Document of The World Bank€¦ · SAIA Antinarcotics Office SAT Superintendencia de Administracion Tributaria ... UTJ Unidad Tecnica Juridica de Administracion de Tierras (Technical

Document of The World Bank

Report No: ICR00001142

IMPLEMENTATION COMPLETION AND RESULTS REPORT (PO94365; PO94897; P101311)

ON THE

PROGRAMMATIC BROAD-BASED GROWTH DEVELOPMENT POLICY LOANS

IN THE AMOUNTS OF

1. US$100 MILLION (July 7, 2005)

2. US$100 MILLION (Aug 29, 2006)

3. US$100 MILLION (Aug 2, 2007)

TO THE

REPUBLIC OF GUATEMALA

June 30, 2009

Central America Country Management Unit Poverty Reduction and Economic Management Sector Unit Latin American and the Caribbean Region

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CURRENCY EQUIVALENTS Exchange Rate Effective 4/28/2009 Currency Unit = Quetzales QZ 1.00 (quetzales) = US$ 0.12379 US$ 1.00 = QZ 8.08 (quetzales) FISCAL YEAR January 1-December 31 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities AML Anti-Money Laundering BANGUAT Guatemalan Central Bank BIS Bank of International Settlements CAS Country Assistance Strategy CEA Country Environmental Assessment CECMA Centro de Estudios de la Cultura Maya (Center for Mayan Cultural Studies) CEM Country Economic Memorandum CEPAL Comision Economica Para America Latina y el Caribe (Economic Commission

for Latin America and the Caribbean) CFAA CPAR Country Financial Accountability Assessment CGC Controlaria General de Cuentas (General Comptroller's Office) CPAR Country Procurement Assessment Report CPI Consumer Price Index DNCAE Normative Directorate for Procurement and Contracting DPL Development Policy Loan DR-CAFTA Dominican Republic - Central America Free Trade Agreement FATF Financial Action Task Force FDI Foreign Direct Investment FONDETEL Fondo para el Desarrollo de la Telefonia (Rural Telephone Fund) FONTIERRAS Rural Land Municipalities FSAL Financial Sector Adjustment Loan FSAP Financial Sector Assessment Program FTA Free Trade Agreement GAFI Grupo de Accion Financiera Internacional GANA Gran Alianza Nacional (Grand National Alliance) GDP Gross Domestic Product GUAPA Guatemala Poverty Assessment IBRD International Bank for Reconstruction and Development ICA Investment Climate Assessment ICAO International Civil Aviation Organization ICR Implementation Completion Report ICT Information and Communication Technologies IDA International Development Association IEMA Impuestos a Empresas Mercantiles y Agricolas (Commercial and Agricultural

Enterprise Tax) IETAP Ley del Impuesto Extraordinario y Temporal de Apoyo a 10s Acuerdos de Paz

(Temporary and Extraordinary Tax to Support the Peace Accords) IFC International Finance Corporation

IIG Invest in Guatemala IMF International Monetary Fund INCAE Instituto Centroamericano de Administracidn de Empresas (Central American

Institute for Business Administration) INE Instituto Nacional de Estadistica (National Statistics Institute) INTFCAP Instituto Tecnico de Capacitacion y Productividad (Technical Institute for

Training and Productivity) LAC Latin America and the Caribbean MDG Millennium Development Goals MFP Ministerio de Finanzas Publicas (Ministry of Public Finance) MIGA Multilateral Investment Guarantee Agency MSME Micro Small and Medium Enterprise NGO Non-Governmental Organization OBA Output-Based Aid OIRSA Plant and Animal Control Office PER Public Expenditure Review PFM Public Finance Management PIB Producto Interno Bruto (Gross Domestic Product) PPP Public-private partnerships PRONACOM Promotion of National Competitiveness PSIA Poverty and Social Impact Assessment SAG Government Auditing System SAIA Antinarcotics Office SAT Superintendencia de Administracion Tributaria (Tax Administration

Superintendency) SIECA Secretaria de Integracion Economica Centroamericana (Central American

Economic Integration Secretariat) SIAF Integrated Financial Management Systems SIAFMUNI Municipal Integrated Financial Management Systems SIT Superintendencia de Telecomunicaciones (Telecommunications

Superintendency) SME ` Small and Medium Enterprise SWAP Sector-wide Approach TA Technical Assistance UN United Nations UNDP United Nations Development Program USAID United States Agency for International Development USDA United States Department of Agriculture USFAA United States Federal Aviation Authority UTJ Unidad Tecnica Juridica de Administracion de Tierras (Technical Juridical Unit

for Land Administration) VAT Value Added Tax WBI World Bank Institute

Vice President: Pamela Cox

Country Director: Laura Frigenti

Sector Manager: Rodrigo A. Chaves.

Task Team Leader: David M. Gould

ICR Team Leader: David M. Gould

GUATEMALA Development Policy Loan I, II, III CONTENTS Data Sheet B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring

1. Program Context, Development Objectives and Design ............................................ 1 2. Key Factors Affecting Implementation and Outcomes .............................................. 5 3. Assessment of Outcomes .......................................................................................... 16 4. Assessment of Risk to Development Outcome ......................................................... 29 5. Assessment of Bank and Borrower Performance ..................................................... 29 6. Lessons Learned........................................................................................................ 31 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ........... 33 Annex 1 Bank Lending and Implementation Support/Supervision Processes .............. 35 Annex 3. Stakeholder Workshop Report and Results ................................................... 39 Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 40 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 42 Annex 6. List of Supporting Documents ...................................................................... 43

MAP

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A. Basic Information

Program 1

Country Guatemala Program Name First Broad-Based Growth Development Policy Loan

Program ID P094365 L/C/TF Number(s) IBRD-73190

ICR Date 06/30/2009 ICR Type Core ICR

Lending Instrument DPL Borrower GOVERNMENT OF GUATEMALA

Original Total Commitment

USD 100.0M Disbursed Amount USD 100.0M

Implementing Agencies Ministry of Public Finance

Cofinanciers and Other External Partners

Program 2

Country Guatemala Program Name Second Broad Based Growth Development Policy Loan



Lending Instrument DPL Borrower GOVERNMENT OF GUATEMALA





Program 3

Country Guatemala Program Name GT DPL III



Lending Instrument DPL Borrower





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B. Key Dates First Broad-Based Growth Development Policy Loan - P094365

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 05/09/2005 Effectiveness: 01/06/2006

Appraisal: 05/24/2005 Restructuring(s):

Approval: 07/07/2005 Mid-term Review:

Closing: 06/30/2006 06/30/2006 Second Broad Based Growth Development Policy Loan - P094897


Date(s)




Closing: 12/31/2007 12/31/2007 GT DPL III - P101311


Date(s)




Closing: 12/31/2008 12/31/2008 C. Ratings Summary C.1 Performance Rating by ICR First Broad-Based Growth Development Policy Loan - P094365

Outcomes Satisfactory

Risk to Development Outcome Moderate

Bank Performance Satisfactory

Borrower Performance Satisfactory Second Broad Based Growth Development Policy Loan - P094897




Borrower Performance Satisfactory

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GT DPL III - P101311




Borrower Performance Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) First Broad-Based Growth Development Policy Loan - P094365

Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies:

Satisfactory

Overall Bank Performance

Satisfactory Overall Borrower Performance

Satisfactory

Second Broad Based Growth Development Policy Loan - P094897



Satisfactory



Satisfactory




Satisfactory



Satisfactory

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C.3 Quality at Entry and Implementation Performance Indicators First Broad-Based Growth Development Policy Loan - P094365

Implementation Performance

Indicators QAG Assessments

(if any) Rating:

Potential Problem Program at any time (Yes/No):

No Quality at Entry (QEA)

None

Problem Program at any time (Yes/No):

No Quality of Supervision (QSA)

None

DO rating before Closing/Inactive status

Satisfactory




(if any) Rating:


No Quality at Entry (QEA)

None


Yes Quality of Supervision (QSA)

None


Satisfactory




(if any) Rating:


Yes Quality at Entry (QEA)

None


No Quality of Supervision (QSA)

None


Satisfactory

D. Sector and Theme Codes First Broad-Based Growth Development Policy Loan - P094365

Original Actual

Sector Code (as % of total Bank financing)

Central government administration 40 40

General agriculture, fishing and forestry sector 10 10

General finance sector 20 20

General industry and trade sector 20 20

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Sub-national government administration 10 10

Theme Code (as % of total Bank financing)

Other financial and private sector development 14 14

Public expenditure, financial management and procurement

29 29

Regional integration 14 14

Tax policy and administration 14 14

Trade facilitation and market access 29 29 Second Broad Based Growth Development Policy Loan - P094897

Original Actual


Aviation 9 9






Municipal governance and institution building 14 14


29 29

Regulation and competition policy 14 14

Tax policy and administration 14 14

Trade facilitation and market access 29 29 GT DPL III - P101311

Original Actual


Aviation 10 10






Infrastructure services for private sector development 14 14

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29 29

Regulation and competition policy 14 14

Standards and financial reporting 29 29

Tax policy and administration 14 14 E. Bank Staff First Broad-Based Growth Development Policy Loan - P094365

Positions At ICR At Approval Vice President: Pamela Cox Pamela Cox Country Director: Laura Frigenti Jane Armitage Sector Manager: Rodrigo A. Chaves Mauricio Carrizosa Task Team Leader: David Michael Gould Neeta G. Sirur ICR Team Leader: David Michael Gould ICR Primary Author: David Michael Gould Luis Alvaro Sanchez Second Broad Based Growth Development Policy Loan - P094897

Positions At ICR At Approval Vice President: Pamela Cox Pamela Cox Country Director: Laura Frigenti Jane Armitage Sector Manager: Rodrigo A. Chaves Mauricio Carrizosa Task Team Leader: David Michael Gould David Michael Gould ICR Team Leader: David Michael Gould ICR Primary Author: David Michael Gould Luis Alvaro Sanchez GT DPL III - P101311

Positions At ICR At Approval Vice President: Pamela Cox Pamela Cox Country Director: Laura Frigenti Jane Armitage Sector Manager: Rodrigo A. Chaves Mauricio Carrizosa Task Team Leader: David Michael Gould David Michael Gould ICR Team Leader: David Michael Gould ICR Primary Author: David Michael Gould Luis Alvaro Sanchez

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F. Results Framework Analysis

Program Development Objectives (from Program Document) The proposed Programmatic Development Loan is the last of a programmatic series of three DPLs intended to support the three main pillars of the government's development plan: promoting equitable growth and strengthening the investment climate, enhancing capacity for increased public spending in priority sectors, and improving public expenditure transparency and management. Other key areas for growth identified in education, health and nutrition, and rural economic infrastructure are supported within the CAS program through investment operations, which build on the ongoing portfolio of interventions in these areas. Revised Program Development Objectives (as approved by original approving authority) None (a) PDO Indicator(s) First Broad-Based Growth Development Policy Loan - P094365

Indicator Baseline

Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Increase in non-traditional exports by at least 9% (by end 2007) Value (quantitative or Qualitative)

US$1,9 billion Increase by at least 9 % by end-2007

Date achieved 12/31/2004 12/31/2007 Comments (incl. % achievement)

No intermediate targets. See DPL III for outcomes.

