PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE September 20, 2011 Report No.: AB6766 Operation Name Third Development Policy Loan on Performance and Accountability of Social Sectors (PASS3) Region LATIN AMERICA AND CARIBBEAN Country Dominican Republic Sector Other social services (39%); Health (33%); General education sector (28%) Operation ID P125806 Lending Instrument Development Policy Lending Borrower(s) Government of Dominican Republic Implementing Agency Ministry of Finance Date PID Prepared September 20, 2011 Estimated Date of Appraisal September 26, 2011 Estimated Date of Board Approval November 17, 2011 Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. I. Country and Sector Background The DR has learned from previous crises about the importance of protecting human capital gains in adverse economic conditions, as the 2003 domestic banking crisis pushed 1.3 million people into poverty. Previous crisis also resulted in sharp declines in social spending. Spending on education and health is still low compared to regional standards but has been protected in the aftermath of the 2003 crisis. The impact of the crisis on social spending and poverty led to renewed emphasis on the importance of safety nets to mitigate risks and address poverty. The Government responded by establishing the Solidaridad program, a conditional cash transfer program aimed at ensuring investments in the human capital of poor households. The Solidaridad program selects its beneficiaries using the Single Beneficiary Selection System (SIUBEN), reflecting a shift from universal, unconditional subsidies to targeted transfers. Since 2008/2009, the Government took significant mitigation measures to address the crisis, including the expansion in coverage of social protection programs, the expansion of the subsidized health insurance regime, and the implementation of food-related policies. In the DR, the quality of health care and access to some basic health services need to be further strengthened. Indeed, although, in general, access to health services is not an issue, quality is an issue at the first level of care. In education, quality is the main challenge. The DR has one of the lowest levels of public spending on education in the region and the lowest performance on the regional standardized exam measuring education quality. Poor performance affects all socioeconomic groups, but the issues are greater among poorer households. II. Operation Objectives The objectives of this DPL remain consistent with the initial objectives of the PASS series: (i) 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; (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. III. Rationale for Bank Involvement This proposed DPL 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). Reforms supported by this series contributed to the protection of human capital of the poor despite the crises. The first operation established the conceptual, institutional, and operative revamp of the safety net framework to focus on promoting human capital investments by poor households. PASS1 also contributed to 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 further strengthened the institutionalization of reforms. It supported the governance arrangements necessary to effectively administer the CCT Solidaridad and to gradually introduce performance agreements. PASS2 also supported the creation of the first Medium-Term Public Expenditure Framework to increase predictability, transparency, and rationalization of the budget, and initiated the implementation of community scorecards for social accountability. PASS3 will support selected policy actions to: (i) consolidate the conceptual, institutional, and operational revamp of the CCT Solidaridad through the systematic verification of CCT co- responsibilities, while deconcentrating CCT operations to regional and local levels; (ii) initiate a new, integrated Monitoring and Evaluation System for the entire Social Protection System, shared across sectors and agencies; (iii) strengthen the internal efficiency and accountability of health services through new daily, electronic Management Information System; (iv) enhance the efficiency and quality of education services, through greater deconcentration of resource allocation, validated student evaluation standards for secondary education, and the establishment of a School for Principals to promote a new management culture; (v) improve the quality of service related to the CCT payment mechanism through greater competitiveness and access to information and improve the accuracy of the targeting mechanism; (vi) improve the accuracy and increase the coverage of the targeting system by initiating the Second SIUBEN Socioeconomic Household Study to update the beneficiary registries of all targeted social programs, including the CCT; (vii) enhance budget management to improve the joint performance of the CCT Solidaridad to meet output targets, including reductions in supply gaps; (viii) introduce a new results-oriented approach to program management through the signing of the first performance agreements for priority health and education programs; (ix) improve access to and understanding of the national budget through the launch of the free, web-based, user-friendly Consulta Amigable online budget transparency portal; and (x) enhance citizen participation in and oversight of social programs through the definition of the expansion of the first social accountability mechanism of the CCT Solidaridad. IV. Tentative financing Source: ($m.) Borrower/Recipient 0 International Bank for Reconstruction and Development 70 Others (specify) 0 Total 70 V. Tranches ($m.) First Tranche 70 Second Tranche Total 70 VI. Institutional and Implementation Arrangements The implementation of PASS DPL3 will continue to rely on the close coordination of the Bank team with the respective institutions responsible for the PASS reforms, namely the Ministry of Finance, the Ministry of Economy, Planning, and Development, the Social Cabinet, the Ministry of Health, and the Ministry of Education. The PASS series also supports a strong results framework monitored by these same institutions. VII. Risks and Risk Mitigation Macroeconomic risks: the outlook remains highly uncertain, in light of the economic woes in Europe and the United States. A spread in the crisis 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. 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 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 societal 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 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 in certain areas, and coordination could slow down some reforms. There are also risks of slow execution and 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 funds to bridge 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 DR 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). VIII. Poverty and Social Impacts and Environment Aspects Poverty and Social Impacts (PSIA) The PASS operations are expected to have significant and positive distributional impacts. The analysis suggests substantial positive human capital impacts of the CCT reforms, including an estimated increase in school enrollment by 6 percentage points and an expected decrease in child labor by 9.2 percent due to the introduction of education co-responsibilities; new health co- responsibilities are estimated to double the attendance of children under five by a healthcare professional, according to the same ex-ante micro-simulation. Positive externalities are also expected beyond the program through improved targeting, results-based financing, greater transparency, and complementary health and education efforts. Environmental Aspects Consistent with the first and second PASS operations, the actions supported by this proposed third PASS operation are not likely to generate significant positive or negative effects on the environment, forests, and other natural resources. IX. Contact point World Bank Contact: Aline Coudouel Title: Senior Economist Tel: (202) 473-3495 Fax: (202) 522-0050 Email: acoudouel@worldbank.org Borrower Contact: Roberto Cabañas Title: Director of Negotiations, General Directorate for Public Credit, Ministry of Finance Tel: (809) 687-5131 Ext. 2358 Email: rcabanas@creditopublico.gov.do X. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop