Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 28532 EC

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$20 MLLION

TO THE

REPUBLIC OF ECUADOR

FOR A

INSTITUTIONAL REFORM PROJECT

May 26,2004

Poverty Reduction and Economic Management Sector Management Unit Bolivia, Ecuador, Peru and Venezuela Country Management Unit Latin America and the Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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REPUBLIC OF ECUADOR

ALCA

APL BCE

CAE

CAS CAF cccc

CFAA CGE

CLD

CNC

COMEXI

CONAM

CONAREM

COSUDE

DIGMER

DO EU FCCGL

FEIREP

FM FMA FMR FTA GDP GOE GTZ

HR HRM

FISCAL YEAR January 1-December 3 1

CURRENCY EQUIVALENTS (Since January 2000)

Currency Unit = US dollar

WEIGHTS AND MEASURES Metric System

SELECTED ABBREVIATIONS AND ACRONYMS

Free Trade Agreement of the Americas (Acuerdo de Libre Comercio pura /us AmCricas) Adaptable Program Loan Central Bank of Ecuador (Bunco Central del Ecuador) Ecuadorian Customs Corporation (Corporucidn Aduaneru Ecuutoriunu) Country Assistance Strategy Colporacidn Andina de Foment0 Commission of Civic Control for Corruption (Comisidn de Control Civic0 de la Corrupcidn) Country Financial and Fiduciary Analysis Comptroller General Office (Contrulonh General del Estudo) Latin American Corporation for Development (Corporucidn Latino Americana pura el Desurrollo) National Competitiveness Council (Consejo Nucional de Competividud) Foreign Trade and Investment Council (Consejo de Comercio Exterior e Inversiones) National Council for State Modernization (Consejo Nucionul de Modemizucidn del Estudo) National Commission of Remunerations (Consejo Nacionul de Remuneruciones) Swiss Agency for Development and Cooperation (Agenciu Suizu pura el Desarrollo y la Cooperacidn- Cooperation Suisse du Dkeloppement) General Directorate of the Merchant Marine and Coasts - Guayaquil Port Authority (Direccidn General de lu Marina Mercante) Development Objective European Union Fiscal Consolidation and Competitive Growth Loan I, I1 Fund for Stabilization, Investment, and Public Debt Reduction (Fondo de Estubilizacidn, Inversidn Social y Productiva y Reduccidn del Endeudamiento Pu'blico) Financial Management Financial Management Assessment Financial Monitoring Report Free Trade Agreement Gross Domestic Product Govemment of Ecuador German Technical Cooperation - Gesellschaft fur Technische Zusammenarbeit Human Resources Human Resources Management

IADB IBRD

ICB ICR IESS

IRSISRI

IRP ISDS IT LAC LOAFYC

M&E MDAs MDGs MEF

MOSTA

NCB NFPS NGO OP OSCIDI

PAD PCN PCU PER PERHD

PetroEcuador PETS PDO PID PCU QCBS RO RVP SA SALT0 SBA SBD

Inter- American Development Bank Intemational Bank for Reconstruction and Development International Competitive Bidding Implementation Completion Report Ecuadorian Institute for Social Security (Institufo Ecuutoriuno de Seguridud SociuL) Internal Revenue Services (Servicio de Rentus Intemus) Institutional Reform Project Integrated Safeguards Data Sheet Information Technology Latin America and the Caribbean Financial Administration Legislation (Ley Orgrinicu de Administrucidn Financieru y Control) Monitoring and Evaluation Ministries, departments, agencies Millennium Development Goals Ministry of Economy and Finance (Ministerio de Economiu y Finunzas) Modernization of the State Technical Assistance Loan National Competitive Bidding Non-Financial Public Sector Non-govemmental organization Operational Policy National Office for Institutional Development (Oficinu de Servicio Civil y Desurrollo Institucionul) Project Appraisal Document Project Concept Note Project Coordination Unit Public Expenditure Review Program for Economic Restructuring and Human Development State-owned Petroleum Company Public Expenditure Tracking Surveys Project Development Objectives Project Information Document Project Coordination Unit Quality and cost-based selection Official Register (Registro Oficial) Regional Vice-presidency Special Account Structural Adjustment Liberalization Task Order Stand-By Arrangement Standard Bidding Documents

