidies such as BonoGas and BonoLUZ, which occurred with the redesign of the Solidaridad Program that was implemented in 2010. 71 Cognizant of the fact that the co-responsibilities system could not be implemented owing to shortcomings in available social services and intersectoral coordination efforts, the Government initiated a process in February 2009 to strengthen the Solidaridad Conditional Cash Transfer Program, with a view to building its capacity to promote human capital and enhance its efficiency. Accordingly, the Office of Social Policy Coordination established the Solidaridad Intersectoral Technical Committee to improve its operational coordination with the social sectors (education and health) and with those responsible for allocating resources (Ministry of Finance), and avoid duplication of efforts and systems, so as to strengthen the comprehensive and systematic verification process designed to ensure compliance by the target beneficiary population with the co- responsibilities required by this program. Improvements are currently being made in the areas of institutional coordination and organizational development of the Solidaridad Program, with a view to efficient functioning of the redesigned CCT program. This improvement effort involves the approval of regulations that will govern the functioning of the CCT Interinstitutional Committee (ADESS, SIUBEN, and Solidaridad) and the CCT Intersectoral Committee (education, health, Solidaridad). The foregoing facilitated adjustments to the transfer, co-responsibilities, and training plan for beneficiaries to ensure closer alignment with sectoral priorities, programs, and standards, as well as the promotion of behavioral changes associated with the causes of sectoral challenges, all of which is set forth in the manual for the Solidaridad CCT Program. Thus, with respect to health, the Program is aligned with the promotion and prevention component of the Basic Health Plan for the poor, the majority of whom are enrolled in the subsidized health program. In the case of education, the redesigned Solidaridad program covers preschool education and the first cycle of secondary education, both of which are objectives in the education sector‘s plans. With a view to ensuring transparency in the Solidaridad CCT Program, the Government implemented a plan to expand the network of RAS-affiliated establishments, at which beneficiaries use the social transfers to make purchases. This plan seeks to (i) promote competition among participating businesses; (ii) broaden the range of products available at the establishments; and (iii) reduce the transaction time and costs for beneficiaries. Assessments of the RAS were conducted during the first quarter of 2011 and information was gathered from a sample group of colmados and beneficiaries, with IDB support. The Government is committed to implementing the recommendations emanating from this assessment. Other objectives of the restructuring of the Solidaridad CCT Program include (i) the deconcentration and automation of its operational cycle and the strengthening of the community organizational structure, aimed at lowering costs and improving services provided to beneficiaries; and (ii) the introduction of a monitoring and evaluation system to strengthen planning, management and accountability. This process was launched with the Social Protection Evaluation Survey (EEPS) conducted in late August 2010; the second EEPS (EEPS-2011) was conducted in June 2011 to provide follow-up on households. In both cases, the Government has received financial support from the World Bank, through scaling-up of the Social Protection Investment Program (SPIP), and the Inter-American Development Bank, through the Social Protection Support Program (First Phase) (DR-L1039). Alignment and synergies with education and health policies Education: Among the goals of the Ten-Year Education Plan for 2008-2018, which are in line with human capital promotion of the poor, are (i) the mobilization of public and private will in order to ensure that five-year-olds receive one year of preschool education followed by eight years of 72 inclusive and quality basic education; (ii) the strengthening, expansion, and diversification of secondary education and quality education for adults, with a view to instilling civic responsibility and paving the way to the job market and/or higher education; (iii) the establishment of clear quality standards and an evaluation system that makes it possible to monitor the performance of the education system, promotes the mobilization of schools, families, and communities for an improved education system, and ensures that certificates and degrees awarded are reflective of the training provided; and (iv) the promotion of educational equity, with support for students from the most vulnerable social groups. In order to ensure that, beginning at age five, the population receives a minimum of nine years of preschool and basic education, and to assess the quality of the knowledge acquired, the Ministry of Education established student assessment criteria for preschool and the first cycle of primary school. The intervention, which is in line with the redesigned Solidaridad CCT Program‘s objectives of strengthening capacity and intersectoral collaboration between the Ministry of Education and the Solidaridad program in order to verify and monitor compliance by beneficiaries with the Program‘s co-responsibilities, as well as results in the education sector, is reflected in the establishment of a Sistema de Gestión de Centro Escolar (School Administration System SGCE) by the Ministry of Education. The SGCE has been operational since 2009 and currently covers all regions, districts, and centers. Health: The key objective is to strengthen the first level of health care in order to increase access by the poor to better quality basic health services. The Ministry of Public Health has been working on a plan aimed at strengthening infrastructure, equipment, human resources, medicines, and other inputs at the primary and secondary health care levels. One aspect of this effort is the introduction of a new system of compliance monitoring tools and protocols. ii) Improved budget management to support the joint performance of the social sectors under the redesigned Conditional Cash Transfer Program The reforms of the policies in this pillar build on previous measures, which were implemented in 2006 and designed to strengthen public sector institutions in the areas of budget and finance management. One innovation introduced by these reforms is multi-year budgeting in the public sector, which must be executed based on the processes and outcomes of multi-year planning. As previously indicated, as stipulated by law, the Ministry of Finance defines the multi-year income and expenditure framework, that is, the comprehensive framework for financial conditions. Multi-year planning, including public investment planning, is conducted on the basis of this obligation, and based on this planning, multi-year and annual budgeting, which sets physical goals for priority production in the public sector, is executed. The current coordination effort between the Solidaridad program and sectoral institutions ties in with this innovative approach to the planning and budgeting processes. Process and output gaps were identified in conjunction with the institutions. In order to bridge the supply gaps created by implementation of the Solidaridad program, the Government pinpointed these gaps, with a view to meeting the additional demand generated by the new transfer system. As a result, investment needs over the next three years required for alignment of the supply of services with demand have been assessed jointly with the sectoral institutions. In order to ensure transparency in the use and allocation of public funds, the Intersectoral Technical 73 Committee, of which the Ministry of Finance is a member through the Directorate General of Budget, established a mechanism by consensus. Under this mechanism, resources allocated in the 2010-2012 budget to cover supply gaps cannot be used for any purposes other than those established in the three- year assessment and implementation schedule presented by the Coordinator of the Social Policy Office to the Ministry of Finance for the gradual closing of the gaps. Likewise, at the operational level, it was proposed that the Financial Management Information System (SIGEF) could generate alert reports