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Implementation Completion Report (ICR) Review - DPLEl Salvador Public Finance And Social Sector DPL


  
1. Project Data:   
ICR Review Date Posted:
06/12/2012   
Country:
El Salvador
Is this review for a Programmatic Series?
 No
First Project ID:
P114910
Appraisal
Actual
Project Name:
DPLEl Salvador Public Finance And Social Sector DPL
Project Costs(US $M)
 450  450
L/C Number:
L7635
Loan/Credit (US $M)
 450  450
Sector Board:
Economic Policy
Cofinancing (US $M)
   
Cofinanciers:
Board Approval Date
  01/22/2009
 
 
Closing Date
06/30/2011 06/30/2011
Sector(s):
Central government administration (57%), Other social services (15%), Secondary education (14%), Primary education (14%)
Theme(s):
Education for all (29% - S) Public expenditure financial management and procurement (29% - P) Social safety nets (14%) Tax policy and administration (14%) Debt management and fiscal sustainability (14%)
         
Prepared by: Reviewed by: ICR Review Coordinator: Group:
Clay Wescott
Jorge Garcia-Garcia Ismail Arslan IEGPS2

2. Project Objectives and Components:

a. Objectives:


    “The main objectives of the Public Finance and Social Sector DPL are to: (i) help El Salvador strengthen medium-term fiscal sustainability; (ii) support good governance and transparency in the use of public resources; and (iii) maintain steady improvements in social protection and education.” (Program document, p. 14).

b. If this is a single DPL operation (not part of a series), were the project objectives/key associated outcome targets revised during implementation?
No

c. Policy Areas:

The program is structured around seven priority areas: (i) expanding fiscal space through the implementation of tax administration measures to fight tax evasion and the implementation of new tax measures; (ii) improving the targeting of existing public subsidies through the elimination of the non-residential electricity subsidy; (iii) modernizing public finance management through the expansion of the integrated financial system and improvements in budget management; (iv) enhancing public sector transparency through the promotion of access to information; (v) expanding the coverage of the social protection program Red Solidaria; (vi) improving the quality of primary education through the implementation of a strategy to address the performance in the lowest ranking schools; and (vii) expanding access opportunities to secondary education through the implementation of the EDUCAME program.

d. Comments on Project Cost, Financing, Borrower Contribution, and Dates

The operation was approved on January 1, 2009, and effective on February 25, 2009 as planned. The first tranche release of US$200 million took place on March 3, 2009 as planned. The second tranche release of US$248.9 million took place on October 27, 2010, ahead of the planned date of January 17, 2011. Two of the tranche conditions were only partially met. There was a front-end fee of US$1.1 million.


3. Relevance of Objectives & Design:

a. Relevance of Objectives:
Adverse fiscal pressures on critical poverty reducing and growth enhancing expenditures resulted from exogenous shocks from the global financial crisis: El Salvador was badly affected because of strong linkages with the USA financial sector, and with exports and remittances. There were also domestic factors contributing to the fiscal pressure, including cost of pension reform, cost of energy subsidies, and debt profile. Project objectives that addressed medium-term fiscal sustainability, transparency in the use of public resources, and steady improvements in social protection and education were highly relevant to addressing these challenges. The objectives are consistent with the Government’s strategy of expanding fiscal space, modernizing public finance management and transparency, and improving the effectiveness of subsidies and social programs. The objectives are aligned with the 2005 Country Assistance Strategy, and with the Country Partnership Strategy, 2010-2012, and its three pillars of: “Strengthen fundamentals for economic recovery by addressing macro and institutional vulnerabilities, strengthen delivery of social services, and increase economic opportunities, particularly for the poor".

b. Relevance of Design:
The design was highly relevant. There is a clear statement of objectives, linked to tranche release conditions and results indicators. There is a reasonable theory of change that policy actions would lead to desired objectives, and that there would be political commitment to taking these actions no matter which of the two major parties won the 2009 election. There is a plausible causal chain between the actions supported by the operation and the results achieved, building on the recommendations of AAA.


4. Achievement of Objectives (Efficacy) :

The achievement of efficacy of objectives will be measured by considering the achievement of Letter of Development Policy targets and PDOs.