Indicator 2 : Reduce customs processing times for imports and exports by at least 10% by end 2007

Value (quantitative or Qualitative)

Air cargo 12 hours; courier 24 hours; seaports 4 days

10 % reduction



Indicator 3 : Reduce from 45 to 22 days (by end 2007) the time required to register a new business


45 days 22 days by end 2007



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Indicator 4 : Cadastral survey of 50% of national territory completed by end 2007 Value (quantitative or Qualitative)

20% of national territory surveyed

50 %



Indicator 5 : Titling and registration for 33% of national territory completed by end 2007 Value (quantitative or Qualitative)

about 12% of national territory titled and registered

33 percent



Indicator 6 : An adequate legal framework for PPP in infrastructure is in place and being implemented by end 2007


No adequate legal regulatory framework for PPP

An adequate legal framework for PPP in infrastructure is in place and being implemented



Indicator 7 : At least a 7% reduction in handling times and costs via efficiency improvements in ports/airports (by end 2007)


20 days for exports and 36 days for imports

at least a 7 percent reduction



Indicator 8 : Legal and regulatory framework to facilitate access to credit by SMEs implemented and functioning (by end 2007)


SMEs have limited access to credit

Legal and regulatory framework to facilitate access to credit by SMEs implemented and functioning

Date achieved 12/31/2004 12/31/2007 Comments No intermediate targets. See DPL III for outcomes.

ix

(incl. % achievement) Indicator 9 : Payment system implemented and in operation (Banguat) by end 2007 Value (quantitative or Qualitative)

Lack of modern Real Time Gross Settlement system

Payment system implemented and in operation



Indicator 10 : Tax administration is strengthened by 2007 as assessed by independent agencies (e.g., IMF WB)


No systematic tracking of large taxpayers, no system for electronic cross checks of tax payments by large tax payers

Strengthened tax administration



Indicator 11 : Tax revenue at least at 11% of GDP by end 2007 Value (quantitative or Qualitative)

Tax revenue at 10.4% of GDP in 2004

11 %



Indicator 12 : Social spending (Peace Accords definition) at 6% of GDP by end 2007 Value (quantitative or Qualitative)

Social spending for 2004 at 5% of GDP

6 %



x

Indicator 13 : Enhanced public financial management performance as measured by international indicators


Public Financial Management System (SIAF) operational in about 60% of centralized government and 30% of decentralized agencie s

Enhanced public financial management performance



Indicator 14 : Strengthened transparency and efficiency in public procurement (WB staff assessment)


Marginal use of standard public procurement system (Guatecompras)

Strengthened transparency and efficiency in public procurement




Indicator Baseline

Value


approval documents)




Indicator 1 :

Increase in non- traditional exports in US$ terms by at least 9% (Banguat data) * (Baseline: US$ 1,9 billion in 2004),


US$1,9 billion Increase by at least 9 % by end-2007



xi

Indicator 2 :

Reduce customs clearance times for imports and exports by at least 15% (SAT indicators) (Baseline (2004): air cargo:12 hrs; courier: 24hrs; seaports: 4 days)


Air cargo 12 hours; courier 24 hours; seaports 4 days

10 % reduction



Indicator 3 :

Cadastral survey of 50% of national territory completed (RIC) (Baseline: 20% in 2004). Titling and registration for 33% of national territory completed (RIC) (Baseline: 12% in 2004)


20 %

50 %



Indicator 4 : An adequate legal framework exists for PPP and is being implemented (Staff assessment)



Adequate legal framework for PPP in infrastructure is in place and is being implemented



Indicator 5 : At least a 7% reduction in handling times and costs via efficiency mprove-ments in ports and airports (Facilitation Group, Pr onacom) (Baseline: 20 days for exports and 36 days for imports in 2005)


Date achieved Comments (incl. % achievement)


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Indicator 6 : Legal and regulatory framework to facilitate access to credit by SMEs implemented and functioning (Staff assessment) *






Indicator 7 : Payment system implemented and in operation (Banguat) Value (quantitative or Qualitative)





Indicator 8 : Strengthened tax administration as assessed by independent agencies (e.g., IMF, World Bank)


No systematic tracking of large taxpayers, no system for electronic cross checks of tax payments by large tax payers




Indicator 9 : Tax revenues at least at 11% of GDP (Ministry of Finance) (Baseline: 10.4% in 2004)


Tax revenue at 10.4 percent of GDP in 2004

11 percent



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Indicator 10 :

Increased availability (6%of GDP) and better targeting of resources for social sectors (Ministry of Finance) (Baseline: 5.0% in 2004)


Social spending for 2004 at 5 % of GDP

6 % of GDP



Indicator 11 : Enhanced public financial management performance (as measured by international indicators)


Public Financial Management system (SIAF) is operational in about 60% of centralized government and 30% of decentralized agen cies

Enhanced PFM performance



Indicator 12 : Strengthened transparency and efficiency in public procurement (Staff assessment)







Indicator Baseline

Value


approval documents)




Indicator 1 : Maintain macroeconomic stability Value (quantitative or Qualitative)

Date achieved Comments (incl. %

Fully achieved. Improved macroeconomic framework

xiv

achievement)

Indicator 2 : Increase in non-traditional exports in US$ terms by at least 9 percent (Banguat data)


1.9 billion

Increase in non-traditional exports in US$terms by at least 9 percent

44% from 2004 to 2008, on average 9.2% p.a.

Date achieved 12/31/2004 12/31/2007 12/31/2008 Comments (incl. % achievement)

Fully achieved.

Indicator 3 : Reduce customs clearance times for imports and exports by at least 15 percent (SAT indicators)


Air cargo 12 hours; Seaports 4 days

Reduce by at least 15 %

Air cargo 1 hour; courier 1 hour; Seaports 22 hours


Fully achieved

Indicator 4 : Reduce from 45 to about 25 days the time required to register a new business (Pronacom indicators)


Time to register a business 45 days

25 days 26 days


Achieved. Other indicators (One stop shop - 14 days) confirm improvements to the business environment

Indicator 5 : Cadastral survey of 50 percent of national territory completed (RIC) Value (quantitative or Qualitative)

20 % of national cadastral survey completed

50 % of national cadastral survey completed

33 %


Partially achieved.

Indicator 6 : Titling and registration for 33 percent of national territory completed (RIC) Value (quantitative or Qualitative)

12 % 33 % 33.1 %


Achieved.

xv

Indicator 7 : An adequate legal framework exists for PPP and is being implemented (Staff assessment)



Adequate legal framework

No adequate legal framework for PPP


Not achieved.

Indicator 8 : At least a 7 percent reduction in handling times and costs via efficiency improvements in ports and airports (Facilitation Gr oup, Pronacom)


20 days for exports and 36 days for imports

7 % decrease 15% decrease in handling times


Achieved. Handling times at airports and ports came down by around 15 % during the period more than twice the goal of 7% per cent.

Indicator 9 : Legal and regulatory framework to facilitate access to credit by SMEs implemented and functioning (Staff assessment)




Improvements in access to finance


Achieved. Various sources show improvements in access to finance (2009 Doing Business, 2008 ICA and Banking Superintendency ).

Indicator 10 : Payment system implemented and in operation (Banguat).




New payment system implemented and all banks are operating on the new system


Achieved. Other important work includes: (a) dealing promptly with two failed banks, and (b) advancing the quality of the r egulatory enforcement and its framework

xvi

Indicator 11 : Strengthened tax administration as assessed by independent agencies (e.g., IMF, World Bank)


Lack of adequate tax administration to minimize evasion


Tax administration reform satisfactory as assessed by the IMF and World Bank


Achieved. Tax administration strenghtened beyond initial expectations.

Indicator 12 : Tax revenues at least at 11 percent of GDP (Ministry of Finance) Value (quantitative or Qualitative)

10.4 % as a share of GDP (using 1958 base year)

11 % as a share of GDP (using 1958 base year)

10.3% as a share of GDP (using 1958 base year)


Partially achieved. Tax revenue increase of 11 percent was achieved in 2007, however due to the economic crisis tax revenue fell as a share of GDP in 2008.

Indicator 13 : Increased availability (6 percent of GDP) and better targeting of resources for social sectors (Ministry of Finance)


5 % of GDP (using 1958 base year)

6 % of GDP (using 1958 base year)

5.8 % (using 1958 base year)


Mostly Achieved. Social expenditures are expected to increase to 7.4 % of GDP in 2009 as government implements its new Cond itional Cash Transfer program.

Indicator 14 : Enhanced public financial management performance (as measured by international indicators)


Public Financial Management System (SIAF) operational in about 60% of centralized government and 30% of decentralized agencie s

Enhanced public financial management performance

Public Financial Management through the Integrated Financial Management System (SIAF) expanded to all public entities


Achieved. PEFA indicators, although not completed, suggest improvements.

xvii

Indicator 15 : Strengthened transparency and efficiency in public procurement (Staff assessment)




Mandatory use of Guatecompras for all public agencies


Achieved.

(b) Intermediate Outcome Indicator(s) First Broad-Based Growth Development Policy Loan - P094365

Indicator Baseline Value


approval documents)

Formally Revised

Target Values



Indicator 1 : No intermediate Indicators Value (quantitative or Qualitative)





approval documents)

Formally Revised

Target Values



Indicator 1 : No intermediate indicators Value (quantitative or Qualitative)


xviii




approval documents)

Formally Revised

Target Values



Indicator 1 : No intermediate indicators Value (quantitative or Qualitative)


G. Ratings of Program Performance in ISRs First Broad-Based Growth Development Policy Loan - P094365

No. Date ISR Archived

DO IP Actual

Disbursements (USD millions)

1 09/30/2005 Satisfactory Satisfactory 0.00 Second Broad Based Growth Development Policy Loan - P094897


DO IP Actual


1 05/18/2007 Satisfactory Moderately

Unsatisfactory 0.00



DO IP Actual


1 12/27/2007 Satisfactory Satisfactory 0.00 H. Restructuring (if any)

1

1. Program Context, Development Objectives and Design Context. At the time of the DPL I, the 1996 Peace Accords agenda of reforms continued to be a preoccupation of the country. The agenda specifically was directed to stimulate and sustain economic and social policy, with a focus on improved delivery of basic services and good governance.1 Progress under the Peace Accords program during the Arzu administration (1996-99) had promoted competition, removal of commodity subsidies, privatization (telecoms and electricity) and increases in social spending; however, the pace of reforms slowed considerably during the Portillo Administration (2000-04). Even so, a social consensus held that advancing the Peace Accords agenda was necessary to enhance the legitimacy of public institutions in the eyes of civil society and the international community. The Berger Administration (2004-08) confronted a difficult economic situation. Income per capita had declined since 2000 and in 2003 macroeconomic stability had become an issue. Complicating the matter, just as Guatemala began to emerge from its financial crisis the Supreme Court struck down revenue measures intended to buttress the country’s fiscal position. The international community, including the World Bank, became increasingly concerned about the risk of fiscal imbalance and particularly, the implications for sorely-needed increases in social spending. The Berger administration quickly articulated a strong commitment to comply with the Peace Accords and confront Guatemala’s macroeconomic and growth challenges. To address fiscal and other concerns, the authorities pushed through: (a) a new tax package which reinstated, in revised form, the gross corporate income tax the Supreme Court had previously repealed, (b) reduced military allocations, (c) protected social expenditures, and (d) devised a 106-point strategic plan to address revenue challenges. The Administration also sharpened its focus on governance, particularly related to transparency of public expenditure and the identification and punishment of corrupt practices. The Government also took steps to facilitate trade (CAFTA, EU, Taiwan, and Colombia) and foster competitiveness as well as generate rapid economic growth, with a view to providing employment and income opportunities for the one of the fastest growing populations in Latin America. Project Development Objectives. The Project Development Objectives for all three Development Policy Loans aimed at fostering broad-based growth by: (i) promoting growth and improving the investment climate, (ii) enhancing capacity for public spending in priority sectors, and (iii) achieving greater transparency in public sector management. The CAS envisaged a program aimed at reducing poverty and inequality, through a combination of budget support and selective investment lending in key areas where, building on prior successful implementation of operations in Guatemala, the Bank had global expertise. These included projects for: (i) education quality and secondary

1 The Peace Accords themselves were not legally binding and formal approval of other laws and decrees within the institutional framework were required to implement the accords. A 1999 referendum to modify the Constitution on certain aspects of the Accords approved some but not all of the proposals.

2

education expansion; (ii) maternal and child health and nutrition; (iii) rural economic development, including infrastructure, technical support and decentralized planning; (iv) land administration (cadastre and titling); (v) infrastructure development through a public-private partnership (PPP) and guarantee approach; and (vi) governance and public sector management improvements. To be responsive to the government's needs, and taking into account the election cycle, budget support lending would be clustered in FY06-07. In addition to lending, the CAS encompassed other analytical work in support of the government’s development plan, “Vamos Guatemala”, including a Country Environmental Analysis (CEA), Poverty and Social Impact Analyses (PSIAs) in FYs 2005 and 2006 and an update of the Poverty Assessment (FY07). The PSIAs were geared to support key policy reforms included in the DPL series to ensure that social impacts were identified and mitigating actions taken. The first PSIA was conducted in the first half of 2005 and provided a detailed analysis of the potential income and welfare impacts of DR-CAFTA implementation on producers and consumers eventually becoming a chapter of the regional DR-CAFTA report that was widely disseminated and discussed in Guatemala. A second PSIA analyzed the impacts of the trade agreement in greater depth on Guatemala's indigenous population (both urban and rural). In addition, a PSIA on the distributive impact of Guatemala's tax regime—including fiscal reforms supported by the first DPL—was completed in FY05 and disseminated to leaders from civil society and think-tanks. The report was sent to Government for review and its findings supported by ongoing Bank operations and/or grant support. Finally, the Poverty Assessment Update, based on the Government's new 2006 living standards survey analyzed trends in poverty and inequality, and this information was also used to inform subsequent Bank operational design. Design and Principles: The DPL programmatic design represented a new lending approach and took into account lessons learned from past operations in Guatemala and the latest thinking on Development Policy Lending. The underlying principles of the initial DPL operation were: (i) Upfront action instead of ex-post conditionality: The loan was triggered by the new government's demonstrated commitment to continue the Peace Accords agenda, albeit in a difficult socio-political context, and by specific and significant policy actions. (ii) Support of a reform program instead of specific conditionality. The DPL and the programmatic approach underpinned a broad government reform program. Lack of reform progress in a specific area could be compensated for with actions in others if the overall reform program remained on track. (iii) Aligning program loans with the budgetary cycle. The proposed programmatic approach was designed to become a predictable low-cost source of financing for the government.

3

The DPLs were scheduled for Board presentation in June or July of three consecutive calendar years to enable the Guatemalan Government to fully incorporate them into the budget and allow for legislative discussion before being presented to the Congress during the third quarter. Development Policy Loans Development Policy Loan I—P094365 The first DPL (July 7, 2005) was integral to the achievement of CAS objectives. It drew largely on the Government's own priorities as delineated in “Vamos Guatemala,” its detailed sector plans, and the Bank's analyses of key issues and desirable policy directions through the GUAPA, CEM, ICA, PER, CFAA, and CPAR. DPL I focused on policy and institutional aspects related to broad-based growth that are most amenable to support via a program of single-tranche loans. These included actions aimed at improving the business and investment climate, creating fiscal space for greater social investment, and achieving key milestones in improving the fiduciary environment.

Development Policy Loan II—P094897 DPL II (August 29, 2006) aimed at maintaining Bank support for the Government’s performance. The underlying factors for proceeding with DPL II included: (i) the government's persistent efforts, in the face of a difficult political context to strengthen tax administration, raise public revenues and lay the groundwork for future increases in taxes through developing political and social consensus on public investment goals and priorities; (ii) the increases in pro-poor social spending as a share of GDP within a framework of fiscal prudence and despite the lack of progress in raising the tax ratio,, by implementing difficult cuts in military and administrative spending and reallocating existing resources; and (iii) the strong progress in all areas of the DPL -other than tax collection-, with performance exceeding expectations in key areas such as improved governance and transparency. Context for Development Policy Loan III—P101311 DPL III (August 2, 2007) was triggered by the steady progress Guatemala made in promoting more equitable, broad-based growth in areas following the medium-term framework laid out in DPL I and II. The design of DPL III focused on full implementation of many of the policy and legislative reforms undertaken under the previous DPLs as well as strengthening the financial sector related to the PDOs. The emphasis on implementation and sustainability, rather than legislative actions, also reflected recognition that the complexity of obtaining congressional approval for new legislation was more complicated because of the election year. Thus, DPL III focused on actions that contributed to the PDOs under the control of the Executive.

4

1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) The proposed Programmatic Development Loan was a series of three DPLs intended to support the three main pillars of the government's own development plan: promoting equitable growth and strengthening the investment climate, enhancing capacity for increased public spending in priority sectors, and improving public expenditure transparency and public sector management

1.3 Revised PDO (if any, as approved by original approving authority) and Key Indicators, and Reasons/Justification N/A

1.4 Original Policy Areas Supported by the Program (as approved): The original policy areas supported by all three DPLs were: I. Promoting Growth and strengthening Investment Climate Specific measures aimed at Promoting growth included: (a) a stable macroeconomic framework, (b) trade expansion through treaties and Central American integration, (c) improvements in the investment climate and business efficiency through de-regulation and creation a strong sustaining institutions, (d) strengthening infrastructure through private sector participation, (e) enhancement of property rights through registration and titling, and (f) financial sector modernization and deepening. II. Enhancing the capacity for public spending in priority sectors Measures in support of capacity enhancement for public spending in priority sectors included: (a) an acceleration in the pace of modernization customs and taxes to facilitate compliance and enforce the law; and (b) increases in the budgetary allocations to social sectors in consonance with the 1996 Peace Accords. III. Transparency and Public Sector Management To improve transparency and efficiency of public resource usethe DPL series supported the following measures: (a) the expansion of the Integrated Financial Management System (SIAF) nationwide including the launching of a fiscal transparency portal to enhance public access to budget data, and (b) the development and expansion of a transparent web-based procurement system (Guatecompras).

1.5 Revised Policy Areas (if applicable) N/A

1.6 Other significant changes N/A

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2. Key Factors Affecting Implementation and Outcomes Program performance was satisfactory. The Bank Board approved each of the DPL operations on time (2005, 2006, and 2007). There were, however, delays in disbursing the available resources as Congressional approval of the operations by Congress took more time than expected and caused delays in effectiveness and disbursements. These delays seem not to have affected the execution of the budget. Overall, the program did not undergo substantial changes during implementation. The policy areas remained the same; so did the Development Objectives, where changes were introduced only to make them more precise. Trigger design was well aligned to track progress toward the development objectives, although in some cases the initial trigger had to be adjusted with different actions under the same development objective. In a few cases, new actions were introduced to reflect unexpected developments, such as addressing the failure of two large banks. Changes to the actions did not weaken the program. The government met all prior actions, in some cases exceeding expectations, as in SIAF expansion and Guatecompras. Some expected results were difficult to meet, such as increased tax collection particularly in a context of falling import tariffs rates, due to the implementation of DR-CAFTA. The following is a summary matrix and narrative of the program’s performance for each of the three program pillars. 2.1 Program Performance First Development Policy Loan Prior Actions Status Promoting Growth and strengthening the Investment Climate

1 Maintain stable macroeconomic framework 2. DR-CAFTA treaty signed and ratified by Congress 3. Investment promotion office, Invest Guatemala, established and fully operational; 4. Achievement of international security certification of all Guatemalan seaports; 5. Guatemala taken off the list of Non-cooperative Countries of the Financial Action Task Force (July 2004);

1. Met 2. Met 3. Met

4. Met 5. Met

Enhancing the capacity for public spending in priority sectors

1. Recovered revenues lost as a result as a result of Constitutional Court rulings through: (i) passage of 2004 fiscal package by Congress; (ii) passage in 2005 of law on petroleum and petroleum derivative taxes, and (iii) better tax enforcement as evidenced by improved collections of at least 0.5 percent of GDP. 2. Budgetary allocations for social expenditures (Peace Accords definition) increased from 5 percent of GDP executed in 2004 to at least 5.5 percent in 2005.

1. Met

2. Met

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Transparency and Public Sector Management

1.1 Integrated Financial Management System (SIAF) operational in 34 central government entities—including Congress—20, decentralized agencies and 46 municipalities; and fiscal transparency portal launched to enhance access to budget data. 1.2 Transparent, web-based procurement system (Guatecompras) in use in 76 public sector agencies and 185 municipalities.

1.1 Met 1.2 Met

Second Development Policy Loan Prior Actions Status Promoting Growth and strengthening Investment Climate

1 Maintain stable macroeconomic framework 2.1 DR-CAFTA Implementation Law approved, and DR-CAFTA effective; 2.2 Movement towards stronger regional integration through simplification and harmonization of procedures with El Salvador and Honduras 3.1 Reduction in customs processing times and costs through: (i) implementation of electronic customs manifest in all ports and airports; (ii) establishment of a 24/7 air express office in Aurora Airport and one-stop offices for documentation analysis at Puerto Quetzal; (iii) implementation of a single customs declaration (harmonized with other CA countries) in place of two; and (iv) reduction in discretionality and number of customs inspections (red light) by implementation of risk assessment and selectivity system based on SAT database and information. 3.2 Cadastre law approved and adopted and RIC established with independent Board; and electronic land registry operational 4.1 Law on Public-Private Alliances in Infrastructure prepared, consulted widely and submitted to Congress; Laws for anillo metropolitano and Franja Transversal del Norte approved by Congress. 4.2 Implementation underway of program to upgrade the country’s main airport facilities in line with international safety norms and PIIAF recommendations

1. Met

2.1 Met

2.2 Met 3.1 Met 3.2 Met 4.1 Met 4.2 Met

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5.1 Further strengthening the financial system through improved supervision of financial groups as evidenced by: (i) organizational restructuring of Superintendency of Banks to enhance implementation of risk-based supervision; and, (ii) satisfactory progress in mapping of financial conglomerates in line with FSAP recommendations. 5.2 Implemented strengthened Payment System including making fully operational the electronic clearing system for banks and new settlement in real time.

5.1 Met 5.2 Met


1.1 Passage of the legal Provisions for the Strengthening of the Tax Administration. 1.2 Satisfactory progress in the implementation of Government’s strategic (106 point) plan for strengthening tax administration, as evidenced by: (i) required electronic filing of VAT tax reports by 300 large taxpayers; (ii) implementation of a control program for the 3,000 largest tax payers based on systematic cross-checks; and (iii) establishment of an up-dated, unified tax register for the 3,000 largest taxpayers. 1.3 Improvements in property tax collections by municipalities through revisions to the Municipal Tax Code and/or approval of new municipal appraisal accounting system manual 1.4 Satisfactory Execution of social expenditure in 2005 and increase in 2006 allocation;

1.1 Met 1.2 Met 1.3 Met 1.4 Met


1.1 Increased operational coverage of SIAF (to 7 additional agencies and about 64 additional municipalities) and Guatecompras (additional 80 municipalities. 1.2 Use of Guatecompras made legally mandatory for all public purchases over Q30,000 and interface with SAP implemented.

1.1 Met 1.2 Met

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Third Development Policy Loan Prior Actions Status Promoting Growth and strengthening Investment Climate

1. Maintain stable macroeconomic framework 2. One-stop-shop for business registrations fully operational, with permanent registrations within 25 days

3. Guatemala has been awarded an air transport safety certification (IASA Cat. 1) for its facilities at La Aurora International Airport on confirmation of the borrower’s ability to adhere to international standard practices for aircraft operations and maintenance established by International Civil Aviation Organization. 4.1 Further improvements in supervision of financial groups as evidenced by (i) application of risk-based consolidated supervision procedures on a pilot basis to selected financial institutions; (ii) mapping of interrelationships between all financial groups and their subsidiaries and related parties; (iii) the classification of information derived from such mapping, as the basis for designing new analytical tools, as required for the assessments of the impacts that the incorporation or withdrawal of related entities may have on the solvency of the financial groups; (iv) quantitative and qualitative improvement of the data on large corporate debtors reported by institutions to Banking Superintendency, as required for the assessment, of corporate portfolio of said debtors, based on their capacity to pay. 4.2 Suspended the operations and initiated irrevocable resolution of two failed banks (Bancafe and Banco de Comercio).

4.3 Establishment and operation of Special Investigation unit in the Banking Superintendency responsible for the investigation of illegal activities.

1. Met 2. Met 3. Met 4.1 Met 4.2 Met 4.3 Met


1. Implementation of the Legal Provisions for the Strengthening of Tax Administration and further progress in implementation of strategic plan, including requiring electronic filing by 3,000 largest taxpayers; (ii) extending control program of cross-checks to these 3,000 taxpayers; and (iii) further expansion of the unified tax register.

1. Met

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2. Satisfactory execution of social expenditure in 2006 and increase in 2007 allocation; and results-based budget prepared for Education and Health Ministries for 2007.

2. Met


1.1 Increased operational coverage of SIAF (to 8 additional central government and decentralized agencies and 70 additional municipalities) 1.2 Change in focus from “Strengthening of the bidding documents, etc). as well as creation/strengthening of the regulatory body (DNCAE) by developing appropriate tools for procurement management (i.e., procedural manual, standard institutional procurement units in government entities by training in the use of implementation of those tools. 1.3 Implemented the use of Guatecompras in at least 370 public agencies out of 280 municipalities.

1.1 Met 1.2 Met 1.3 Met

The following section reviews the implementation of the program for each one the policy areas.

I. Promoting Growth and Strengthening Investment Climate

Under the first pillar, the DPL series supported efforts in a number of complementary areas thought to be of high relevance to accelerate economic growth. These included, maintenance of an appropriate macroeconomic framework, promotion of international trade through the ratification of the US-Central America-Dominican Republic Free Trade Agreement (CAFTA-DR), improvements in the investment climate and business efficiency, supporting legislation aimed at removing infrastructure bottlenecks, and strengthening the financial sector. I.1 Macroeconomic environment Building on the country’s record of macroeconomic management, the DPL series supported Government’s efforts to maintain a stable macroeconomic environment, further strengthening Guatemala’s reputation as a country with prudent fiscal and macro policies. The DPL framework did not set specific targets to evaluate macroeconomic performance, but the core macroeconomic indicators either remained stable at satisfactory levels or improved. Inflation, which in 2007 escalated as a result of the food price crisis and the dramatic increase in oil prices, was the exception but in line with developments in other countries.

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I.2 Promoting Trade Expansion In 2004, Guatemala’s only free trade agreements were with Mexico and Chile. The DPL series supported the government’s efforts to obtain greater access to the markets of its two main trading partners, the United States and Central America. In March 2005, the Guatemalan Congress ratified CAFTA-DR (DPL-I). However, the Office of the United States Trade Representative requested additional negotiations, making it necessary to change the initial laws. In June 2006, Congress approved these changes. The Treaty became effective on July, 1 2006 and has been effective since then (DPL-II). During the implementation of the DPL series the Bank prepared and disseminated analytical work examining the likely impact of the treaty on the economy and proposing strategies to protect the poor by linking the traditional sectors to the globalization process. Some of these initiatives are currently under implementation. In addition, the DPL series supported a process of greater regional integration, including the harmonization of 95 percent of customs duties and the use of identical customs forms in Guatemala, Honduras, and El Salvador. A scheme to eliminate customs inspections at the national borders for goods cleared through specified Central American border entry points is in operation since DPL-II. Originally, DPL-I foresaw further prior actions on regional trade for DPL-III, but DPL-II dropped them in favor of other actions. While these measures were not included in the DPL series, this did not reflect a slowdown in the implementation of the regional integration agenda. I.3 Promoting Investment Climate and Business Efficiency A good investment climate and business efficiency appeared as key elements underlying a growth strategy based on trade liberalization and expansion. To support the government’s efforts aimed at improving the investment climate and increasing business efficiency, the DPLs supported the following actions: (a) facilitating business registration and moving goods through customs, (b) fostering Foreign Direct Investment (FDI); and (c) advancing registration and titling of real estate. Bank self-standing operations were already assisting in these areas, specifically, the Competiveness Enhancement Project, the Tax Project (SAT), and Land Administration DPL. The focus on business registration was part of a broader effort to improve the business environment, along the framework provided by Doing Business (DB) Indicators. The approach was grounded on consultations with the private sector to identify the areas of intervention. These efforts led to the creation of a “one-stop-shop” that according to DB2008 reduced the number of days needed to register business by 42 percent, i.e., to 26 days. According to Doing Business (2009), the number of days to register a business remains at 26 (DPL-III). As part of the same effort, the DPL focused on improving the performance of customs (trade facilitation) with significant achievements including: (i) the introduction by the Superintendencia de Administracion Tributaria (SAT) of electronic customs manifests in all parts of the country and airports; (ii) the reduction in the discretion in customs

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inspections (red channel) through the introduction of risk assessment and selectivity based on the SAT database and related information (in 2004, 80 percent of goods went through the red channel); (iii) the improvement in the performance of the main airport (Aurora) through the establishment of a 24/7 air express office and of the main port (Quetzal) with the creation of one-stop offices for documentation analysis; and (iv) the increase in the transparency of the import process through the introduction of a system that allows importers to track on-line the status of their imports (DPL-II). As for the efforts to facilitate and encourage the inflow of Foreign Direct Investment (FDI), the authorities established in 2005 a fully operational investment promotion office, Invest in Guatemala (IIG). IIG complemented the Office of the Presidential Commissioner for the Promotion of National Competitiveness (PRONACOM), as part of the Central America Network of government competitiveness agencies (DPL-I). Both of these agencies had as an objective helping the economy compete in a DR-CAFTA world. The Competiveness Enhancement Project supported these efforts. MIGA provided technical assistance for the creation of Invest in Guatemala (DPL-II). Finally, Guatemala traditionally had lacked modern real estate registration and titling institutions. The ensuing legal uncertainty had arguably been one of the contributors to internal conflict. Most of the agricultural land was untitled, giving rise to multiple claims and putting landholders in a status of high insecurity, the DPL supported on-going efforts to remedy this situation. A prior action for DPL-II supported the approval of the Cadastre Law in 2005. This law set the legal basis for a modern registration system through the creation of Registro de Information Catastral (RIC) (DPL-II). DPL-III did set targets to track implementation. I.4 Strengthening Infrastructure through Private Sector Participation Given the limited availability of public resources, and the prudent approach to macroeconomic policy, the room for public investment to undertake large infrastructure works had been traditionally limited in Guatemala; hence, efforts to involve the private sector through Public Private Partnerships (PPP) were highly relevant to eliminate infrastructure bottlenecks that could limit the growth potential. In 2004, Guatemala lacked an appropriate legal framework for PPP operations. The authorities sought to remedy this situation through the approval of a law on Public-Private Alliances for undertaking infrastructure projects. This law was presented to Congress as a prior action for DPL-II. In addition, and given the likely difficulty in obtaining approval for a blanket PPP law, the authorities obtained approval for two specific priority projects to modernize critical routes, namely, laws authorizing PPP arrangements for the construction of the Anillo Metropolitano and Franja Transversal del Norte. DPL-III noted efforts to enhance security arrangements at the Aurora International Airport. As a result, Guatemala successfully passed an audit and received final certification for Category 1 classification under the International Aviation Safety Assessment. This enabled direct flights (both cargo and passenger) to U.S. destinations by Guatemalan carriers, thereby enhancing competitiveness by facilitating tourism and

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the transport of Guatemalan exports. Overall progress in upgrading safety standards for the La Aurora Airport was impressive and exceeded expectations. I.5 Strengthening the Financial Sector By the time the Berger administration came to power, a process was underway to address the aftermath of the 2001 financial crisis, with the remaining challenges centered on: (a) strengthening the regulation of the banking sector by removing risks from unregistered offshore operations and related lending; (b) improving the reputation of the country by extending full cooperation to the Financial Action Task Force; and (c) facilitating access from small and medium enterprises. DPL-I acknowledged government efforts that took Guatemala off from the list of Non-cooperative Countries of the Financial Action Task Force (July 2004) (Guatemala has remained off the list since then). The Superintendency of Banks (SIB) has staffed and trained specialized units in charge of tracking money-laundering. As argued in DPL-I, the financial sector agenda focused on further strengthening of the financial system through improved supervision of financial groups, as evidenced by: (i) restructuring the organization of the Superintendency of Banks (SIB) to enhance implementation of risk-based supervision; and (ii) mapping the financial conglomerates in line with 2000 FSAP recommendations. DPL-II found that the authorities had made satisfactory progress in reorganizing the SIB, adopting rules for risk-based supervision, and mapping the interconnections among financial groups. In turn, DPL-II foresaw commencing implementation of the new financial architecture by DPL-III. However, during 2006-07, difficulties in two commercial banks, which accounted for around 10 percent of the assets of the banking system, tested the strength of the financial sector. The authorities found that Bancafe, the fourth largest bank, was non-compliant with legally established prudential norms due to difficulties created by offshore operations. Similarly, Banco del Comercio faced problems arising from an undisclosed affiliate. The authorities addressed the crisis with the support of the IMF, the Bank, the IFC, and the IDB. The resolution of Bancafe initiated in October 2006, and that of Banco de Comercio, initiated in January 2007 using the mechanisms provided by the 2002 Banking and Financial Groups Law. The deposit insurance, FOPA, and the Banking Capitalization Fund, FFCB, funded the resolution of these two banks. FOPA subsequently was successfully recapitalized through additional fiscal funds, an increase in the premium charged to banks as well as additional funding from the banks. FFCB has yet to be recapitalized.

In addition to the DPL dialogue, the Bank also provided support through the Financial Sector Adjustment Loan (FSAL), which had been designed within the framework provided by the 2000 FSAP. DPL-III acknowledged the efforts made by the authorities to limit the impact of the two-problem banks. IEG rated as highly satisfactory Bank performance under the FSAL.

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Despite the crisis, by the end of the DPL, the basis had been established for risk-based supervision, which was practically non-existent in 2003, and efforts to improve supervision of financial conglomerates are about to commence. A Bank technical assistance operation (FTAL) has continued to aid the improvement of the legal and regulatory framework for finance and the implementation process. Also, a strengthened payment system included a fully operational electronic clearing system for banks and new settlements in real time (January 2006). Since November 2006, the new payment system of the Central Bank covers clearance and settlement activities and since December 2006 foreign exchange transactions. However, perhaps because of the attention required to contain the impact of the two failed banks, approval of additional legislation originally presented by the Berger administration (the Insurance Law and the Movable Collateral Law to increase access to finance by small and medium enterprises) was still pending by the end of the DPL series. Congress approved the Movable Collateral Law in 2008.

II. Enhancing the capacity for public spending in priority sectors Under Pillar two, the DPL series supported government priorities very much in line with the Peace Accords of 1996: (a) increasing the mobilization of public revenues through taxation and (b) allocating greater budgetary resources to social expenditure. The Peace Accords had set precise targets in both regards: 12 percent of GDP for internal revenue mobilization2 and 6 percent for allocation to social expenditure. Meeting both targets had proven elusive in the past. The DPL series set an interim target of 11 percent of GDP for revenue. II.1 Taxation and Customs The DPL agenda covered: (a) tax policy, (b) expansion of the tax net by bringing in new taxpayers, (c) facilitating compliance, and (d) more selective and effective enforcement. The DPL series emphasis on taxation supplemented and supported the on-going work to reform the SAT, which had slowed during the previous administration. On tax policy, DPL-I focused on recuperating revenues lost as a result of Constitutional Court rulings that pushed back policy reforms introduced by the previous administration. The proposed solution included temporary policy measures that had to be reviewed periodically, but has since become permanent. The DPL series did not consider a comprehensive tax policy reform, as this was not on the agenda of government and instead focused on improving tax administration. In this regard, DPL-I supported the passage of the Law against Tax Evasion and Avoidance (2006). This law provided the “Secretaria de Administracion Tributaria”

2 The ratios given here use a GDP with the original base year used in the Peace Accords (1958). The equivalent target, with a 2001 base is 13.2 percent.

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(SAT) with better tools to enforce legislation and implement a 106-point tax strategic action plan to improve tax and customs administration. In addition to the new law, the reform of the SAT had the support of the World Bank and Inter-American Development Bank. The World Bank Tax Administration TAL (FY98) had supported the merger of taxes and customs and provided the agency an independent revenue source equivalent to 2 percent of revenue mobilized. The Tax TAL was completed successfully3 despite implementation difficulties during the Portillo administration, including serious governance issues at SAT that in turn led to arrests and prosecutions of some high level administrative staff. These efforts produced positive results as acknowledged by DPL-III. By 2007, the unified tax registry had grown by 10 percent. Electronic filing had expanded to cover large and special taxpayers. Extended cross-checking of information and other innovative techniques to encourage compliance and facilitating compliance were helping reduce Value Added Tax (VAT) evasion, which was down to 31.6 in 2006, from 35.2 percent in 2001. A May 2007 assessment by the Bank and the IMF found that the government’s objectives on tax administration and customs had been met. II.2 Improving budget allocations The DPL series set targets under each operation to increase incrementally the allocation of budgetary resources to the social sectors, following the definition of the Peace Accords. The increased allocation proceeded faster than the original schedule. From 5 percent in 2004, the allocation increased to 5.3 percent in 2005, 5.4 percent in 2006 and 5.8 percent in 2008. III. Transparency and Public Sector Management

The Integrated Financial Management (SIAF) had been under design and implementation since 1996, with the support of a Bank Project series that is still under implementation. After a rapid start the implementation, the process had slowed during the Portillo administration; but, the design was well advanced. The DPL complimented the decision of the country to extend its implementation nationwide. The DPL targets tracked the process of expansion of the SIAF within the central government and the municipalities. The expansion process proceeded rapidly and faster than initially expected. By the end of the DPL series most of the public sector was using SIAF. The DPL series did not set targets regarding other aspects of the SIAF expansion process, consistent with the stated objective of improving the efficiency of public resource use. The expansion of the SIAF system contributed to greater transparency by making detailed budgetary information available to the public, aided by new technologies that permit on-

3 The ICR graded outcomes and Bank performance under the project as marginally satisfactory. IEG concurred. The main drawback identified by the review was the implementation delay. However, the project’s performance and results during this CAS were satisfactory.