to facilitate follow-up and monitoring by the Intersectoral Committee. iii) Gradual introduction of performance agreements between policy-making bodies and the social sectors Results-based and performance contracts are an innovation currently being implemented. These instruments operationalize the results-based management approach in public administration, specifically with respect to budget management and accountability. They were designed to establish a flexible managerial link between the budget sources provided and the desired improvements in the performance of the social sector, specifically in the areas of health and education. These contracts include commitments regarding (i) verifiable compliance with goals and objectives, which can be monitored by performance indicators set forth in the results-based and performance contracts; (ii) greater managerial flexibility—for the implementing entity—in the enforcement of regulations governing execution, human resources, and inputs; and (iii) possibly, budget incentives for the implementing entity and/or incentives for managerial staff and employees during the term of the results-based contract. In this connection, both agreements were signed in 2008 by representatives from the policy-making bodies and the health and education ministries. These agreements reflected the political will of these ministries to proceed with the establishment of basic conditions, which would involve institutional strengthening efforts and processes to facilitate conclusion of the results-based contract with policy- making bodies (Ministries of Health; Public Administration and Economy; and Planning and Development). Both agreements are currently being concluded by the Ministries of Education and Health and the policy-making bodies. Internal Health Management Agreements. In addition, in the case of health, two management agreements have been concluded between the Ministry of Health and the regional health offices in Cibao Central and El Valle, in which the Ministry promotes, as part of its management role, the deconcentration and decentralization of public health services. The commitments, objectives, and goals are set forth in these agreements and serve as a guide for actions regarding the provision of health care to persons in population groups identified as priorities, based on the stipulations in the legal framework governing the separation of functions and the establishment of health services networks. iv) Greater transparency in national budget execution and civil society oversight in the social sectors The Government remains committed to enforcing the existing Access to Information Law in the Dominican Republic. The aim, with respect to this three-year Programmatic Loan in particular, is to strengthen access to information on national budget execution. To that end, the IT platform was created, and the Ministry of Finance is on the verge of operationalizing the Consulta Amigable system, which will provide up-to-date information on execution by institutions. 74 In order to make the actions of the Social Policy Office transparent, the entities belonging to the Social Protection System published the list of eligible beneficiaries, as well as the amounts transferred through the Solidaridad CCT Program, which may be verified on the websites of any of these entities. More recently, in a bid to enhance transparency in public expenditure, the value of the supply gaps for the health, nutrition, and education services was published, which, for the three-year period (2010-2012), totaled US$323.7 million. In addition, the Government has committed to ensuring that civil society will not only have access to information, but will also be able to participate in the assessment of the performance of the social sectors. In this context, the Government is already working to strengthen the community participation and social oversight system of the Conditional Cash Transfer Program. In this regard, the Ministry of Finance will officially launch the Consulta Amigable (CA) tool as a public access interface with the Financial Management Information System (SIGEF). This portal attests to the Government‘s commitment to ensuring transparency in financial transactions conducted by the public sector. With a view to establishing the community participation and social oversight plan to monitor the availability of health and education inputs and management of CCT services, which relate to compliance by beneficiary families with co-responsibilities, a community reporting pilot project was carried out between April and June 2011 in the context of the Núcleos de Familias Solidarias.43 This pilot was conducted with a sample of 750 beneficiary households, health service providers, education service providers, food suppliers (RAS), community organizations, and Program liaisons. The community reporting process is used to ascertain the views of the beneficiaries on the services they receive from the Program, as well as from the health, education, and food services providers (RAS). It also helps determine the providers‘ own opinion of the services they provide and the collaborative search for solutions to problems. Approval of the proposal for nationwide rollout of the pilot will be contingent on the results of this pilot, which will be presented in September to the CCT Intersectoral Committee. In view of these actions in the Government‘s program, this three-year programmatic loan in the amount of seventy million United States dollars (US$70 million) for Performance and Accountability of Social Sectors is of special importance, and falls under the country‘s new joint strategy with this financial institution. We wish to express our gratitude to the World Bank for its ongoing support to the Dominican Republic. Very truly yours, Juan Temístocles Montás Daniel Toribio Minister of Economy and Planning and Development Minister of Finance [OFFICIAL STAMP 43 The Núcleos de Familias Solidarias are groups of beneficiaries of the Solidaridad program, which were created primarily to promote the active participation of these beneficiary families in meetings to discuss a variety of topics, chief among which is compliance with co-responsibilities. 75 Annex 5: Funds Relations Note 76 DOMINICAN REPUBLIC—ASSESSMENT LETTER FOR THE WORLD BANK October 4, 2011 This letter updates the IMF staff assessment included in the latest report discussed by the IMF Executive Board at the time of the Fifth and Sixth Reviews in July 2011 under the Stand-By 1 Arrangement (SBA) (see the Press Release No. 11/286). Since then, an IMF mission visited Santo Domingo in early September 2011 to carry out discussions on the seventh review under the program 2 (see the Press Release No. 11/335). Further discussions were conducted during the Annual Meetings in Washington DC in late September 2011. Discussions were productive but an agreement has not been reached yet. 1. Overall macroeconomic conditions remain broadly favorable despite a worsening in the global economy. After growing vigorously at 7¾ percent in 2010 (closing the output gap), real GDP growth decelerated in the first half of 2011 to about 4 percent (yoy). Residual pass-through from higher commodity prices still weighed heavily on inflation, with headline CPI reaching 10¼ percent (yoy), well over the 5–6 percent target. However, the monetary tightening cycle that started in late 2010 helped to limit second-round inflationary effects, with core inflation in August 2011 reaching 6¼ percent (yoy), up from 4¼ percent in December 2010. Also in the first half of the year, credit rating agencies upgraded the Dominican Republic‘s country risk from B to B+ and the government issued US$500 million in bonds in the international market in July 2011. 2. Risks have shifted to lower growth and higher inflation. Against the background of a deteriorating global economy, growth projections for 2011 have been revised downward to 4–5 percent (from 5–5½), and inflation projections have been revised upward to 7–8 percent. The expected current account deficit for 2011 was revised upward by ⅓ of a percentage point of GDP to about 8 percent, reflecting delays in gold exports. A further weakening in global economy, would adversely affect tourism and remittances flows, put pressure on credit markets and international reserves, and soften economic activity further. 