FOR OF'FICLAL USE ONLY

SENDA National Secretary for Administrative Development (Secretanh Nacional de Desarrollo Administrativo) National Technical Secretariat for Human Resource Development and Remuneration (Secretaria Nacional Ticnica de Desarrollo de Recursos Humanos y Remuneraciones del Sector Publico) Integrated Debt Management System (Sistema de Gestidn y Administracidn de Deuda)

System (Sistema Integrado de Gestidn Financiera) National Information System o f Institutional Development, Human Resources and Public Sector Remunerations (Sistema Integrado de Administracidn de Recursos Humanos)

SENRES

SIGADE

SIGEF Integrated Government Financial Management

SIGRH

SOEs TAL TE

TG

T I

TR TTL URHIs USAID

VAT WBI WTO

Statement of Expenditures Technical Assistance Loan Special Account (Cuenta Transitoria de Recursos Exremos) Local Counterpart Account (Cuenta Transitoria de Recursos del Gobiemo) Transparency International Chapter of Ecuador, Civic Participation Payment Account Task Team Leader Human Resources Administrative Units United States Agency for International Development Value-added tax World Bank Institute World Trade Organization

Vice President: David de Ferranti Country Director: Marcelo Giugale

Sector Director: Ernesto May Sector Manager: Ronald Myers

Edgardo Mosqueira Kathrin A. Plangemann Task Team Leaders:

This operation was prepared by a World Bank team composed of Messrs./Mmes. E. Mosqueira, K. Plangemann, J. Frank, C. Machicado, J. Rinne, E. Simon, S. Alborta-Hudson (LCSPS); M. Andrade, N. Brune, G. Durand, E. Fanta, C. Olle, B. Merino, J. Salazar, G. Shepherd, A. del Villar, (Consultants, LCSPS); J. Lopez-Calix (LCSPE), P. Larreamendy (LCCEC), R. Senderowitsch (LCSPR), F. Braun (Consultant, LCSPR), W. Reuben (LCSEO), A. Silva-Leander (SDV), F. Altimari, E. Brito (LEGLA), X. Morel (LOAG3); P. M c Kenzie (LCOAA), A. Jimenez (Consultant, LCOAA), K. Alfaro, M. Osorio (LCOPR), G. Reid (ECSPE), F. Recanatini (WBIGG), M. Zold (Consultant, INT). Peer Reviewers: Y. Matsuda (LCSPS), E. Campos (PRMPS), R. Pinto (AFTPR).

This team was led by MessrsIMmes. Edgardo Mosqueira and Kathrin A. Plangemann (LCSPS, Task Managers), and worked under the general guidance o f Messrs. Marcelo Giugale (Director, LCC6C), Vicente Fretes-Cibils (Lead Economist and Sector Leader, LCC6C), Ernesto May (Director, LCSPR), Ronald Myers (Sector Manager, LCSPS), and McDonald Benjamin (Country Manager, LCCEC).

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may n o t be otherwise disclosed without W o r l d Bank authorization.