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line availability through the web. Today the general public has access to the same information in SIAF as government officials. The progress on procurement followed a similar path with the expansion of Guatecompras, a web-based tool that makes information available to the public on government procurements. Guatecompras, is now working towards supporting e-procurement. The use of Guatecompras has become mandatory and budgetary processes are contingent on its use. Strengthening the procurement regulatory body (DNCAE) by developing tools for regulatory management (i.e., procedural manuals, standard bidding documents, etc), was not achieved because of expected enhancements to the law that would make the tools obsolete. The substitution of public expenditure transparency and management actions (concerning expansion of SIAF's integration with Guatecompras) compensated for, but did not replace, the need for reform of procurement practices. The expansion of SIAF and Guatecompras was a difficult process especially at the level of municipalities because many of the mayors objected to the utilization of SIAF, arguing that the central government did not have the authority to mandate its use by local governments. Nonetheless, a key element in its adoption at the municipal level was the support of civil society organizations to this valuable tool.

2.2 Major Factors Affecting Implementation: There were a number of factors affecting program implementation. First, the DPL program was well aligned with the government’s own program, “Vamos Guatemala.” This program sought to put the country back on the development path originally initiated by the Peace Accords of the early 1990s, which had been neglected by the administration prior to the DPL series. Second, although the government was highly committed to the reform program it did not always succeed in obtaining the support of Congress for its key initiatives, which delayed the effectiveness of the DPL operations. Third, the DPLs were anchored in ongoing projects with the support of the World Bank and other institutions. The World Bank support included SIAF, SAT, Financial Services, cadastre, and land registration, among others. Fourth, in some cases, civil society, by supporting SIAF, or the private sector, by supporting the competitiveness agenda, proved valuable allies in the reform process. Nonetheless, there remains substantial opposition in the country to increased revenue mobilization. Fifth, several events, such as Hurricane STAN, the banking crisis, the struggle to increase the revenue yield, the difficult dialogue with Congress—all affected implementation of a policy reform program that was strategically ambitious.

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2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: The Bank provided support for government and civil society activities to help build capacity to evaluate information, increase transparency, and build public sector accountability. The government and the Bank took advantage of several important data sources to assess progress and development impact of the DPL, including:

Central and nonfinancial public sector budget monitoring from the Ministry of Finance

National Institute for Statistics reports, including a living standards survey planned for 2007, and annual tracking surveys

Investment climate surveys

Central Bank of Guatemala reports and analysis Reviews and analyses of laws and implementing regulations from the

Bank and other stakeholders

Data from key Government agencies such as SAT, Pronacom and RIC

Financial audits and follow up of CPAR and CFAA recommendations

Bank and IMF supervision missions and reports CEPAL and SIECA surveys.

2.4 Expected Next Phase/Follow-up Operation (if any): Based on the successful results of the initial DPL series, the Bank launched a new DPL series in 2008. The new series is aimed at supporting government actions to develop a broad consensus on critical reform areas, especially in the area of fiscal and institutional reform. In September 2008, the Bank Board approved the first Programmatic Fiscal and Institutional DPL for an amount of US$200 million, which has been disbursed. A second DPL, under preparation, will help Guatemala weather the storm of the current global crisis and complement the IMF’s precautionary SBA approved in April 2009.

3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The objectives of the DPL series remain relevant to meet the development challenges of the country. In fact, the Colom Administration is giving continuity to most of the themes, albeit with different emphasis. Indeed, the program of the current government emphasizes strengthening the capacity of the state to create conditions propitious for economic activity and delivering basic services to all of the population. In this regard, fiscal issues—revenue mobilization, quality of public expenditure and transparency remain highly relevant. Fiscal reform continues to be at the front of the agenda, but remains a contentious area for reform. Social spending is a key priority with emphasis now on introducing a conditional transfer program to attend the neediest. The global crisis is putting stress on the economy, and while the country is relatively well prepared, completing the reform agenda (prudent supervision, access, etc). acquires certain urgency

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and prudence. The Bank maintains a dialogue and assists the authorities on most of these issues through the implementation of the 2008 Country Partnership Strategy. Nonetheless, the current economic environment and the contentious domestic politics may make deeper fiscal reform difficult.

3.2 Achievement of Program Development Objectives

a. Achievement of the Program’s Broader Development Objectives The achievement of the outcomes under the program has been satisfactory. Positive and satisfactory improvements took place in most of the areas of engagement. These achievements, particularly when seen against the backdrop of a slowdown in the reform drive during the previous administration show that Guatemala has made significant progress, but, nonetheless still ranks low in a wide range of global indicators (business environment, human development, governance, etc).. An accomplishment of the DPL series was to help rekindle the reform process. Economic growth accelerated between 2004-08 and the average yearly rate of economic growth was 4.75 percent, compared with near stagnation during the previous four years. Certainly, higher prices for coffee (Guatemala’s main export), expanding exports associated to a positive global environment, growing remittances, and higher investment fueled economic growth. Still the program contributed to the short-term performance by helping to improve macroeconomic stability and address promptly the banking difficulties that emerged at the end of 2006. Guatemala’s macro situation, while deteriorating, is proving relatively resilient during the current crisis. The competitiveness agenda launched by the Berger administration advanced as CAFTA-DR and other international agreements helped expand market opportunities and foreign and domestic investment responded. Facilitation of tax payments and moving goods through customs has been achieved. The authorities managed to address promptly and effectively the failure of two large banks, while at the same time continuing the agenda to improve on the regulatory design. Significant gains have been made in improving the transparency of public expenditure and the ability of the authorities to control and report on budget execution. The resources allocated to social expenditures increased along the lines of the Peace Accords and have contributed to expanding health and education services. There were some laggard areas, however. Neither the Public-Private Partnership (PPP) legal framework has been approved nor the special laws for large road projects implemented. This is unfortunate as infrastructure (roads and electricity) remain an important constraint to competitiveness. Registration and titling of rural land has not moved as fast as expected. Although the target tax revenue to GDP ratio was mostly met up to 2007, mobilizing revenues in Guatemala remains a challenge as the economy is now slowing down and fiscal reform continues to be controversial. Overall, the gains made during the DPL series provided a solid basis from which to advance on development outcomes. The DPL contribution to reaching the outcomes lies

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in having served as a mechanism of prioritization and coordination for government and is consistent with the CAS program. Also, the commitments under the DPL helped the authorities address internal coordination and disagreements.

b. Achievement of Program Development Indicators

I. Promoting Growth and Strengthening Investment Climate Objective I.1 Macroeconomic stability Medium-term outcome indicator:

Maintain macroeconomic stability

The macroeconomic policy framework is better in 2009 than it was in 2004, and Guatemala is relatively better situated to face the current global crisis than its neighbors. Indeed, the combination of the government's macroeconomic track record, the low public and external debt burdens (around 20 percent of GDP), the solid commercial debt repayment history, as well as the robust economic growth from 2004 to 2008, have contributed to continued improvements in the rating of its international debt. Fitch rated Guatemala BB+ with a stable outlook in 2008, up from BB- in 2005. Fitch has maintained this rating. Standard & Poors upgraded its country risk assessment of Guatemala to BB- with a stable outlook, placing Guatemala on a par with well-performing middle-income countries. In view of one rating agency, Fitch, these strengths have provided a sufficient buffer to deal with adverse shocks and should continue to do so over its rating horizon. Major concerns in 2007-2008 were inflation and the high current account deficit, due to external factors such as high oil prices, which are falling in the current economic downturn.

Objective I.2 Promotion of trade expansion Medium-term outcome indicator:

Increase in non-traditional exports in US dollar terms by at least 9 percent (Banguat data) (Baseline: US$1.9 billion in 2004).

The DPL sought to measure the impact of trade expansion efforts (CAFTA-DR et al). through increases in non-traditional exports. This indicator was met. The information available shows that non-traditional exports have expanded 44 percent since 2004, or 9.6 percent per year as did traditional overall exports, driven partly by higher commodity prices. With hindsight, however, the short- to medium-term expansion of non-traditional exports is not the only way (and perhaps not the best) to measure the likely impact of the trade agreements. Domestic observers are of the opinion that the real relevance of CAFTA-DR is bringing stability to the existing transitory trade arrangements with the US, the main trade partner of the country. So while CAFTA-DR in effective substituted for previous temporary and ad-hoc trade preference systems, rather than substantially reduce trade barriers, the long-term certainty it provides may be inducing investment. The 2008

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Investment Climate Assessment (ICA) argues, for instance, that CAFTA-DR is already contributing to a noted increase in foreign investment, with further impacts on trade anticipated overtime. The efforts to create a more integrated Central American Market are continuing under the Colom administration, with Guatemala placing greater emphasis on working with El Salvador and Honduras. Notably, the plans for integration extend beyond trade in goods to the development of complementary infrastructure, such as energy and roads. Thus, the emphasis on greater integration with global and regional markets is deepening. Objective I.3 Promoting investment and business efficiency (The four medium-term outcome indicators are discussed in two groups below) Medium-term outcome indicators:

Reduce Customs clearance times for imports and exports by at least 15 percent (SAT indicators) (Baseline: air cargo: 12 hrs; seaports: 4 days in 2004).

Reduce from 45 to about 25 days the time required to register a new business

(Pronacom Indicators) (Baseline: 45 days in 2004). These two indicators of the business climate have been met. First, it now takes significantly less time to process goods through customs at airports and seaports. Air cargo is now clearing in an hour as opposed to 12 hours in 2004. Seaports require an average of 22 hours, not 4 days (2004). Couriers go through in an hour, not a day (2004).4 Efforts at improving performance transparency at customs and taxes continue with the recently implemented SAQBE customs management system currently under implementation in three large ports. This system will allow the importer or exporter to identify bottlenecks some of which may be outside customs. The program of the new administration is giving greater emphasis to logistics as an important pillar of the competitiveness of the country. In this regard the authorities, in cooperation with the private sector are benchmarking key logistics networks to identify other bottlenecks. Second, a one-stop-shop for business registration is now operational. Doing Business (DB) 2008 quotes as 26 the days needed to register a company—a reduction of 42 percent from 2004. DB2009 quotes the same number of days.5 Other improvements in business facilitation include a reduction in the number of days for registering property to

4 2009 Doing Business likewise reports a reduction in the time and cost of importing and exporting goods.

5 To be precise, to obtain the definite registration, tax and social security numbers and authorization to print invoices takes 14 days. A temporary license is obtained in one day and the final license 14 days later. The rest of the days are spent outside the one-stop fulfilling complementary requirements.

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30, a 57 percent reduction from 2004. This is the easiest property registration in LAC according to DB2009. These and other advances have ranked Guatemala a “top reformer” in Doing Business 2007 and 2008. In 2009, Guatemala was listed as a “reformer.” Independent evidence corroborates that indeed the business environment has improved. The 2008 Investment Climate Assessment (ICA) compared results from business surveys in 2007 and 2003 and found major improvements in a wide range of indicators. Other indicators of positive impact include a pick-up in the creation of new business since 2004 (after having dropped during the previous four years). 6 The combination of improved access to external markets and more stable macroeconomic environment and the administrative efforts by government are contributing to noted increase in FDI, whose value has more than tripled since 2005, when it was US$208 million. Despite all these gains, the ICA also identified three areas where progress has lagged: in justice (contract enforcement), infrastructure, and security. To sustain and build on gains, these areas will need focused attention going forward. Guatemala has in place various public and private institutions that can help monitor progress and lead efforts going forward. 7 There is also a wide experience of public private sector dialogue. The World Bank, the IDB, and the IFC have contributed or are contributing to building and maintaining this institutional architecture. The World Bank has done so through Competitiveness Enhancement project which closes end-June 2009. As this financing ends, the IDB funding will replace it. The IFC, in turn, has assisted some municipalities to remove local barriers to business. Medium-term outcome indicators:

Cadastral survey of 50 percent of national territory completed (RIC); Baseline: 20 percent in 2004

Titling and registration for 33 percent of national territory completed (RIC)

(Baseline: 12 percent in 2004)

6 Kappler, Leora; Amit, Raphael; Guillen, Mauro and Quesada, Juan Manuel: “Entrepreneurship and Firm Formation Across Countries” Policy Research Working Paper—4313, The World Bank, Development Research Group.