3. There were some deviations on fiscal targets for end-June 2011. Mostly reflecting a large overrun in the electricity sector deficit due to lack of price flexibility as energy cost rose (0.6 percent of GDP deviation in the target), there was a deviation to the consolidated fiscal deficit for end-June 2011 (0.2 percent of GDP). The rest of performance criteria have been observed and there was progress in observing most structural benchmarks. However, the authorities still have to design and implement a strategy to adopt the cost-recovery ―technical tariff‘ and the flexible pricing mechanism, which are important benchmarks for end-September 2011. 1 Press release issued on July 18, 2011 (see: http://www.imf.org/external/np/sec/pr/2011/pr11286.htm). 2 Press release issued on September 15, 2011 (see: http://www.imf.org/external/np/sec/pr/2011/pr11335.htm). 77 4. The authorities continue implementing the consolidation phase of the program. Fiscal tightening is broadly on track. A number of corrective measures were adopted in mid2011 to safeguard the target of a consolidated fiscal deficit of 3 percent of GDP in 2011 (from 4.1 percent of GDP in 2010) and to offset growing electricity subsidies. Measures included: (i) an increase of 8 percent in electricity tariffs in May; (ii) a tax package yielding 0.4 percent of GDP approved in June; and (iii) a 12 percent cut in non-social expenditure spelled out in the supplementary budget approved in July. The authorities report that the 2012 budget will be broadly in line with the envisaged 2 percent of GDP consolidated deficit included in program projections, although there might be additional expenditure pressures in the run-up to the election. Monetary policy remains on hold but attentive since May 2011, which is appropriate given the supply-driven and one-off nature of recent shocks. 5. Discussions are expected to continue in the next several weeks and a mission is tentatively scheduled for November 2011. Given delays in completing the seventh SBA review, staff and the authorities are devising a work program to conduct the seventh and eighth SBA reviews jointly later in the year. Completion of the 2 reviews would facilitate access to external financing in the amount of about US$800 million (1½ percent of GDP). 78 79 Annex 6: Debt sustainability analysis 1. This annex presents a debt sustainability analysis based on the macroeconomic framework presented in the main text.44 Both a deterministic model and a stochastic approach introducing Monte-Carlo simulations have been applied using Analytica© software. A6.1: Recent developments 2. Public debt levels in the Dominican Republic rose sharply in 2003-2004 in the context of the domestic financial and economic crisis, as growth slowed down and fiscal accounts deteriorated. Central Bank debt (mainly domestic) increased as a result of the bailout of the banking sector. However, beginning in 2005 consolidated debt was brought back to 34.3 percent and has been relatively stable since then. Some of the trends observed in the last six years are a progressive reduction in Central Bank debt levels (from 18.3 percent of GDP in 2004 to 13.4 percent in 2010); an increase in Central Government debt from 17.6 percent of GDP in 2007 to 23.7 percent in 2010; and an increase between 2009-2010 in the share of public external debt (due to larger multilateral financing in the context of global crisis, as well as to the favorable terms of the PetroCaribe agreement with Venezuela). Figure A6.1: Consolidated public sector debt (% of GDP) 50% 47.4% 45% 40.2% 40% 37.4% 36.1% 36.6% 34.3% 33.1% 33.5% 35% 30% 25% 19.4% 20.9% 20% 17.2 15% 10% 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Central Government Other non-financial public sector Central Bank External debt Domestic debt Source: Staff calculations based on data from Ministry of Finance and Central Bank of the Dominican Republic 44 This debt sustainability analysis relies on information provided by the General Directorate of Public Credit, Ministry of Finance, in what regards real interest rates, maturity profile of the debt and expected debt amortizations in future years for the non-financial public sector debt. Public debt is defined as the debt obligations of the consolidated public sector, including the central Government, central bank and other public sector entities. Public debt is measured as gross debt, i.e. the bonds owned by agencies within the Government are not netted out from the total value of debt. 80 A6.2: Debt Sustainability 3. The Dominican Republic‘s public debt is projected to decline steadily in the medium term under the baseline scenario which is characterized by: (i) sustained growth averaging 5.5 percent of GDP in the period 2011-2016; (ii) an average primary surplus of 1.1 percentage points of GDP; (iii) an average annual nominal depreciation of 3.0 percent; and (iv) an average inflation rate of 5.1 percent. The alternative historical scenario45 assumes (i) 5.16 percent GDP growth, (ii) 0.3 percent primary surplus, (iii) 11.1 percent depreciation and (iv) 12.4 percent inflation over the next five years. The no policy change scenario assumes a constant primary balance over the forecast period. 4. Under the baseline scenario, the debt to GDP ratio would decline from 37.4 percent in 2010 to 35.3 percent in 2012 and 28.3 percent in 2016. Assuming historical averages would prevail (scenario A.1), public debt would decline to 35.5 percent by 2016. Assuming a constant and persistent primary deficit (scenario A.2), public debt levels would rise to 39.1 percent in 2016 (Table A6.1). Table A6.1: Public debt projections under baseline and alternative scenarios (% of GDP) 2010 2011 2012 2013 2014 2015 2016 Baseline 37.4 36.6 35.3 33.2 31.4 29.7 28.3 A.1 Key variables at their historical averages in 2011-2016 37.4 36.3 36.3 36.1 35.8 35.6 35.5 A.2 No policy change (constant primary balance) in 2011-2016 37.4 38.2 38.5 38.2 38.2 38.5 39.1 Source: Staff calculations. 5. Sensitivity analyses were conducted to assess the potential impact of isolated and simultaneous shocks on several variables. As illustrated in Figure A6.2, a primary balance shock and sudden currency depreciation are the main risks to debt sustainability in the Dominican Republic. Finally, a simultaneous shock encompassing reduced growth, higher interest rates and accelerated peso depreciation would increase debt to 48.6 percent of GDP in 2012. 6. Stochastic simulations assign low probabilities to extreme scenarios. Stochastic simulations produce confidence intervals for the public debt ratios corresponding to varying degrees of uncertainty for four key macroeconomic variables: (a) domestic interest rates, (b) the growth rate, (c) the exchange rate, and (d) the foreign interest rate. Assuming an average primary surplus of 1.1 percentage points of GDP in the period 2011-2016, there is a 90 percent probability that the public debt to GDP ratio will remain between 25 and 32.1 percent (Figure A6.3). Under an alternative scenario where the primary deficit stays at the last decade‘s average level of 0.3 percent of GDP, the 90 percent confidence interval for the public debt to GDP ratio would become 28.3-37.8 percent. 45 Based on historical averages over the last decade. 81 Figure A6.2: Debt ratios under sensitivity tests Baseline, historical and no policy change scenarios Real interest rate shock in 2011 and 2012 (B.1) 50.0% 50.0% 45.0% 45.0% 40.0% 40.0% 35.0% 35.0% 30.0% 30.0% 25.0% 25.0% 20.0% 20.0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Historical No policy change Baseline Real i-rate shock Baseline GDP growth shock in 2012 (B.2) Primary deficit -2.7% in 2011 and 2012 (B.3) 50.0% 50.0% 45.0% 45.0% 40.0% 40.0% 35.0% 35.0% 30.0% 30.0% 25.0% 25.0% 20.0% 20.0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Slower GDP growth Baseline Worsen primary deficit Baseline Combined shock (B.4) 30% nominal depreciation shock in 2011 (B.5) 55.0% 50.0% 50.0% 45.0% 45.0% 40.0% 40.0% 35.0% 35.0% 30.0% 30.0% 25.0% 25.0% 20.0% 20.0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Combination of shocks Baseline Exchange rate shock 2011 Baseline Source: Staff calculations. 82 Figure A6.3: Risk analysis simulating random shocks (baseline scenario) Source: WB staff calculations. 