    1. Help El Salvador strengthen medium-term fiscal sustainability; There were two sub-objectives under this objective.

    Expanding fiscal space. Prior to the operation, the tax administration was functioning reasonably well (most PEFA dimensions rated A or B), with shortcomings in taxpayer access to information and controls in taxpayer registration system (C rated). The operation supported new measures for tax and tax administration (improved coordination among tax agencies including cross-checking information between tax and customs and creation of an Internal Affairs Unit in the Tax Administration Office, and improved border control), leading to increased tax collection to 15.2 percent of GDP in the year to June 30, 2011, slightly exceeding the PDO target.

    Improving the targeting of existing public subsidies. Although the government initially eliminated untargeted subsidies for electricity, water and gas, it reintroduced a range of subsidies to mitigate the impact of adverse price shocks. Thus, the PDO target (40 percent reduction) was only partially achieved (33 percent reduction).

    Taking this performance into account, IEG rates achievement of this objective as substantial.

    2. Support good governance and transparency in the use of public resources; There were two sub-objectives under this objective.

    Modernizing public finance management. Prior to the operation, there were weaknesses in the Medium-Term Fiscal Framework, 2008-2014 and in the costing of sectoral strategies (Informe del Desempeño de la Gestión de las Finanzas Públicas [PEFA], 2009, p. 59-60). According to the ICR, many benefits were achieved with support from the operation to address these issues. A medium term budget framework was incorporated in the budget law of 2011, with emphasis on bottom-up preparation of costed, strategic plans consistent with the top-down fiscal framework. Expenditure monitoring has also improved through expanded coverage of the Integrated Financial Management System (SAFI) to 95 percent of the central government expenditure, as expected, including 24 central government entities, 59 decentralized government entities, and 2 public enterprises. In addition, result-based budgeting is being piloted in two ministries in 2011.

    Enhancing public sector transparency. Prior to the operation, the government published annual budget documentation, year end financial statements, and contract awards above $100,000 (PEFA, p. 54-6). A prior action and tranche release condition supported access to information through the Fiscal Transparency Portal. The result was an increase from 44 percent to 92 percent of procurement awards published at http://www.comprasal.gob.sv, exceeding the PDO target of 80 percent. Executive decree No. 850 defined standards for public access to public financial information. This includes real time data on budget execution, including for primary service agencies such as universities and hospitals, and external audits from the Central Bank, and Multisectorial Development Bank; such information was not publicly accessible before. This enhanced transparency provides Salvadorans with valuable information to hold public bodies and politicians to account for the use of public resources.

    Taking this performance into account, IEG rates achievement of this objective as high, with no shortcomings.

    3. Maintain steady improvements in social protection and education. There were three policy areas under this objective.

    Expanding the coverage of the social protection program Red Solidaria. The conditional cash transfer program was implemented in the 100 poorest municipalities. The initial target was 120,000 families, formally revised to 100,000. Actual achievement was 92,100 families, due to ineligibility from rising incomes, and migration out of targeted municipalities.

    Improving the quality of primary education The operation supported a reduction in the number of non-performing schools from 410 in 2007 to 204 in 210, exceeding the PDO target of 256. However, this result covers only the non-performing schools in 2007; there is no information on whether other schools may have slipped into the non-performing category.

    Expanding access opportunities to secondary education. Secondary enrollment was increased from 594,000 to 633,369 students, slightly exceeding the intermediate outcome target of 632,700. This growth followed elimination of tuition and graduation fees, expansion of classrooms, availability of grants, and flexible modalities including web-based learning and flex-time courses. During implementation of the operation, the government became aware of quality problems in some of the modalities; it decided to address them before expanding further. As a result, the government only increased the number of education grants (cupos) by 1,400 in 2009, compared to the expected 10,000. This meant the second tranche release condition was only partially met, but this did not affect the expected outcome. The Bank approved the change as better contributing to the overall sectoral objective. IEG concurs, since the expected outcome of increasing secondary enrollment was exceeded.

    Taking the above performance into account, IEG rates achievement of this objective as substantial.


    5. Efficiency (not applicable to DPLs):

    6. Outcome:


    The objective was highly relevant to addressing the challenges of protecting critical poverty reducing and growth enhancing expenditures from adverse fiscal pressures. The design is highly relevant, with a reasonable theory of change that policy actions would lead to desired objectives, and that there would be political commitment to taking these actions. Efficacy of achievement of the three key objectives is substantial, with only minor shortcomings. The operation supported measures leading to increased tax collection, elimination of untargeted subsidies, better linking the medium term budget framework to the annual budget, expansion of the SAFI, greater fiscal transparency, expanded coverage of conditional cash transfers, and improved quality of and expanded access to education. There was a shortfall in achieving the targets for untargeted subsidies for electricity and for number of families benefiting from conditional cash transfers. Two second tranche conditions were partially waived because of a change in conditions, without weakening the achievement of the program. Results achieved can be attributed to the operation, along with parallel operations of other development partners.

