world bank document...1996/08/05 · document of the world bank report no. t-6839-es technical...

Document of

The World Bank

Report No. T-6839-ES

TECHNICAL ANNEX

EL SALVADOR

PUBLIC SECTOR MODERNIZATION TECHNICAL ASSISTANCE LOAN (PSM-TAL)

August 5, 1996

Sector Leadership GroupCentral America Country DepartmentLatin America and the Caribbean Region

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Currency Equivalents(As of July, 1996)

Currency Unit = Colon (¢)US$ 1.0 = ¢8.72

LIST OF ACRONYMS AND ABBREVIATIONS

ANDA A dministraci6n Nacional de A cueductos y A lcantarilladosANTEL A dministraci6n Nacional de TelecomunicacionesBCR Banco Central de Reserva (Central Bank)CEL Comisi6n Ejecutiva Hidroelectrica del Rio LiempaCEPA Comisi6n Ejecutiva Portuaria A ut6nomaCOM Comite de A,odernizaci6n (Committee for Modernization)CPMSP Comrisionado Presidencial para la 1lodernizaci6n del Sector Pubhlico / Comisi6n Presidencial para la

.Afodernizaci6n del Sector PuiblicoFUSADES Fundaci6n Salvadoreha para el Desarrollo Economico y Social (Salvadoran Foundation for Economic

and Social Development)GTZ Gesellschaft fur Technische Zusammenarbeit (Gerrnan Technical Assistance Agency)HRIS/SIRH Human Resources Information System / Sistema de Informaci6n de Recursos HumanosHRM Human Resources ManagementEBRD International Bank for Reconstruction and DevelopmentIDB Inter-American Development Bank[FM/AFI Integrated Financial Management / Admninistraci6n Financiera IntegradaINCAFE Instituto Nacional del Cafi (National Coffee Institute)INPEP Instituto Nacional de Pensiones para Empleados Ptublicos (National Pensions Institute for Public

Employees)IRP Institutional Restructuring PlansISSS Instituto Salvadorenio del Seguro Social (Salvadoran Social Securitv Institute)MICDES .Ifinisterio de Coordinaci6n v Desarrollo Econ6inico y Social (Ministry for Economic and Social

Coordination and Development)MINEC A<finisterio de Economia (Ministry of Economy)MINHAC A-finisterio de Hacienda (Ministry of Finance)MIPRE Itfinisterio de la Presidencia (Ministry of the Presidency)MITRA ifinisterio de Trabajo (Ministry of Labor)MOP ,finisterio de Obras Puiblicas (Ministry of Public Works)MRI Mv6dulo de Recolecci6n InstitucionalMRREE Afinisterio de Relaciones Exteriores (Ministry of Foreign Relations)NFPS Non-Financial Public SectorNPC National Project CoordinatorPCU Project Coordination UnitPNC Policia Nacional Civil (National Civic Police)PPF Project Preparation FacilityPSM Public Sector ModernizationPSM-TAL Public Sector Modernization-Technical Assistance LoanPSMP Public Sector Modernization ProgramPSP Private Sector ParticipationSAFI Sistema de Ad,ninistraci6n Financiera Integrada (Integrated Financial Management System)SAL Structural Adjustment LoanSAP Structural Adjustment ProgramSCL Single Currency LoanTAL Technical Assistance LoanUNDP United Nations Development ProgrammeUSAID United States Agency for International Development

TABLE OF CONTENTS

SECTION A: PROJECT DESCRIPTION ...................................................... I

Background ...................................................................... I

Ongoing Public Sector Reform ...................................................................... 3

Project Objectives ...................................................................... 4

Project Description ...................................................................... 4Institutional Restructuring and Debureaucratization ...................................................................................... 5

Human Resources Management ... .. ....... 10Financial Resource Management .13.......................................................... ............ 13

Privatization and Private Sector Participation in the Provision of Public Services ................................................... 18Project Coordination .2............................................... ..... 24

Project Costs and Financing .25

SECTION B: PROJECT ADMINISTRATION AND IMPLEMENTATION ................................ 27

Organization and Implementation ...................................................................... 27

Training Plan ...................................................................... 28

Procurement ...................................................................... 28

Disbursements and Financing ...................................................................... 30

Accounts and Audits ...................................................................... 30

ANNEXES

Annex A: Draft Matrix of Key Project Activities

Annex B: Estimated Cost and Financing Plan

Annex C: Procurement and Disbursement Arrangements

Annex D: Organizational Chart of the Executive Organ of the Government

Annex E: Preliminary Training Plan

Annex F: Central Government: Employment Data

Annex G: Modernization of Infrastructure

Annex H: PSM-TAL Field Supervision Plan

This report and the accompanying Memorandum of the President are based on the findings of preparation, preappraisal, and appraisalmissions that visited El Salvador from December 1994 to February 1996. Main contributors to the reports and mission participants wereHarald Fuhr (Task Manager), M6nica Fidel, Kai Hertz (Consultant), LASLG; Aldo Baietti and Charles Thomas (PSDPS); MonikaQueisser (FSD); Raimundo Arroio (Consultant). Other contributors to the project were Ellis Juan (PSD), Carlos Gabuardi, Marta Molares-Halberg (LEGLA), Rosita Estrada (RIM, Costa Rica), and Mauricio Mathov (OBPIE). Peer reviewers are Gary Reid (LA3PS) and MichaelStevens (PSP). Robert M. Lacey and Donna Dowsett-Coirolo are the Sector Leader and Country Director (LADCN) respectively, for thisoperation. Preparation and appraisal missions were undertaken jointly with the IDB. IDB participants were Fernando Costa (Project TeamLeader), Hugo Betancor (RE2/OD3), Mario Sangines (INT/FIS), Cerstin Sanders (Consultant). Managers for the IDB operation are JorgeSapoznikow, Division Chief (RE2/OD3), and Miguel Martinez, Regional Department Manager.

EL SALVADORPUBLIC SECTOR MODERNIZATION TECHNICAL ASSISTANCE LOAN (PSM-TAL)

TECHNICAL ANNEX

SECTION A: PROJECT DESCRIPTION

Background

1. El Salvador's recent history has been characterized by civil war, economic and political instabilityand cumulative problems in the social sectors. Since the 1992 Peace Accord the overall situation of thecountry is improving. The Government of El Salvador has managed stabilization and transition effectivelyand economic growth has been reactivated. Consolidation of peace and democratic decision making, aswell as fostering private sector-led growth, will now require continuous deepening of the reform process.It will also require attacking the economic and political roots of the conflict in an orderly, participatoryand consensus-based manner.

2. Such pressing needs for consolidating reforms and building up new confidence, however, will imposea heavy burden on traditional public sector institutions which are presently unprepared to manage suchchange (see Box I for an overview of the public sector). Despite considerable political and economicprogress in the past years, El Salvador's public sector still suffers from major structural weaknesses anddeficiencies: (i) high functional inefficiencies caused by overdimension and centralization of the state; (ii)low economy and efficiency caused by its current organizational structure, its extremely weak financialand human resources management, and the low professionalization of its civil service; (iii) poor servicedelivery; and (iv) outdated and inadequate administrative infrastructure and equipment.

3. These weak inherited structures which resulted from the non-market interactions and oligopolisticcompetition that dominated the economy in the past decades, are obstacles to fostering a more competi-tive export oriented economy led by the private sector and attractive to foreign investment, and reducingwidespread poverty. As currently structured, public sector institutions are likely to hinder these goals:directly, through overregulation and protection of monopolistic public enterprises, the public sectorgenerates prohibitively high costs for market entry and crowds out private, innovative competitors; andindirectly, through bureaucratic inefficiency and overly complex administrative procedures. The sector'sinability to deliver adequate services, notably in the social sectors, increases political insecurity andinstability. In short, the public sector's institutional deficiencies pose the risk of major setbacks in bothpolicy making and implementation of public sector reforms before broader private sector participation indevelopment can gain sufficient momentum.

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Reforms are needed toBox I. The Public Sector in El Salvador is divided into the non-

* tailor the structure of Government to financial public sector (NFPS) and nine financial institutions. Thethe evolving fanctions of the State; NFPS encompasses: (a) the Central Government including thestrengthen Eathe financial management Legislative, the Judiciary, the Electoral Organism; as well as the* stregthenthe fnancla manaement Executive with the Presidency (Presidencia), its S secretariats, aand accountability of public sector Ministerial Council, and 14 ministries; (b) a group of institutionsagencies; consisting of 35 autonomous entities, the public hospitals, and the

. realign public sector incentive municipalities in 14 administrative departments; and (c) 6structures; public enterprises. The autonomous entities and public enterprises

. avoid overap o misiare within ministerial portfolios of responsibility. Three of the* avoid overlap of missions and autonomous institutions and one public enterprise (ANTEL, the

functions of Government entities; telecommunications company) fall under the authority of the* reduce redundant staff and increase Presidency (see organization chart of the Executive in Annex D).

the ratio of professional/technical to Public expenditures related to GDP are within the averagesupport staff, for low- and middle-income countries. Together with Guatemala

* strengthen and provide alternative they are the lowest in Central America. In 1994, publicexpenditures including net lending amounted to 14.2% of GDP

means of delivering public services. for the Central Government and 17.5% for the NFPS, compared

with 16.2% and 20.1% in 1992. The projections for 1995 are4. The new Government, which took 13.8% and 17.7%, respectively. 1996 Budget plans are 14.1% andoffice on June 1, 1994, has therefore 18.2% respectively.declared public sector modernization Of the public expenditures, current expenditures on wages(PSM) to be one of its key development and salaries and goods and services account for more than half ofpolicy objectives. Several public speeches NFPS spending (55% in 1994, a projected 53.2 % for 1995, and aof the President of the Republic reaf- budgeted 56.5 % for 1996). Outlays on wages in the NFPS

amounted to 7.1% of GDP in 1994 (projected 7.0% for 1995 andfirmed the need to accelerate PSM during 1996). Central Government wages accounts for 5.3% and 5.6% of1996 in key areas like privatization, de- GDP (projected for 1995 and 1996, respectively).and re-regulation, institutional reform and Despite the fact that, at first sight, El Salvador's NFPS doeshuman and financial resources develop- not appear particularly oversized, there are some worryingment. features related to its performance. The Government anticipates

that the complex structure of its public sector will not allow it to

5. Under the Government's Public respond in an adequate and timely manner to the country'seconomic and social priorities. Distortions, overlaps, and

Sector Modermization Program, the State inefficiencies exist in the definition of responsibilities; thewill withdraw from intervention in and functions and size of the entities; and the quantity anddirect production of goods and services Tcomposition of staff needed to deliver public services. A numberwhich can be produced more efficiently of activities undertaken by the Government are now obsolete orby the private sector. Of necessity, it will better served by the private sector. Others could be carried out

bmore efficiently by decentralized levels of Government.be much leaner, yet stronger In ItSSome 140,000 people work in the public sector (some 10%

capacity to formulate, Implement and C0of total non-agricultural employment): 90,000 in the Centraloversee economic policies, and much Government, 51,000 in the Autonomous Institutions (see Annexmore efficient and effective in delivering F). The composition of employment indicates a combination ofservices. Above all the State will overstaffimg - particularly in the lower ranks - and understaffingconcentrate on facilitating private sector at the same time, particularly at professional level. With the sharpled development. Central Government drop in real wages (1993 real monthly wages had dropped to

about 34% of their 1980 level), public sector incomes havefunctions will be pared down to a set of deteriorated. Yet, paradoxically, public wages at the lower end arestrategic economic and social manage- still competitive compared to those in the private sector, whilement tasks, including: (a) managing the professional salariesare not.country's financial and human resources

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more effectively and efficiently, achieving greater transparency and responsiveness, and strengtheningcapacities to formulate and implement public policies, with specific focus on poverty reduction andenvironmental protection; (b) designing, implementing, and overseeing a legal and regulatory frameworkthat assures free and open competition and efficiency in markets, and the rule of law in civil society; (c)leading and fostering the country's integration with the world economy; and (d) delivering or contractingfor delivery of only those services with "public good" attributes that the private sector cannot aloneprovide in sufficient quantity and with sufficient quality and access.

6. Most of the ministries participating in the PSMP have set up Reform Groups responsible forimplementing ministry-wide modernization policies. These Reform Groups are closely coordinated withthe PSMP in the CPMSP. Strengthening these groups will allow for carrying out gradually and ade-quately modernization efforts in each ministry.

Ongoing Public Sector Reform

7. In November 1995, the President appointed a minister-ranked 'Comisionado Presidencial para laModernizaci6n del Sector PuTblico' to lead and coordinate the Governments' public sector modernizationactivities in different Government entities. Politically, inter-ministerial cooperation and coordination areachieved by the Commissioner through the 'Comisi6n Presidencial para la Modernizaci6n del SectorPublico (CPMSP), which includes the Minister of Finance and the Minister of Economy. Technically,modernization activities are coordinated and guided by a Project Coordination Unit (PCU). Eachministry, in turn, has its own reform groups ('Grupos de Reforma') that are responsible for implementingand micro-managing modernization activities (see also Section B, Project Administration and Implemen-tation).

8. There is evidence of broad support both in the private sector as in the National Assembly for suchreforms. Although still fragmented and with different connotations, most parties agree on the need tocarry out PSM in order to sustain and broaden achieved progress, and implement sound policies thatreduce poverty. The CPMSP will play a key role in providing a coherent framework for PSM andenabling consensus building on essential features of the reform process.

9. PSM efforts can build upon previous and in-debt discussions with the Government particularly in thecontext of 1995 Country Economic Memorandum ('El Salvador: Meeting the Challenge of Globaliza-tion', Report No.: 14109-ES) and the Bank's newly approved Competitiveness Enhancement TechnicalAssistance Project (Ln. 3946-ES). PSM and PSD efforts are thus well coordinated and most likely to leadto synergy during implementation.

10. The Government has expressed strong interest in advancing rapidly with the implementation of aPublic Sector Modernization Program (PSMP) to be supported by the proposed Public Sector Moderni-zation Technical Assistance Loan (PSM-TAL), and provide the necessary institutional setting and staff tocarry out reforms in Central Government agencies. Prepared under an ongoing Bank supported TAL (Ln.3648-ES), a Government approved Modernization Plan would guide implementation. The proposedPSM-TAL is scheduled to be fully co-financed with the Inter-American Development Bank (IDB). TheIDB would, additionally, provide special contributions to hire professional staff, and an additional quickdisbursing loan that would allow to cover short-term financial needs during project implementation.

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11. The Government's new vision of the State is reflected in a detailed Modernization Plan (Programade Modernizaci6n del Sector Puiblico, May 1996). The Plan includes (a) the institutional structure of theexecutive branch of the public sector for the next five years, (b) a redefinition of the role of the State andits functions, (c) the role and functions of each sectoral ministry, (d) macro-institutional and micro-institutional restructuring priorities, including definition of restructuring goals (with efficiency-enhancingmeasures), and identification of those areas that will be decentralized or privatized, (e) general require-ments of human and financial resources, and fiscal impact, and (f) a timetable for developing andimplementing institutional restructuring plans at the entity level.

Project Objectives

12. The objective of the PSM-TAL is to strengthen the Government's capacities to implement its PublicSector Modernization Program (PSMP), i.e. defining a more subsidiary role for the public sector;gradually improving its performance, accountability and transparency; and enhancing private sectordevelopment. For this purpose, the proposed project seeks to assist the Government in three interrelatedareas: (a) define the new roles of the public sector; (b) strengthen operations for those entities that remainin the public sector; and (c) involve the private sector in the provision of public services. A PPF advanceof US$1.9 million (P279-ES) is supporting start-up activities.'

Project Description

13. The proposed PSM-TAL has the following four components: Institutional Restructuring andDebureaucratization; Human Resource Management; Financial Resource Management; and Privatizationand Private Sector Participation in the Provision of Public Services.

14. The project would complement: (i) other Bank projects that support sectoral organizational andinstitutional strengthening (e.g. in the Ministries of Education and Health where it would provide some ofthe necessary administrative/normative frameworks), as well as ongoing efforts to improving privatesector development (e.g. through the Competitiveness Enhancement Technical Assistance Project, Ln.3946-ES, FY96); (ii) USAID and IDB support in the areas of integrated financial management andtax/customs administration; and (iii) efforts by other donors, e.g. GTZ, UNDP and USAID, in relatedareas of modernization, particularly in decentralization and municipal strengthening.

The IDB is processing in parallel an adjustment operation for public sector modernization in support of the Govern-ment's PSMP.

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Institutional Restructuring and Debureaucratization

(estimated US$ 5.3 million, 11% of project costs)2

Issues

15. The present structure of the public sector is outdated and a major obstacle to the effectiveimplementation of economic and social policies. The public sector continues to monopolize the deliveryof the bulk of the country's infrastructure services as well as a large number of functions that could beperformed more efficiently by the private sector. Ministries and their dependent agencies do not have aclear definition of mission, and have yet to shed unnecessary functions, and to reorganize others, todeliver high-priority services more efficiently. Some functions are overstaffed while others are under-resourced and bereft of essential skills. There are no established norms to govern the organizationalstructure of the different areas within ministries, and no single entity is responsible for rationalizingstructures. It is a common practice in some ministries to modify their internal organization ad hoc andassign new functions that, eventually, overlap with those of other public sector entities. Managers are notheld accountable for the allocation of human and financial resources, nor for the results obtained withthese resources. The current civil service legislation has distorted the labor market by making staffmobility difficult and facilitating bad workers to remain in the public sector. As a result of all these weak-nesses, the public sector is excessively bureaucratic, and this constitutes a barrier to private sector develop-ment.

The Government's Reform Program

16. With assistance from consultants financed by the TAL and UNDP, the Government prepared a draftPublic Sector Modernization Program (PSMP), in which institutional restructuring is given primeimportance. In addition, institutional restructuring studies for pilot ministries (Public Works, Agriculture,and Finance) were carried out. With the exception of the Public Works study (see Box 1I), however, therecommendations of the studies were not clear nor detailed enough in the new objectives and functionalroles of the entities to be able to draw from them the next steps needed to implement the program. TheGovernment made explicit its commitment to a subsidiary role of the State in its draft 1994-1999Economic and Social Plan which sets the stage for decentralizing or privatizing certain activities that arenow being carried out by central ministries. With assistance from the Bank, the Government preparedinstitutional restructuring guidelines and terms of reference for consultancies that will (a) develop anoverall assessment and 'fiapping" of the public sector, (b) propose a new macroinstitutional structurethat will eliminate functional inconsistencies and overlaps, and (c) formulate proposals for the restructur-ing and modernization of selected Ministries and decentralized institutions. It is envisaged that activities(a) and (b) will be completed within the next month and a half, with assistance from consultants to befinanced with remaining funds of the TAL.

2 Figures in parentheses represent the estimated base cost of the component, including IBRD and IDB-financedassistance, and government contribution.

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17. In dialogue with different Ministers, the Box I: A Case for Institutional Restructuring: theCPMSP, and, eventually, the President have Minist of Public Works. A good example for the

selected the followig .e fr il institutional restructuring exercises currently needed in Elselected the following Ministries for institutional Salvador's PSM is the Ministry of Public Works (Ministeriorestructuring: Presidency, Economy, External de Obras Publicas, MOP). At present, MOP, which consistsAffairs, Public Works, Transport and Housing, of three Vice-ministries (Public Works, Housing and UrbanEducation, Health, Agriculture, and Finance. Development, and Transport), is heavily involved inMoreover, the Government foresees institu- executing road construction and maintenance, including

rural roads. Previous studies indicate that the missions andfimctions within MOP are vaguely defined and that overlap

three decentralized institutions to be identified. between the different units has increased considerably. MOPEach of the selected entities selected for employs some 13,700 staff, out of which 3,000 areinstitutional restructuring will produce administrative and professional staff. Some 10,100institutional restructuring plans (IRPs) with employees are daily wage laborers (Jornaleros) withspecific actions and timetables for increasing the temporary contracts, yet with de facto permanententities' efficiency, reducing their size and fiscal employment status despite irregular work load. Some 2-3percent of the Jornaleros are beyond the maximum ageburden, rationalizing their organizational and allowed by law to remain in the public sector (70 years).functional structure, focusing their activities, The Government blames traditional MOP structures -and strengthening their institutional capabilities i.e. its monopoly position - for ineffective and inefficientand service delivery. provision of infrastructure services. Anticipating increasing

infrastructure needs for private sector development in the18. The Ministry of Finance, for example, has future, the Govermnent is now demanding alternatives. It

indicated strog cn to iintends to restructure MOP and focus on new options forindicated strong comrmtment to improve service involving the private sector in road construction anddelivery by making explicit its intention to move maintenance, as well as in other areas of infrastructure.towards clear-cut standards of professional According to the Government, institutional restructuring ofperformance and overall quality management. MOP would lead to a new set of functions largely directed toSuch standards would involve a strategic planning, supervision and regulation of infrastructure

services, while de-facto provision of these services would,c.ontinuous feedback from the public servincrementally, be contracted out and provided by, or in(particularly, tax payers) and the private sector, cooperation with, private sector firms.and would be accompanied by massive training In order to cariy out such new tasks, a 'smaller' MOPprograms. Since the Government expects with redefined missions and functions, would needoverall quality orientation and management to considerable strengthening and more professional staff,0 yetbe increasingly met within its competetive less staff for actual construction and maintenance. Recently

passed legislation would enable MOP to 'rightsiz-e'enhancement program for the private sector, the pasdlgltinwudebeMO tonhsieemployment and allow for early retirement of staff, withministry intents to serve as a pilot institution for some 4,400 employees being involved in such exercise.this endeavor. It would help signal such Moreover, contracting out of road construction andcommitment clearly to both the private sector maintenance will enable MOP to reduce its staff evenand other public entities and enhance the further. Yet, efforts are needed to improve staff qualilica-introduction of such standards gradually in both tions and professional salaries, and ensure effective

contracting out of services. New incentives - and rules - forsectors. ppnvate sector participation in infrastructure need to

complement the reform of MOP.19. Measures to reduce overstaffing beganunder the previous Government with voluntary retirement programs in 1991-93 (at the national level) andin 1993 (in the Ministry of Agriculture and through the law that created the National AgriculturalTechnology Center). However, these early measures did not discriminate between essential and non-essential positions, and the Government lacked the technical and political capacity to control recruitmentand the creation of new posts. Moreover, the employment reductions did not proceed from an overallvision of the role of the State and a clear definition of its functions. In a new effort to reduce overstaffing

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the Government established a new law on October 12, 1995, 'Decreto 471" (see Box III) that had amuch broader impact.

20. With assistance from the Bank, the Government prepared institutional restructuring guidelines andterms of reference for consultancies that (a) developed an overall assessment and 'inapping" of the publicsector, (b) proposed a new macroinstitutional structure that will eliminate functional inconsistencies andoverlaps, and (c) formulated proposals for the restructuring and modernization of selected Ministries anddecentralized institutions. Activities were completed in May 1996 with assistance from consultantsfinanced with remaining funds of the TAL. A presentation of these proposals was given to the Presidentof the Republic.

21. The institutional restructuring plans at the entity level will be carried out with assistance from aconsulting firm to be financed under the proposed project. The starting point of the institutionalrestructuring plans will be the approved Modernization Plan of the PSMP and the outlines for institu-tional modernization prepared by each ministry. The institutional restructuring plans for Education,Health, and Agriculture will be financed by the respective sectoral project but will be coordinated withthe PSMP to ensure consistency. It was agreed with the Government that until the institutional restructur-ing plans of ministries are approved by the Interministerial Commission, no modification of the internalinstitutional structures will be made until instructed by the Commission. The Government intends toembark on modernization in a sequential manner: It would start with a first set of ministries (MINHAC,MINEC, MRREE) in late CY 1996, and then set the stage for another group of ministries (MOP,MIPRES and three decentralized institutions)3 that would join in early CY 1997.

22. As a result of institutional restructuring at the macro and microinstitutional levels, the Governmentexpects that further, more targeted, employment cuts will be required to enhance overall institutionalperformance. These cuts would result from qualitative 'tight-sizing;" i.e., eliminating or transferringfunctions to the private sector, and avoiding overlaps. It is expected that the contracting out of roadconstruction and maintenance services in the Ministry of Public Works alone, would reduce employmentin that ministry by about 5,000. Moreover, further private sector participation in the provision of publicservices is expected to lead to reductions in employment by another about 2,000 staff. Such furtherinstitutional restructuring would require an adequate incentive package to ensure acceptance by displacedworkers. Elements of this package would include:

* fair and transparent selection process for staff reduction and cancelation of non-essential vacancies;

* adequate compensation packages;

additional safeguards to assure that displaced workers would be able to regain their standards ofliving, such as training and/or availability of micro-enterprise credits for displaced workers;

* open communication channels with interest groups;

monitoring mechanisms in place to make sure workers who have received severance packages are notrehired.

3 Institutional restructuring plans for MINED. MISAL, and MAG wii be financed under the respective sectorial projects.

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Proposed Assistance under the PSM-TAL g"x III: Downsizing and futher "Right-Sizing" of

Publi !Employment.: In October 1995 El Salvador's23. In institutional restructuring, the PSM-TAL Legslative Assembly.approved a law (Ley-Decreto No.will finance the following activities: (a) prepara- 4714 Tempora de Compe:ari6n EconOmica por

Servcios PrestadJos:en.:el :Sector PNblico) :to compensatetion of Institutional Restructuring Plans (IRPs) Sen'ic em taos en by thIifo)st compensatefor selected entities; (b) implementation support pp aftbyh ishfprse o themand institutional strengthening at the entity level; Under this law, employees occupying redundant(c) updating of legal instruments as needed; (d) poss to be: suppressed in the FY 96 Budget, and thosedevelopment and implementation support for a having met mnimum age ad years-of-sdicdebureaucratization strategy; and (e) introduction requirementfora public pension, were oered a choicebetween two packages:-of information technology government-wide. o m s

*o nef month's salary for each year of service: sith: IaMoreover, the PSM-TAL will finance TA maximum monthly amount of 4,620 colones (SSsupport to the PSM Institutional Restructuring :529)-,orReform Group. A plan for the phasing in of . one month's salary for every year of service up:to adifferent institutions will be developed and will be maximumof 12years of service.attached to the Modernization Plan. All three categories of personnel -- Xregular staft

contractual employees, and daily wagei laborers -- were* Support to the JR Reform Group. The PSM- coveredbythe law.

TAL will finance short-term international A circular issued bytthe Ministry of Finance to all.Central Governinent mlinistries,:. dece taize&d00.aad

experts and long-term local support to the IR Ceutralmovenmntintustnes, decentalze andautonomous institutions, called for decisions on theComponent Coordinator within the Project identification of superfluous posts to be: basedl on (i)Coordination Unit (PCU). This activity is institutional restructuring exercises :involving thebeing initiated under the PPF. redefinition of the objectives. roles and finctions of work

units; (ii) duplication of functions; (iii) legal chages* Preparation of Institutional Restructuring that eliminated fuAnctions; l(iv) procedural changes-to

Plans (IRPs). The PSM-TAL will finance increase efficiency and productivity in service delivery;consulting services to help prepare IRPs for d () transfer of services to the private sector or otherministries and decentralized institutions. The parts of thepublic sector for reasons of efficiency or

effectiveness. Am high-evel inter-mifnisteril commissionGovernment identified the ministries of Fi- chaired .by the. Mnister of Justice. was :set up to reviewnance, Economy, External Affairs, Public complaints.ofiglarities in the.pess..Works, Transport, Housing and Urban De- By May 1996,: some .12,000 posts in Central.velopment, and Presidency, as well as three Government (including vacant ones), plus some fl0)00decentralized institutions still to be nomi- posts in the Autonomous Entities,i.e. 13%, and 3% ofnated, to carry out the restructuring process theirapprovdpts respecively were suppressed; thehigh-level inter-ministerial commission had& complted(the IRPs for the ministries of Educat iof mos,outstding complaintsalreadyiniHealth, and Agriculture, will be financed J iy. Th Gonmle ad issuedshortten notesAtounder the respective sector Bank-assisted 0cover the cost of the severance packages toaing 9someprojects). Discussions are taking place within .668 milionwcolones ($ 77i. millio. the Government to carry out lRPs for other T fistphase ofretr mamountto a firministries (Interior, Justice, and Labor). ThisUnavoidably itwas: lagely offset by the approval of tsome1,0002 newactivity will be initiated with PPF financing. potsin public tand socialscn.y preiousy

* TA for Implementation of JR Recommenda- .agtounderthe Acuerdosde.Paz. .. 1. Th nt.haseo adjuistmients in Central

tions. The PSM-TAL will finance consulting Goverent empXoyment willbe imade through ithservices and training to help entities undergo- i ews of miissions and :functions of all :pb ecting IRPs to implement the reforms, monitor enities.

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and evaluate progress against previously set targets, and strengthen their capacity to design andimplement priority programs.

* Development of Legal Framework. This activity will finance consulting services to help updateexisting legal instruments or develop new ones, as needed. This activity will be initiated with PPFfinancing.

* Introduction of Information Technology Government-wide. The PSM-TAL will finance computersand office equipment (fax and photocopy machines) for ministries and selected decentralized institu-tions.

24. Incentives built into the project for agencies to Bx IV: A Case in Debureaucrafization: In earlyundergo reform are pay and grading reform for 1996, the Govemment bas launched a pilot project inthose that rationalize their structure, and assistance the country's second largest municipality, Sonsonante,for increased productivity in the areas of human to speed up the registration of births. Previously parentsresource and financial management. were responsible for taking documents issued by

hospitals to the civil registry. Not only did this

25. While many of the structural and capacity- contribute to errors and even tbrgery, it imposed quite a2mry- burden on parents, particularly on those in rural areasbuilding reforms supported by the project will take who would have to pay their own way back to town justyears to yield their full benefits, there is one area of to complete the birth registration process. Starting withintervention, debureaucratization, where the interviews with parents, doctors, nurses, municipalGovernment seeks to demonstrate results quickly. officials, the pilot project has led to the redesign ofThe PSM-TAL will finance some of the start-up more user-friendly forms, which hospitals forward

directly to the civil registry. A communicationscosts and support initiatives to identify and redesign campaign is underway with posters and announcements(or excise) bureaucratic procedures and processes proclaiming 'Ahora nacer en El Salvador es misthat cause dissatisfaction among public service users fAcil" (To Be Born in El Salvador is Easier Now). andand other government '"ustomers." (see Box IV). It the debureaucratization team is working to replicate thewill also support workshops to bring reformers up project in other major municipalities.to speed on lessons learned from similar efforts to cut red-tape in countries such as Sweden, the UK,New Zealand and (in part) the U.S.. At the technical level the group is supported by an overall coordina-tor in the PSMP's Technical and Coordination Unit, staff in the Chamber of Commerce, and short-termprocess redesign consultancies. This subcomponent takes into account citizen participation. As astrategy of citizen participation - within the Debureaucratization Component - the Project 'El SalvadorEficiente" has been developed. It is a joint effort between the public and private sector which hopes toidentify and simplify, from the users point of view, transactions that affect the development of the privatefirm and of the civil society in general, in order to facilitate the insertion of the country in the globaliza-tion process. To facilitate the coordination of the project, the 'Comision El Salvador Eficiente" has beenformed, made up of high level representatives of the public and private sector, in which the Comisio-nado Presidencial will preside. The debureaucratization group has developed a work program and plansto undertake rapid diagnostic surveys to pinpoint the nature and magnitude of the problems detected,prioritize actions to be taken, and develop implementation plans. In the diagnostic and implementationphases, the group will work closely with members of the reform groups in the ministries to ensure strongownership.

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Institutional Arrangements

26. Most of the ministries participating in the PSMP have set up Reform Groups responsible forimplementing ministry-wide modernization policies. Each entity under the program will develop an IRPwith the help of the consultants, and present it to the CPMSP for approval. The specific technicalassistance that will be required for implementing each IRP will be determined by the Reform Groups ineach entity, assisted by the IR Component Coordinator. The Institutional Restructuring ComponentCoordinator, assisted by short-term international advisers and long-term local consultants, guide theprocess and regularly discuss progress with the Coordinator of the PCU. The 1R Component Coordinatorwill also coordinate closely with the Privatization Coordinator.

Human Resources Management

(estimated US$6.3 million, or 13% of total project costs)

Issues

27. Achieving the Government's objective of creating an efficient and productive public sector willdepend greatly on how it selects, manages, develops and deploys its human resources. Yet after morethan a decade of neglect during the civil war, human resource management in the public sector is indisarray. At the present time, central management of the civil service is a part-time occupation, entrustedto an understaffed office in the MINHAC, headed by a director whose primary task is the administrationof the ministry's own personnel. Low-priority functions and sectors are seriously overstaffed, especially atlower levels, while high-priority ones are short of skilled staff. Antiquated regulations prevent managersfrom efficiently redeploying labor. Career development, including plans for upgrading staff skills simplydo not exist. The pay and grading system - marked by ad-hoc decisions on pay awards, wagecompression, and large disparities in pay across ministries for posts of very similar content - lowersmorale and undermines the state's ability to compete with the private sector for skilled people.

28. Productivity is also low due to uncontrolled growth in the wage bill, which has been crowding outspending on essential operations and maintenance inputs - at present, expenditures for wages and salariesare consuming close to 70% of recurrent expenditure. Procedures for creating and eliminating posts arenot well-defined, and the annual budget exercise is not buttressed by a central register of approved postsand a system of monthly reporting by ministries of staff in post. As a sign of the magnitude of theseproblems, MINHAC could not until very recently determine with any degree of accuracy how manyemployees were on the payroll, where they were working and what functions they were carrying out.TAL assistance provided first assessments in this area (cf para. 33, and Box V).

11


29. Recognizing that isolated actions cannot turn around a collapsed civil service system, there is nowwidespread agreement within the Government and outside of it on the need for a comprehensive civilservice reform program. With the support of the TAL, the Government prepared a plan for such aprogram which has been incorporated into the PSMP. Specifically, that plan focuses on (a) creating theCentral Government's institutional capacity for administering, monitoring and controlling humanresources, (b) gradually developing a public service that is adequate in terms of size and quality, and (c)establishing the conditions for staff motivation, incentive, and development.

30. Specifically, the plan calls for (a) implementing an integrated human resource management informa-tion system in all central ministries and those 'decentralized institutions' that receive transfers from theCentral Government, (b) creating a central human resource management entity for the Executive, (c)strengthening the human resource management capabilities in operational units within ministries anddecentralized institutions, (d) reducing public employment to eliminate redundant staff, defining theadequate benefits packages needed to retire staff, and developing support programs for affected staff, and(e) developing a new legal framework for the civil service.

31. Human Resources Information System Box V. The Human Resources hiformaion Sys*em (UM): This(HRIS). To lay the foundation for system, developed by the Ministry of Finance, under the assistancecomprehensive reform of the public sector, by the ongoing TAL, ains at establishing an efficient anda priority has been to build up the Ministry transparent human resources database about all the Government'of Finance's capacity to monitor and employees.enforce manpower controls. Significant in With the TAL's assistance, a central HRS was implemented

in the Ministry of Finance, as well as personnel infornationprogress has been made. With financing systems in the pilot ministries of Finance and Agriculture.from the TAL, a central office in MINHAC Furthermore, a transfer of existing (manual or computerized)was established and equipped to collect and personnel information from all ministries onto the central databasemaintain pay and employment data for the was and in part still is being carried out. Due tD some difficultiescivil service. A basic set of existing in retrieving the required data, the existing database is still lackingpartial information.personnel data from payrolls and personnel The PSM-TAL thus seeks to expand the HRIS throughout thefiles in the 13 Central Government Government's entities, enabling and ensuring a goyenment-wideministries and 48 dependent institutions computerized HRIS, that proides the Government with anwas collected, converted into machine- important and indispensable tool for an efficient human resourcereadable format via the M6dulo de management and policy. The PSM-TAL will assist the Governent

by providing the necessary equipment and consulting services forRecoleccion Institucional (M) and the implementation of the HRIS throughout the Government'sloaded onto the HRIS, installed in the entities.central office. Budgetary data on approvedposts has also been loaded onto the system. At the same time, to begin the process of restoring afunctioning system of manpower controls, HRISs linked to the central system were installed in two pilotministries, Finance and Agriculture.

32. Nonetheless, the HIRIS still needs to be integrated in permanent fashion with the large number ofdispersed payroll systems, some of which are still maintained manually. Despite its importance as a criticaltool for planning and implementing the reform of the State, the HRIS remains in a precarious position,and functions of the HRIS office have not been formalized or given legal standing within the structure ofGovernment. Senior managers in the ministries, as well as finance and personnel chiefs, are not yet

12

familiar with the potential of the system as a management tool. At less senior levels, further developmentof norms and procedures, together with training, is required to integrate the ERIS into the everydaybusiness of personnel offices, and thus in the process ensuring the integrity of data transferred to thecentral system.

Proposed Assistance under the PSM-TAL

33. To support the Government's reform program, the human resources management component of thePSM-TAL will finance the following activities: (a) completion and implementation of the HRIS; (b)design and development of a grading and remuneration system; (c) design and development of a modemhuman resource policy; (d) support for the establishment of a central human resource management unit;(e) institutional strengthening of the ministries' capabilities for human resource management; (f)development of a new legal framework for the civil service; and (g) training. Moreover, the PSM-TALwill finance TA support to the PSMP Human Resources Management Reform Group. These issues willbe addressed and financed as follows:

* TA Supportfor the Establishment/Improvement of a Central HRM Unit. The PSM-TAL will financehigh-caliber international experts to help set up a central human resources management modernizationunit and provide it with expert advice.

* Support to the HRM Reform Group. The PSM-TAL will finance long-term expert advice and short-term local experts to support the HRM Reform Group Coordinator. Local experts are being financedunder the PPF.

* Human Resources Management Information System. The PSM-TAL will finance consulting services,equipment and training to complete the work started under the TAL. The HRIS will be implementedin all ministries and decentralized institutions, and the system will be permanently linked with payrolland integrated with SAFI. With financing under the PPF, the HRIS currently used by the ministries ofFinance and Agriculture will be extended to additional ministries, and additional human resourcemanagement modules will be designed.

* Human Resources Management Policy System. This subcomponent would: (i) design and develop agrading and remuneration system. This activity will provide consulting services and training to de-velop a unified grading and remuneration system for the civil service. A study of salary scale criteriafor administrative staff is underway, and it is envisaged that under the PPF a diagnostic review of theremuneration systems currently in place would be carried out; and (ii) design and develop a modernhuman resource policy. The PSM-TAL will finance consulting services to develop a transparent,consistent, and equitable personnel system, consisting of procedures for recruitment, selection, pro-motion and dismissal.

* Institutional Strengthening of the Ministries' Capabilities in Human Resource Management.Institutional strengthening support will be provided to personnel management units in the core minis-tries. These units have to be set up and staffed adequately to, eventually, manage human resources atministry level.

* Development of a new Legal Frameworkfor the Civil Service. Consultant services for the completionof the legal framework (Ley de la Funci6n Publica) is being financed with PPF funds. Since new

13

legislation in this area will need to be based on broad political support, special emphasis will be givento consensus building measures throughout revision and drafting of the law.

Training.4 The PSM-TAL will finance extensive training programs to upgrade staff qualifications andcapabilities during implementation and establish such programs as part of career development withinthe civil service. Initially, special focus in training will be given for (a) human resource managementstaff of ministries and decentralized institutions, on the HRIS to enable them to take full advantage ofthe system, (b) middle-level office staff, to learn basic office technology, (c) high-level managers, toacquire change management techniques, (c) key ministry staff, to be trained in specialized topics andbecome trainers to other staff, and (d) middle-level managers/technicians to receive managementdevelopment and technical training. Activities envisaged under the PPF would include carrying out atraining needs assessment within the scope of the project, and providing training to human resourcemanagement staff of ministries to enable them to take full advantage of the HRIS being extended tothem. Given the overall importance of upgrading the quality of human resources for achieving sus-tainability of PSM efforts, the Bank and the IDB would assist the Government to receive substantialbilateral and multilateral grants for staff training and instruction (see section B, and Annex E (1 and2)). The German Foundation for International Development (DSE) has indicated interest already tobroaden training assistance for the Government's public sector modernization program, particularly inthe areas of financial management, public procurement and auditing techniques.


34. The Human Resources Component Coordinator, assisted by long-term international advisers andshort-term local consultants, will provide guidance and will monitor the work of the human resourcemanagement groups in each ministry, and will receive from them feedback on the operational applicationrequirements of each sector. The coordinator will work closely with the Institutional RestructuringComponent Coordinator.

Financial Resource Management

(estimated USS 16.9 million, or 34% of total project costs)

Issues

35. Financial resources management in the public sector comprises four different systems: (a) budget, (b)accounting, (c) treasury, and (d) public debt. These systems are centrally operated but are independent ofeach other. This leads to obstacles in the management of financial resources, which in turn results in adisarray and negative impact on social and economic development strategies and policies.

36. In November 1995, the Government approved a new law (Ley de Administraci6n FinancieraIntegrada, AFI) (see Box VI), establishing the basic norms and procedures for an integrated financial

4 Refers only to training for staff remaining in the public sector. It is proposed to provide additional funds for safeguardsto assure that displaced workers would be able to regain their standards of living, such as training and/or development ofa micro-enterprise credits scheme.

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resources management. Under the principle of centralized regulation and decentralized operation, theGovernment plans to establish accounting standards and procedures, as well as implement one singleintegrated financial system to be used throughout the administration. Financial responsibility andaccountability, including the related data processing functions, will be transferred to the ministries andother decentralized agencies. For this purpose, Financial Administration Units following the newintegrated financial resources management guidelines established by the law, have been created in eachministry/agency.

37. To improve tax administration and strengthen compliance, since 1989 the Government has advancedin the implementation of a tax and customs admninistration reform program (see also Box VII for achievedprogress in tax reform policies), including: (a) enactment of a new law (Ley del Delito Fiscal) prescribingstiffer penalties for tax evasion, including imprisonment; (b) creation of a Large Taxpayers' Unit nowcovering the largest 1,000 taxpayers accounting for over 80% of tax obligations; and (c) increase in theefficiency of collection, administration, and control of taxes through the restructuring of audit units in theinternal revenue service, a new integrated tax reporting system, and a vehicle registration system.

The Governments Reform Program

38. The Ministry of Finance will function as the "lead" institution, regulating and guiding the wholeadministration and consolidating the information flowing from the Financial Administration Units. Theintegrated financial management system will include the following modules:

* Budget. Improve both the preparation of the yearly estimates of Government revenues (by source),and investments and expenditures (by program) and the comparison of actual revenues/expendituresagainst the budget during the year. In addition, physical targets such as number and types of employ-ees per unit (to be compared against the Human Resources Information System, HRIS, database),service delivery indicators (number and type of students in the Education programs, number of pa-tients served by hospitals in the Health sector, etc.) will also be forecasted and controlled;

* Procurement of Goods and Services. To keep track of all Government purchases and relatedstatistical information;

* Human Resources Information System (HRIS). To know the number and type of employees workingin each governmental unit, payroll calculations and associated costs for salaries, benefits, etc. Thecurrent HRIS would be used as the starting point for this module;

* Public Debt. To provide information of Government obligations from both external and internalsources and their due dates, exchange rates and interest fluctuations, etc.;

• Treasury Cashflow. To provide information about the determination of the Government's dailyposition in terms of funds availability, and the allocation of funds to ministries/agencies for the pay-ment of their obligations. This entails receiving data from the banking system, the tax/customs sys-tems, the public debt module, the SECOBYS, etc.;

* Government Accounting. Establish essentially the consolidation of all the Government accountingtransactions; and

* Auditing tools. To facilitate the supervision of the decentralized operation of ministries/agencies.

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Proposed Assistance under the Box VI: The Integrated Financial Management Law The Organic Law ofPSM-TAL Government Financial Management, known by its Spanish acronym as the

SAFI Law, harmonizes public sector financial management within one39. This component has four framework, the integrated financial management system.objectives: (i) establish an Articles I and 2 of the law refer to the object and breadth ofintegrated financial management application of the law: Articles 3 and 4 set for the govermment's responsi-(IFM) system; (ii) strengthen the bility to manage its funds: and Articles 5 and 6 detail monetary andcustom administration; (iii) financial programminng, Article 7 establishes the SAFI system: it alsorelates SAFI to the National System of Audit and ControL SAFI, accordingincrease the effectiveness, to Article 9, will be implemented by the Ministry of Finance and, accordingperformance, and geographical to Article 13, is given the legal responsibility to dictate general policies tocoverage of the tax administra- guide the design, implementation, function, and coordination of SAFI'stion; and (iv) increase the subsystems, including: budgeting, treasury, public credit, and governmentperformance of ex-ante and ex- accounting,

The budgeting subsystem is the responsibility of the budgeting office,post Government spending which is established by Articles 20 through 59 of the SAFI Law. Itcontrol. forecasts internal and external revenues and liabilities, and assigns

resources to finance the operations of all public entities. The Budgeting40. To support the Government's Office is also responsible for maintaining a balanced budget.reform program, the financial The Treasury Office, in charge of the treasury subsystem, is

responsible for the recognition, deposit, distribution, presentation, andrecording of government financial resources- resources that are put at the

component will finance the disposal of public sector entities to pay obligations in the execution of theirfollowing activities outlined budgets. The office, established by Articles 60 through 81, is alsobellow: responsible for the custody and safekeeping of all govermment titles and

documents.4 1. In Financial Administration. The subsystem of public credit (Articles 82 through 97), under the

Office of Public Credit, monitors the public debt, which is primarily accruedWith support from USAID, the through projects to improve El Salvador's economic and social well-being.Government has achieved some The accounting subsystem (Articles 98 through IIl), under theprogress in different subsystems of direction of the Office of Government Accounting, is the integratingfinancial resources management, component providing a unitary, shared, secure, and timely database for thebut an integrated financial transactions and operations of the public sector. This subsystem

consolidates the set of technical standards, procedures, and principles forthe compilation recording, processing, and control of the governments'

to be developed (see Box VI.) financial infornation, for use in the audit and control of financial andThe project will support the budgetary decisions.Government in the design and The Revised Court of Accounts Law The Court of Accounts is nowimplementation of normative independent, and its jurisdiction reaches all public sector entities. However,pfinciples regulating financial the Court of Accounts no longer engages in pre-control: this is now theresponsibility of each implementing agency. Instead, it performs externalresources management in a posterior audits, and is rector of the National System of Control and Audit.comprehensive and transparent The Court of Accounts is charged with the task of preventing financialmanner, and establish and imple- management irregularities and ensuring that government resources are wellment effective and efficient utilized. The Court of Accounts may also apply legal sanctions if itoperative procedures, necessary determines that there has been wrongdoing.

The Court of Accounts has the foregoing authorities-however, its taskis more that that of finding fault and punishing the guilty. The Court of

ces management. This includes Accounts is also a management tool, providing information to govemrnmentfinancing of consultancies, equip- officials so that they may evaluate their own performance. It will not onlyment, and training for all Central evaluate financial accounts, but will also look at operative, administrative,Government ministries. and other results. The new law also allows the Court of Accounts to

contract private firms to perform audits of public entities (R.H. C./Acc.]I/9/96).

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Budget: In 1995 and as a transition year, the Ministry of Finance (Ministerio de Hacienda,MINHAC) has been working with a new budget system called "Budget by Management Areas",which reflects priority areas identified by the present administration (social development, administra-tion management, justice and security, economic development, public debt, general Governmentcommitments, decentralized institutions). The new budget will be fully implemented in 1996.Concerns about the system are that it does not appear to constitute a fundamental budgetary reform:resources are still allocated the traditional way (i.e.originating, in general, from previous budgetallocations and programs), and the budget process does not promote improvements in performance,nor does it create performance incentives.

Although a conceptual design for the integration of sub-systems has been developed, there is still alack of integration of the budget with the accounting and treasury/cash management systems. Finally,although there seems to be delegation of authority in budget preparation to individual ministries, pro-vided they stay within established quarterly ceilings, an alternative control model at the detailed levelhas not been developed. In the absence of clear policy goals and commitments on output, a singledelegation of input controls may have negative fiscal and broader policy consequences. In order toimprove the quality of the budget document and provide elements to meaningfully analyze budgetarydata, the project will assist in: (i) the revision of the tools developed for budgetary preparation,approval, and execution by previous efforts; (ii) improving the techniques for programming budgetaryexecution in coordination with the Treasury area, ensuring operational decentralization without theloss of overall financial control; and (iii) providing tools to do substantive budgetary evaluationsbased on real output data.

* Treasury/Cash Management: Progress has been achieved in this area as well. Treasury currently hasa single account at the Central Reserve Bank (BCR) to better control revenues and expenses at thecentral level. Payment authorization procedures, as well as revenues receipt procedures, have beenstreamlined, thus increasing efficiency and cutting administrative costs. Nevertheless, some areas needto be strengthened and improved. Decentralization of payment and banking systems needs to beintegrated with the reforms of the budgetary and accounting systems to ensure adequate controlmechanisms are in place. Similarly, a link between cash management and debt management should beestablished. Furthermore, there is a need to ensure that idle cash in departmental bank accounts iseffectively eliminated. The project will assist the Government in: (i) the definition of procedures withthe 'Direcci6n de Presupuesto' in budget execution and resource management; (ii) the design andimplementation of the expenditure decentralization process; (iii) the establishment of a unified accountfor expenditures from which agency transfers are managed; and (iv) promote efficient informationexchange with the revenue-generating agencies.

* Debt Management: An effective and efficient computerized and integrated debt management systemshould be developed. This is a prerequisite for efficient debt management. Furthermore, a link withthe IFM database and with financial simulation modules should be established. Likewise, becauseministries (other than MINHAC) account for approximately 20% of public debt, the debt manage-ment system must be able to account for alternative sources of financing. Debt raising should becentralized at MINHAC. The project will support the Government in: (i) the review of the existingdatabase and its development in accordance to IFM requirements; (ii) provide training and technicalassistance to establish guidelines for accessing capital markets and develop skills in debt negotiationand contracting.

17

Accounting System: Although accounting has a Box VII: Progress in Tax Reform: In the periodrelatively modern 'Ley Orgdnica', improvements from 1989-95 te Government introduced major taxreelati bel made in the way information is regis- reform policies. Revisions were made in incomeneed to be made In the way information IS regis- taxes in 1990. Rates were reduced at the same timetered and managed by the system. One of the most that generous exemptions were eliminated. Theimportant methodological issues relates to the exempt minimum of the personal income tax wassequence of financial data production, which in an raised from 12,000 to 18,000 colones, the number ofIFM framework needs to feed off the budgetary brackets was reduced to 7, and the top marginal rateexecution register to automatically produce tradi- was cut down to 50%. The exempt minimum of the

corporate tax remained at 25,000 colones, but thetional accounting (double-entry) reports. Actually, number of brackets was reduced to 3 with rates ofthe accounting system feeds from the accounting 10%, 20%, and 30%. Tax credits were granted forcodes themselves and produce budgetary reports, up to 50% of the cost of investrnent in plant andcausing a break in the information flow. Thus, the equipment, and an estimated withholding tax of 1%project will support the following activities: (i) was introduced on corporate revenues.makject accountingrmethods ollompngactib ithes 1M w El Salvador's most comprehensive tax reformmake accounting methods compatible with IFM went into effect in 1992, including steps to: (a)requirements; and (ii) design MIS outputs that substitute a broad-based and non-distortionary 10%allow meaningful analysis. VAT for the cascading turnover tax; (b) simplify the

income tax and reduce disincentives; and (c) reduce42. Public Procurement: Existing guidelines for public effective protection by reducing import dutyprocurement (Comprasy Contrataciones) are outdated schedules. Income taxation was further simplifiedand need redefinition and further adjustments in order and rationalized: the number of personal income tax

to gradualy aw fr mbrackets was reduced from 7 to 4, and theto gradually allow for more flexibility in public progression of the rates in higher brackets wasprocurement at the sector ministry level. The project limnited by lowering the top marginal rate from 50%will assist the Government in the design and implemen- to 30%, with the proviso that the effective rate nottation of new public procurement guidelines, and exceed 25%. The corporate tax rate schedule wasmonitoring of procurement costs by a informatics also simplified further by replacing the 6 tax

brackets with a flat rate of 25% -- the highestsystem. effective rate of the personal income tax -- and the

initial exemption level was raised to 75,000 colones.43. Customs Administration: Customs administration The tax credit on reinvested profits and certainseems to be the more troublesome area in terms of exemptions from the income and property taxes weregovernmental control, procedures, information systems repealed. The double taxation of dividends wasand human resources. In effect, the administration has eliminated.been unable to deal appropriately with the illeg Further fine-tunings in 1993 led to the repeal of

the coffee export tax and subjected coffee producersintroduction of merchandise Into the country; to adopt to the income tax (a withholding tax of 2%,oeffective control mechanisms; to streamline, modernize subsequently reduced to 1%). The inheritance taxand train its personnel; and to efficiently use regular was also repealed because of its high collection costinformation to control ensure proper compliance with and insignificant yield. The schedule of the tax oncustoms rules and regulations. real property transactions was amended. VAT

sanctions were modified, its exemptions were44. Some examples of customs administration's major tightened, and the base was redefined to include

import duties. This eliminated VAT's implicitproblems are: (i) lack of appropniate coverage of the discrimination against domestic suppliers. Motorcountry' borders, not only in geographical (land and vehicle registration fees were doubled andsea) coverage, but also in terms of procedures; (ii) the exemptions limited. Finally, the net wealth tax,CEPA (Comisi6n Ejecutiva Portuaria Aut6noma) is which despite its base inadequacies yielded 2.5% ofcharacterized by excessive bureaucracy, which adds Central Government revenue and 0.2% of GDP, was

unnecessary amirrepealed in April 1994, In 1995 the VAT wasunnecessary administrative costs to the operation; and increased to 13%/o.(iii) lack of appropriate controls internally, once I

18

merchandise is introduced to the country. The project will support the Government in activities leadingto an institutional strengthening of customs, through (i) revising of normative guidelines, as well as thedesign and adoption of new norms and procedures, and (ii) establishing an informatics system integratedin SAFI.

45. Tax Administration: The Government has been working in this sector for a number of years withUSAID and IDB support. Progress has been made, resulting in an increase of revenue and tax collection.Nevertheless, some areas need improvement or expansion: (i) tax evasion needs to be minimized; (ii)geographical coverage of tax administration needs to be widened; (iii) fiscalization procedures andmethods have to be strengthened through the use of sectoral econometric studies to measure tax evasion,which could then be used as guides for fiscalization programs; and through the development and supportof new techniques and procedures for tax compliance control of informal sector institutions and for thoseperforming activities in the capital markets; and (iv) the tax administration direction (DGII) should betrained and a plan developed to (a) revise its structure and develop a proposal to establish the Orient andOccident Regional Subdivisions; (b) implement the Auditing and Systems Unit and the Programming andTax Evaluation Unit; and (c) develop a proposal to consolidate the organizational structure of the DGII'sManagement Information System Unit.


46. The Financial Resources Component Coordinator, assisted by long-term international advisers andshort-term local consultants, will provide guidance and monitor activities of the financial resourcesmanagement reform groups in each ministry.

Privatization and Private Sector Participation in the Provision of Public Services

(estimated US$12.1 million; 25% of total project costs)

Issues

47. The privatization process, and the introduction of private sector participation (PSP) into theprovision of public sector services in El Salvador began in 1991 as part of the Government's efforts tofree markets and promote private sector growth. The 1992-1994 Plan for Economic Development calledfor a restructuring of the public finances, the reduction in nonproductive public spending and theelimination of the parastatal sector through the sale of state enterprises and through the transfer of certainpublic services to the private sector. Since the announcement of the Plan, the Government achieved anumber of successes in an effort to reduce the parastatal sector. Among these, has been the privatizationof most of the financial sector, inclusive of five commercial banks and four savings and loans agencies. Inaddition, other enterprises have now been privatized such as, the free zone in San Bartolo, the IndustrialFishing Complex, the President Hotel, Cemento Maya, INCAFE and several other enterprises, as well asassets and land.

48. In 1993, the Government engaged consultants to assist in reviewing the status of the reforms and torecommend a strategy and action plan for the reform of the public sector. An important component of

19

this work was the development of a strategy and institutional framework for advancing privatization andPSP of the remaining enterprises, including some in key sectors such as the 'Administraci6n Nacional deTelecomunicaciones' (ANTEL) and the 'Comisi6n Ejecutiva Hidroelkctrica del Rio Lempa' (CEL), thetelecommunication and power monopolies, ANDA, the water authority, and most of the transport sector,including the Acajutla port and national railroad (see Annex G for background information). Since 1991this work was also complemented by efforts to reform the country's obsolete and low-performing publicpension system. Financed by the IDB, USAID, and supported by the Central Bank, a team withrepresentatives from different governmental entities had started with diagnostic work, and outlined firstproposals for a comprehensive modernization of the system.

49. The Government incorporated previous work in its 'Plan de Acci6n de Modernizaci6n del SectorPublico'. The plan seeks, inter alia, renewed momentum in:

* privatization and private sector participation in public service provision by staging a centralized andcoordinated program for divesting most of the remaining enterprises under Government's control; and

* thoroughly reforming the country's pension system


Privatization/Private Sector Participation in Public Service Provision

50. During preparation of the PSM-TAL, the Government has taken first steps towards implementing itsnew privatization strategy that shifts the fundamental purpose of the program from relieving budgetarypressures to privatization as a policy instrument for sustained growth. Priority has therefore been given tokey infrastructure sectors. The program seeks to: (i) promote competitive markets for the provision ofinfrastructure services; (ii) minimize the role of regulatory agencies through legislation to facilitate entryand access to existing networks; and (iii) enhance capital market development and widen ownership bystaging transactions through public offerings. A clear indication of the Government's strong committmenttowards improving overall competion in the economy is its recently launched Competitiveness Enhance-ment Program supported by the Bank (Ln. 3946-ES, FY96). This aims to reduce impediments to privatesector investment, improve competition and enhance the efficiency of the country's productive enter-prises.

51. During 1995, the Government established technical working groups for each sector to direct reformefforts and prepare enterprises for privatization. The Government also took action to establish a moreappropriate regulatory and business environment for private sector investment in key infrastructuresectors. Late in the year, the program accelerated after the appointment of the Comisionado for theModernization of the Public Sector and other Cabinet changes. New legislation is under preparation forthe electricity sector which places greater emphasis on creating a competitive environment, and similarlaws for telecommunications and other infrastructure sectors are also being drafted.

52. Further specific achievements since December 1995 include: (i) empowerment of the ModernizationCommission to lead the privatization effort; (ii) recruitment of regulatory specialists to design the legaland regulatory frameworks for both the electricity and telecommunications sectors; (iii) executiveapproval for restructuring the state-owned electricity entity into four autonomous enterprises; (iv)

20

commencement of the transfer of assets to these enterprises and of the preparatory work for theirprivatization; (v) executive approval of the privatization schedule for the first of the four enterprises to beprivatized and of the appointment of financial advisors; and (vi) executive approval to begin theprivatization of the state telephone company, ANTEL, plus the appointment of financial advisers and thebeginning of preparatory work in the enterprise. Advance funding under a Project Preparation FacilityPPF has been allocated to support the orderly continuation of these early achievements.

Reform of the Pension System

53. Since 1991, a 'Grupo de Reforma' - consisting of ex-MICDES, Central Bank, and Ministry ofFinance staff that ensured continuity - has been working on the reform under guidance of the INPEPpresident in a very focused manner. During the preparation of the PSM-TAL, steady progress was madein the design of the new private social security system, inclusive of the design of the required laws andregulatory changes. The drafts are prepared with the support of Chilean consultants which have alsoassisted the Government and the Grupo de Reforma in the overall design of the reform strategy.

54. The pension reform plan of GOES envisages the transition to a new pension system which is similarto the Chilean pension system. Draft legislation has been prepared for a system with the followingfeatures: The new system will consist of fully funded individual accounts managed by competing privatepension funds. Participation in the new system will be mandatory for all new labor market entrants andoptional for workers who are affiliates of the current institutions, the Instituto Salvadoreno de SeguridadSocial, ISSS (for private sector employees) and the Insitituto Nacional de Pensiones para Empleados delSector Puiblico, INPEP (for public sector employees). In order to rationalize the existing system, it isplanned to increase retirement ages, unify and gradually increase contribution rates, and adjust the benefitformulae. The draft legislation for the pension reform has been presented to the Bank for comments andis currently in the process of revision.

55. Based on these advances, the Government would like continued assistance in both the technicalaspects of privatization, private sector participation in service delivery, and pension reform as well themanagement aspects of the program. The PPF would assist the Government in revising and furtherfinetuning initial proposals, and in implementing first key steps in the areas mentioned.


56. This component seeks to support the Government in privatizing the remaining enterprises andselected public services that are constraining private sector growth and development. The componentwill focus on

* key sectors and public services including telecommunications, power generation and distribution, portactivities, customs administration, and water and sewerage;

* the reform of the pension system, that will provide new options for private sector participation.

Despite the focus on key sectors, assistance will also be included for privatizing the remaining smallerenterprises as well as assets and land in order to reduce substantially Government's holdings of commer-cial activities.

21

57. The component will also build on regulatory work that is being initiated by other Bank and IDBprojects in these key sectors and public services. The Energy Sector Modernization Loan and theCompetitiveness Enhancement Project will provide assistance in establishing regulatory frameworks andregulatory agencies in the telecommunication and energy sectors, while IDB's Multilateral InvestmentFund will provide assistance for similar work in the telecommunications sector as well as additionalresources for the power sector. This component will primarily focus on areas which have not beenadequately covered, such as the water/ sewage, ports, and road maintenace services, but neverthelessneed an adequate framework for regulation in order to promote competition.

Privatization and Private Sector Participation in Public Service Provision

58. This subcomponent will finance technical assistance, consulting and advisory services and equipmentsubdivided in the following categories: (i) strengthening the privatization group for managing andcoordinating the program; (ii) TA and equipment for the establishment of the regulatory agencies for thewater/ sewage and transport sectors; (iii) direct transaction assistance to selected public enterprises inpower and telecommunications as well as technical assistance for increasing public sector participation inports, water/sewage, and road maintenance services; and (iv) other studies for improving private sectorparticipation in service delivery.

• Strengthen the Privatization Group to Coordinate and Manage the Component. While it is the intentof Government to delegate a significant number of tasks to private consultants and advisers for theimplementation of the program, the privatization group within the PCU will still be required to coor-dinate many of the activities crossing various entities of the Government apparatus and oversee thework of consultants and enterprises involves and report on progress. For these functions the privati-zation group is severely understaffed. Accordingly, the component will finance two specialists intransactions and regulatory mechanisms.

* Strengthen Regulatory Environment in the Transport and Water Sectors. This sub-component willcomplete work that has been already started through the assistance of the other sectoral loans of theWorld Bank and the IDB in establishing a pro-private sector regulatory environment and for establish-ing and strengthen regulatory mechanisms and agencies that will be entrusted to oversee activity ineach sector. Specifically focus of this program will be given to establishing the proper regulatoryframework for private participation in the water and sewage sector as well as the transport sector. Inthe context of implementing privatization activities, and based on a study of the exiting legal andinstitutional framework for environmental protection, this subcomponent will, furthermore, financeenvironmental studies identifying potential weaknesses and recommending institutional and legalcorrective measures to ensure environmentally sound privatization policies and actions.

* Direct Transaction Assistance to Selected Enterprises andfor Private Sector Participation in PublicServices. This major subcomponent will finance the services of accountants, lawyers, investmentbankers and other financial advisors, environmental specialists and other technical and managementspecialists for preparing, marketing and selling the enterprises slated for privatization, includingANTEL, CEL distribution and possibly thermal power generation. In addition, the sub-componentwill also finance similar services for preparing and bidding concessions in the water, ports and roadmaintenance sectors. The activities will involve such tasks as due diligence and audits by financialaccountants, preparations of sales or concession memoranda's, investor search and promotion activi-ties, marketing assistance, preparation of legal documents, advisory assistance to the Government in

22

deal structure, staging of transaction, negotiations and closing and post-closing activities. For enter-prises or services that will be contracted out but not necessarily sold to private investors, this sub-component will finance technical specialists for identifying and packaging concessionary contracts andfor drawing up the legal agreements, for soliciting operators and for making awards.

Special Studies to Support Privatization Program. While most of the privatization options andstrategies in each key infrastructure sector will be funded under separate projects, this component willinclude funds for studies and privatization plans for road and highway maintenance and for facilitatingthe issuance of shares of privatized enterprises in the capital markets.

Reform of Pension System

59. In order to ensure successful implementation of the proposed pension reformn, the circumstances ofpension reform in a small country like El Salvador will have to be taken into account, especially since theproposed model has so far only been tested in larger countries. In the design of the new system, particularconsideration must therefore be given to issues such as i) institutional capacity, ii) economies of scale andscope in the provision of member services, iii) the availability of adequate instruments for the investmentof pension funds as well as iv) the risks of concentration and the resulting regulatory and supervisorydifficulties. The institutional capacity of supervising the private pension funds is crucial. To ensure properfunctioning of the new system, extensive training is required for the staff that will regulate and supervisethe new private pension system.

60. In the organization of member services, the options and advantages of unbundling the servicesprovided by the pension fund management companies should be studied in more detail with the objectiveof maximizing competition between fund managers. Further, the legislation for the new scheme shouldallow for pension fund investment abroad as well as for foreign investment in the pension fund manage-ment companies

61. In addition, substantial rationalization and improvement in the efficiency of administration of theexisting institutions is necessary. The contribution records of members switching over to the new systemwill have to be systematized to calculate the transfer certificates in recognition of members' pastcontributions. Further, it will be necessary to modernize the existing system, since it will continue tocollect contributions (supplemented by budgetary transfers) and pay out benefits to members who remainas affiliates.

62. To support the Government's pension reform program, this subcomponent would, more specifically,finance the following activities:* compilation, verification and registration of individual contribution records in INPEP and ISSS;

* design of methodology and operational procedures for calculating and issuing the certificate oftransfer;

* design of an social security identification number integrated into the personal identification system;

• financial assessment of the public pension system with the objective of separating the health andpension programs of ISSS and the pension and loan programs of INPEP;

23

* elaboration and implementation of financial and organizational plan for the public system during thetransitional phase;

* study of the market for private pension fund management companies with respect to the specialconditions of pension reform in a small country;

* study of options for organizing the collection of contributions;

* data processing and office equipment as well as staff training for the agency supervising privatepension fund management companies;

* communication and dissemination of pension reform activities, including study tours for members ofthe Assembly, opinion leaders and managers of the public pension system.


63. The component will be implemented by the privatization group within the PCU. The group will bestaffed by several high caliber professionals in the area of financial transactions, legal, public informationand legislative and regulatory frameworks. The privatization group will direct and supervise work thatwill be carried out by a number of enterprise teams (consisting of sector ministries, enterprises and thestaff of the privatization group) for the privatization of the specific enterprises. In addition, the group willreport to the 'ComiW de Modernizaci6n' and act as its adviser for approving specific strategies andtransactions.

64. In the area of Pension Reform, project assistance would be provided through the 'Grupo deReforma' (see para. 54). Given the scope and importance of the reform, the Government has givenparticular attention to consensus building and participation of key stakeholders, as well as to publicinformation prior to implementation. This component intends to support such efforts strongly duringimplementation and supervision, and provide ample opportunities for exchanging ('best practice')experiences from implementing pension reform in other countries, with focus on similar efforts in CentralAmerica.

Environmental Protection during Privatization

65. In April 1996, a study on the institutional and legal aspects of environmental protection was carriedout. In the absence of clear-cut environmental policies and responsible institutions, the study recom-mended the project to assist the Government in initial key steps towards environmental protection, and,incrementally, contribute to respective environmental policy formulation. Furthermore, the studyrecommended more targeted environmental audits of selected entities, particularly in power generation,water/sewage and ports sectors.

66. The project will ensure that privatizations and private sector participation in service delivery financedunder this component will be carried out in a manner that adequately protects the environment. Whilebroader environmental issues are outside the project's scope, this component will make resourcesavailable in case the Government decides to extend its privatization efforts to environmentally sensitive

24

sectors. In this case, the project provides funds up to US$500,000 to: (i) define the environmentalrequirements and issue guidelines satisfactory to the Bank for each sector concerned (i.e. in powergeneration, water/sewage, ports); (ii) strengthen the capacities of the environmental units within thesesectors until such time that one single entity is established and given the full authority to handle themonitoring enforcement for the entire country; (iii) carry out environmental audits of the enterprisesbeing privatized fully or through concessions as part of their standard work program required to preparethem for bid. The findings of such audits would be summarized and disclosed in the informationprospectus and bidding documents provided to prospective bidders.

Project Coordination

(estimated US$8.6 million, or 18% of total project costs)


67. The PSM-TAL will finance a Project Coordinating Unit (PCU) within the Presidential Commissionfor the Modernization of the Public Sector (CPMSP) that is responsible for coordinating the project andproviding support and orientation to all entities involved in the reform. The project will also support thecarrying out of Government activities associated with the incremental operating costs of the PSM-TAL.The PCU was set up in 1995 during project preparation. It is headed by a National Director -'Comisionado Presidencial para la Modernizacion del Sector Pziblico' - and is staffed with a TechnicalCoordinator and six Component/Sub-Component Coordinators in charge of the different areas coveredunder the project. Moreover, the PSM-TAL will support the existing project administrative unit,established in 1991 under the Bank's ongoing Social Sector Rehabilitation Project (Ln. 3348-ES), incarrying out the procurement of goods and services under the project. This unit will report to the PCUfor the purposes of the PSM-TAL. The PCU will have a budget to finance long- and short-termconsultant services, training and office technology equipment (see Figure 1: Organization Chart).

68. To facilitate overall project coordination and implementation, special emphasis would be given tostarting with effective public relations policies and launching public information campaigns on PSM. ThePPF is providing initial financing for the PCU, as well as for selected modernization efforts and thelaunching of the PR campaign. Before effectiveness of the PSM-TAL, IDB would provide amplecofinancing for this unit under specific TA under its loan.

69. The project will also assist the Government to coordinate effectively different sources of fundsprovided by the donor community to carry out PSM efforts in different areas5 . Joint seminars andworkshops would ensure exchange of information and complementarity between different projectapproaches, and contribute to better synergy of project objectives. Coordination with the Bank's ongoingmodernization efforts in sector ministries (in health, education and agriculture) and with the Competitive-

5 While one specific area of PSM - decentralization of state institutions - is outside the scope of this project, a localcoordinator for decentralization (within the PCU) will be financed under the IDB loan to contribute to coherent policymaking in this area. Such arrangement would help ensure effective communication between PSM activities at centralgovernment level and efforts towards modernization in municipalities (cf. example in Box IV). Decentralization andmunicipal development policies are currently being assisted by GTZ.

25

ness Enhancement Loan would be given particular importance. The same holds for IDB assistanceprojects in related areas.

Project Costs and Financing

70. Total base cost of the project is estimated at US$49.2 million equivalent. Overall project costs(including contingencies and IDB's inspection and supervision fees) is estimated at US$51.5 million (seeBox VIII). The IBRD loan will finance US$24.0 million, and the IDB will finance US$19.7 million. Ofthe IDB portion, US$15.9 million will be used to finance the Financial Resource Management Compo-nent and US$3.8 million will finance professional staff of the PCU. The Government contribution will beUS$7.8 million equivalent, primarily to finance counterpart staff, training support costs, office space,supplies, secretarial services, and vehicle operation. A PPF (P279-ES) advance of US$1.9 million will berefinanced under the loan. Retroactive financing will be allowed for expenditures not exceeding US$2.4million (10% of the loan amount) after 1 September, 1996. Given the country's focus in internationalfinancial transactions, and its positive experiences with floating interest rates for its international loans,the Government has chosen a LIBOR-based US dollar single currency loan (SCL). The IDB intends, at alater stage, to provide an additional quick-disbursing loan (estimated at US$50 million) to assist theGovernment's overall public sector modernization program.

Box VIII: Public Sector Modernization TAL - Overall Cost Estimates (USS'000)

Areas / Components IBRD IDB GOES TIMI of which % of BasePSM-TAL PSM-TAL TC PPF Costs

A. Institutional Restr.d Debureaucratization 4,289 - - 1,054 -543 255 10.9%

Institutional Restructuring 3,435 1,032 -- 467 9.1%Debureaucratization 854 22 876. 1.8%

B. Human and Financial Res. Management/ 6,182 14,342 - 2,650 ?15 828 47.1%Tax and Customs Administration

Human Resource Management 5,749 515 6,264 395 12.7%Financial Res. M. /Tax and CustomsAdm. 433 14,342 2,135 16.91.1. 433 34.4%

C. Privatization PSP 10,170 1,900 12,07 460 24.5%

D. Project Coordinatlon 2,658 - 3,774 2,150 -- - 300 17.5%

Subtotal (Base Costs) 23,299 14,342 3,774 7,754 - 100.0"/

Contingenaes 701 1,434 59 - .1 57IDB Loan Inspection & Supervision Fee 159 1S9

Totl Xroec Cas-t - - 24,00 15,3 3*174 - 7813 - 1,Z 1 tO0

Figure 1: Project Organization Chart

Presidental Commission for Public Sector ModernizabonMin. Fin. Presid. Commissioner I Min. Econ.

Presidential Commissioner Advisers(National Project Director) * Legal

* Economic

Political Coordination Political CoordinationOf PSM Of PSM

| ~oo~General CoordinatorI (PC U) P

IProject Administrtio | Communication/ PRLegal Advisor

* nformaticsProcurement Accountng/ Financ t')

| Fiencil Roe. || Human || Social Security |I| littional Prmv arion Debureaucratization Decentraizatbonmanagement || Reore : :::EE: Ieom Rstuung :: ]P$P:N |

Technircal Coordination \ \ \ / / TrTchnicral Coordinationof PSM \ \ \ / / of PSM

Selected Ministriesand Public Institutons

Reform Goups Institutional RestructuringFinancial Resource ManagementHuman Resource ManagementDebureaucratzabonPrivatization and PSPPensions

Implementation of Decentralizabon Implementation ofPSM PSM

27

SECTION B: PROJECT ADMINISTRATION AND IMPLEMENTATION

Organization and Implementation

71. The Borrower will be the Republic of El Salvador. Overall project coordination of the PSM-TAL isthe responsibility of the Presidential Commission for the Modernization of the Public Sector (CPMSP).The CPMSP is composed of a minister-ranked President-appointed Presidential Commissioner for theModernization of the Public Sector (the Commissioner) who is the CPMSP coordinator and head of thePSMP, and the Ministers of Finance and Economy.6

72. Success of the project will depend crucially on sustained political backing at the highest level and onappropriate organizational mechanisms within government. The political direction of the reform isprovided by the Commissioner who is, for the purpose of the PSM-TAL, the National Director of theProject. Political coordination of reform efforts is achieved through interministerial coordination via theCPMSP. Privatization efforts are accompanied and monitored by a politically independent, highlyrespected and experienced 'Comisi6n de Notables." The Comisi6n de Notables, which is made up ofwell-respected citizens from different sectors of society, oversees the privatization processes to ensurethat they are carried out in a transparent manner within the law.

73. The technical direction of the PSMP is carried out by the Commissioner with the support of atechnical coordinating unit. This unit is the Project Coordinating Unit (PCU) for the purpose of the PSM-TAL. The PCU provides technical leadership and is responsible for project execution in the respectiveareas. The PCU has been building a track record by successfully managing activities under the PPF andthe TAL (Ln. 3648-ES). It depends directly from the National Director of the Project and is supported bya Project Coordinator, seven component coordinators, and staff in charge of procurement and account-ing/financial administration. The component coordinators and the administrative staff report to theProject Coordinator.

74. Beneficiary entities are responsible for project implementation, while the PCU maintains the technicaland administrative coordination functions for all components. In the case of the Human and FinancialResource Management Components, the Ministry of Finance as the normative entity in charge forimplementing the macro-systems of human and financial management, will ensure that activities areexecuted in accordance with the overall plan agreed with the PCU.

75. Each of the main beneficiary ministries and decentralized institutions have either set up or are settingup reform groups responsible for promoting, planning, coordinating and monitoring their agency's effortsin institutional restructuring and human resource and financial management. Each reform group is headedby a coordinator appointed by the minister or head of institution involved. The agency coordinatorsmaintain permanent communication with the component coordinators of the PCU, and report to theNational Director. To facilitate overall project coordination and implementation, special emphasis would

6 As part of the Government's institutional restructuring, the ex Ministry of Coordination (MICDES) that had previouslycoordinated PSM efforts was dissolved on December 31, 1995. Now, PSM efforts are being fully coordinated by theCOM.

28

be given to starting with effective public relations policies and launching public information campaigns onPSM.

76. In order to ensure coordination with the Reform Groups within individual sector ministries specialworking groups would be established. They would be related to specific PSM issues, and being guidedand supervised by the PCU.

77. The project has been designed flexibly in order to respond to changing needs during implementationand potential outcomes resulting out of the participatory approach of the project. Due to the nature of apublic sector modernization project, initial and ongoing participation of the major stakeholders within theproject design and its main activities was encouraged and will be ensured during project implementationthrough special built-in participatory-mechanisms such as consultation, reform groups, workshops, andjoint committees. Further, targeted service delivery surveys would allow for selective participation ofuser groups and citizens in PSM efforts and accompany implementation. Such surveys would also sustaineffective monitoring. Some of these activities will be financed under the PPF. Additional periodic reviewswould be carried out (initially on a quarterly basis) and disbursements would be synchronized withprogress achieved.

Training Plan

78. Given current levels of qualifications of public servants, the introduction of new management tools aswell as new human resources and information-systems through PSM will require major training efforts.The project would provide training according to groups of staff and education levels. As a condition forBoard presentation, the Government proposed a training needs assessment that will serve as a basis for adetailed plan of training activities under the project. This would allow for assessing the overall fundsneeded, and to seek bilateral and multilateral donor contributions to assist the Government's efforts. Apreliminary training estimate and a diagnosis of training needs in its original Spanish version appears inAnnex E (I and 2).

79. Given the overall importance of upgrading the quality of human resources for achieving sustainabilityof PSM, the Bank and the IDB would assist the Government to receive substantial multilateral andbilateral grants for staff training and instruction.

Procurement

80. Procurement will consist primarily of consultants' services for training, including transportation andper diem, technical assistance, and studies. It would also include computing and communicationsequipment and software, five vehicles, and some office refurbishing and furniture.

81. All project components to be financed under the proposed Loan would be procured in accordancewith the Bank's Guidelines for Procurement of January 1995. Procurement would be conducted byadministrative staff of the PCU. This staff has acquired substantial experience in handling national andinternational public procedures during the implementation of the Social Sector Rehabilitation Project (Ln.3348-ES) and the TAL (Ln. 3648-ES). In addition, specific technical assistance would be provided under

29

the project to strengthen the PCU to provide additional training to enable staff to handle a substantialnumber of consultants' contracts that would be required in the project. Detailed procurement anddisbursement procedures to manage procurement and ensure acceptable procedures would be included ina comprehensive Project Implementation Plan (PIP) that will be used by all relevant project executingentities. The Government has selected a consulting firm satisfactory to the Bank that will, inter alia, helpprepare the PIP. During negotiations, agreements were reached with the Government on a first draft ofthe PIP. The PIP will define (i) for each component: objectives, key project activities, outputs, institu-tional arrangements, performance indicators and timing targets (Annex A of Technical Annex); (ii) foreach component: work program, budget, and procurement plans for the first year of implementation; (iii)responsibilities of the Government's agencies associated with project implementation; (iv) monitoring andevaluation indicators and targets; and (v) an informatics strategy for information and communicationsystems to be applied by the agencies involved in the project. Completition, and adoption by presidentialresolution (acuerdo ejecutivo), of the Project Implementation Plan was agreed to be a condition for loaneffectiveness.

82. Procurement arrangements under the project are summarized in Annex C. Although not foreseen,contracts for goods valued at US$250,000 equivalent or more, would be procured through ICBprocedures in accordance with Bank guidelines. Contracts for systems development, computingequipment and software for the Human Resource Information System (HRIS), valued at US$100,000equivalent or more per contract, would be procured through ICB two-stage procedures acceptable to theBank. Contracts for other goods valued at US$100,000 or more but less than US$250,000 equivalent percontract, would be purchased through LIB, among suppliers with maintenance and service facilities in ElSalvador, up to an aggregate of US$1.5 million equivalent. For ICB and LIB procedures, the PCU woulduse the standard bidding documents (SBDs) issued by the Bank, with such modifications as agreed by theBank to be necessary for the purpose of the project. For negotiations, the PCU submitted satisfactorydrafts of the SBDs and agreed to put them into effect by loan effectiveness. Contracts for goods valued atless than US$100,000 but more than or equal to US$50,000 will be procured through internationalshopping, up to an aggregate amount of US$400,000. When estimated to cost less than US$50,000 perpackage, goods would be procured under national shopping procedures, up to an aggregate amount ofUS$300,000. Both international and national shopping will require quotations from at least three eligiblesuppliers.

83. Individual consultants and consultant firms for training, including transportation and per diems,technical assistance, including auditing services, and studies, would be contracted following the Bank'sGuidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as ExecutingAgency (August 1981). For complex consulting assignments, Bank-issued standard forms of contractwould be used. For other assignments, standard forms of contract, issued by the Borrower and acceptableto the Bank will be employed. Standard letter of invitation (LOI) agreed with Bank would be usedwhenever appropriate.

84. During appraisal, technical assistance required to support the components and the PCU werereviewed and agreed with the CPMSP. During negotiations, the Government presented evidence ofprocurement plans for the first year of activities. Finetuning and further programming will be done withinthe PIP.

30

85. Prior Review by the Bank. Prior review by the Bank would be required for procurement proce-dures and documentation for all tender packages and contracts for ICB and LIB, regardless of its value.It is expected that these procurement arrangements would result in about 85 percent of Bank-financedcontracts by value. All terms of reference for training, technical assistance and studies, all contractingdocuments, including short lists, of technical assistance and studies of critical nature, and single sourcecontracting would be subject to prior review. Documentation for contracts with consultant firms, valuedabove US$100,000 and for individual consultants, valued above US$50,000, would also be subject toprior review. The thresholds for prior review are justified, based on a careful review of estimated costsand nature of consultants services which would be required under the project. All other documentationwould be subject to ex-post review during auditing and by Bank supervision missions on a random basis.

86. No recent Country Procurement Assessment on El Salvador is available. However, El Salvador'sprocurement regulations clearly authorize, as a special provision, application of procurement proceduresof international financial institutions in the procurement of goods and services, where financing of suchprocurement comes from an international financial institution.

Disbursements and Financing

87. The proposed loan would be disbursed over a four-year period, with a completion date of February28, 2001. The project closing date will be August 31, 2001. Disbursements would be made on the basisof Statements of Expenditures (SOEs) for contracts valued below US$100,000 for goods, belowUS$50,000 for individual consultants, and below US$100,000 for consultant firms. For every contractequal to or above these amounts, disbursements would be fully documented. For disbursements madethrough SOEs, detailed documentation providing evidence of expenditures would be retained by thePCU, and made available for the required audit and also for supervision by IBRD. A special account inU.S. Dollars with an authorized allocation of US$2.1 million would be established in the Central ReserveBank of El Salvador to facilitate Government's execution of the project. The first advance to the specialaccount, however, will be limited to US$0.7 million to avoid overfunding or having an inactive accountduring the first few months of the project. The special account would be replenished on a monthly basis.

Accounts and Audits

88. The project administration unit will maintain records and accounts of all transactions related to thePSM-TAL. The PCU would hire independent auditing services satisfactory to IBRD to prepare annualaudits at the end of each government fiscal year. The audit reports would include separate opinions on theuse of SOEs and the special account. The PCU would submit the audit reports to IBRD within sixmonths of the close of each fiscal year.

El Salvador: Public Sector Modernization Technical Assistance LoanKey Project Activities and Performance Indicators

Objectives Inputs Activitics/Processcs Outputs/Impact Institutional | Indicators (*) TimingI I I I Arrangements

A. INSTITUTIONAL RESTRUCTURING AND DEBUREAUCRATIZATION (estimated US$5.3million)A. 1. Institutional Restructuring (estimated US4.5 million)Eliminate functional * Consultant * Mapping of the public sector anid Output Institutional restnmcturing A Agreedfuture macroinstlutional Jan 96-Dec. 99inconsistencies and overlaps services for review of alternatives for the new * Proposals developed for the agrcements between heads structure of the public sector byin public sector institutions institutional macroinstitutional structire of the new macroinstitutional of ministries/decentralized the CPM.SPand improve the levels of restructuring public sector. structure of the public sector institutions and the * 3 senminars held with minister staff.efficiency of public sector proposals of * Detection of functions that are ior the restructuring of the Comisi6n Presidencial para * 8 institutional restrulcturinginstitutions. selected entities, obsolete and should be eliminated, institutions(s). la Modemizaci6n del Sector programs completed

and for are duplicated and should be * Institutional restructuring Pfiblico (CPMSP) in the e 12 programns eliminated.implementation merged, are weak or non-existent programs completed. case ofreformns within * 4 institutions transferred to theof institutional and should be strengthencd or * Restructured public enitities. institutions. CPMSP in the pnvate sector.restruuring created, are currently under the case of merging or p 9 rnstitutions relocrtedprogrars. responsibility of a ministry btit extemalization of

should be transferred to the private institutions.sedor or other agents and could bedecentralized to regional or Impact Ministries and decentrali7edmunicipal levels. Increased erniciency in provision institutions to be determined

* Evaluation of the services that the of public services. by CPMSP.institution(s) provide to the publicor to other public sector enitities,and their means of delivery. andproposals for adequate staffinglevels and profiles, new processesneeded for service delivery, and anestimated new budget for theinstitution(s).

* Assistance to entities forimplementation of theirinstitutional restructuringprograms.

* Development of adequate incentivepackage for staffthat will bedisplaced by institutionalrestructuring.

()Key indicators are shown in italics. Annex A (Page I of II)


O)bjectives Inputs Activities/Processcs Outputs/mpact Institutional Indicators (*) Tiniing

_, I I I Arrangements

Improve legal framework ] * Consultancies * Review of main legal instriments Output Ministries and decentralized * New, legal instruments developed. Jun 96 - Dec 99

for the public sector. for updating related to the institution(s) and * legal framnework institutions to be detemined or evisting ones updated. in all

existing legal detection of omissions developed (excludes by CPMSP. restructured entities.

instruments, contradictions or obsoleteness of development of civil serviceand for the legal framework in relation to law and regulations covereddeveloping the new mission ofthe institution(s) under the Hluman Resouircenew ones. undergoing institutional Management component).

restructuring.TA to develop legal framework Impactconsistent with reform. * Public institutions with

clear and updated legalframework enabling them tocarry out utictions withtransparency andaccountability.

Strengthen information * Information * Provision of infomiation Output Ministries and deceintralized * 70% of saff in restructured entities Jun 96 - Dec 99

technology skills oftministry technology technology equipment to selected * Information teclmology institutions to be detemnined are routinely using analylical tools

staff (i.e., comiiputer entities undergoing institutionial equipmeint in place in by CPMSP. and methods developed under the

hardware and restructuring. selected institutions, with project

software, fax * Training in use of technology to staff trained to operate and * 70% of staffed trained in oniEce

machines manage/implement maintain technology. technology.

photocopy programs/tasks.machines) and Impacttraining. * Selected institutions able to

process in timely mannerpriority programns.

A. 2. Debureaucratization (estimated US$0.9 million)Simplify and redesign * Consultant * Appoint coordinator, prepare TORs * Completion of effective, well- Debureaucratizaiion Unit in * 3 to 4 projects lauinched and Jan 96 - Dec 96

bureaucratic processes to services, and recruit consultants. publicized PCU, "Comision El yielding imnprovements in 1996.

increase efficiency and computer * Review and analyze existing studies debureaucratization projects Salvador Eticiente". * 12 to l6 additional projects Jan 97 - Dec

responsiveness in service equipment and and survey data to identify and such as the effort begun in launched andyielding 2000

delivery, training for prioritize sub-projects for year I February 1996 to simplify the improvements.

process and years 2-5. birth registration process. * Number of press conferences & Jan 97 - Dec

Achieve visible redesign, * Form high-level steering group, led * "Grupos de reforma" trained Debureaucratization Unit. other media events held each year. 2000 (annual)

improvements in selected service by the Comisionado and made up of in Debureaucratization * Number of references made each Jan 96 - Dec

service areas in first year to delivery & five private and public sector method.s. month to debureaucratization 2000 (monthly)

help establish credibility of customer representatives, to approve work * Additional administrative CGrupos de reforma and projects in written and broadcast

modernization program. satisfaction. program and communication streamlining projects Debureaucratization Unit. media.

Workshop to strategy for Camara de Coniercio's launched by "grupos de * Award ceremonies held to Jan 96 - Dec

share "El Salvador Eficiente" initiative, reforma" and other inspired recognize achievements of civil 2000 (annual)

intemational and to ensure CC's work public servants without servants that have led or contributed

experience complements that of UTC's prompting (but with technical to succcssful debureaucratization

(*)Key indicators are shown in italics. Alnnex A (Page 2 of H1)


Objectives Inputs Activities/Processes Outputs/Impact Institutional Indicators (*) TimingI I ~~~~~~~~~~~~~I I I Arrangements lll

from similar Debureaucratization unit support if requested) from projects.debureaucratiz * Carry out service delivery customer component coordinator's * Significant increase in % of By Feb 96ation projects. satisfaction surveys, as well as office. Salvadorans that associate (thereafter

focus group interviews. * Service delivery baseline and Debureaucratization Unit. modernization of the state with measured* Work closely with "grupos de progress indicators effort to simplify procedures, annually or

reforma" and front-line workers to established in selected high- reduce paperwork and provide biannually)map and redesign bureaucratic priority service areas. more user-friendly service [to beprocesses, test and replicate new measured through newspaper polls,approaches, and train civil servants random opinion sampling, focusin application of new processes. group interviewsl (30/70-70/301.

* Disseminate results to opinion * 3 or more 'grupos de reforma"leaders and service users, have initiated their own projects.

l Surveys of efficiency and usersatisfaction levels carried outperiodically in 3-5 high-priorityservice areas, with results madeavailable to users.

Impact * Significant increase in % of adult Feb 98 - Dec* More efficient, ctistomer- citizens and firm leaders of all sizes 2000

oriented service delivery. that view civil servants as more Feb 98 - Dec* A corps of civil servants that efficient and responsive to thei 2000

seeks continuous process needs.improvements. * Selected partnerships with private

and not-for-profit sectors to identifyand continuously improve services.I

B. HUMAN AND FINANCIAL RESOURCES MANAGEMENT (Estimated US$23.2 million)B. 1. Hluman Resource Mana emnt (HRM) (Estimatcd at US$6.3 million)Strengthen central * Consultant * Support implementation of l)ecree * IIRIS is used by all ministries M.inistrv of Finance (lIRNt * Number of ministries (11 in 1996. 1996-97govenmment's capacity to services. 471 to nin their payrolls, prepare Coordin.Mor and Central 13 iii 1997 ajid numsbef uf (monthly)implement and monitor civil computer * Install basic 1HRIS modules staffing budgets, and record HRIS Office). decentralized institutions (16 inservice pay and enrploi nent equipnment and (personnellposts. payroll, and movements of persornel. 1996; 28 in 1997) with HRISpolicies by completing the softw are, arid budget) in all remaiiing ministries * [IRIS data on posts, pay, and Ministry of linance (IIRNI completely installed andinstallation of the I iRIS training and decentralized institutions occujpants of posts is no more Coordinator and Central Junctioning.which integrates essential receiving govemment transfers for than one month old in all HRIS Office).data on personnel, posts and salaries niinistries. * Number of ministries (6 in 1996. 1996-98oigani7ational stiuctures * Integrate 11RIS with SAI1. * Institltional HIRISes NMinistrv of Finance (liRM 10 in 1997, x in 199S) and (monthly)vwith the paT701l in all pernanently and continuously Coordiiator. SAFI nuimber of decentralizedministries and selected liniked to Ministry of Finance's Coordinator, arid Central institutions (12 in 1996. 21 in

decentralhzed institutions central HRIS and to SAFI. IIRIS Office). 1997: x in 1998) producing

payrolls with HRIS.

(*)Key indicators are shown in italics. Annex A (Pagc3of 11)


Objcctivcs Inputs Activities/Processes Outputs/Impact InstituLional Indicators (*) Timing

Strengthen legal and institutional * Central HRIS Office Ministry of Finance and * Number of ministries (3 in 1996; 1996-98mechanisms (including buidgetary incorporated into new central HRM Coordinator. 13 in 1997) and number of (annual)sanctions) that compel ministries to personnel management unit decentralized institutions (2 inmaintain, regularly update, and which has legal authority to 1996; 7 in 1997) preparingtraisfer essential data on personnel, force compliance of ministries personnel budgets with HRIS.pay, posts, and organiizational and decentralized institutionsstnmctures to thc Ccitital IIRIS with central government's dataOltrice. requirements.

Proide up-1o-date * Facilitate regular transfcer (at least * Central BHRIS Office monitors Ministry of Finance (IIRM * Out of total number of approved 9/96-2000inforomation nceded to monthly) of required data to movements of personnel (entry, Coordinator, Central HRIS posts (ley dc salario and (quarterly)

dci elo, arid St[IPpo1t T-itiCAl NMinistry of Finance's Central IIRIS exit, transfers, rehiring of Of fice, and Budget contratados) in central govemmenthiunian rerouirce niet Office. retrenchees, etc. ) and togcther Directorate). ministries, % of posts for whichSitchiteilli indliding * 1 stattlisit computerized conitrols on with Budget Directorate takes Central SIRH Office has data (i)cl,isrtficAt1n and esaluationi rchiring of beneficiaries of Decree necessary actions to enforce no older than 60 days and (ii) noof posts. recnitlnment. 471 anid those affected by future infoirnation requirements. older than 30 days, on pay,

htienies of ccr, ice, institutional rcstructuring exercises. * With inputs from Central geographic and administrativeprontivin. staffappcaisal, * Train technicians in operation and IIRIS office, and in location, function, unique i.d.arnd training maintenance of HRIS collaboration with Budget Ministry of Finance (HIRM number of occupant if not vacant,

* Train huimsan resource and finanicial Directorate, new central Coordinator and Central full name, date of entry intoanalysts/managers in use of IIRIS personnel management unit IIRIS Office). service, and date of birth.as management tool (e.g., oversees implementation of * Mid-year and annual reports 1997-2000preparation of staff budgets, job government-wide pay and summarizing facts and figures onevaluation and reclassification, employment policy. civil service employment and paytraiitig planis, etc..). * Central IIRIS Office prepares produced by Central IIRIS Office

* D)evelop and implement additional annual report containing basic for Minister of Finance.IIRIS moduiles including (a) data on pay and employment in Ministry of Finance (I IR1 * Number of technicians trained in 1996-1998adisititistration & evaluation of the civil service for Minister of Coordinator and Central operation and maintenance of (annual)posts, (b) trainitig, (c) career Finance to approve and make HRIS Office). HRIS, and number of ministriesmanagement, and (d) staff available to Legislative and number oadecentralizedappraisal. Assembly, the press, and institutions with enough

taxpayers who request it. odequately trained technicians toa Central IHRIS 0111ice provides Miir fFnne( M ensure su.stainability. 1996-1998

data support for developmeint Ministry of Finance (ItRM * Number ofhuman resource andof govenmuent-wide Coordinator and Central finance specialists/managers (annual)classification and pay norms, HRIS Office). trained to oversee payroll runs,carcai development and prepare staff budgets, and usetrainitig, and staff appraisal HRIS as a management tool, andsystems. number of ministries and number

oadecentralized institutions withsufficiently trained personnel toensure sustainability. 1996-2000

* Savings from elimination of (annual)payrolls irregularities andretirement of staff exceedingmandatory retirement age. 1996-2000

(')Key irdicators are shown in italics. Annex A (Page 4 of I )


Objectives Inputs Activities/Processes Outputs/lmpact Institutional Indicalors (*) TimingI I | l | Arrangements l l nl

* Turnover rates for technical andprofessional staff in Central HRISOfrice & in mninistries' personnelunits. 1996-2000

* Degree of coordination betweenCentral HRIS Office and BudgetDirectorate. 1996-2000

* Central HRIS Office's legalauthority and budgetary provision.

lmpact* Pay and employment * Opinion surveys of public service

policymaking (based on solid users and taxpayers on efFiciencyiniformation) that contribtites to and effectiveness of governmentthe efficiency and effectiveness institutions.of government operations. * Correspondence between budgeted

* Stronger control over wage and actual wagesexpenditures and better balance * Incidence of payroll irregularities.between outlays on wages and Personal emoluments as % ofoutlays on O&M that civil current expenditures.

servanits need to be productive * Wage bill as % of GDP.on the job.

Lstablish new legal * Consuilting * Review, discussion, and revision of * Passage by legislative High -level ministerial * Technical agreement on draft law May 96framework for the efficient services and proposed law led by interministerial Assembly of Civil Service Law commission composed of by representatives of Presidency,and flexible management of training. commission with technical support (to be followed by representatives from Justice, Labor, and Financehuman resources in the fronm the UTC and coordinator of development of enabling Presidency and ministers of ministries.central government the human resource nmanagement regulations and technical Justice, Labor, and Finance, * Political agreement on draft law by May 96

component instruments -- see outputs with technical support from Presidency, and nministers of* Prior review of draft law by World undcr other HRM subsystems). UTC and HRM component Justice, Labor, and Finance.

Bank legal counsel and staff to coordinator in Ministry of * Political agreement on draft law by May 96ensure that it would not prevent Finanice. Council of Ministers.effective implementation of other * Presentation and approval of new May 96 - DecII RFM subcomponents. law in Legislative Assembly. 96

* Presentation of agreed draft tomembers of the Council ofMinisters.

* Final revision of draft law. linpa * Increased civil service productivity* Orientation/training sessions for * Efficient, flexible management [tbdl

members of Ministry of Finance's of human resources in central [ Central government's capacity to"grupo de reforma " government. recruit and retain personnel in

* Presentation of draft law to essential skill areas; and to adaptLegislative Assembly. skill mix to changing role and

* Intervention of "grupo de reforma" functions of state Itbdl.members in Assembly committeediscussions to provide technical andlegal "defense" of law's provisions. .

(')Key indicators are shown in italics. Annex A (Page 5 of I11)


Objectives Inputs Activities/Processes Outputs/Impact Inslitutional Indicators (*) Timing lI I I I | Arrangements

Develop capacity of central * Consulting * Prepare terms of reference, recruit, * Establishment of central Ministry of Finance. * New "Reglamento Interno del Dec 96unit to design. supporl, and services and and select consultants/advisors. management unit with de jure Organo Ejecutivo " specifyingoversee implementation of training. * Assign at least two permanent staff to and de facto authority to location andfunctions of centralhuman resource unit during year 1. oversee implementation of management unit.management policies and * Prepare and put into effect legal personnel management * At least 2 permnanent staff recruitednorms in central government instruments including changes in norms. for new central unit in year one. Dec 96ministries. "Reglamento Interno del Organo * Four-year staffing and budgct Central management unit * Progress against central

Ejecutivo" to establish functions of plan for central management initially in Minisry of management unit 'sfour.year Jan 97 - Jan 2000unit and its location within new unit. Finance [final location to be sraffing plan. (annually)organizational structure of central * Central management unit established at outset of e Personnel managers in allgovernment. with sufficiently trained staff proJectl- ministries trained in essential Jan 97 - Jan 2000

* Design of unit's organizational and adequate resources to human resource management (annually)structure including profiles of carry out normative and Ministry of Finance. huans reasourc rainaeestaessential posts. monitoring functions. tasra (at unit 40 2000

* Develop mediumn-term budget and *Ministerial personnel units Central managemnent unit year 2000).staffing plan. with sufficiently trained staff initially in Ministry of * Progress of ministries against Jan 98 - Jan 2000

* Recruit qualified staff gradually to and resources to carry out Inance stafing plans. (annually)fill posts in accordance with priorities essential HRM tasks. s Nomns and guidelines issued by Jan 97 - Jan 2000of other HRM sub-components. central management unit, and

* Train central management unit staff. degree of compliance with thehm by* Develop model structure, resource ministries.

framework, and post descriptions for * Gradual increase in status of Jan 98 - Jan 2000personnel management units in personnel management function Itoministries, in close consultation with be measured informally ingovemment-wide "HRM grupo de interviews).reforma" made up of representativesfirom central government ministries'management teams.

* Oversee gradual recruitment of I-pact .Skill profile of civil service.qualified staff to fill personnelImat*Slprfe cvlsrtemanaieme pstsain minisies. * Implementation of human * Turnover rates in key skill areas.management posts in ministries. resource policies that attract * Client satisfaction with servicem Train personnel managers in and retain personnel in delivery.ministries. essential skill areas at an * Service delivery cost, quality, and

affordable cost. coverage of demand in selected* Gradual improvement in fit areas.

between functions ofgovernment and level of skillsrequired to carry them out.

* Higher productivity in thedelivery of services.

(')Key indicators are shown in italics. Annex A (Page 6 Of 1l)


Objectives Inputs ActiviliesfProcesses Outputs/mpact | Institutional Indicators (*) Timing lObjIctives Inputs Activities/Processes O pIaArrangements |_l_l

Streamline, rationalize and * Consulting * Prepare terms of reference, recruit * Unified classification system Ministry of Finance (HRM * Convergence/divergence of new Jan 98 - Jan 2000unify pay and grading of services, and select consultants. with limited number ofpay unit). pay and grading norms to/from bestcivil servants in central training, * Collect infonmation on and analyze bands (10-15) for central practice in industrialized countries.government ministries. computer the large number of existing pay and goverrment posts. * At least 4 professionals in central Jan 98 - Jan 2000

equipment grading systems operating in public * Personnel managers in every Ministry of Finance (HRM management unit and 40 in line (annually)and soflware. sector, as well as private sector ministry and in central unit). ministries trained in application of

comparators. management unit trained in new pay and grading system; andI In consultation with "IIRM grupo de applying new classification number of ministries withreforma" prepare norms for unified system. sufficiently trained staff to evaluatepay and grading system, and present * Operational manuals. Ministry of Finance (HRM jobs and reclassify them.implementation options with * Posts evaluated and unit). * Number of ministries (all by' year Jan 98 - Jan 2000corresponding costs to Minister of reclassified in all ministries line ministries with 2000) that have reclassified posts. (annually)Finance. implementing restructuring technical support and * Number of ministries (all by year Jan 98 - Jan 2000

* Minister of Finance obtains Council plans. oversight from Ministry of 2000) submitting salary (annually)of Ministers approval for pay and * Ministries present plans for Finance (HRM unit). restructuring proposals that meetgrading model, to be implemented salary rationalization line ministries.gradiially in ministries that have * Ministry o z Finance and line Minister of Finance with centrally-determined norms.presented satisfactory institutional ministries negotiate schedules support from Budgetrestruuring plans. of implementing salary Directorate and HRM unit.

* train personnel managers in central rationalization.management unit and ministries inapplication of new pay and gradingnotms.

Impact * Creater decompression of salary* Competitive civil service pay structure (from x:y to 14:1).

structure capable of * Gap (in percent) between salaries ofattracting, retaining and managementtprofessionaV technicalmotivating skilled personnel personnel in civil service and

Devclop and oversee Consulting . Rcview andmotvatin skilledtmersonndls private sector comparators.Develop and oversee * Consulting * Review and assess slternative models * Recruitment systenm(s). Ministry of Finance (iRM Degree to which line ministries Jan 98 - Decimplementation orpersonnel services and (including cost implications) for * performance appraisal unit). comply with centrally-determined 2000management nomis and training. recruitment, performance appraisal, system(s). norms in areas of recruitment, (annually by area)guidelines in the areas of promotion and career development, * Promotion and career performance appraisal, promotionrecruitment, performance and discipline, in consultation with development system(s) and career development, andappraisal, promotion and interministerial *IIRM grupo de including schemes of scrvice discipline.career development, and reforma." for management, professional * Number of management, Jan 98 - Decdiscipline, and technical staf. professional and technical staff 2000

* Assess desirability of creating elite * Discipline and appeals receiving training and average (annually by typemaaemelpnnt, pofesina,corps of civil service managers and process (es).nubroraighus fW

management, professional, technical staff ("key post systenm"/ * Regulations and operational Ministry of Finance (HRMreeedand technical training senior executive servicc). manuals in suppon ofthe unit and personnel reasedu Jan 98 - Decprograms, bv ssem management units in line .nrae s opronnea 2000

* Select models and tailor as ncedcd to r nabove systems. minist,ies opposed to seniority in promotion (annually)El Select o modlandtailor asnee o * faigr iitis,of civilI servants.El Salvador contest. * Stafftrained in central * Number of civil servants disciplined

(')Key indicators are shown in italics. Annex A (Page 7 of 11)


Objectives Inputs Activities/Processes | Outputs/Impact Institutional Indicators (*) TimingI I I I I Arrangements I I

management unit anid in InHle M inistry of Finance (11RkM by type of itlf-acti on.* Prepare, enact and disseminate ministries to implement ullit).

enabling regulations and guidclines. systems.* Train central management unit and * Staff in all ministries trained

line ministry staff in application of in human resource andnew IIRbf sub-systeins. program management, as well

* Implement sub-systems gradually. as selected areas of essential* Monitor compliance of line ministries professional and technical

with personnel management skillsiareas.guidelines, carry out selective audits,and adopt sanctions as necessary.

* Assess training needs of staff in keyposts.

* Develop and deliver management,professional and technical training ImPAct * Lower cost, higher quality, andprograms for essential PSM activities * Higher civil service greater coverage in se-vice delivery(excludes training on office productivity. (specific indicators in selectedtechnology under the Institutional * 'Iighter linkc between services to be established inRestructuring component).- performance and rewards. baseline service delivery surveys

* Better fit between jobs and and nmeasured in follow-upskills of civil servants. surveys).

* Increased morale, especially * 'Fumover rates in skilled positions.among nianagers, professional * Average education and trainiiigand technical staff. levels of civil servants in

management, professional andtechnical streams.

* "Attitude surveys" within civilservice.