7. In sum, under reasonable assumptions consolidated public debt in the Dominican Republic will remain sustainable, with a reasonable prospect of presenting a declining path. Special attention has be paid to potential exchange rate shocks, especially in the context of global economic turmoil, as a sudden depreciation could cause an increase in the debt levels and severe debt refinancing problems. Raising reserve levels to around 2.5 months of imports may be seen as a desirable objective. Additionally, ensuring fiscal discipline, reducing tax exemptions and implementing reforms in the electricity sector would also help to ensure debt sustainability. 83 Annex 7: Macroeconomic outlook: Recent fiscal developments 1. The following sections provide an overview of key developments in the Government‘s fiscal policy framework, including tax reforms, spending cuts and progress on electricity sector reforms. A7.1: Tax reforms 2. In June 2011, the Government submitted a draft bill for tax reform to Congress that initially included the following measures:  A 1 percent tax on the financial assets of the banking sector  A 10 percent unified tax on gambling and lottery, for income tax purposes  An upper limit for the exemption on real estate property tax raised to RD$6 million (US$ 162,000), but now applying to the sum of real estate assets by owner (instead of property individually exceeding RD$5 million)  A reduction in the tax on dividends from 25 percent to 10 percent  An increase on tax withholdings applied to payments for goods and services by Government entities from 0.5 percent to 5 percent 3. According to Ministry of Finance estimates, these measures would have yielded an additional RD$9.9 billion in tax collections in 2011 and RD$7.4 billion in 2012, equivalent to 0.46 percent and 0.30 percent of GDP, respectively. 4. Several of the proposed reforms were widely debated among stakeholders. In light of the fiscal urgency, the measures were passed by the National Congress in less than a month, but with substantial modifications. The following are the main policies included in the final decree:  A temporary increase in the corporate income tax from 25 percent to 29 percent, valid for 2 years  A temporary 1 percent tax on the financial assets of the banking sector, limited to 24 months  A new 2.5 percent income tax on free zones sales in the local market  The originally proposed 10 percent unified tax on gambling and lottery (for income tax purposes) was substituted by specific operation fees (e.g. a fixed fee depending on the size of the casino) 5. The increase in tax revenue resulting from these measures is estimated to reach 0.26 percent of GDP in 2011, as the increase in corporate income tax will start to affect collections only in 2012. Additionally, tax administration measures such as the indexation of the excise tax on fuels, improved control on tax exemptions and the indexation of excise tax on motor vehicles are expected to yield a 0.18 percent increase in revenues in 2011, for a total estimated increase of 0.44 percent of GDP. A7.2: Spending cuts 6. In order to safeguard its fiscal position and comply with the 2011 fiscal targets in an adverse context of increasing food and energy prices, the President announced a series of austerity measures in March 2011, including a 12 percent cut in public spending (except for social sectors and the transfers to the electricity sector) for the rest of 2011. The Government also announced that no new infrastructure projects would be initiated in 2011. In addition to the cuts, the Government announced new public contracting procedures in the energy area, so that only energy-saving equipment is acquired. Additionally, the Ministry of Finance would be allowed to ―discount‖ the electricity bill from the budget assigned to different public administrations at every level, in order to ensure 84 payment. Finally, the Government is also supporting the conversion of transport units to natural gas, in order to save around US$25 million in fuel imports. Overall, initial Government estimates suggested that the austerity plan would reduce expenditures in 2011 by 1.1 percent of GDP. 7. The spending cuts were later modified as it became clear that the transfers to the public electricity sector (CDEEE) were set to almost double, from the budgeted US$350 million to US$690 million. In the modified budget, approved by Congress in July 2011, capital expenditure was cut by 7.5 percent and some current expenditure items were also cut back (including a 5 percent cut in the provision of health services, though education spending was protected) to finance the increased transfers to CDEEE. In addition, the Government resorted to additional financing from PetroCaribe to make up for reduced disbursements from externally-financed investment projects. A7.3: Progress on Electricity Sector Reforms 8. The Dominican Republic has long been plagued by the underperformance of its electricity sector, including unreliable supply and financial troubles. This is a key constraint to growth because of its impact on the business climate. But it has also created an important fiscal problem, as the deficit of the public electricity sector has been covered by transfers from the treasury, representing on average 10 percent of total primary expenditures between 2006 and 2010. Solving the challenges in the sector is therefore key to ensure that public resources are freed up for programs in priority sectors. 9. The authorities have made considerable progress towards reforming the sector, but challenges remain. In December 2009, the authorities presented a detailed plan for the reform of the sector, consistent with the medium-term budget balances agreed in the IMF program. The main objectives of the electricity sector reforms are to: (i) provide reliable service to all clients; (ii) eliminate untargeted subsidies; (iii) differentiate generation inputs away from the current high dependence on fossil fuels; and (iv) achieve a long term viable energy sector. Specifically, the main reform commitments included: (i) further reform of the tariff mechanism to eliminate the gap between the current (applied) and ―indexed‖ (generation costs included) tariffs through increased flexibility; (ii) continued increases in the cost recovery index (CRI) which includes improvements in invoicing, collection and reduction of operational costs (for distribution and holding companies); (iii) completed transition from a inefficient subsidy scheme to a targeted subsidy scheme, Bonoluz; and (iv) increased investment efforts to expand and differentiate energy generation and to improve the distribution and transmission systems. Progress towards these commitments has been as follows:  The tariff gap between the applied and the ―indexed‖ tariffs could not be closed because of high oil prices (in particular the heavy fuel oil price). However, in November 2010 and June 2011 retail tariffs were increased by 11 percent and 8 percent, respectively. The main action on this matter is the completion of the Technical Tariff Study (financed by the Bank) that determines the efficient tariff level and proposes a smoothing-out mechanism to return to flexible tariffs that reflect the actual costs of generation. Based on this technical study, legislation on the application of the new mechanisms for calculating changes in the tariff is expected to be approved in September 2011.  There have been advances in the reduction of operational costs, invoicing and collecting, and losses in the last year: (i) costs were cut by 45 percent in CDEEE; (ii) collection increased by 13 percent (in US$); (iii) energy costs were reduced by US$100 million through negotiations with generators; (iv) clients registered by EDEs increased by 0.5 million; (v) new management teams in 3 EDEs are working on an aggressive plan to reduce losses through tele-metering and investments in protecting circuits from fraud and theft. The CRI does not reflect these improvements because past CRI figures were incorrect and have only recently been revised downwards. 85  The transition from an inefficient subsidy scheme (the PRA) to a targeted cash transfer (Bonoluz) was successfully completed during 2010/early 2011. Currently there are 140,000 poor households who benefit from Bonoluz (subsidy equivalent to 100kwh per month of consumption). The challenge is to register the other 660,000 poor household that live outside the former PRA areas.  Quality of service is improving. During 2010, power generated was 9 percent higher than in 2009 (and 44 percent higher than in 2004). More neighborhoods receive electricity on a 24 hour basis and CDEEE has made important efforts to improve transparency and customer service. Thanks to the actions of the 3 EDEs and on-going investments (including one financed by a Bank Loan – Distribution Rehabilitation Loan of US$42 million), electricity losses are expected to shrink by 5-7 percent during 2011 and an additional 4-6 percent in 2012. 