7 Institutions focused on competitiveness include PRONACOM, INVEST IN GUATEMALA, FUNDESA, and others. etc. FUNDESA competitiveness work focuses on connecting small and medium enterprise sector and the regional economies to the process of globalization, following on analytical work (PSIA) that call for strengthening the linkages to markets of the small and medium enterprises and the rural areas.

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Of these two indicators of progress in land administration, the second target was exceeded, while achievement fell short on the first. According to information from RIC, the on-going cadastral survey has covered slightly over 30 percent of the country up from 20 percent in 2004; most of this work corresponds to El Peten, the largest department in the country. The target has not been met because of delays in implementing the supporting World Bank financial assistance—Land Administration APL. Implementing the first project of the APL (phase 1) took longer than expected and the second project was delayed first by a long lag to obtain congressional approval and then because of initial weak implementation capacity of RIC and a change in the Project’s cadastral surveying strategy proposed by the new administration (which took office in January 2008). The ICR for the first project examined the impact of land registration on economic outcomes in El Peten and found increases in the price of registered and titled land. No further analyses of impact are currently available. Land titled and registered, according to the latest information, has gone from 12 percent in 2004 to 33.1 percent in 2006. This slightly surpassed the program outcome target of 33 percent. Historically, only property in the larger cities had titles at local registries. Progress in titling outside the larger cities, and especially in areas covered by the cadastral survey, has proceeded slowly for various reasons. First, titling is voluntary and FONTIERRAS—which was created as an autonomous agency by the 1999 Land Fund Law to facilitate titling—has weak capacity and a broad mandate which makes it difficult for FONTIERRAS to focus on titling. During the first phase, FONTIERRAS did not make titling a high enough priority and could not keep up with the progress made on cadastral surveying. Second, between 15 to 20 percent of the plots have problems that delay titling and the legislation to adjudicate among competing claims is not yet in place.8 Third, greater integration is needed between RIC and the General Property Registry (RGP), a different institution from RIC. With hindsight, although the law creating RIC was a positive step, changing institutional structures for land administration in the country is a long process requiring continuous political will. Today, implementation of the Bank-financed project on land administration continues to proceed at a slow pace. As noted previously, the process of real estate registration has improved and Guatemala ranks high according to 2009 DB. However, the process of titling rural land, where the potential for conflict exists, is moving slowly. Objective I.4 Strengthening Infrastructure through private sector participation Medium-term outcome indicators:

An adequate legal framework exists for Public-Private Partnerships (PPP) and is being implemented (staff assessment)

8 There are no clear rules on how to proceed when there are doubts about the quality of land claims. This has contributed to delays in titling. A Land Regularization Law is needed.

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At least a 7 percent reduction in handling times and costs via efficiency improvements in ports and airports (Facilitation Group, Pronacom)

Of the two indicators, the first one was not met, the second was exceeded. Congress did not approve the PPP Law during the Berger administration. Neither did the Berger Administration succeed in implementing two special laws to undertake major road projects that Congress approved. Thus, the objective of setting an adequate framework for PPP remains unmet. According to local experts, the two drafts of the PPP law considered by Congress had design problems and therefore, with hindsight, it was probably best that they were not approved. A third version of the law is now in Congress and the current government lists the approval of this law among its priorities. Engaging the private sector to help develop infrastructure remains a high and relevant priority (as previously noted, infrastructure was cited in the 2008 ICA as of the major constrains to competitiveness and economic growth in Guatemala). While infrastructure remains a challenge, the progress in facilitating transit through customs exceeded the program target. PRONACOM reports that handling times at airports and ports came down by around 15 percent during the period more than twice the goal of 7 percent. Doing Business 2009 likewise reports a drop in the time and cost of importing. But, trading across borders remains costly in part due to the infrastructure constrains. Objective I.5 Strengthening, modernizing and deepening of the financial sector (The two medium-term outcome indicators are discussed in separately). Medium-term outcome indicator:

Improvements in the legal and regulatory framework to facilitate access to credit by SMEs implemented and functioning (staff assessment)

The medium term outcome indicator has been accomplished. Guatemala has made significant progress in improving the regulatory framework and implementing it. Indeed the prior actions supported by the DPL series have contributed to: (i) the application of risk-based consolidated supervision procedures on a pilot basis to selected financial institutions; (ii) the mapping of interrelationships between all financial groups and their subsidiaries and related parties; (iii) the classification of information derived from such mapping, as the basis for designing new analytical tools, as required for the assessments of the impacts that the incorporation or withdrawal of related entities may have on the solvency of the financial groups; (iv) improvements, both quantitative and qualitative, of the data on large corporate debtors reported by institutions to Banking Superintendency; and (v) approval of a new law on Movable Collateral. In parallel to these improvements on the regulatory front, Guatemala has also improved its ranking in a number of indicators that measure credit access, including by SME. For example, Guatemala improved its ranking with regard to access to credit in the 2009

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Doing Business to 28 from 61 in 2008. Similarly, the 2008 ICA also reports that access to credit has improved and information available at the Superintendency of Banks shows that credit to the SME sector grew by 60 percent from 2005 to 2007. The country has made successful efforts to expand credit to the micro enterprises and in three major banks, over 15 percent of the loans are considered micro-credit. SIB continues to review the existing financial regulation to identify options that best can help the development of micro-finance, which today comprises a wide range of mostly non-regulated entities. Perhaps more importantly, the objective of strengthening and modernizing the financial sector has also been achieved. Today the Guatemalan financial sector is stronger than in the past and the analysis of the new information generated by SIB has permitted the identification and correction of potential risks in a limited number of banking institutions. Following the identification of these risks, the SIB proceeded to present the results from the analysis to the boards of the banks jointly with actionable recommendations to be implemented overtime. The result was a positive response from the approached Banks. The fact that banks have complied with recent increases in mandatory general reserve requirements on the way to full coverage of bad debts (currently at 70 percent), signals increased discipline and commitment from banks. On the whole, standard financial sector indicators show that the improvements in the financial sector since 2000 continued during 2004 to 2008: the coverage over assets at risk increased from 43.6 in 2004 to 73.2 in 2008; the profitability over capital went from 14.4 in 2004 to 16.3 in 2008; and the capital asset ratio went from 8.9 in 2004 to 10.3 in 2008. These indicators have remained stable since December 2008 till now. The strength of the financial sector is also reflected in prompt and effective response to the failure of two banks during the DPL period. Indeed, the authorities and its international partners showed skill and commitment, a point stressed by the ICR to the FSAL. The performance of the Bank was also rated highly and, in fact, IEG confirmed a rating of highly satisfactory for Bank performance under the FSAL. These events brought to the forefront the need to accelerate improvements in supervision and risk management. But also pointed out the need of proceeding gradually, as tightening regulations too fast may itself create compliance difficulties. Medium-term outcome indicator:

Payment System implemented and in operation (Banguat) This objective has been achieved. The Central Bank continues to improve the payment systems and work is underway to interconnect with other countries in Central America.

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II. Enhancing the capacity for public spending in priority sectors Objective II.1 Improvement in tax collections Medium-term outcome indicators:

Strengthened tax administration as assessed by independent agencies (e.g., IMF, World Bank)

Tax revenue at 11 percent of GDP (Ministry of Finance, base year 1958)

(Baseline: 10.4 percent in 2004) The first indicator on strengthened tax administration was achieved. The tax revenue target was met for 2007, but due to backsliding in 2008 progress on the medium-term outcome is considered to have fallen short. Revenue collection as a proportion of GDP (using the 2001 revised National account) increased from 10.4 percent in 2004 to 11.2 percent in 2007, meeting the DPL series target of 11 percent, but falling short of the Peace Accords equivalent target of 12 percent of GDP. In 2008, the ratio dropped to 9.5 percent. A 2007 review of the tax and customs system and the ICR for the Guatemala Tax Administration TAL (which closed in March 2007) concur that Guatemala’s tax and customs practices had improved. The merger of tax and customs in one agency, SAT, has taken hold as has the autonomy of the agency, in contrast to the situation during the previous period to 2004. There is also significant agreement in tax and customs facilitation—around 95 percent of the tax revenues are paid electronically and the time and cost of handling goods through customs has declined. The roster of taxpayers is increasing continuously. Institutionally, SAT is stronger and equipped with modern systems and procedures and greater legal powers to enforce the law. The SAT has improved its strategic capacity and has moved beyond the “action plan” approach of the previous period. Its enforcement capacity has also improved through design and ability to carry out risk-based auditing. The need for these reforms was identified through a dialogue with the private sector, a dialogue that still continues. Despite these substantial gains in tax administration, tax revenue fell short of the target in 2008. While the global economic slowdown contributed to this decline, the lack of significant progress on tax policy constrains tax collection. In the past, efforts to maintain or improve the revenue yield have led to temporary tax measures which were accompanied by an abundance of tax exemptions, creating fiscal risk and standing in the way of a more comprehensive tax policy. Guatemala’s low revenue collection continues to limit the capacity of the government to undertake needed social investments and build up competitive capacity. With hindsight, the reasonableness of expecting a sustained increase in revenue mobilization with respect to GDP in the context of a DPL is questionable, unless a comprehensive tax policy is already in place. IEG made a similar point in commenting to the ICR for the Tax Administration TAL.

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The impact of the tax administration reforms are leading to an improved business environment and a greater formalization of the economy;9 but the impact on revenue collection over the long-haul is less certain as it will depend on more tax policy reforms and effective enforcement. Objective I.2. Improving budget allocations Medium-term outcome indicator:

Increased availability (6 percent of GDP) of funds for social sectors and better targeting of resources for social sectors (Ministry of Finance).

The medium-term indicator was mostly achieved in terms of increased funds for social sectors, whether or not the resources are better targeted remains to be assessed. The resources available to social sectors increased considerably in real terms both because GDP growth increased and because a higher share of GDP was allocated to social services. Social expenditures as a percentage of GDP increased from 5.3 percent in 2005 to 5.4 percent in 2006 and 5.8 percent in 2008. 10 These resources contributed to expanding health, education, and other social services. In 2009, social expenditures as a share of GDP are expected to jump to 7.4 percent as the government implements a new Conditional Cash Transfer (CCT) program. These increasing resources are likely to have contributed to maintaining the positive trend in human development indicators identified by the 2008 Poverty Assessment. Based on 2006 survey information, the 2008 PER found advances across the board including in education, health, and water and sanitation since 2000. During this period, Guatemala reduced its gap with average LAC indicators. Nutrition was an exception. 11 The improvements have been such that during the 2000-2008 period Guatemala’s rate of improvement in social indicators ranked amongst the best in the region and the world. Still, the 2008 Poverty Assessment notes that Guatemala still continues to lag Latin America in all social indicators. Where gains in service access have been made, like in basic education and health indicators, quality of services remain a concern.

9 The 2009 Doing Business does not reflect the gains made in tax compliance facilitation and continues to rank Guatemala low at 120 with no changes in the indicators since 2006. The authorities are aware of the dissonance and have approached the Doing Business staff for clarification.

10 Information from the 2008 Poverty Report shows that public expenditure on social programs (health, education, water, culture and others) as a percentage of GDP has oscillated at around 6 percent since 1999. The significant increase took place from 1996 (3.5 percent) to 1999. Guatemala’s social expenditures as a percentage of GDP are about half of the Latin American average.

11 See 2008 Poverty Report, Table 2.

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No definitive information was obtained to assess trends in the targeting of public expenditures in the social sectors. Nonetheless it appears that the additional resources have been uniformly allocated across social sectors. Under the government’s new CCT program additional expenditures are being targeted toward the poor and extreme poor. Greater attention to assessing the impact of social sector spending could help improve the impact of future investments in Guatemala.

III. Transparency and Public Sector Management Objective III.1 Improving transparency and efficiency of public resource use Medium-term outcome indicators:

Enhanced public financial management performance (as measured by international indicators.