B. 2. Financial Resource Management (estimated US$16.9 million): (see separate s.atrix provided by I1))- Financial hfanagement (est. USS10.5 million)- Public Procurement (est. USXO.S5 million)- Tax Administration (est. US$3. 0million)- Customs Administration (est, USX2. 8 million)

(')K;e% indicators are sho%Nii in italics. Arnnex A (I'agegXoti 11 )


Objectives Inputs Activities/Processes Outputs/limpact Institutional Indicators (*) TiminglIl I I | -Arrangements

C. PRIVATIZATION AND PRIVATE SECTOR PARTICIPATION (Estimated US$12.1 million)

Increase efficiency and Consulting services * Provision of TA for establishing and Privatization Group & National Project Coordination Unit/ Output Indicators (1):improve quality of services by (national and strengthening a privatization group Framework Privatization Groupthrough private participation international) and for establishing a national * Technical privatization unit * Effective privatization unit May-July 96in infrastructure consulting firms privatization regulatory framework. established and fully staffed. and established* telecommunications and individual * Program monitoring systems * Program monitoring systems* power consultants * Provision of TA and equipment for operating. Task groups for operating.* water establishing regulatory frameworks * National Privatization Law privatization within * National Privatization Law* transport sectors and organization for water and prepared for National respective publicand transport sectors. Assembly. enterprises/ ministries u Regulatoryframeworksfor May/Dec 96* social security. telecomm and power sectors (for teleconur)

and a ~~~~~~Enterprises restursctured for June 96/ July 97* Provision of direct transaction Power & Telecommunications competitive markets. (for power, and

Enhance capital markets assistance for private participation in * Regulatory frameworks Project Coordination Unit! S co f maritsh ftrst set of electr.through greater mobilization infrastructure. established for telecomm and Pension reform Group Sales ofemacouty shares (51ted) companies)of long-term domestic power sectors.resources and through * Provision of TA and equipment for * Contracts for advisors andplacement of shares of establishing a national private awardedprivatized enterprises pension system as well as for * Bids prepared for a minimum Environmental Units within * Regulatorypframeworksfor water Aug 96-July 97through the stock exchange rationalizing the system that will of 51% offering to private CEL, CEPA and ANDA ports and airport sectors.

remaia in the public sector. * Tariffs rebalanced * ~~Enterprises restructured forremain in the public sector. investors and workers, competitive markets.*Tariffs rebalanced. * First concessions e-xecuted.

Widen ownership of * Provision of TA for strengthening * Worker redundancyproductive onterprses capital markets and special programs developed

individuals and workers privatization studies. * First stage sales executed. * Privatization options studies for Oct 96 - Oct 97* Enterprises restructured for highway maintenance and other

* Targeted provision of TA and competitive markets. servicesEnsure environmental equipment for strengthening the * Maintenance operationsprotection during sectoral environmental units within restructured and prepared forprivatizations and PSP in the power, water and ports/airports Water, Ports and Airport Services private sector participation.three areas ofcritical sectors to (i) assess and address * Regulatory frameworks * Transfer offuist maintenanceconcern: adequately potential environmental established for water, ports operations to private sector.* Power (electricity): implications of increasing private and airport sectors.

CEL sector participation in these sectors; * Contracts for advisors* Water: ANDA (ii) establish cumulatively legal awarded. * Legislative frameworkfor Social May 96 -May 97* Ports/ Airports: CEPA standards for sound environmental * Bids prepared for concessions Security Reform

policies in these areas, and (iii) carry to private investors. * min. of 3 private pensionfunds.out environmental audits and * First concessions executed. * ISSS and INPEP processes mergedmonitor possible environmental * Enterprises restructured for in one institution.action where needed, competitive markets.

* Worker redundancy programdeveloped and tariffs * Capital markets strengthening Jan 97/ July98adjusted. studiesJa97Juy8

* Effective supervision and trading I

(*)Key indicators are shown in italics. Annex A (Page 9 of 11)


Objectives Inputs Activities/Processes Outputs/Impact Institutional Indicators ()| TimingI Arrangements I

rules of stock exchangeHighway Maintenance and Other * Recognition bonds traded inSectors secondary narkets by pension* Privatization studies of funds.

highway maiaance nd * Shares of privatized entrpriseother evic conpited. traded

* Mainenance operatiomrestuured nd prepared forprivate sector paticipatioL * Environmental audit reports for

* Transfer of fist mairtance privatization and PSP in the power,operations to private sector. water, porls/ airport sectors;

* Environmntal requirements for thepower, water, ports/ airport sectors;

Social Security Reform * Effective environmental units* Legislative framework within the power, water/sewage,

developed and introduced to ports sectors;the National Assembly.

* Private pension fundsestablished. Output Indkcators (2): B ofthe

* Recognition bonds isued for (tb.d.) Bytbeneficiaries in existingsystem Number of infrastructure sedors

* Existing social security restructured under a competitivesysdem orpizaionally and environnentfiancially rationalized intoone institution. Number of sepate independent

entities privatized in power andteleconmisuicati sectors in toal and

QAgital Market Development as percent of total assets* Capital markets

strengheing stuadies Number of new private sector entrantscompleted. in power and teleconan sector since

* Supervision and trading rules opening to compdition.

of stock e hange Number of concessions transacted with

* R ecognition bond s trade. in private sector for managernent in totalsecondary markes byde m nd as percentage of total assets.seodary markets by

pension fsunds. Reduction of emnployees from payroll of*Issus ofsharcs ofprivatized Government as a results of privatizationeneraprises conimenced. prograrm.

Environmnental Protection Durng Increase in coverage under new pensionPrivatizations (power.water/sewage, ports sectors): Number of small shareholders in

* Environmental requirements privatized companies.for privatization/PSP in the

(*)Key indicators are shown in italics. Annex A (Page lOof 11)


Objectives Inputs Activities/Processes Outputs/impact Institutional Indicators (*) TimingI Arranigernents

power, water/sewage, ports Increase in volume of trading in stocksectors established, exchange.

* Environmental auditscompleted prior to privati- Increase in long term domestic funds.zation/ concessioning ofpublic utilities;

* Action plans for environ- Impact Indkators:mental mitigation in thesesectors completed; Increase in private sector investment By the end of the

* Upgrading of institutional and increase in total employment in projectcapacities in the power, each key sector (see below, and t.b.d.).water/sewage, ports sectors(- CEL, ANDA, CEPA) Based on existing base-line data on By the end of thecompided to (i) carry out service quality and prices, for each projectenvironmental audits; (ii) entity privatized:monitor environmental action * Reduction (min. 20%) of user; and (iii) improve the prices after initial rebalancing.legislative framework for * Improvements in quality measuredenvironmental protection in in standard indicators.these sectors. * Increase in employnmet after initial

resrUucturing.t Incrase in productivity, profits and

revenue (mim. 15%l)* Expansion of outpuVcoverage of

existing services overall and inrural reas (mim. 40%)

* Increase in new services.

Impact of infrastructure sector on By the end of theprivate sector performance. proje

Improvemets in private sectorproductivity (5% p.a.).p Grodwth in private sector totaloutput, investment and employment(lO%p.a.)

* Increase in foreign directinvestment. (15% p.t.)

Econoy-wide imp-a By the end of the* Increase in long-terms fminacing project

through domestic sources (5% p.a.)* Total reduction of annual flows

from Goveanent to public sectorenterprises (30% total)

* Reduction of public sectorenterpre debt. (30% total)

(*)Key indicators are shown in italics. Annex A (Page 11 of i i)

ANNEXIPage I of 10

EL SALVADORFINANCING OF THE CTU AND MODERNIZATION OF THE FISCAL ADMINISTRATION

(ES.005)

MATRIX OF ACTIVMTIES AND OUTPUTS

AREAlACTIViTY ASSIGNED CONSULTANT ANTICIPATED RESULT EXPECTED IMPACT

A. SJAF.I.1. GENERAL SAFI FRAMEWORK

a. Diagnostic study of the Computer systems consulant Evaluation of the existing computer systems and Have in place strategic vision for developing

development of computer systems strategic analysis to ensure an integrated the SAFI databases that will make the best

platform. possible use of the existing systems.

b. Development of rules and Senior area experts and legal counsel Vertically and horizornally consistent regulations Clear, modem and consistent standads

regulations for subsystems for application of integrated financial developed for implementing the SAFI.

management law.

c. Design of institutional financial Senior technical consultant, UFI consultant Organizational structure, personnel requirements, Have in place a homogenous structure

units (UFls) job descriptions and equipment for UFls compatible with the central system for

determined. development of the SAFI.

2. BUDGET SUBSYSTEM

a. Adjust the apparatus devised for Senior budget expert, legal counsel Manuals, instructions, procedures and other Consistency in budget preparation and

preparing, approving and instruments revised and improved for approval and eficiency and effectiveness in

executing the budget. tandardized application of budgeting budget execution and evaluation.methodology.

b. Develop and apply the method for Senior budget expert Standards and routines established for Efficient and transparent procedures to guide

programming execution of the procedures Involved in programming budget execution of the govemment budget in both

budget (PEP). execution. the UFbs and in the SAFI's lead agencies.

c. Develop techniques for concurrent Senior budget expert A general methodology established for Mechanisms to analyze budget execution and

monitoring of the budget monitoring and evaluating budget execution. shft its direction when necessary.

d. Strengthen instruments for global Senior budget expert and macroeconomic Strengthening of the DGP's technical capacity to A consolidated national budget that is both

analysis and consolidation of the analysis expert produce consolidated budgets consisent with the hntemally consistent and consistent with the

budget govemment's macroeconomic program. macroeconomic ermironmenLt

e. Complete the budget subsystem Computer systems expert and senior budget A complete and up-to-date budgetary data Management and use of the SAFI database,

database. expert subsystem Integrated with the SAFI. with all necessary budgetary data forIntegrated financial management

f. Design and implement a system Senior budget expert and budget evaluation A system in operation that produces More effient and rational allocation of

for a material-financial budget expert comprehensive material-financial budget resources thanks to the availability of

evaluation. evaluation reports for the govemment's main information on costs, pace of execution, etc.

programs. I

ANNEX IPage 2 of 10

AREA/ACTIVITY ASSIGNED CONSULTANT ANTICIPATED RESULT EXPECTED IMPACT

3 TREASURY SUBSYSTEM

a. Establish the pertinert Senior treasury expert Programming of Treasury single fund harmonized Prompt paymert of the govemnmernts financialmechanisms wifh the DGP to with payments at UFl. obligatons with as lite financial opportunitysynchronize budget execution cost as possible.wlth the transfer of funds to UF1s.

b. Decentralize and deconcentrate Senior treasury expert and financial Operating system that transacts payments Each primary unit able to expedite and take fullpayments from the Treasury programming expert through the UFls by effecting transfers from the responsibility for paying its obligations, withService to the central Treasury single fund to insitutional subsidiary the DOT focusing on financial management.govemment's agencies. accounts.

c. Put the single fund into operation. Senior treasury expert Unification of the central govemment's fund for Financial control over the central govemment'sexpenditures and hs management with modern resources within DGT.programming and management Indruments.

d. Establish linkage with the revenue Senior treasury expert and collections expert Revenue data Input into the SAFI database at the Integrated financial analysis of revenue,systems. various stages of the process. expenditures and borrowing.

e. Apply financial management Senior expert and expert in securities markets Technical and legal Instruments developed to The DGT acting as the government's financialinstruments, enable Treasury to manage Hi securites portfolio manager.

and make shon-term financial investments.

f. Complete development of data Senior treasury expert, computer systems Definitlon and implementation into IFM computer The SAFI database with all treasury dataprocessing at the DGT. expert system of records and internal checks for included to ensure integrated financial

Treasury management. management

4. ACCOUNTING SUBSYSTEM

a. Make technical instruments for Senior experts and senior accounting expert Integrated accounting, based on the records Prompt and computerized govemmentclassification and records SAFI- administered by IFM at the central level and UFls. bookkeeping to meet demands for accountingcompatible. and management information.

b. Develop a model for analytical Senior accounting expert Create a method of economic-financial analysis. Availability of technical Information on financialmanagement reporting. management for purposes of decision-making.

5. PUBLIC DEBT SUBSYSTEM

a. Review and strengthen the debt Computer systems expert Debt-management and analysis systems tested Efficient management of public debt, and itsmanagement computer system. and introduced. full inclusion In the SAFI.

b. Strengthen the process by which Debt management expert and management Changes needed for better debt management Greater borrowing capacity on capital markets,debt-related policy is made and and negotiation expert proposed and their introduction planned. under the best possible terms and conditions.provide training in techniques ofdebt negotiation, renegotiationand borrowing. I_I I

Pae3do 10

I~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~NE I

AMNACTIVfl ASSGED CONULTANT ANTICPATED RESULT EXPECTED IS ACT

6. TRAINING

a. Develop and implement a PMSP training coordinar, senior experts, A crtical mass of personnel taind in Inegrted Guarantee lit the rtnno Introduced in tiecomprehensive training plan In short-term eprts an a senior technical financl management t fina l n ngent weIntegrated financbl management, advisor appd wid susaied.for the Ministry of the Treasuryend the UFls.

7. COMPUTER SYSTEMS

a. Analyze, review and document a Computer systems expert A fully operational debt management system Public debt managoment integrated withpublic debt program and inter- interconnected with the SAFI budget execution financial management system.connect it with the integrated system for debt repayment and service.financial management computersystem.

b. Design, implement and document Computer systems expert, programming and Start up of computer system, including the central Operation of integrated financial managementthe SAFI computer system. communications experts database, UFI databases, local networks and using a modem, operating pladorm to ensure

interconnections, secure, accurate and efficient informationmanagement

c. Assist in the selection and Computer systems expert Selection and purchase of equipment and Operation of the data processing system withpurchase of hardware and software to put the new SAFI operating platform suitable equipment and program.software. into operation.

B. INTERNAL REVENUE SERVICE1 RULES AND REGULATIONS

a. Support issuance of the tax code CIAT Tax code analyzed internally and with Have in place an appropriate regulatoryprofessional associations and submitted to the framework.

b. Prepare and issue the legal Legislative Assembly during 1996. Regulationsregulations. Issued by no lter than 1997.

2. REGIONALIZATION

a. Design the structure of the CIAT Have both offices In operation by the end of Have expanded ths DGUl', coverage towestem and eastern regional 1996, each staffed with about 100 people incrase tax revenues.offices. performing taxpayer sistnce and auditng

functlons.b. Selet and outfit the office

premises. Have all DOGII functons performed at two regionaloffkes by the end of 1997.

c. Slect and train new auditors.

d. Assign and train administrativepersonnel.

e. Design and carry outdisemination plan.

ANNEX IPage 4 of 10

AREAIACTIVflY ASSIGNED CONSULTANT ANTICIPATED RESULT EXPECTED IMPACT

3. AUDMNG

a. Carry out studies to measure tax CIAT Have added over 3,000 new taxpayers by late Tax revenues increased by adding taxpayersevasion. S96 and over 8,000 by late 1997 torom informal from the informal sectof and reducing tax

sectors and oversights in the formal secto. evasion to a minimum.b. Introduce computer-assisted Econometric studies measuring VAT and income-

auditing techniques, tax evasion completed by the end of 1997; taxrevenues as a pereentage of GDP up more

c. Develop and introduce programs than 2%.for sectors that are difficuit tomonitor.

d. Assis with new auditingtechniques.

4. INSTITUTIONAL STRENGTHENING

1. ORGANiZATlONAL DEVELOPMENT CLAT Planning, management control and systems An institutionally stronger DOII, with anaudifing unib up and operating by late 1996. improved intemal structure and more efficient

a. Establish management planning planning and management control.and control units. Economic4ax study techniques and programs in

use by th first hall of 1997. A new service-oriented mentality at the DOGN asb. Estabish systems auditing unit a mens of encouraging volintary tax

Organkatonal dtuctr adjusted In accordanc compliance.c. Consolidate tax programming and wlh the tax code, th tax care servc and the

evaluation unit. new functions by the end of 1997.

d. Improve organizational structure. Permanent, institutional insruments for taxInformation and taxpayer siance In place and

11. TAXPAYER ASSISTANCE the legal service for taxpayers and staff operatingby program's end.

a. Design and Introduce a taxpayerassistance and disseminaion Taxpayer asistance ystem, functioningplan. Inentives system and a disciplinary system in

use at the DGII by the end of the program.b. Design and introduce a legal

advisory service.

Ill. HUMAN RESOURCES

a. Design personnel policy andIntroduce tax career service.

b. Design and Implement anIncentives system and adisciplinary sydem.

ANNEX IPaPe 5 of 10

AREA/ACTMTY ASSIGNED CONSULTANT ANTICIPATED RESULT EXPECTED IMPACT

5. COMPUTER SYSTEMS

a. Consolidate environment. CIAT DGII s main support systems in place, including The DGII's computer system standudized;

current account and electronic filing, operating FOX4PRO gradually replacing SYBASE for

b. Consolidate and adjust computer with databases (SYBASE) by the program's end. greater efficiency, control and security in

systems development plan. computer systems.A consolidated computer systems office,

c. Develop and introduce current equipped with an applications development plan,

account and electronic filing. by the end of 1996.

d. Computerize DGII offices.

e. Strengthen technical support area.

6. TRAINING

a. Provide training for CIAT Training provided before the end of each activity. A permanent training system instituted to make

implementation of the program's Three international seminars on major topics DGII staff more efficient and more productive.

components. relating to the tax code and symposia held witheconomic, professional, legal, political and other

b. Provide training to introduce and sectors in 1996. DGII training unit in operation by

explain the tax code. the end of 1997.

c. Help establish the DGII trainingunit.

C. CUSTOMS REVENUE SERVICE1. RULES AND REGULATIONS

a. Review customs rules and Technical advisor Have put forward draft general customs law and Have those involved in foreign trade equipped

regulations to put together a the respective implementing legislation. with a legal framework that provides simple,

systematic legal text that will fixed, intelligent rules to facilitate foreign trade.

facilitate understanding of andcompliance with the current taxlaws.

b. Study and prepare draft Harmonized system expertregulafions that harmonize thesystems for duty-free zones,bonded warehouses, temporaryimports and other inwardprocessing arrangementscompatible with the CentralAmerican Agreement.

c. Unify regulations so that all Organization and methods expertspertinent public agencies are ableto apply these systems incoordinated fashion.

ANNEX IPage 6 of 10


d. Review and adapt the charter andoperating rules and regulations inaccordance with the new customsorganization.

e. Develop regulations for the PNC'sfinance division.

2. ADMINISTRATIVE ORGANIZATION

a. Review the existing organization Technical advisor An organizational structure that is compatible with A new structure for the customs service,of the customs system and the customs revenue service's new roles in eliminating redundant functions, creating unitspropose ways to make it more facilitating foreign trade, and an efficient suited to its new roles and eliminating thoseefficient, bearing in mind the inspection and auditing system. that have become extraneous, all to facilitatechanges in other areas of the foreign trade.system.

b. Establish an instiutional structure Organization and methods expert Manual of functions suited to the new Stronger internal auditing to ensure correctthat provides the new organizational arrangement procedures and practice.organization with adequatesupport, which includes givingeach customs service the properauthority and means.

c. Transfer functions to the private Merchandise origin expert Establishment of a computerized system forsector and regulate them (storage, monitoring functions and areas transferred to thecustody, handling and shipping of private sector under concessions.merchandise).

d. Award concessions to the private Inspection expertsector for storage, custody,handling and delivery ofmerchandise and determine thecustoms revenue service'sresponsibilities and functions vis-a-via concession holders.

e. Make the PNC's finance divisionpart of the customs service'sorganizational structure andcoordinate its activities.

f. Strengthen intemal auditing, oneof whose main purposes shouldbe to monitor the modemizationand automation of the customsrevenue service.

ANNE51 IPage 7 of 10


3. OPERATING PROCEDURES

1. Facilitationa. Review the current procedures Technical advisor Effective control of merchandise entering and Acceptable levels of satisfaction on the par of

used in foreign trade operations leaving the country. foreign trade agents.and propose adjustments to Organization and methods expertstreamline them. More rapid dispatch of merchandise. Lower costs for the above agerns and

increased competitiveness.b. Introduce automated payment of Efficient and timely customs Inspection.

customs duties and taxes and Improvement in the corporate image of theselective merchandise Swift and impartial documents processing. Customs Revenues Office.identification based on rationaland random criteria; identify the Establishment of a database on merchandise Reliable and current foreign trade statistics.criteria that can be used for the value, origin and classification.selection mechanisms.

c. Require that Customs carry outthe general procedures tordispatching Import and exportmerchandise wihin no more than24 hours.

d. Support and introduce moreexpedibous procedures forimmediate processing ofpredetermined cases of justifiedurgency.

11. Primary Fiscal Controla. Establish the customs services Audit expert

effecive control over cargomanifests and equivalentdocuments, requiring thatshipping companies submit themto customs using automated datasystems.

b. Prepare and Introduce aprocedure for domestic andintemational transit operations,that is in keeping with CentralAmerican rules and regulationsand that safeguards fiscalinterests and keeps traffic flowing.

ANNEX IPage 8 of 10

AREA/ACTMTI1Y ASSIGNED CONSULTANT ANTICIPATED RESULT EXPECTED IMPACT

c. Review the procedure wherebyrevenues are collcted throughbanks, determining whathelatter's responsiblitIe are andensure that they are electronicallyconnected to the computersystem at the Customs cashieroffice.

d. Regulate and introduce aprocedure for controlling andadministering special systems.

I11. Merchandise valuationa. Restructure the administrative unit Merchandise valuation expert

in charge of merchandisevaluation and properly train thestaff selected for that unit.

b. Develop the database ofIntemational prices and establishrules to ensure that it is properlyused, maintained and constantlyupdated.

N. Ex post inspectfon (auditing)a. Prepare permanent plans for ex Customs inspection expert

post review ot customsdeclarations.

b. Define, approve and introduce expost inspection procedures incoordinafion with the DGII.

c. Prepare a manual on deferredinspection.

d. Prepare and carry out semiannualselective auditing of Import and/orexport businesse and ceriba bywhich to evaluate performance ofth plans.