10. However, the increase in fuel prices (by 28 percent in the case of fuel oil) in the first four months of 2011) has counterbalanced the savings generated by the measures. Another challenge is the lack of budgetary resources for the expansion of the Bonoluz subsidy: in the 2011 budget, no resources were allocated to the program, which made it necessary to reallocate resources from other social programs on an incremental basis. This not only endangers the achievement of the Bonoluz target of 250 thousand beneficiaries by end-2011, but also the expansion of other social transfer programs. 11. Continued structural reforms should help close the electricity sector deficit in the near future. All three main distribution companies (EDEs) are now headed by new managerial teams. The main objective of these managerial changes is the reconstructing of the commercial and control capabilities of the utilities in order to reduce non-technical losses and increase cash recovery. It is expected that the new teams will be able to increase billing and collection significantly, in particular from large customers that will be subject to tele-metering. Initial projections of the financial gap of the electricity sector for 2011 were in the order of US$350 million; however, due to the increase in oil prices, the target has been increased to US$690 million. 12. The World Bank has continued an active dialogue in the energy sector which has helped advance important structural reforms. Past performance in this sector has been disappointing and some of the sector critical vulnerabilities – such as strong dependency on fuels in its energy matrix – have not yet been removed. However, with the implementation of three key reform elements: (i) a new reforming head in CDEEE; (ii) a new professional management in EDEs, and (iii) efficient cost- recovery tariffs to be implemented from 2011 onwards, sharp reductions in non-technical losses (electricity theft) seem achievable. These will translate into an improved financial performance of the sector in the medium term. 86 Annex 8: The Government’s response to food and fuel price volatility 1. In the Dominican Republic, the confluence of unstable international food prices and increased fuel prices constitutes a significant constraint on household finances, with a disproportionate impact on the buying power of poor households. The food and fuel price increases are transmitted to household food baskets through cost increases in three major areas: (i) importing goods for final consumption; (ii) producing goods with a high share of imported foods; and (iii) shipping foods. The burden of these cost increases is estimated to be felt nearly four-fold for the poorest households compared to the richest quintile. These repercussions affect food security in the decreased consumption of poor households as well as their substitution of more expensive quality foods, for cheaper foods with less nutritional value. 2. Lessons from the 2008/2009 Crisis: The consumer price index for food more than doubled, resulting in a severe impact on purchasing power. Increased fuel prices resulted in the exhaustion of the annual budget appropriation for the universal liquid petroleum gas subsidy and electricity subsidy in the first quarter. The production of various foods was partially or fully subsidized as a means to mitigate sharply increasing food prices. By September 2008, the inflation rate reached 10.8 percent, its highest level since December 2004, when the domestic banking crisis bankrupted four banks. At the same time, the Social Protection System was strengthened to transition the universal gas subsidy to a targeted transfer, Bonogas, to the poor and lower-middle class. Fiscal savings were also reassigned to increase the coverage and amount of Solidaridad transfers to poor households to mitigate price increases. The more complex, universal electricity subsidy was also gradually dismantled to create a targeted electricity transfer, Bonoluz. The Dominican Republic has served as a model for using the momentum of a crisis to rethink the delivery of subsidies, including the introduction of well-targeted, progressive mechanisms in times of constrained resources. Other countries, particularly much of the Caribbean, are less prepared to respond to crises given the predominance of untargeted subsidies and the lack of well-engineered mechanisms to rapidly adjust transfers to offset such covariate shocks. 3. The Dominican Republic is well positioned to respond to these price increases through, among others: i. A Unique Beneficiary Registry used to target social programs through a proxy means test that covers 60 percent of households, poor or non-poor. ii. Nationwide electronic payment system that uses a debit card for payments of a range of subsidies and transfers. iii. CCT program which covers 21.2 percent of households and 61.5 percent of the poor. 4. Challenges ahead: Since mid 2010, the rise in food prices continues to outpace increases in the general price index. The Government has responded to the 2008/2009 crisis by expanding the coverage of Solidaridad to 60,000 additional households, along with an increase in coverage of the targeted electricity subsidy. 87 Annex 9: Challenges and policies in the education sector 1. The performance of the education sector remains a serious concern. Enrolment rates are above the Latin American average, reflecting sustained progress since the 1990s, although enrolment in pre- school and secondary school is comparatively low. The confluence of the small education budget and high demand for enrolment has resulted in overcrowding, with multiple shifts. Analysis of the determinants of enrollment and quality confirmed persisting challenges related to differences in enrollment, quality and attainment across socioeconomic quintiles46. Though initial intake in primary education is high, with minimal differences across gender or rural-urban groups, enrolment starts decreasing by age 14 for students from the poorest socioeconomic quintile and by age 16 for students from the wealthiest quintiles. Differences in education attainment across socioeconomic levels likely reflect higher repetition and drop-out rates of individuals from the poorest quintile: students from the poorest quintile spend 12 years at school to accumulate 9.6 years of education, while the wealthiest quintile accumulate 11.8 years of education with 13 years of schooling. Figure A9.1: Formal School Attendance by Age Figure A9.2: Grade Attainment by Age 100% 14 90% 12 80% 70% 10 60% 8 50% 40% 6 30% 4 20% 2 10% 0% 0 10 11 12 13 14 15 16 17 18 19 20 10 11 12 13 14 15 16 17 18 19 20 Poorest Quintile Richest Quintile Poorest Quintile Richest quintile 2. Quality of education is the main challenge for the education system and affects most students regardless of socioeconomic status. The Dominican Republic has one of the lowest levels of public spending on education in the region, as a share of GDP.47 The Dominican Republic has the lowest performance on the SERCE test, the regional standardized exam measuring education quality. Further, its relative position has strongly decreased since the mid 1990s. The comparisons between measures of quality and GDP indicate overall inefficiency in the provision of education; the Dominican Republic has the largest gap between its predicted and actual score on the SERCE test in the region. Poor performance affects all socioeconomic groups: on average, individuals from the wealthiest quintile perform similarly to individuals in the poorest quintile in Nicaragua (see Figures A9.3 and A9.4). 