Strengthened transparency and public efficiency in public procurement. (staff assessment).

Both medium-term outcomes are judged to have been met, though a more thorough assessment is currently underway that will help gauge Guatemala’s progress relative to other countries. A Public Expenditure and Financial Accountability (PEFA) exercise is assessing public financial performance in Guatemala, including procurement practices. The results can then be compared with the 2005 Country Financial Accountability Assessment and the Country Procurement Assessment Report. In the absence of international indicators, results on improving public financial management were gauged in terms of (a) coverage, (b) control, (c) transparency, (d) potential for expansion, and (e) impact on efficiency.

On coverage, SIAF expanded beyond expectations and now covers all public entities at the central and local levels. In addition, through an executive decree (11-2006), social funds, trust funds, and NGOs using public funds (fideicomisos) are required by law to be included in the budget and use SIAF. In 2004, SIAF was operational in only about 60 percent of central government agencies and 30 percent of decentralized agencies.

On control, SIAF incorporates modern processes and systems in budgeting, treasury operations, accounting, and human resource registration and payroll. A management system complements SIAF by establishing automatic linkages between the core financial modules and supporting administrative systems (e.g., procurement and registries of fixed assets). As a result of the more extended coverage and the design of the SIAF system, the central government now has greater control over budget execution and outcomes. All reporting (either periodic to the public or annual to Congress) relies on information provided by SIAF. The current SIAF platform allows expansion, for instance, towards multi-year budgeting. Though, some rigidities in the budgetary classifications may constrain other developments, such as results-based budgeting, ongoing efforts to upgrade the system would overcome such constraints.

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Interviews undertaken with civil society representatives, while gathering information for the preparation of this ICR, evidenced an ample consensus that transparency in the use of public funds increased by making SIAF information available online. In fact, civil society organizations have been active and support the expansion of the SIAF and they have helped move the process through in the face of political opposition.

Similarly, Guatemala’s web-based procurement tool, Guatecompras, has also expanded coverage to the point that it is mandatory for all public agencies, as opposed to 2004 when it was hardly used. Today, Guatecompras (GC) is partially interfaced with regular budgetary procedures, which cannot be carried out unless a GC number has been assigned. Guatecompras serves to inform potential bidders and let the public know of upcoming transactions. The information allows the public (press) to monitor transactions, as is already taking place. Guatecompras does not yet allow for procurement online, although such an extension is reportedly feasible in the near future. Further progress in procurement reform will require approval of proposed changes to the existing procurement legislation, which is pending in Congress.

Recent analysis of the likely impact of SIAF and Guatecompras improvements on development outcomes or the effectiveness of the Ministry of Finance or local governments is not available. Thus, it is not possible to make definite statements on the impact on the efficiency of public expenditure. Somewhat dated analysis, such as from the FY06 Public Expenditure Review (PER), suggests that the government’s enhanced budget management capacity has contributed to more effective use of public funds. The Country Procurement Assessment Report (CPAR) showed procurement reforms have produced fiscal savings from lower prices and better quality. The Country Financial Accountability Assessment (CFAA) found that the capacity of local governments to mobilize revenues and deliver services has improved. Documentation presented to the Board March 4, 2008 for approval of the Additional Financing to the Third Integrated Financial Management Technical Assistance Project makes reference to improvements in efficiency. Discussions with the authorities, civil society, and Bank technical staff show that a greater emphasis on tracking impact should be part of any future agenda. Also, the information available from SIAF should lead to greater involvement of civil society in monitoring results building on the lessons from Accion Cuidadana, or the training of journalists to follow economic information, and should help strengthen sustainability. Forthcoming analytical work could focus on developing a precise understanding of the links between the PFM reform achievements and improved service delivery in health, education, and nutrition, among others.

3.3 Justification of Overall Outcome Rating Ratings: Satisfactory. The themes selected for the DPL were relevant to the development challenges of the country and they were aligned with the government program. The themes continue to be relevant today as they at the core of the challenges of the country.

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The DPL program was ambitious and covered a wide range of areas, some of them subject to a difficult political economy, a fact that influenced implementation. The Program achieved the bulk of the development outcomes. Public finance is more transparent, the Ministry of Finance has better control of fiscal affairs, social sectors are receiving greater resources, and tax compliance and enforcement have improved. The business environment is now better and access to external markets is more secure, with CAFTA and the advances in Central America intervention. The authorities showed skill and commitment in dealing promptly with the failure of two major banks and are advancing in mending the regulatory framework and practices to prevent problems similar to the past and protect against current threats from the global slowdown. A strong macroeconomic situation has position the country to deal well with the current crisis. However, the country still does not have a solid legal framework to engage the private sector in infrastructure—a weak link in competitiveness. And, registration and titling of land is progressing at a snail’s pace. Tax revenue mobilization remains a challenge for macroeconomic health and delivery of social services. The DPL was well integrated with the CAS investment program; various investment and technical assistance operations help with achieving the prior actions and moving towards the development objectives. Examples include: the work on taxation through the Tax TAL, the work on the budget and procurement through the SIAF project; the work on finance through the FSAL and the on-going Finance TAL; the Land Registration Project; as well as analytical work that either helped design the DPL program or track impact.

3.4 Overarching Themes, Other Outcomes and Impacts (if any, where not previously covered or to amplify discussion above) (a) Poverty Impacts, Gender Aspects, and Social Development The DPL contribution to a stable and growing economy and the greater allocation of resources to social sectors is likely to have contributed to reduce poverty. 12 In 2006, poverty affected 51 percent of Guatemalans, slightly lower than 56 percent in 2000. Given that per capita income declined from 2000 to 2004, poverty reduction during 2000-2006 was likely driven by rising incomes and remittances since 2004. Extreme poverty remained at around 15 percent from 2000 to 2006. Poverty continues to be high among rural and non-Spanish speaking populations; 70 percent of rural Guatemalans live below the poverty line and 25 percent live in extreme poverty. Guatemala continues to have one of the highest GINI coefficients in Latin America and worldwide, despite a decline from 0.48 in 2000 to 0.45 in 2006.

12 The information in this and the next paragraph comes from “Guatemala: Poverty Assessment—Good Performance at low levels.” 2008.

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(b) Institutional Change/Strengthening Institutional gains have taken place across the board in the program: (a) the independence of the SAT has been assured and its technical capacity increased, (b) SIAF and its gains have been integrated into the Ministry of Finance, (c) the SIB has been restructured to better serve the needs of modern supervision; and (d) a set of semi-public institutions with private sector involvement are overseeing the improvement in competitiveness. (c) Other Unintended Outcomes and Impacts (positive or negative) N/A

3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops (optional for Core ICR, required for ILI, details in annexes) N/A 4. Assessment of Risk to Development Outcome All risks identified by the DPL series proved to be factors in implementation of the government’s three pillar reform program. They included (i) political risks, (ii) societal tensions related to the country's post-conflict status, (iii) exogenous shocks related to natural disasters, and (iv) macroeconomic risks due to external or domestic market volatility. These risks were mitigated by the coordination of DPL operations with the budget process, the political commitment to the reform agenda agreed in the DPLs at the time of implementation, the results orientation and transparency of the program and dissemination of impact to the general public, as well as sustained and incremental improvement in interregional trade liberalization and financial and banking reform with prudent oversight by the financial sector.

5. Assessment of Bank and Borrower Performance (relating to design, implementation and outcome issues)

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry (i.e., performance through lending phase) Ratings: Satisfactory. The DPLs were aligned both with the country’s reform program, called “Vamos Guatemala”, and the Country Assistance Strategy that was a direct reflection of the government’s explicit development priorities. The DPL instrument was employed to meet the array of challenges confronting the country after a low point in economic, fiscal, and governance indicators preceding the Berger Administration. The quick disbursing nature of the DPL was designed to render large-scale and immediate budgetary support in key and critical areas of the government’s program, which was a compelling need at the time the DPL series was initiated. Hence, the quality at entry was good and the instrument used by the Bank was appropriate and was aligned with the government’s preference to jump-start its ambitious reform program. It was understood by the Government and the Bank at the outset that strong interagency and ministerial cooperation and coordination would be needed, which was also viewed as an important aspect of institution building that had been neglected by the previous administration.

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Interviews with officials of the Berger administration that acted as counterparts to the Bank concurred the design was adequate and aligned with the program and financial needs of the government. (b) Quality of Supervision (including M&E arrangements) Satisfactory. The supervision reports for the DPLs indicated all binding conditions stated in the Loan Agreement were met with no issues arising and all prior actions showing demonstrable progress. The dialog with the Government of Guatemala remained positive and the team composition was appropriate to carry out the supervision. The intent of the DPLs was to help finance the government’s budget and meet the PDOs that reflected the priorities of the Government’s reform program, “Vamos Guatemala.” While there was a delay in congressional approval of the national budget that impacted disbursement, the Bank team and the government were able to adjust to the circumstances and disburse planned amounts against DPL I, II, and III successfully. (c) Justification of Rating for Overall Bank Performance Ratings: Satisfactory. The overall Bank performance showed flexibility and persistence, drew on strong borrower commitment, and reflected strong analytical work performed before during and after the DPL series was initiated. By incorporating the Peace Accords agenda in the context of fiscal, investment, and social platforms, the Bank continued to maintain a dialog through the DPL instrument in key development areas and helped the government maintain the basic momentum required to achieve the myriad Vamos Guatemala objectives. The former officials interviewed commended the Bank for its readiness to adjust to circumstances that would have allowed Guatemala to borrow on long term basis at competitive rates. In their view, the Bank managed to put in place a competitive package that was financially attractive, while lowering the burden of conditionality by aligning triggers and prior actions with the program of the government and introducing enough flexibility to deal with the unforeseen developments.

5.2 Borrower Performance (a) Government Performance Ratings: Satisfactory. The government continued to seek congressional and civic support for its stated reform program objectives through the DPL series. Although there were temporary setbacks in the form of delays in congressional approval of DPL-related support for the budget, the government remained focused on achievable outcomes and met the majority of the program triggers agreed to continue with the growth program. (b) Implementing Agency or Agencies Performance Ratings: Satisfactory. The Ministry of Finance stood at the center of the government’s reform agenda and as such took responsibility for keeping the DPL agenda on track. The DPL prior actions were all met and the required inter-ministerial and interagency cooperation was forthcoming. In addition, while the legal framework for private public partnership was not politically feasible, the competitiveness agenda moved forward and appears to be a platform on which further progress can be made. Likewise, the

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government showed strong commitment to the fiscal reform program, despite setbacks in Congress. Programs on tax administration reform were highly successful. Evidence of that is the commencement of a second series of DPLs in 2008. (c) Justification of Rating for Overall Borrower Performance Ratings: Satisfactory. Given the circumstances at the time of the DPL series initiation, namely a reform program derailed and the need to put it back on track quickly, the Borrower (government) sought a mechanism to push forward its ambitious reform agenda but with adequate control and targeting of interventions as well as results in reestablishing its standing in the region and internationally. The commitment of the government to the objectives embedded in the DPLs moved the program forward through massive and deliberately rapid financial infusions in the budget. The government showed the requisite flexibility to adjust to changing circumstances—congressional delays in budget passage in particular—and yet maintain the thrust of its growth agenda, hence the satisfactory rating.