ANNEY IPage 9 of I0


4. HUMAN RESOURCE TRAINING

a. Develop the job descriptions for Technical advisor Draft of a manual of funcions and job Better command of the organizational structure,

employees of the Customs Service. descriptions. thereby increasing staff efficiency.

b. Evaluate current Customs personnel Organization and methods expert Nationwide distribution of staff according to Promotion of interest In self-improvement.

to determine what their training needs workload.

are and how qualified they are fortheir positions.

c. Prepare and introduce a proposal for Establishment of a pay scale for customs Employee security and improved mechanisms

establishing a customs revenue personnel. for employee mobility, making knowledge and

career service. performance the primary considerations forpromotion.

d. Create a training model and the Proposal for a training academy or agreement

agency in charge of applying it. with a training institute.

e. Establish a management controlprogram.

f. Develop a training plan in thetechnical areas of valuation, origin,procedures and classification.

5. COMPUTER SYSTEMS

a. Determine the users' data needs. Technical advisor All procedures computerized. Swifter procedures and better controls.

b. Introduce the modifications Computer systems expert All units connected to the customs office, and the Timely and reliable data.

necessitated by the review and latter connected to other public and private

changes in operating procedures. institutions.

c. Develop and introduce the Systems security expert Creation and maintenance of an 'intelligenf Better measures by other state agencies.

following modules: information system.(I international and domestictransit control; (ii) selectivity indetermining the extent to whichexport and Import declarationswill be checked; (ii) control ofguaranteee and bonds;(iv) pending documents;(v) managing administrativeappeals and claims;(vi) inspection; (vii managementand fiscal satistics to supplementthe SIDUNEA statistics.

d. Test the various modules and the Systems analysts and programmers A positive contribution to the decision-making

system as a whole. process.

ANNEX IPage 10 of 10


e. Acquire and install acommunications system forprompt relay of information withincustoms and to other MINHACagencies.

t. Prepare technical and userdocumentation.

g. Advise on the purchase of theequipment needed to developand run the systems.

h. Establish mechanisms that protectthe physical safety and security ofthe computer system.

D. PROCUREMENT AND CONTRACTING

a. Analyze legislation currently in International consultant; local consultants A streamlined and more transparent sector. A simplified procurement process. Cleareffect and prepare a preliminary Laws, rules and regulations now in force that procedures will benefit private sectordraft standardized procurement complicate the procurement process in public organizations that provide goods and serviceslaw for the entire public sector. sector institutions eliminated. to public insttutions and enhance the

credibility of public insttutions.

b. Develop a plan of action and thecorresponding altemative forstandadizing the biddingdocuments used in public sectorbidding; the new documents areto be patterned after IDB andIBRD models.

c. Develop an ongoing trainingprogram for the appropriate(public sector) employees,conerming the new law, biddingdocuments, and procurement Ingenwe.

Annex B

El Salvador

PUBLIC SECTOR MODERNIZATIONTECHNICAL ASSISTANCE LOAN

Estimated Costs and Financing Plan(USS'000)

Local Foreign Total

Estimated Project Costs

Institutional Restructuring lDebureaucratization 2,069 3,274 5,343

Institutional Restructuring 1,876 2,591 4,467Debureaucratization 193 683 876

Human and Financial ResourcesManagement 8,857 14,318 23,175

Human Resource Management 3,445 2,819 6,264Financial Resource Management 5,411 11,499 16,911

Privatization / PSP 3,983 8,087 12,070

Project Coordination 6,093 2,489 8,582

Total Base Costs 21,001 28,168 49,169

Contingencies 812 1,382 2,194IDB Loan Inspection & Supervision a/ 159 159

Total Project Cost 21,972 29,550 51,522

Financing Plan

IBRD 7,655 16,345 24,000IDB 6,504 13,205 19,710Government 7,813 7,813

Total 21,972 29,550 51,522

a/ Inspection and supervision fee charged by the IDB on its loans.

Annex C

EL SALVADORPUBLIC SECTOR MODERNIZATION TECHNICAL ASSISTANCE LOAN

A. Procurement Arrangements(USS million)

Procurement Methods NBFCategory ICB a/ NCB Other IDB GOES TOTALGoods 14 2.2 6.0 9.6

(1.4) (2.2) b/ (3.6)

Training, Technical Assistance and Studies 20.4 13.5 33.9(20.4) (20A)

Operating Expenditures 7.8 7.8

1DB Loan Inspection and Supervision 0.2 0.2

TOTAL 1.4 0.0 22.6 19.7 7.8 51.5(1.4) (0.0) (22.6) 1 (24.0)

Figures in parentheses are the Bank-financed amounts(a) ICB 2-stage for procurement of computing equipment and software for Human Resources Management Information System.(b) Includes about US$1.5 million equivalent to be purchased through LIB, about USSO.4 million equivalent to be procured under intefnational shopping.

and about US$0.3 million equivalent to be procured under national shopping.NBF = Non-Bank financing

B. Disbursement Arrangements

Category Amount(USS millon)

Goods 3.2 100% of foreign expenditures, 100% of localexpenditures (ex-factory cost) and 87% oflocal expenditures for other items procured locally.

Training, TechnicalAssistance and Studies 18.2 100%

Refunding of PPF 1.9 Amount due

Unallocated 0.7

Total 24.0

Estimated Disbursements(USS million)

Bank FY 1997 1998 1999 2000 2001Annual 3.5 7.0 7.5 4.0 2.0Cumulative 3.5 10.5 18.0 22.0 24.0

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Annex E (1)

Preliminary Training Plan

Objective Target Recipients Amount(USS)

Training needs assessment and 40,000

design of training programs

Training high level managers High level managers 500,000

in change management (S00 people) ($10OO pperson)techniques

Training of trainers in Key staff 100,000specializedtopics (100 people) ($1OO p/person)

Management development and Middle level managers/technicians 600,000technical training (f 000 people) ($600 p/person)

Basic office technology training Middle-level office staff 1,200,000(about 4000 people)

($300 p/person)

Total 2,440,000

Annex E (2)

Diagn6stico Profesiografico del Perfil Actual de los Empleados Puiblicos

Para la realizaci6n del diagn6stico de la demanda de capacitaci6n requerida para poderejecutar con exito el Programa de Modernizaci6n del Sector Puiblico, se ha estimadoconveniente hacer primero un estudio de la situaci6n actual de los funcionarios yempleados puiblicos, con el fin de pronosticar el grado de aprovechamiento o de dificultadque tendran estas personas para asimilar los contenidos planteados en el plan decapacitaci6n resultante; en segundo lugar se realizara el levantatniento de necesidades decapacitaci6n con representantes de los diferentes componentes del Programa deModernizaci6n.

Comprendi6 el anAlisis de la situaci6n actual de los Empleados y Funcionarios del SectorPublico, para lo cual se han revisado las siguientes variables:

* Nivel academico* PirAmide de edades* Tiempo de servicio* Sexo

Se utiliz6 este metodo ya que en la actualidad no se cuenta con un Sistema deClasificaci6n y Valoraci6n de puestos central para todo el Sector PuIblico, por lo tanto noexisten perfiles de contrataci6n para los ocupantes de los cargos en el Gobierno, tampocose cuenta con un Sistema de Evaluaci6n del Desempefio estandar para el mismo grupo deEmpleados que permita evaluar si las deficiencias en el rendimiento son producto de unperfil inadecuado de las personas en cada puesto de trabajo, o a otro tipo de problemas,como falta de capacitaci6n o ausencia de motivaci6n.

Para la realizaci6n de este estudio se utiliz6 la base de datos del Sistema de Informaci6nde Recursos Humanos SIRH, el cual recopila informaci6n de mas de ciento treinta milempleados del Sector Puiblico (no se encuentran registrados en esta base los miembros dela defensa nacional, ni de la Conision Ejecutiva del Rio Lempa).

La informaci6n fue segmentada de la siguiente manera:

* Nivel Gerencial* Nivel Tecnico Administrativo* Personal de la Unidades de recursos Humanos

Annex E (2)

Presentaci6n y Analisis de Resultados

1. Nivel gerencial

1.1 Nivel Academico

Para este analisis y el de todos los que se haran dentro del nivel Gerencial, se tomaron encuenta todas las personas que ocupan cargos de direcci6n dentro de las Instituciones enestudio, desde Directores Simples hasta Jefes de Secci6n, totalizando 1153

Al realizar la separaci6n por niveles educativos se encuentra que el 6% de losFuncionarios han alcanzado unicamente el nivel basico (hasta noveno grado); el 22% haalcanzado el Bachillerato, mientras que un 9% posee niveles tecnicos; el 1% seencuentran cursando carreras universitarias; el 61% corresponde a profesionalesuniversitarios y menos del 1% han completado estudios de post-grado.

Dos datos llaman poderosamente la atenci6n: el primero es que al sumar los niveles basicoy bachillerato (28%) nos encontramos con una cantidad grande de personas que en laactualidad ostentan cargos de direcci6n con niveles educativos bajos (307 Funcionarios);el segundo es que solo se encontr6 a siete personas con post-grado, lo que, como semencion6 en el pArrafo anterior representa menos del uno por ciento de los funcionarios;ambos datos plantean una debilidad educativa para el Estado.

Dentro de este segmento es alentador encontrar una 'franja ancha" de profesionalesuniversitarios (61%) que equivalen a 664 Funcionarios, lo que se convierte en unaforlaleza educativa para el Estado.

1.2 Pircmide de edades

La pirramide de edades para el nivel gerencial se comporta de la siguiente manera: en laclase de 20-30 afios se encuentra el 9% de los Funcionarios; de 31-40 anos, el 38%; en laclase de 41-50 anios, se encuentra el 35%; arriba de 61 anios se encuentra el 4% de losEmpleados.

Para fines estrictamente de capacitaci6n, pueden ser considerados todos los Funcionarios,sin importar su edad, particularmente en lo que se relaciona a cambio Actitudinal y en elconocimiento del los nuevos sistemas de trabajo; sin embargo, para fines de desarrollo yformaci6n de Cartas de Reemplazo, se debe pensar principalmente en las dos primerasclases, que van de los 20 a los 40 a-nos, ya que cualquier inversi6n que se realice en estesegmento, le proporcionara al Estado una plusvalia laboral de 15 a 30 afios de vida iutil,principalmente si se piensa en un programa de becas para estudios de Post-grado.

En relaci6n con las dos clases ultimas, que van de 61 a mas de 70 afios, y que representa el4%, se podria pensar en dos tipos de acci6n para e futuro inmediato de estas personas:

Annex E (2)

* Seleccionar un banco de candidatos elegibles para formnaci6n de Asesores para lasdistintas Instituciones del Estado, ya que se pueden encontrar personas con un historiallaboral 'Vico" en experiencias, las cuales pueden ser aprovechadas en diferentessituaciones.

* Aprovechar los programas que poseen las instituciones de seguridad social en accionespreparatorias para el retiro.

1.3 Tiempo de servicio

Los resultados de esta clasificaci6n se encuentran de la siguiente manera: de 0 a 5 afios deantiguedad, se encuentra el 40%; de 6 a 10 afios, el 19%; de 11 a 15, el 12%, de 16 a20%, el 14%; el restante 15% se encuentra oscilando en tiempos de servicio que van delos 21 a mas de 41 afios.

Resulta interesante observar la concentraci6n existente en las tres primeras clases, es decirde 0 a 15 anios de tiempo de servicio, las cuales agrupan al 71% de los Empleados; si secruzan estos datos con las edades de los Funcionarios en cuesti6n y su nivel educativo, setendra mayores argumentos para iniciar un plan 'Vida-Carrera" a largo plazo orientadohacia el rumbo que el Gobiemo necesite marcar de acuerdo a sus planes estrategicos.

1. 4 Sexo

Para esta variable se ha analizado la diferencia que existe entre sexos y por niveleseducativos, encontrando datos curiosos como el hecho de que al comparar el nivel deeducaci6n basica, no se encontr6 a ninguna mujer, es decir las 62 personas que ocupancargos de direcci6n son hombres. En ese mismo orden, al relacionar los niveles educativosde las mujeres comparadas con ellas mismas, podemos observar que porcentualmentehablando se encuentran mejor preparadas que los hombres.

2. Nivel Thcnico

2.1 Nivel academico

Para el analisis de esta variable como para las demas del nivel tecnico, se ha tomado a latotalidad de las Personas que han sido clasificados de acuerdo a su ocupaci6n, enposiciones de caracter estrictamente tecnicas (arriba de actividades administrativasrutinarias y abajo de cargos de direcci6n), ascendiendo a 6655 personas.

En este apartado encontramos que, en el nivel basico se ubica al 8% de los Empleados; enel nivel de Bachillerato, el 37%; nivel Tecnico, el 12%; estudiantes universitarios, el 5%;Profesionales Universitarios graduados, el 38% y finalmente se encontraron uinicamente 3personas con estudios de Post-grado.

Annex E (2)

El enfasis en este nivel ocupacional deberia estar orientado a disminuir los niveles basico yde Bachillerato y aumentar los niveles de Tecnico y de Profesionales Universitarios, de talmanera que tambien pueda ser considerado este personal dentro de los planes dedesarrollo y formaci6n de Cartas de Reemplazo.

Por otra parte, este grupo de Empleados es el que ejecuta operativamente los planes detrabajo del Estado, por lo tanto mientras mas elevado sea el nivel academico, se esperariauna mayor capacidad de ejecuci6n, y una mayor flexibilidad en la introducci6n de procesosde modernizaci6n.

2.2 Piramide de edades

El comportamiento de las edades en el segmento del Personal Tecnico se encuentra de lasiguiente manera; en la clase de 20 a 30 ainos, se encuentra el 27%; en la clase de 31 a 40anios, el 38%; en la de 41 a 50, el 27% y en el segmento de 51 a mas de 70, encontramosel 8% de los Empleados.

Llama la atenci6n en el analisis de esta variable, la franja ancha que resulta al unir las dosprimeras clases, ya que arroja un resultado del 65% de los empleados en edades que vande los 20 a los 40 anios, por lo que se puede considerar a la mayor cantidad en estesegmento como una poblaci6n 'joven" y con la posibilidad de una Plusvalia Laboral altapara el estado.

2.3 Tiempo de servicio

La distribuci6n de datos en esta variable se encuentra de la siguiente manera; en el rangode 0 a 5 anios, se encuentra el 49%; en el rango de 6 a 10, se encuentra el 17%; en el rangode 11 a 15 afios se ubica el 11%; en el de 16 a 20 anios encontramos al 13%; el restante10% agrupa a personas que tienen entre 21 a mas de 41 afios de servicio.En esta variable, impresiona el alto porcentaje de Empleados en las dos primera clases, esdecir, en el rango de 0 a 10 afios se encuentra el 66% de los Empleados considerados eneste estudio.

Si el dato anterior es congruente con la piramide de edades, tendriamos una situaci6n idealpara un programa de desarrollo a largo plazo; de no ser asi, se tendria que revisar laspoliticas actuales de selecci6n y contrataci6n de los Empleados del Sector Puiblico, de talmanera que a la hora de la escogitaci6n de nuevos Servidores del Estado, se prevea eltiempo de vida uitil (laboralmente hablando) de estas personas.

2.4 Sexo

Para esta variable se ha analizado la diferencia que existe entre sexos y por niveleseducativos, encontrando una tendencia similar a la del nivel Gerencial, pero con el datocurioso de que al comparar las Personas graduadas universitarias, existe una mayorcantidad de mujeres que de hombres.

Annex E (2)

3. Unidades de Recursos Humanos

Al efectuar un analisis de la posici6n que actualmente ocupan las unidades de de RecursosHumanos en la Instituciones incluidas en el presente estudio, se puede observar que menosdel 30% de dichas unidades se encuentran en niveles de Direcci6n, ni reportando a lamaxima autoridad de la Instituci6n, es decir la mayor cantidad de unidades se encuentransubordinadas a divisiones administrativas, en el mejor de los casos con nivelesorganizativos de departamentos y en peor a nivel de secciones.

Los niveles educativos del Personal que integra las unidades de recursos humanos, sepodria decir que es adecuado al rol que en la actualidad se les ha asignado en la mayoriade las Instituciones: 'idministradores de expedientes y tramitadores de acuerdos"

De acuerdo a este tipo de actividad, definitivamente las unidades de recursos humanos nopodran tener un papel protag6nico en la investigaci6n y modificaci6n de la culturaorganizacional, en el desarrollo de los cuadros gerencialaes, tecnicos y administrativo, nimucho menos, en la planeaci6n estrategica de los recursos humanos.

Por otra parte, pensar en una nivelaci6n de la jerarquia de las unidades, implica laescogitaci6n de las Personas adecuadas a un nuevo perfil del Gerente de RecursosHumanos, que responda al avance cientifico y tecnol6gico en esta rama del saveradminsitrativo, y por otra parte a un entrenamiento intensivo para el personal tecnico yadministrativo que conforme las unidades, de cara a las nuevas exigencias de los usuariosde los servicios publicos.

Finalmente, al analizar las plazas que actualmente conforman las unidadaes de recursoshumanos, se observa que en algunas Instituciones, existen personas asignadas, cuyasactividades no tienen ninguna relaci6n con el rol principal de la Administraci6n deRecursos Humanos.

Annex F

El Salvador: Employment in the Executive and Decentralized Institutions

Regular Staff - - of total Posts('Ley de Contracted Daily-wage - of which in the Cenbt

Mlnistry Salarlosi Staff Labourers Others al Tot vacant GovemmentPresidency 647 151 - 27 825.: 200 0.9%Coordination 61 464 5 3 53 0.6%Finance 3,313 774 - 180 -:':'4, 240 4.7%Foreign Relations 512 65 - - 5,' . 99 0.6%Interior 2,654 158 512 15 3,3,'. - 3.7%Justice 1,325 472 50 - 1 .847 ' - 2.0%Educafton b/ 38.677 140 - 193 39010 807 43.0%PubileHeaithc/ 19,386 90 12 1.967 Z',,- , 2.623 23.7%Labour 365 1 - 24 0 40 0.4%Economy 576 442 27 68 1,113 452 1.2%Agrlcufure 629 708 1,201 34 . 5' 42 2.8%Pubric Works 3,216 626 10,108 36 '13986 100 15.4%Viceministry of Transport 156 80 60 -29, - 0.3%Viceministry of Housing 280 83 107 1 471 28 0.5%

Total 7179 ' 4,4 12,0 ' ,8': '0,67 S4''8' , :%

-% of total PostsRegular Staff within the Auton.

Autonomous and ('Ley de Contracted Daily-wage ...... of which e& ec.Decentralized Institutions di Salarlosl Staff Labourers Others a! 'Ttal vacant Instituons

of which:ANTEL 5,155 404 960 - 6,519 - 12.6%CEL - - . .. 0.0%ANDA 1,311 26 1,921 1 ' .259 169 6.3%CEPA 598 4 14 - .--. ,.,.6:6 . 7 12%lSSS 0.0%INPEP 417 254 - 6 67 40 1.3%Procuradura General 342 259 - 5 606 8 1.2%Banco Central de Reserva 3 3 - 736 742.: 97 1.4%Corte de Cuentas 1,141 6 - 80 1,227 . 80 2.4%Fiscalia General 291 149 - 1 441 4 0.9%Fondo de Inversion Social - 284 - 6 . 290 34 0.6%

Totai" 9,.258 1,389 . 2,9 .- .,.. ,9 . 4 2: ;

a/ Posts not further specified.b/ Of which 32,570 are teachers.c/ Of which 6,244 are doctors and paramedics.d/ According to official reports the total number of employees is 51,644.

Annex G

Modernization of Infrastructure'

Overview

1. Mounting problem. El Salvador entered the 1990s with under-developed and under-maintained infrastructure, poorly adapted to the demands of a dynamic, export-led marketeconomy. Telecommunications, power, transport, water and waste services deterioratedduring the civil war. Security expenditures crowded out spending on basic maintenance andinvestment, and acts of war heavily damaged the power and transport networks. The wartimeeconomy was also marked by strong state intervention in the pricing and delivery of services.Energy, telecommunications and water were merged into vertically-integrated, state-ownedmonopolies. Regulatory and executive functions were not clearly separated, and worse, thecompanies performed both but were not responsible for either. Rate-setting, investmentdecisions, procurement, financial oversight, and other key responsibilities were diffused acrossmany institutions. Large numbers of surplus employees were hired. Competition in serviceprovision was minimal, with little private participation. Prices were not adjusted for twodecades, and then only for inflation or devaluation. With the exception of the lucrativetelecommunications monopoly, the utility companies became dependent on ever largergovernment bail-outs. By the war's end, the Government was saddled with a daunting backlogof maintenance and investment, which translated into large unmet demand and frequentinterruptions of service (Table 111. 1).

2. The view from the private sector. Deficiencies in the quality and quantity ofinfrastructure continue to hamper private sector growth, according to the survey, particularlythe relative severity of telecommunications, highway and power problems. Not only did theytop the list of infrastructure-related concerns for the sample as a whole, but they were theuppermost infrastructure concerns of important groups of firms: industrial and commerce,large and medium-sized, export-oriented and non-exporting, and those in San Salvador whereone quarter of the country's population resides. Exporting firms are bothered most by thepoor condition of the highways. Moreover, developers of Free Trade Zones reported seriousdelays in obtaining sites, telephone, power and water services.