46 See report on the Determinants of Enrollment and Quality, prepared under the Social Sectors NLTA. 47 Civil society is pressuring Government to increase spending to 4 percent of GDP. 88 Figure A9.3: Test Scores by Country and GDP Figure A9.4: SERCE Scoring by Country and Level Socioeconomic Status GDP AND INTERNATIONAL SCORE SERCE 6th GRADE BY SOCIO - ECO STATUS CENTRAL AMERICA & DOMINICAN REPUBLIC 1 SGP 600 KOR HKG JPN MAC FINNLD CHE BEL EST CAN CZE FRA SVK NZL DNKAUT GBR DEU IRL AUS 0 HUN POL SVN SWE ISL 550 AZE RUS HRV ESP USA LUX SERCE SCORE LVA MYS NOR ARM LTU SCG MLT ITA PRT GRC ISR MDA BGR THAURY ROU CYP UKR CRI BIHTUR -1 500 LBN MEX MKD ARG MNG JOR ALBTUN IRN CHL IDN GEO EGY COL BRA BHR PHL PRY DZAECU KWT NIC SYR PER MAR GTM PAN SLV OMN 450 KGZ -2 DOM BWA SYC QAT SAU KEN GHA SWZ MUS 400 MOZTZA -3 ZAF UGA -2 -1 0 1 2 LSO NAM INDEX OF SOCIO CONDITIONS MWI ZMB -4 CRI SLV 6 8 10 12 GUA NIC LN_GDP PAN DOM Source: OECD TIMSS UNESCO -GDP figures are PPP 3. An analysis of the flow of information and resources in the education sector undertaken by the Bank at the MINERD‘s request identified bottlenecks that hamper those flows and create inefficiencies. The study compared the ―de jure‖ structure of the flows, as described in the bylaws and operational manuals of the education sector, with the ―de facto‖ structure, which was constructed with evidence from field visits and interviews with stake holders at different levels of the education system. The overall diagnostic presented diverse profiles and duplication of functions in the system, weak communication protocols and a top-down relationship between the central administration and the schools. Based on the diagnostic, the study recommended an update of the operational manuals of the sector (including job descriptions), improvement of communications processes (taking advantage of the School Management System), improvements in the planning process (better use of the schools‘ Annual Operation Plans), and greater participation of school communities in the design of education policies. Four main processes in the education system were analyzed in detail:  Provision of Quality Teachers: The pedagogical Supervision process tends to be weak, with limited impact on teacher practices and student results, and inadequate capacity to identify real needs for teacher training. The study recommends an inclusive approach to pedagogical support that prioritizes self-evaluation, classroom observations and professional development plans for teachers.  Provision of School Inputs: Interviews with school principals point to their lack of confidence in the current process of requesting and receiving school materials and resources, in particular regarding the on-time arrival and quantity to be delivered to the school. The study recommended that MINERD decentralize the procurement process, particularly bulk purchases, and use the schools‘ Annual Operation Plans to more accurately determine needs.  Appropriation and clarity of public policies: There seems to be little appropriation at the school level of the education policies generated at the central level. The study recommended stronger technical monitoring at different levels in the education system to coordinate, articulate and follow-up on policies emanated from the center, and improved training of principals and authorities to provide the needed leadership and management capacities that the implementation of new policies requires. 89  Flow of Information: Overall, information flows in many directions, does not always use official channels, and does not provide accurate, on-time data useful for planning and policy making. The study reinforced the importance of the recently adopted School Management System to improve planning, information-based policy, and the more systematic identification of and response to training and resource needs (See Section III.2 below). 4. The study was validated with different groups, including school principals, district and regional officers, and central authorities. The main results were presented to both the previous and the current administration at MINERD, contributing to the dialogue around concrete policy actions to address the identified challenges. This dialogue resulted in the policy action for this proposed third PASS operation on the deconcentration of resources and the improved use of the schools‘ Annual Operation Plans to more accurately determine needs. 90 Annex 10: Poverty and social impact analysis (PSIA) Background and issues 1. As presented in the PD of the PASS DPL1 and DPL2, the Bank set out to provide an analytical and policy base to examine and monitor the expected impacts of priority policy actions supported by the PASS series. The Government embarked on a program of cross-cutting reforms that include the reorientation of social protection efforts to human development promotion and the simultaneous coverage of supply gaps in social sectors. The Social Cabinet and MEPD called on the Bank to help strengthen the analytical capacity of the Government to accompany these reforms with a strong evidence base. The approach 2. The PSIA process followed a sequential analytical base that informed policy, operational and financing decision-making in line with the PASS DPLs. The PSIA approach featured a highly participatory process with the establishment of a committee to coordinate inputs of the Social Cabinet, MEPD, Ministry of Finance and line ministries. This committee defined the scope of the analysis and identified major positive and negative risks of the program of reforms: (i) efforts to bridge supply gaps in education, health and nutrition linked to the CCT program (co-responsibility for the Government); and (ii) efforts to condition transfers to households' investments in education, health and nutrition (co-responsibilities of the poor). 3. The efforts resulted in an analysis of the efficiency of resource allocation in the supply-gap program (together with a methodological toolkit and monitoring instrument to undertake such types of analysis) and a report on the ex-ante simulation of expected impacts of the co-responsibilities in health and education (this will be complemented with an ex-post impact evaluation). In addition, the efforts helped build the capacity of key technical administrators and planners in the Social Cabinet and MEPD to improve the capacity of these actors to apply the methodology to other programs in the future. Knowledge sharing was a key part of the process, with a capacity-building workshop, the dissemination of reports, and a high-level seminar led by the Vice-President to present results. 4. The analytical toolkit and methodology used provides important applications for emerging policy themes in the Dominican Republic, beyond the PASS series, such as potential targeting mechanisms for new demands for increased educational spending. As part of the PSIA process, and with funds from the World Bank PSIA MDTF, a political economy and stakeholders‘ analysis has been initiated for completion by the end of 2011 to look at mechanisms to enhance the cross- accountability agenda and results-based focus in social sectors, while taking stock of potential risks (and mitigation measures) in the introduction of performance-based agreements on the programs to close supply gaps. This will support the preparation of a series of policy note for the transition in Government scheduled for 2012. Final activities are planned to fully transfer the analytical toolbox, with the possibility of additional training for civil society organizations in the results and methodology of this PSIA in 2012. Methodology and data sources for the PSIA 5. For the analysis of the impact of co-responsibilities on education enrolment and use of health care services, the PSIA team developed ex-ante simulations – a methodology that helps simulate what 91 the impact of changes in rules is likely to be, in light of what is known about household behavior. To do that, the team built a model that explains the behavior of households, for instance in terms of the decision to send children to school (using household survey data). Then, the team tested how households would react to changes (e.g. the introduction of alternative transfer schemes). In the case of health, the team analyzed the key factors that determine households‘ use of health services such as immunization or pre-natal services (factors such as education levels, location, number of children, etc.). The team used the approached developed by Bourguignon, Ferreira and Leite in 2003 for Brazil and used throughout the region. The simulation was based on data from the National survey of household incomes and consumption (Encuesta Nacional de Ingresos y Gastos de los Hogares, ENIGH) of 2007, as well as the SIUBEN. 