6. Lessons Learned 1. DPLs can facilitate the Bank’s role as a catalyst for moving forward a broad program of reforms and promoting important coordination among a diverse group of public and private beneficiaries. The Guatemala programmatic DPL series played an important role in helping the authorities coordinate and execute their own development strategy. The DPL triggers and prior actions served as a useful public commitment that helped the authorities and civil society keep track of progress on key development objectives. It also helped the authorities coordinate program delivery across numerous government agencies and projects. Government officials noted that the prior actions under the DPL helped them galvanize and stimulate the reform process, especially by motivating various agencies to complete their prescribed tasks within a broader reform agenda. In addition, the DPL supported the overall Country Assistance Strategy and investment program by enhancing the policy framework in key complementary areas. The operation was well coordinated with the government’s efforts to rekindle the implementation of the 1996 Peace Accords reform agenda, which had slowed under the prior administration, as well as support broad social and political consensus building under a difficult and contentious political environment. 2. A complementary technical reform framework is essential to promote multiple DPL objectives and provide the necessary synergies for overall program effectiveness. The effectiveness of a broadly designed DPL requires complementary technical support from Bank projects, other International Financial Institutions, government programs, or local institutions. Without this technical support, it would have been difficult to achieve the ambitious development objectives as reflected in the DPL series on a timely yearly schedule coordinated with the national budget. In Guatemala, the DPL was well integrated with the Bank’s investment operations and the government’s program of policy reforms under the CAS framework. The DPL benefited from the support of

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investment projects, TA operations, and analytical work, including the Tax Administration TAL, SIAF project, Financial Sector AL, Land Administration APL, the DR-CAFTA report, CPAR/CFAA reports, among others. Most of these operations, had been under implementation for some time, and had already laid a groundwork from which results could spring. 3. Program design can accommodate risky environments, but only if there is clear government ownership. A broad design allows flexibility to adjust to changing circumstances, i.e., if one part of the program proves intractable, the operation can still move forward if program interdependency is low. Hence, as in the case of Guatemala, a broad design seems appropriate to help implement a program, despite a politically contentious environment, as it can also be an instrument to provide inertia to large segments the reform program even when some parts face difficulties. As noted, the reform agenda had the support of a broad technical assistance program and the degree of country ownership was very high. While some parts of the program did not achieved expected or sustained results, such as the legal framework for public private partnerships, other parts could be expanded or deepened, such as in the financial sector support. Despite the high degree of ownership facilitated with inter-agency coordination, the operation did not drive the legislative agenda. In the case of Guatemala, ownership alone did not always translate into reliable delivery when implementation depended on third-party agreements. For example, the alignment with the Vamos Guatemala development plan supported the reform platform, but the implementation risks remained high and program outcomes were missed in some areas given the lack of political consensus and strong vested interest groups. 4. There are limitations to what a DPL can deliver in difficult policy areas. Although a broad DPL design, as noted, allows flexibility to accommodate risks in the delivery a wide program of reforms, a broad design can also dilute efforts to meet many and diffuse objectives. In Guatemala, the agenda fell behind in difficult policy areas like land registration and titling, and public private partnerships for infrastructure which has been, and continues to be, difficult areas for agreement in the political arena. In these areas, the role of the DPL as a commitment mechanism is limited, as perhaps it should be. If taken too far it runs the risk being viewed as an external interference in internal affairs. The past and present authorities agree that the DPL structure should be aligned with government programs, but going beyond this may entail considerable risks for the overall program. 5. Breaking difficult barriers, like increasing the ratio of revenue to GDP, or measurably increasing the effectiveness of government, may require more focused complements to the DPL process. In contentious policy areas, such as land and tax reform, emphasizing analytical work and broad dialogue may be more effective. In addition, as suggested by some stakeholders in Guatemala, alternative approaches may exploit further synergies across initiatives, such as improving efficiency in public expenditures with increasing revenue flows to the government. While these complementary strategies were pursued during the implementation of the DPL, closer and more explicit scrutiny of the political economy of difficult areas could lead to design

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approaches to dissipate the possibility of policy stalemates, but it is no guarantee of success. 6. For the delivery of results, the Guatemala DPL succeed with the involvement of civil society and the private sector as key forces to forge the necessary political consensus to maintain broad policy dialog and political momentum. The Guatemala experience with the DPL series suggests that increasing the societal demand for reform improved program design and moved the policy agenda forward. Reforms that increase transparency and trust are likely to find support among civil society, as a lack of public information frequently leads to mistrust and lack of political commitment. In Guatemala, civil society, the private sector and the Congress were actors in either the design or implementation of various reforms included in the DPL package. Civil society provided a powerful voice in the demand for transparency and similarly played a role in improving the effectiveness of public expenditure. The dialogue with the private sector also proved effective in maintaining the focus on competitiveness. Bank sponsored forums for dialogue on public policy effectively engaged Congress on fiscal policy options. Interviews with country stakeholders confirmed the important role these forums played in building a consensus on the introduction of new reforms. Efforts to show progress on the transparency agenda illustrates the point. The teams working on taxes, customs, and competitiveness involved the private sector through dialogue in the design and implementation of the agenda. This involvement improved the design by identifying areas that needed improvement and helped facilitate broad acceptance by both public and private sector participants. 7. A well articulated results framework is required to track and evaluate DPL outcomes, but is not a perfect instrument. A good results framework facilitates evaluation, but it cannot be a definitive measure of the impact of an operation. For instance, although a reasonable argument can be made that the approval of the DR-CAFTA (prior action) would increase the growth of non-traditional exports (medium-term outcome), this not necessarily the case. An important aspect of the passage of the DR-CAFTA was the permanence it created for previously temporary trade arrangements, but this does not necessarily imply a higher increase in growth of non-traditional exports. While, non-traditional exports did increase, it is unclear whether this is attributable to solely the DR-CAFTA treaty or simply a pre-existing trend. Likewise, a stagnation of non-traditional exports would not have necessarily reflected poorly on the on the impact of the treaty, or the success of the prior action, as other factors could have come into play. Other examples of this type of attribution problem can also be found, but this is a general problem with the interpretation of results, not this particular operation, per se. Care should be taken to ensure that the expected results reflect, as close as possible, the core content and likely impact of actions supported, but are not an unambiguous indicator or guide to the impact of the operation.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies Pending

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(b) Cofinanciers N/A (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society) N/A

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Annex 1 Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members P094365 - First Broad-Based Growth Development Policy Loan

Names Title Unit Responsibility/ Specialty

Lending Supervision Cecilia Claudia Corvalan Senior Transport Economist LCSTR Enzo De Laurentiis Manager LCSPT Michael J. Goldberg Sr Private Sector Development LCSPF Jose L. Guasch Sr Adviser LCSSD Carlos Felipe Jaramillo Country Director LCC6C Yira J. Mascaro Sr Financial Economist AFTFP Jorge A. Munoz Lead Rural Development Special LCSAR Luis R. Prada Villalobos Senior Procurement Specialist LCSPT Mario Francisco Sangines Senior Public Sector Specialist ECSPE Jordan Z. Schwartz Lead Economist LCSSD Ricardo Antonio Tejada Financial Officer BDM Manuel Vargas Sr Financial Management Specialist LCSFM

P094897 - Second Broad Based Growth Development Policy Loan


Lending Supervision Juan C. Belausteguigoitia Lead Environmental Economist LCSEN Cecilia Claudia Corvalan Senior Transport Economist LCSTR Enzo De Laurentiis Manager LCSPT Waleska Garcia-Corzo Country Economist LCSPE Michael J. Goldberg Sr Private Sector Development LCSPF David Michael Gould Lead Economist LCSPE Monica Lehnhoff Procurement Analyst LCSPT Yira J. Mascaro Sr Financial Economist AFTFP Lars Christian Moller Country Economist LCSPE Jorge A. Munoz Lead Rural Development Specialist LCSAR Luis R. Prada Villalobos Senior Procurement Specialist LCSPT Mario Francisco Sangines Senior Public Sector Specialist ECSPE Charles E. Schlumberger Sr Air Transport Specialist ETWTR Manuel Vargas Sr Financial Management Specialist LCSFM

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P101311 - GT DPL III


Lending Supervision Juan C. Belausteguigoitia Lead Environmental Economist LCSEN Antonio Leonardo Blasco Financial Management Specialist LCSFM Enrique Fanta Ivanovic Senior Public Sector Specialist LCSPS Waleska Garcia-Corzo Country Economist LCSPE David Michael Gould Lead Economist LCSPE Michael S. Geller Sr Program Asst. FPDFI Alberto Leyton Representative LCCSV Yira J. Mascaro Sr Financial Economist AFTFP Lars Christian Moller Country Economist LCSPE Charles E. Schlumberger Sr Air Transport Specialist ETWTR Neeta G. Sirur Country Operations Adviser LCC2C Manuel Vargas Sr Financial Management Specialist LCSFM

(b) Staff Time and Cost P094365 - First Broad-Based Growth Development Policy Loan

Stage Staff Time and Cost (Bank Budget Only)

No. of staff weeks USD Thousands (including travel and consultant costs)

Lending FY05 4 24.94 FY06 1 5.72 Total: 5 30.66 Supervision FY05 0.00 FY06 15 57.51 Total: 15 57.51

P094897 - Second Broad Based Growth Development Policy Loan



Lending FY06 50 208.75 FY07 35 95.33 FY08 1 4.93 Total: 86 309.01 Supervision Total: 0.00

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P101311 - GT DPL III



Lending FY07 31 165.47 FY08 17 59.62 Total: 48 225.09 Supervision FY07 0.00 FY08 24 74.17 FY09 0.00 Total: 24 74.17

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Annex 2. Beneficiary Survey Results (if any) N/A

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Annex 3. Stakeholder Workshop Report and Results (if any) N/A

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Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR Lender’s Classification of the Project The general objective of the three Loans was to support the Government’s financing needs. Thus the loans were designed as budget support operations, without any direct link to sectoral or specific expenditures, in accordance with the country’s priorities. The loans responded to the Governments’ efforts in the execution of a Policy Reform Program to improve the efficiency and targeting of expenditures and social investment towards the poorest sectors of the population. Disbursements of resources were subject to compliance with certain general conditions, including maintenance of a stable macroeconomic framework and a transparent environment in the administration of public finances. In order to achieve the Government objectives the loans supported several actions: 1) protection of the Ministry of Education’s and of the Ministry of Public Health and Social Assistance’s budgetary allocations corresponding to the years of the loans’ execution. Iin this area, taking as the baseline the budgetary allocations for the year 2005 as approved by Congress, it can be observed that during the years of execution the allocations increased by 13 percent13 whereas for the year 2008 the increase reached 48 percent. Similarly, for the year 2006 social spending reached Q14,604.3 millions that represented 40.1 percent of the total expenditure by the central administration, or 5.4 percent of GDP, compared with 5.3 percent in 2005. Likewise, the following accomplishments were reached:

Implementation of the “ventanilla única” for the registration of businesses in the Registry within 25 days.

The Republic of Guatemala was awarded a certification from the air transport security for the La Aurora International Airport, confirming of the country’s capacity to adhere to the international practices in airplanes operations and maintenance operations established by the Organization of International Civil Aviation.

New improvements in the supervision of financial groups.

13 It is important to indicate that as a result of the non-approval of the Budget in FY2007, the approved Budget of FY2006 went into effect; when comparisons are made with the approved amounts, the percentages are 13 percent in 2005 and of 26 percent for 2006.

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Intervention and dissolution of bankrupt banks (Bancafé and Banco de Comercio), without altering the solidity of the country’s financial system.

Creation of the Special Investigation Unit of the Banking Superintendence in charge of investigating illegal activities.

Implementation of the Legal Framework to strengthen the Tax Administration Office. Support for efforts aimed at advancing the strategic plan, by for example, requiring the electronic submission of applications from the biggest 3,000 contributors; the expanding the crossed-controls controls program to these 3,000 contributors; and expanding the registry unified tax.

Widening of SIAF’s operative coverage (to 8 additional central government and decentralized organisms and 70 additional municipalities).

Implementation of the use of the Guatecompras to at least 370 public entities from a total of 280 municipalities.

Borrower’s performance In order to improve the efficiency and focalization of social investment toward the poorest sectors, the Government of Guatemala designed the Economic and Social Reactivation Program which is comprised of four strategic elements: Guate Crece, Guate Compete, Guate Solidaria, and Guate Verde. The implementation of the Loans constituted for the Government of Guatemala a strengthening experience in inter-institutional coordination, in which the involved entities participated, and achieved the execution of loans within the envisioned time frame. In addition, it must be pointed out that thanks to loans’ management and the start of the implementation for a poverty reduction strategy, an identification process was set out to identify the poorest communities with large indexes of unsatisfied basic necessities. This in turn allowed for the analysis of the existing documentation to achieve clear criteria on targeting. Bank’s performance The Bank provided consistent support during the project’s preparation, which was focused on providing support to the Government of Guatemala to attend to actions related to the financing of its priority programs. The Government of Guatemala considers the Bank missions to be satisfactory and appropriate, as well as the technical teams involved in the development of these operations.

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Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders N/A

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Annex 6. List of Supporting Documents IMF Staff Reports DPL Project Documents Poverty Assessment Investment Climate Assessment Country Economic Memorandum Public Expenditure Review Financial Sector Program Update Country Fiduciary Assessment (CFAA and CPAR) IMF/World Bank Report on Tax Administration