¶demnncumi ,R, Radad1Pr lifrasfiure in Catral AnEca, 1992Tdqiemuin lines | Ni road lititwaan caity nec*icity lrduwal |imwbil pe 00 pM. kmp_ 1000 p(X kA per .00 pp kH(m) kAHper 100 p

Ceirl ArricaCcsaRia 364,1a 1 1.> 5,60D 2.00 1,09,0 3 4,109 132,60D

El Salvadr 204,0OO 3. 1,936 0.37 697,9( 13 2,382 44,970GilamEa 231,100 2.3 3,485 0.38 769,00( Z2 28,090

1-dA 117,10D 2 2,400 0.4 540,500 1 2315 44,090Ncaragu 66,80E 2.1 427,0X 1 1,616 49,840Paru 265,50D 11.1 2360 0. 956,200 4W 3,030 126,220

Mmdco 6,753,700 7_ 5 R_f2 095 29,274ODO 12Z42 142,09.

Noos: Pia Edas figuresare ftun 1992 fr El Salvar, nd 1990 f all ctbr fnes.Elricityga&x aid (nptIx± figwes are fm 1990 for the US. and lexico.

S9.r Wirid eloprmnt Repxt 1994, ANrET CE, AmLnao Clras Pu-icas El Salvador.

m Excerpts from El Salvador. The Challenge of Globalization. Country Economic Memorandum and Private

Annex G

Infrastructure Provision: Approaches And Lessons Of Experience

3. The Government recognizes that poor performance of state-owned enterprises is largelyresponsible for infrastructure bottlenecks, lagging investment and unmet demand, and the lackof access of the poor; that technological change and advances in applied economics havestripped some infrastructure monopolies of their "naturalness," lowering barriers to entry andsubjecting sectors to competition, if not in the market, then for the market; and that goodeconomic regulation of natural monopolies can promote economic welfare and afford investorsand consumers sufficient protection against potential abuses. The Government also recognizespractical constraints. The scale of investment required to satisfy pent-up demand, let alonesupport an export-led growth strategy, is far beyond its financial capacity. Significant privateinvestment, foreign and domestic, will have to be mobilized to close the infrastructure gap.The success of the export-led growth strategy will hinge partly on closing this gap. Surveys ofmultinationals often cite infrastructure quality as one of the most critical factors in influencingdecisions on the location of investments in manufacturing and high-technology sectors.

4. As the Government reassesses its role in each infrastructure sector, it is useful to framethe analysis with four broad considerations:whether a service is publicly or privately owned and managed, it should be run on acommercial basis with prices covering costs, and any subsidies, provided directly andtransparently;* creating a market structure that maximizes opportunities for competition is critical;* as non-competitive elements are unbundled from competitive or potentially-competitive

ones, as a rule, the former will require continuing oversight or regulation to protectinvestors and consumers from abuses. While the form of regulation will depend on acountry's institutional endowment, it should ideally be organized at arm's length from theGovernment, and operate under rules that are clear, expeditious, credible, and stable; and

* a growing body of research and recent Latin American experience suggest that privateownership and management are most effective in locking in gains from commercializationand competition.

Seizing Opportunities: General Recommendations

5. The legacy of the 1980s has been highly negative for infrastructure. The Governmentmust overcome the huge backlog of maintenance and investment in order to improve thequantity and quality of infrastructure while, at the same time, transforming the role of the stateand inviting the private sector to become a new partner in these activities. This change in therelationship between the state and the private sector is, indeed, the only way to address theneeds for increased management skills and finance. The foundation for this transformation hasbeen established and some steps, e.g., in power, have been taken. The agenda of policy andinstitutional change in each infrastructure sector involves:

revising the basic legal framework of governance, to separate the policy-making andregulatory functions of government (national, subnational, or municipal) from theoperational functions, and clearly define responsibilities for all public and private entitiesinvolved in the sector;

Sector Assessment. Executive Summary and Main Text (The World Bank/ LA2CO) October 1995; Chapter III.

Annex G

* reforming market structures within sectors (breaking down the vertically integratedentities), to unbundle truly natural monopoly components from competitive or potentiallycompetitive activities-thereby permitting competition both in and for market segments;

* articulating in detail the new government role in regulation, which involves: (i) fornatural monopolies defining regulatory policies to protect investors and the public interest,stipulated in statutes or contracts between public and private entities; and (ii) creatinginstitutional mechanisms and implementation capacity to carry out this regulatory function.A key will be to ensure a politically independent approach for tariff policy based on soundeconomic and financial criteria;

* specifying the financial role of government: (i) the subsidy policy, if any, that is justifiedto compensate operators for non-remunerative but essential services; any subsidiestransferred directly to target groups need to be identified and financed; (ii) in activitieswhere the State will retain a significant role, (e.g., non-toll roads) a secure institutionalframework is needed to ensure financing of maintenance and accountability to users (e.g.,a road board funded by road user charges);

* promoting private sector participation in the reformed system, which may requireproactive support for at least a transitional period. At a minimum, there is a need to createa transparent, streamlined process of contract design, competitive bidding, andscreening/approval of transactions; ensuring that new entrants compete fairly withincumbent operators; and removing constraints to competition, such as limited access tomarket information.

D in those activities which remain, transitionally or for the longer term, under publicownership and operation - such as (in most countries) the transmission of power and themain road network - restructuring of the responsible entity is needed to create incentivesfor efficient, commercial operation and to permit even limited private sector involvement,such as through contracting-out services or management. This restructuring may requirecorporatization, downsizing, decentralization, and improvement of financial andmanagement information systems.

6. These six broad categories of policy and institutional reforms are not a chronologicalsequence, although most countries begin with the first and the last; each step is mutuallyreinforcing and needs to progress in concert. However, the full agenda is enormouslydemanding to countries with limited institutional capacity and each country has to find its ownpace and sequence. Moreover, there is a range of choices regarding strategies andorganizations to meet reform objectives. International experience suggests two clear lessons,with special significance for countries with limited institutional capacity such as El Salvador:(i) choices which allow greater scope for competition provide stronger incentives for goodperformance, while reducing regulatory requirements; and (ii) allowing extensive privateparticipation (in management, financing, and ownership) - in ways that permit it to absorbrisks as well as the rewards of good performance - improve the prospects for successfuloutcomes.

Telecommunications

7. Structure. Since 1963, the state-owned company, Administraci6n Nacional deTelecomunicaciones (ANTEL), has been the sole provider of basic telephone service, with thepower to license or grant concessions for value-added services. In recent years, ANTEL has

Annex G

allowed private operators to offer value-added services, although competition remains weak.A cellular operator was granted a five-year concession and by 1994 had 1,500 subscribers. Itscharges are high by international standards: firms paid US$1,000 for a connection and 35 centsa minute in 1993, compared, for example, with only US$100 and 16 cents a minute in SriLanka, where there are four licensed operators. Data transmission facilities have been leasedto a private operator, with three to four more leases to be negotiated soon. A paging servicehas also been licensed.

8. Performnance. El Salvador's telecommunications sector has been among the weakest inLatin America. In 1989 there were just 2.9 lines per 100 inhabitants, which comparedfavorably only with the poorer neighboring countries of Nicaragua (1.2), Honduras (1.9) andGuatemala (2.2). Network expansion, though, lagged even these neighbors. In 1981-91, thenetwork grew 5.9 percent annually compared with 11.4 percent in Honduras and 7.5 percentin Guatemala. As a result, El Salvador had by 1992 the longest waiting list for telephone linesin Central America. Many of the sector's weaknesses are due to the inefficiency of ANTEL.In 1989, it operated with fewer lines per employee (22) than all Central American carriers,except Nicaragua (16). Unrelated activities have yet to be contracted out or sold off, includinga hospital, and furniture and construction companies. About 10 percent of ANTEL's 7,052employees in 1992 were employed in health and security, and over 17 percent were working innon-economic rural offices, some of which generate only 20 colones (US$2.3) a month inrevenue.

9. Like many monopoly carriers, ANTEL generates large revenues for the general budget.It posted earnings of 500 million colones (US$57.8 million) in 1993. But 87 percent of itsrevenues come from expensive international calls, which in 1991 were 22 to 34 percent moreexpensive than in other countries in the region. Were the company subjected to greatercompetition, its sterling financial record would tarnish quickly. Basic telephone rates were notincreased for 20 years, and adjustments are made ad hoc to meet cash needs and politicalobjectives. The under-investment that has plagued the sector owes much to recurringgovernment interference. On the strength of its profits the company could have borrowed oncapital markets, but it was not permitted to do so. Since 1989, the company has managed withdonor support, to upgrade and expand the network. The number of lines doubled to 302,492,or 5.5 lines per 100 inhabitants. About two-thirds of the lines are now digital, and SanSalvador has a fiber optic network. But demand for services is racing ahead of supply: thewaiting list for lines increased from 162,000 in 1992 to 200,000. ANTEL estimates that bythe year 2000 the number of lines would have to rise by 90 percent to catch up on the backlogof orders and accommodate private sector needs.

10. Reform. Besides stepping up investment, ANTEL's management and the Governmenthave introduced measures since 1989 to increase efficiency. One-time improvements inproductivity were achieved partly by cutting staff by about 14 percent over the past threeyears. Repair response time similarly improved: 90 percent of down lines are now repairedwithin four days. In addition, ANTEL recently developed a restructuring plan that woulddivest many non-core activities and public works contracts are increasingly bid out to theprivate sector. The implementation of turn-key projects by the private sector has helpedreduce the project cycle. Time needed for feasibility studies has fallen from 36 to 18 months,

Annex G

and construction from 24 to 18 months. Finally, with IDB support, a review of the legal andinstitutional framework was completed in February 1994, and with World Bank technicalassistance, an action plan was completed in July 1994 for the reform of key public enterprisesincluding ANTEL.

11. Deepening reform. Modernizing the communications system is critical to the country'sexport-led growth strategy. It will require large investments in expansion of the basicnetwork; sufficient supply of high-quality fax, data transfer, packet switching, cellular, andother services essential to modern commerce; competition in service delivery to keep pricesdown; and a regulatory function - clearly separated from telecommunications operations - withresponsibility for protecting investors and consumers. These investment requirements can onlybe met by attracting significant private participation which will require that a clear and credibleregulatory regime for entry and prices be established.

Power

12. Structure. All planning, regulatory and executive functions are vested in the Comisi6nEjecutiva del Rio Lempa (CEL), a state monopoly. Almost all electric power for publicservices is generated by CEL (there is a very small amount of self generation), which sells thebulk of its electricity to distribution companies and the remainder to large end-users. In thepast, the distribution of electricity (except for rural areas) was in the hands of the privatesector through concessions. These expired in 1986, however, and since then four of the sevendistribution companies have been under the administration of CEL. The Electric PowerCompany of El Salvador, formerly one of the private distributors but now controlled by CEL,distributes electricity in the capital area.

13. Performance. The degree of electrification in El Salvador is low compared to that ofother Latin American countries, although access to electricity has increased from 33 percent in1980 to 61 percent in 1993. Power interruption and voltage irregularities were among themost severe constraints cited in the survey. Although outages have subsided in the past twoyears, one-third of the survey firms had their own generating capacity, most likely in responseto the uncertain power supply. Among large enterprises, 55 percent had their own capacity.During the 1980s CEL entered into a period of prolonged decline. During the civil war therewere over 2,000 attacks on substations and 3,800 on the transmission system costing CELabout US$200 million. Moreover, during the last decade there was significant governmentintervention in setting tariffs. Rates were not based on economic criteria, and CEL was notallowed to make automatic adjustments for inflation, devaluation or other cost increases. Bythe end of the decade the average tariff was 33 percent of long run marginal cost (LRMC). Inthe early 1990s a prolonged drought required CEL to purchase energy from Guatemala and toincrease fuel purchases to substitute for hydro power. These events strained the alreadyweakened capacity of CEL, and as a consequence power interruptions and voltage fluctuationsbecame frequent. Although, the situation is improving, the capacity of CEL to meet demandis inadequate. Demand grew by about 10 percent p.a. during 1991-93 immediately followingthe peace accord, and is expected to grow at 9 percent p. a. through the end of the decade. Thepower sector now faces an enormous backlog of investment.

Annex G

14. Reform. The power sector has been a high Government priority and significantprogress has been achieved. In May 1991 the Government adopted an Energy Sector Policyconsistent with an open, market-based economy. It set four objectives: (i) an appropriate legaland institutional framework; (ii) adoption of pricing policies based on economic costs; (iii)significant private sector participation; and (iv) establishment of an institutional and policyframework to address environmental issues. A package of energy legislation establishingplanning and regulatory agencies, a framework for power tariffs and a corporatized CEL hasbeen submitted to the Assembly. The first independent power generation project (80 MW)was announced in October 1993. The Government has also decided to re-privatize powerdistribution. CEL's efficiency has been high in spite of the events of the last decade.Compared to other Central American countries, CEL has the highest number of customers peremployee and ranks second in energy sales per employee. A tariff increase of 32 percent wasapplied in late 1992, and the Government has further committed to reach 85 percent of LRMCby 1996 and 100 percent by 1999.

15. Deepening reform. The critical next step is to establish a track record ofimplementation of the necessary policy and institutional reforms. Significant additional tariffincreases are required to reach the 85 percent of LRMC goal in 1996. New concessions needto be granted for private power distributors. Additional independent power projects areplanned for 1995 (80 MW) and 1997 (50 MW). Implicit in the new structure of the sector is are-shaped role for CEL, partitioned between generation and transmission, with each organizedas an independent commercial enterprise. In the future CEL-Generation would generatepower, buy it from independent power producers through power purchase arrangements, orcompete directly with them to supply energy to large consumers or distribution companies.CEL-Transmission would retain its central role in power transmission but would be establishedas an independent company and guarantee open access to generators. CEL's current activitiesin urban power distribution would effectively cease with the sale of its current franchises toprivate operators.

Roads

16. Structure. The Ministry of Public Works (MOP) is responsible for the transportsector. The Vice Ministry of Public Works is responsible for highway maintenance,rehabilitation and construction, through the Direcci6n General de Caminos (national roads) andDirecci6n de Urbanismo y Arquitectura (urban roads). Municipalities have responsibility forportions of the urban road network.

17. Performance. El Salvador has approximately 12,400 kms of roads: (i) 1,936 kmspaved with 38 percent in bad condition, 30 percent in fair condition, and 32 percent in goodconditions; (ii) 7,890 kms unpaved with 57 percent in bad condition, 31 percent in faircondition, 12 percent in good condition (iii) 112 kms in San Salvador (fair to good condition);and (iv) other municipalities, 2,474 kms in generally bad condition. The primary roadnetwork consists of two East-West axes, the Panamerican Highway and the Coastal Highway,and four North-South axes. Supply of roads and highways is sufficient, except for ruralpenetration roads in the ex-conflict areas. However, deficiencies in the transport sector werethe most severe infrastructure constraint noted in the survey. Maintenance suffers from under-

Annex G

execution and inefficiencies and salaries and benefits comprise about 80 percent of the roadmaintenance budget.

18. Reformn. A Vice Ministry of Transport has recently been established to direct andcoordinate policy. It will assume functions that were previously handled by other ministries(transport regulation, user fees and tolls), eventually becoming the transport regulatoryauthority. In parallel a number of regulatory actions have been taken (establishing weightlimits and facilitating border crossings), and a number of institutional changes in MOP havebeen initiated. Staff levels in the MOP have been reduced significantly, particularly in theDirecci6n General de Caminos.

19. Deepening reform. Improving the quality of existing roads through increasedmaintenance, rehabilitation and modernization is the principal challenge. MOP has prepared afive year rehabilitation and maintenance plan but it must secure budget allocations for roadmaintenance over the long term. Funds are assigned to MOP as part of the centralgovernment's budget process, based on last year's level of expenditures with no analysis orevaluation of programs. Moreover, there is a bias toward external funds which, however, arefor discrete programs with defined time frames. Ideally they can supplement but not substitutefor long term road maintenance funds.

Ports and Rail

20. Structure. The Comisi6n Ejecutiva Portuaria Aut6noma (CEPA) has responsibility forthe ports of Acajutla and Cutuco, the state owned railroad and the airport. CEPA was createdin 1952 to manage Acajutla, and added responsibilities during the 1970s. Planning, regulatoryand executive functions are vested in CEPA, although with significant intervention from lineministries.

21. Performance. Acajutla is an open access port on the Pacific Coast about 85 kmssouthwest of San Salvador. It has capacity for about 1,500 million metric tons, and is close toreaching that level, with total traffic of about 1,300 million metric tons in 1993. Cutuco, alsoon the Pacific coast about 185 kms from San Salvador, handled 50,00 tons in 1991, one-fifthof its 1978 traffic level. The railroad is severely deteriorated with 50 percent of its sleepersdamaged. Rolling stock is in a similarly deteriorated state. CEPA estimates that only 2percent of the nation's cargo traffic moves by rail. The airport dates from 1978, has a smallrole in exporting (about 1 percent of all exports), but is increasingly important in non-traditional exports. CEPA is relatively stable financially. It earns a modest profit due toairport operations, while the railroad loses money and the ports break even. Acajutla suffersfrom labor and operational problems, which leads to a lack of competitiveness with some otherCentral American ports. Labor concessions in the 1980s have led to a salary structure andwork rules that are increasingly constraining CEPA's competitiveness. The most importantcompetition is from Puerto Queztal in Guatemala. Additionally the lack of maintenance andinvestment during the 1980s created a backlog at Acajutla that is slowly being addressed byCEPA. Cutuco has limited installations, is only accessible by railroad, and must compete withthe nearby privately owned port of Punta Gorda.

Annex G

22. Reform. The Government has initiated a number of changes and is actively exploringprivatization options, including granting operating concessions, divesting storage facilities andcontracting out maintenance. CEPA has improved its financial situation through tariffincreases and has taken steps to reduce personnel at Acajutla by about half (650 out of 1,400workers).

23. Deepening reform. Although CEPA has achieved financial stability and is improvingefficiency, it faces a number of strategic issues. It must recover traffic lost during the civilwar and compete, in price and services, with Central American ports. This will require greaterprivate sector participation, and the transformation of CEPA into a regulatory authority.

Water and Sanitation

24. Structure. The Administraci6n Nacional de Acueductos y Alcantarillados (ANDA) isthe principal water and sanitation institution, but responsibilities are spread across manyinstitutions. Water/sanitation production and distribution is split between ANDA for mosturban systems, some municipalities, and the Ministry of Health for rural systems. The SocialInvestment Fund (FIS) also participates in the construction of rural systems.

25. Performnance. All water produced in El Salvador is sub-surface. For the most partrivers and lakes are too contaminated for use. Water coverage was 55 percent in 1992, ofwhich 78 percent was urban and 16 percent rural. Sanitation coverage was 69 percent, ofwhich 87 percent was urban and 52 percent latrines. There are ten waste water treatmentplants but these handle only 3 percent of production. Demand is projected to grow at 4percent p.a. through the end of the decade. To reach 100 percent coverage in themunicipalities covered by ANDA, investments on the order of US$150 million p.a. would beneeded over the next five years. Losses are estimated at 40 percent and service is intermittent.In San Salvador it was estimated in 1993 that users received water about 16-18 hours per day.Of the 350,000 connections, about two-thirds have working meters. ANDA's financialproblems are largely the result of the tariff structure, as well as weaknesses in its billing andcollection systems.

26. Reforn. Some initial steps have been taken toward sectoral reform. A draft diagnosticstudy of the water/sanitation sector has been prepared and new draft legislation is currentlyunder review. In the last five years ANDA has been able to improve its financial situation.Operating losses have been reduced by about two-thirds, and the overall deficit by about one-third. Tariff increases in 1990 and 1992 contributed to the improved financial performance.

27. Deepening reform. The Government must implement tariff reform, and addresssimultaneously the rehabilitation and expansion of production and distribution systems.Establishment of planning and regulatory agencies is essential. The Government lacks a waterresources strategy and policies for conservation and usage. Too little attention is given toenvironmental issues, especially in view of the decline in aquifers and the low coverage ofwaste water. The institutional framework is disjointed, and there is a multiplicity ofinstitutions operating in an uncoordinated and ineffective fashion.

Annex H

EL SALVADOR

PUBLIC SECTOR MODERNIZATION TECHNICAL ASSISTANCE PROJECT

FIELD SUPERVISION PLAN

FY1997:Initial Supervision Mission/Project Launch

Task ManagerPrivatization/Regulatory SpecialistInstitutional Reform SpecialistHuman Resource SpecialistInformation Systems SpecialistProcurement SpecialistTraining SpecialistEnvironment Specialist

FY1997-99Regular Supervision Missions - scheduled twice yearly, one of them comprising specialistsin all project areas:

Task ManagerRepresentatives of the following specialties, depending upon need:

Privatization/Regulatory SpecialistInstitutional Reform SpecialistHuman Resource SpecialistInformation SystemsProcurementTraining and Institutional DevelopmentMonitoring, Evaluation and CostingEnvironment Specialist

FY1998:Mid-term Review

Task ManagerRepresentatives of the specialties listed above

FY2000Project Completion Report Preparation Mission

Task ManagerMonitoring, Evaluation and Costing Specialist

Annex H

The supervision requirements by IBRD fiscal year are:

1997 1998 1999 2000General Portfolio Management 8 8 5 5OperationsInformatics System 2 2 2 2Mid-Term Review _ 8 1 1Supervision Missions 10 8 8 8Total SWKs 20 18 23 15

IMAGING

Report No: 6839 ESType: 0

TrA J

world bank document...1996/08/05 · document of the world bank report no. t-6839-es technical...

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