6. For the analysis of the incidence of programs aimed at closing supply-gaps, the PSIA simulated different investment plans to see who would benefit from new investments, depending on where these investments would take place. The PSIA used information with a very high resolution (for small geographic areas) in order to have more precise estimates. It used four potential criteria that could be used to allocate the program‘s resources, with investments focused in regions with (1) high prevalence of households that benefit from the CCT program, (2) low net enrolment in schools, (2) high incidence (percentage) of poverty, or (4) large numbers of poor. The analysis used information on poverty incidence (using poverty maps), school enrolment, health care utilization and the prevalence of existing services. Results Area 1: Analysis of the introduction of co-responsibilities in the CCT 7. The ex-ante micro-simulation assessed the expected impact from the introduction of co- responsibilities in health and education. The analysis built on early findings from key stakeholders' interviews and quantitative analysis, which pointed to the potential for positive impacts from the CCT program to incentivize human capital accumulation among the poor, while producing positive externalities beyond the program in targeting systems, results-based financing, transparency, and complementary health and education efforts. 8. The results of an ex-ante micro-simulation suggest that the introduction of education co- responsibilities would increase school enrollment by 6 percentage points and decrease child labor by 9.2 percent. In health, the same simulation found that attendance of children under-5 by a healthcare professional should double. Such results are in line with the results achieved by other CCTs in the region. This analysis is also being used to estimate the potential results from other adjustments in the design of the program, such as the differentiation of education transfers by grade level. 9. The findings also highlighted the barriers to compliance with health and education co- responsibilities by poor families, including lack of access to national identity documentation. To address this risk, additional measures have been taken: (i) as of March 2011, the Central Electoral Council, through the National Civil Registry, had issued national identity documents to 81,762 poor, previously undocumented Dominicans that have been incorporated into the SIUBEN database, therefore qualifying for inclusion in social programs; and (ii) the Government, in coordination with the Central Electoral Council and the Social Cabinet, has taken additional steps to provide legal assistance to facilitate the documentation process of still undocumented beneficiaries. Since launching this legal assistance phase in April 2011, 16,000 individuals have been provided with identity documents and are being incorporated into the SIUBEN database. The findings also highlighted the potential negative externalities from the planned penalization of households for non- 92 compliance, when such non-compliance is due to gaps in the supply of basic services, and not to household decisions. Results Area 2: Rethinking the incidence of social spending in the Dominican Republic 10. The PSIA also produced a Benefit-Incidence Analysis (BIA) to assess the progressivity of the programs aimed at closing gaps in supply in health and education compared to larger public spending in each sector. The resulting report was prepared as part of the analytical underpinnings of PASS2, to analyze the targeting mechanism that was used in defining the selection of localities for investment in the program aimed at closing supply gaps. Results suggest education spending is semi-progressive overall, whereas the targeting used for program aimed at closing supply gaps may be less progressive in practice, depending on the criteria used to target resources. The resources dedicated to the closing of supply gaps in health are shown to be very progressive, especially when spent on refurbishing existing UNAPS inter alia. The analysis also points to a fair calibration of the supply gap estimates but also suggests that these should be recalculated on a yearly basis and use a mix of indicators to increase their efficiency, including poverty maps and available services. The targeting mechanisms that would ensure pro-poor marginal spending are currently being considered by the Government. 11. The Benefit-Incidence Analysis (BIA) of Government spending pointed to the limited risk of penalization of households for non-compliance due to remaining supply gaps in health and education due to the additional measures taken by the Government under programs focused on supply gaps. Evidence shows that education spending is somewhat progressive, whereas the targeting used for the program focusing on supply gaps is a little less progressive in practice. The resources dedicated to the closing of supply gaps in health appear to be very progressive. The analysis also points to a fair calibration of the supply gap estimates but also suggests that these should be recalculated on a yearly basis and use a mix of indicators to increase their efficiency, including poverty maps and available services. Progress can be seen in closing supply gaps in education, health, and nutrition through concerted efforts (new planning processes and budget protections). The Government is therefore consolidating the gains made in institutionalizing the CCT Intersectoral Committee to increase its oversight, including taking corrective actions to ensure an adequate pro-poor incidence and improved level of execution of investments in closing the supply-gaps. 93 Annex 11: Fiduciary aspects 1. As discussed in the document, the fiduciary risk related to the Public Financial Management (PFM) environment in the Dominican Republic remains moderately high, though the Government has continued to engage in reviewing, strengthening and reforming the way its public finances are planned and managed in the last few years. The country has made good progress in passing important reforms that targeted the FM legal framework and redefined the role of the institutions involved on public financial management. Developing the reforms has involved not only MoF, MEPD and MPA, but also legislative and other oversight entities concerned with quality and efficiency of budget execution and control. Implementation has shown modest improvements as explicitly indicated in the 2007 Performance Expenditures and Financial Accountability (PEFA) Report, and the 2010 PEFA Update. Key PFM entities show notable progress in defining their strategic plans, aligned with the National Development Plan. Many joined activities – Government/civil society/private enterprises/donors to strengthen key FM and oversight entities are taking place. 2. The Government has continued to deploy and is steadily implementing a National Integrated Financial Management Information System: the SIGEF. Its sub- system for municipalities SIFMUN now covers almost half of the municipalities and its subsystem of implementing units with external resources, UEPEX, is already being utilized in most projects financed by major development partners. The integration of this system with the flurry of new (and renewed) planning instruments, and other initiatives recently introduced including the Development Strategy, the Multi-Annual National Plan for the Public Sector 2010-2013, the Regional Plans, the Medium-Term Sector and Institutional Strategic Plans, and performance contracts, among others, remain a challenge. Once existing management challenges are addressed and the integrated information system is fully deployed to all public entities, including decentralized entities, improvements are expected in enhanced transparency, strengthened internal controls, improved recording of accounting transactions and greater access to quality, timely, and digestible public financial data. 3. The main PFM oversight entities, the Contraloría General de la República (Comptroller General, CGR) and the Cámara de Cuentas (Chamber of Accounts, CdC), are both members of the LAC Organization for Supreme Audit Institutes (OLACEFs -Organización Latinoamericana de Entidades Fiscalizadoras Superiores). Both are responsible for the internal and external audit functions of the public sector, although CdC has a broader scope, since the CGR is only limited to entities of the Central Government. Both entities are implementing concrete measures to improve Governmental performance accountability by enhancing their capacity and staff skills in accordance with their new legal framework. With very limited resources, both entities have been implementing activities to improve compliance with their legal auditing mandate, largely financed by external resources. In 2010 the CGR was granted constitutional power and the entity kept its internal control role. To be able to comply with its auditing role, the CGR would require a substantial increase in its workforce, along with training and capacity building, which would normally translate into greater resource allocation; although not possible in times of scarce resources. The CdC, following recommendations of a self assessment of its institutional arrangements performed in 2008, is compelled to continue enhancing its effectiveness and strengthen its capability as Supreme Audit Institution (SAI) while addressing the low public trust in the organization. Along these lines, the Chamber has signed agreements with the European Commission, the United States Agency for International Development (USAID), and the Bank, among other donors. Both oversight entities, CGR and CdC have also signed inter-institutional agreements with other Governmental oversight bodies, such as the Dirección de Prevención de la Corrupción Administrativa (DPCA); however, beyond formulation, the actual implementation of those agreements remain uncertain. 