    a. Outcome Rating: Satisfactory

    7. Rationale for Risk to Development Outcome Rating:

    There is risk of some changes occurring that would be detrimental to sustaining the outcome achieved, as foreseen at appraisal. The strong results by the opposition Nationalist Republican Alliance (ARENA) in congressional elections in March, 2012 may hinder implementation of enhanced social protection, though continuing support from Grand Alliance for National Unity party to the ruling Farabundo Martí National Liberation Front administration should help maintain support for fiscal reforms. The consultative process managed to forestall one of the political risks originally foreseen: that the second tranche benchmarks wouldn’t be met (the two partially met benchmarks resulted from strategic improvements, not political obstructionism). Macroeconomic risks from global deleveraging and volatility continue. Because of a lower economic growth rate than its neighbors, and less room for countercyclical policy, the country is more vulnerable in some respects to food and commodity price increases. Yet, with improvements in tax and expenditure management, and increased social protection, the government is better protected from these risks than in 2008. Natural disaster risks continue as before, but the country has disaster management systems in place that can mitigate their impact, and there is access to emergency financing mechanisms.

    If these risks were to materialize, they could have a negative impact on the outcome achieved. However, the follow-on projects supported by the Bank help to mitigate these risks, including the Sustaining Social Gains for Economic Recovery DPL (SSGER - approved October, 2009), the Fiscal Management and Public Sector Performance Technical Assistance Loan (FMPSP, approved November, 2009) and the Public Finance and Social Progress DPL (PFSP - approved April, 2011), which launched a new programmatic series. These follow-on projects provide a strong foundation for reforms that will help to mitigate the above risks, including modern systems for selection of tax auditing, better monitoring and actions to prevent taxpayers from stopping filing, new tools for recovering late tax payments, the adoption of the Access to Information Law in December, 2010, and the prospect for even greater access to public financial information. For example, the Law mandates that all audits should be available on-line by mid-2012.

    a. Risk to Development Outcome Rating: Moderate

    8. Assessment of Bank Performance:

    a. Quality at entry:

    In preparing this operation, the Bank built on the recommendations of prior and ongoing analytical work, including the Public Expenditure Review (FY05 and FY11), Country Financial Accountability Assessment (CFAA - FY06), Country Procurement Assessment (CPAR-FY06), and Update on the CFAA (FY07). It drew on these to select highly relevant objectives and components, with parallel support from a US$500 million loan from the Inter-American Development Bank, and support from the EU, Luxemburg, the IMF, and the US Millennium Challenge Account. The Bank identified well the considerable risks of the operation, and took effective steps to mitigate them such as extensive dialog with the opposition. The monitoring and evaluation framework was clearly designed, and the Government collected data in a timely manner to assess progress.

    Quality-at-Entry Rating: Satisfactory

    b. Quality of supervision:

    Four implementation status reports and a mid-year review prepared by the Bank give a reasonable analysis of progress. The Bank's engagement through continuing analytical work (e.g. PEFA, FY09, Public Expenditure Review FY11) helped to measure progress, and respond to emerging challenges, while the Bank's coordination with other development partners helped to align support around a coherent reform program. The Bank's engagement also paved the way for follow-on operations as the implications of the global financial crisis became clearer. The Government’s comprehensive Informe de Cierre (Closing Report) attached to the ICR affirms that the Bank was flexible and responsive in using the DPL to help mitigate the impact of the 2008 economic crisis as it unfolded.

    Quality of Supervision Rating: Satisfactory

    Overall Bank Performance Rating: Satisfactory

    9. Assessment of Borrower Performance:

    a. Government Performance:

    The program built on comprehensive reforms carried out since the 1992 peace agreement to strengthen the democratic system, promote economic stability, develop efficient markets and improve public management. The Government's reform commitment is evidenced by an improvement in the World Governance Indicators from 1996-2008 in government effectiveness and control of corruption, although a recent increase in organized criminal violence is a concern. The DPL was negotiated with a range of stakeholders, including the main opposition party, the FMLN, that subsequently prevailed in the presidential election in March, 2009. All major political groups agreed with the program, helping to facilitate Congressional approval granting the Government the authority to negotiate the DPL; during the previous 3 years, five operations approved by the Bank had been rejected by the Congress. This work was supported by the Policy Dialogue and Consensus Building non-lending technical assistance. When the DPL was designed, it was impossible to anticipate the scale of the impact of the global financial crisis. The consultative process not only facilitated approval for the DPL, but opened the door for subsequent operations focused on mitigating the impacts of the crisis. The operation built on a strong foundation of a political transformation consolidating peace and democracy, structural economic reforms, stable macro policies, and adequate fiduciary environment for DPLs. There were excellent transition arrangements after the loan closing, supported by related operations by the Bank, Inter American Development Bank, and International Monetary Fund. Strategies and priorities were approved by the Economic and Social Counsel, a group with participation of the main political opposition party, civil society groups, and private businesses. In addition, the Government's Development Plan 2010-2014 is fully consistent with the operation's objectives, and was fully vetted with key stakeholders.

    Government Performance Rating: Satisfactory

    b. Implementing Agency Performance:

    The Ministry of Finance, Central Bank, Technical Secretariat of the Presidency and Ministry of Education all worked closely together to implement coordinated reforms, and to collect monitoring data. The implementing agencies collected the data needed to assess progress, and used it for managing this and related operations.

    Implementing Agency Performance Rating: Satisfactory

    Overall Borrower Performance Rating: Satisfactory

    10. M&E Design, Implementation, & Utilization:

    a. M&E Design:

    Tranche release conditions and PDOs are linked to each objective, and are clearly defined. The design benefited, inter alia, from the Public Expenditure Review 2010, under preparation at the time, and policy notes and technical assistance under the Human Development for Poverty Reduction program.

    b. M&E Implementation:

    The Ministry of Finance and partner agencies collected the data needed to assess progress from agreed sources.The target in the Development Policy Letter was expressed differently (test scores in non-performing schools improve by 3%), but it was formally replaced with the indicator on reduction in the number of non-performing schools. In one case, the target for a PDO (on number of targeted households for conditional cash payments) was reduced following the release of new information.

    a. M&E Utilization:

    Monitoring data assessed both outcomes and outputs, were used to assess progress supported by the DPL, and in some cases, progress supported by subsequent DPLs.

    M&E Quality Rating: Substantial

    11. Other Issues:

    a. Safeguards:

    The operation supported reforms in tax, public expenditure management, and transparency that do not have direct effects on safeguard issues.

    b. Fiduciary Compliance:

    The 2004 CFAA and CPAR indicated that the fiduciary environment for DPLs was adequate. The 2009 PEFA gave a broadly positive assessment; some suggestions on improvement were supported by actions from this and subsequent operations.

    c. Unintended Impacts (positive or negative):

    The ICR points out that reducing electricity subsidies, increasing the coverage of conditional cash transfers and increasing access to secondary education should have positive distributional effects, while tax reforms could have produced negative distributional effects. However, there is no evidence presented for these hypotheses in the ICR.

    d. Other:



    12. Ratings:

    ICR
    IEG Review
    Reason for Disagreement/Comments
    Outcome:
    Satisfactory
    Satisfactory
     
    Risk to Development Outcome:
    Moderate
    Moderate
     
    Bank Performance:
    Satisfactory
    Satisfactory
     
    Borrower Performance:
    Satisfactory
    Satisfactory
     
    Quality of ICR:
     
    Satisfactory
     
    NOTES:
    - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006.
    - The "Reason for Disagreement/Comments" column could cross-reference other sections of the ICR Review, as appropriate.

    13. Lessons:

    There are a number of general conclusions going beyond this particular operation. First of all, extensive work on consultation and consensus-building throughout an operation can pay large dividends in removing blockages to difficult reforms. In particular, in countries where there is a possible change of government, it is important that the opposition be consulted, and that they agree to support the changes supported by a DPL. Secondly, a two tranche operation may be appropriate when there is a possibility of a change in government during implementation. It helps to reinforce a possible new Government's commitment to the reforms, while avoiding the costs of approving a second operation. Finally, the productive use of DPLs is enhanced when there is complementary analytical work, technical assistance, and well-coordinated assistance from other partners.


    14. Assessment Recommended?

    No

    15. Comments on Quality of ICR:

    The ICR is informative, candid, and generally clear. A minor shortcoming is that it gives the DPL credit for policy changes that were supported by subsequent operations. For example, the approval of the new Access to Public Information Law is listed as an achievement under the good governance and transparency objective, when it was an action supported by PFSP.

    a. Quality of ICR Rating: Satisfactory

    (ICRR-Rev6DPL-Jun-2011)
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