94 With multi-year and multi-sectoral non-lending technical assistance, institutional development trust funds, and within the framework of the Participatory Government-Private Sector-Civil Society Anti- Corruption Initiative (IPAC) Roundtables 3 for FM and 10 for Oversight Entities, and taking into consideration the areas that need strengthening according to the PEFA reports, plus all strategic plans, the WB and other donors are supporting PFM –including oversight entities. For this purpose, civil society organizations and private enterprises are engaged on the demand side to balance Governmental efforts for increased accountability and transparency in the management of public funds. A10.1: Procurement 4. The Dominican Republic has made important advances in the Procurement Reform over the past five years, nevertheless, substantial challenges remain. The latest Country Procurement Assessment Report (CPAR) for the Dominican Republic was published in April 2005. Since then the country passed Law 340-06 for Public Procurement of Goods, Works, Services and Concessions, approved in August 2006 and later modified by Law 449-06. This law is the first to comprehensively include all aspects of procurement of goods, works, services, the selection of consultants and concessions in the country, while also attempting to increase competition and transparency by allowing direct contracting only for limited circumstances specifically detailed in the law. As the country entered into the Dominican Republic-CAFTA negotiations, the Public Procurement Law has been validated as fully consistent with the procurement provisions of said agreement. Another important milestone in the procurement reform was the passing of Decree No. 490-07 that provided the enabling regulations for the new procurement law and the launching the portal ―comprasdominicana�. Nevertheless, in practice, Law 340-06 is not fully implemented and there is a need for more transparency and efficiency in the system. 5. The Bank has provided support to the national procurement body, Dirección General de Contrataciones Públicas (DGCP), in the development of their National Procurement Strategic Plan as part of the NLTA for Improving the Quality and Efficiency of Public Expenditures in the Dominican Republic. This Plan has been incorporated into the Ministry of Finance wider Strategic Plan. The National Procurement Strategic Plan includes activities that are to be implemented in the short-, medium- and long-term to ensure significant improvements in the procurement system. Sustained Government support for this Plan is crucial for procurement reform. With the support from the Bank and other donors such as USAID, IADB and the European Union, DGCP has started some activities indentified in their Strategic Plan. However, coordination issues between the DGCP and the Ministry of Finance, as the implementing agency for the Integrated Financial Management System (SIGEF), is causing additional delays to the process. 6. The Government has expressed their interest in the application of the OECD Procurement Indicators and has started preparations to undertake this exercise. Additionally, the conceptual module for the Public Procurement Portal has already been developed. DGCP has also prepared the modifications needed to strengthen the enabling regulations for Law No. 340-06, which have to be approved by a Presidential Decree. These activities are key for the improvement of the Public Procurement System and should be monitored to ensure the success of the reform. A10.2: Flow of Funds 7. The flow of funds within the Dominican Republic portfolio from Designated Accounts denominated in US Dollars to the Operating Account in RD pesos, has continued to improve, and most of the issues that persist on slow disbursement are procurement related. Project Implementation 95 Units (PIUs) report the cycle continues to be from three to seven days, according to discussions during the Country Portfolio Performance Reviews (CPPRs) in 2009-2010. Efforts include a more efficient release of allocated funds via the Treasury, following the cycle indicated in the new legal framework, which included eliminating the need to involve entities which added no value to the process, the use of modern administrative tools, such as e-banking for electronic wire transfers, and e-disbursement through Client Connection. The combined measures show a less cumbersome and effective flow chart. The quick count of bank accounts continues to be high. They went up from more than 3,000 in 2007 according to the 2007 PEFA Report, to 6,000 according to the 2010 PEFA Update. A formal inventory is already underway, as the groundwork to implement a Single Treasury Account, as mandated by the 2005 Treasury Law. The implementation of the Single Treasury Account will allow continuing decrease of the extra-budgetary expenses. A10.3: Central Bank of the Dominican Republic 8. The Financial Sector in the Dominican Republic does not apply International Financial Reporting Standards, according to the 2004 Report on Observance of Standards of Codes on Accounting and Auditing (ROSC A&A) Report and the 2009 ROSC A&A Update. Entities in the financial sector adhere to specific rules issued by the respective regulatory agencies, namely, the Superintendency of Banks (SB), the Superintendency of Insurance (SIS), the Superintendency of Pensions (SIPEN), and the Superintendency of Values (SV). These rules, at the time of the World Bank assessment, differ from the international standards (IFRS). The World Bank, therefore, recommended harmonizing regulatory accounting principles for banks, insurance companies and pension funds with IFRSs in the medium term which meant the next 1 to 2 years. No convergence initiatives had been announced as of May 2011. 9. An independent audit firm performed the external audit of the Central Bank of the Dominican Republic (BCRD) for the Fiscal Year 2010. The auditors issued unqualified (clean) opinion of the financial statements (FSs) for the audited period, in accordance with the accounting practices followed by the BCRD. In notes 2 and 3 to the 2010 FS, the auditors mentioned that the Central Bank does not follow International Financial Reporting Standards (IFRS). It follows the policies established by the Monetary and Finance Law (No. 183-02) and its enabling regulations, the Internal Regulation for Accounting of the Central Bank, applicable Resolutions of the Monetary Board, and accounting practices utilized by central banks. Although this is a clear departure from the IFRs, their auditors attest that they represent an integral foundation for accounting. The accounting method to prepare the FS are based on the historical cost, with the exception of the financial instruments considered as negotiable which are measured to its reasonable value. According to Note 3.16, there is not a unified accounting basis for recording income and expenses. Some income (investment interest, sales of fixed assets, and staff loans) are registered on an accrued basis of accounting, while investment discounts are horizontally amortized and commission income is recognized on the cash basis of accounting. Likewise, expenses for interest financing for issued instruments are registered when incurred, discounts are horizontally amortized, while other expenses are recorded using the accrual basis of accounting. 96 Annex 12: MAP IBRD 33398 97