ECUADOR EC Institutional Reform

CONTENTS

Page A . STRATEGIC CONTEXT AND RATIONALE .................................................................. 6

COUNTRY AND SECTOR ISSUES .............................................................................................. 6 RATIONALE FOR BANK INVOLVEMENT .................................................................................. 9 HIGHER LEVEL OBJECTIVES TO WHICH THE PROJECT CONTRIBUTES ...................................... 9

B . PROJECT DESCRIPTION ................................................................................................ 10 LENDING INSTRUMENT ........................................................................................................ 10 PROJECT DEVELOPMENT OBJECTIVE AND KEY INDICATORS ................................................. 10 PROJECT COMPONENTS ....................................................................................................... 11 LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN ............................................. 16 ALTERNATIVES CONSIDERED AND REASONS FOR REJECTION ............................................... 16

C . IMPLEMENTATION. ........................................................................................................ 17 1 . PARTNERSHIP ARRANGEMENTS ........................................................................................... 17 2 . INS~TIONAL AND IMPLEMENTATION ARRANGEMENTS ................................................... 17 3 . MONITORING AND EVALUATION OF OUTCOMES/RESULTS ................................................... 18 4 . S U S T A I N A ~ ~ ~ ~ Y ................................................................................................................. 18 5 . CRITICAL RISKS AND POSSIBLE CONTROVERSIAL ASPECTS .................................................. 18 6 . LOAN~REDIT CONDITIONS AND COVENANTS ...................................................................... 19

APPRAISAL SUMMARY .................................................................................................. 20 1 . ECONOMIC AND FINANCIAL ANALYSES ............................................................................... 20 2 . TECHNICAL ......................................................................................................................... 20 3 . FIDUCIARY .......................................................................................................................... 20 4 . SOCIAL ............................................................................................................................... 21 5 . ENVIRONMENT .................................................................................................................... 21 6 . SAFEGUARD POLICIES ......................................................................................................... 21 7 . POLICY EXCEPTIONS AND READINESS ................................................................................ 22

ANNEX 1: COUNTRY AND SECTOR OR PROGRAM BACKGROUND ......................... 23

ANNEX 2: MAJOR RELATED PROJECTS FINANCED BY THE BANK AND/OR OTHER AGENCIES ................................................................................................................... 28 ANNEX 3: RESULTS FRAMEWORK AND MONITORING ............................................... 31 ANNEX 4: DETAILED PROJECT DESCRIPTION .............................................................. 43

ANNEX 5: PROJECT COSTS ................................................................................................... 51 ANNEX 6: IMPLEMENTATION ARRANGEMENTS .......................................................... 52

ANNEX 7: FINANCIAL MANAGEMENT AND DISBURSEMENT ARRANGEMENTS53 ANNEX 8: PROCUREMENT ARRANGEMENTS ................................................................. 57

1 . 2 . 3 .

1 . 2 . 3 . 4 . 5 .

D .

4

ANNEX 9. ECONOMIC AND FINANCIAL ANALYSIS ...................................................... 67 ANNEX 10: SAFEGUARD POLICY ISSUES .......................................................................... 70 ANNEX 11: PROJECT PREPARATION AND SUPERVISION ........................................... 71 ANNEX 12: DOCUMENTS IN THE PROJECT FILE ........................................................... 72 ANNEX 13: STATEMENT OF LOANS AND CREDITS ....................................................... 73 ANNEX 14: COUNTRY AT A GLANCE ................................................................................. 74 ANNEX 15: MULTISTAKEHOLDER CONSULTATIONS ................................................. 76

Figures: Figure 1. The Government’s Public Sector Reform Strategy Figure 2. Tax and Non-Tax Revenue o f Central Government (% GDP) and Important Tax Reform Efforts, 1964-2002 Figure 3. Government Effectiveness (LAC, 2000-2001)

Tables: Table 1. Project Development Objective and K e y Indicators Table 2. Criteria for Selection o f Components Table 3. Risks and Mitigation Measures Table 4. Progress in the Government’s Program supported by the FCCGL-I in 2003 Table 5. Governance indicators for Ecuador (World Bank Institute, WBI) Table 6: Related Wor ld Bank Projects Table 7. Projects and Programs o f Other Donors in the Area o f State Reform Table 8. Implementation Arrangements per Component Table 9. Project Structure

Procurement Tables: Table A: Allocation o f Proceeds

Boxes: Box 1. The Program for Economic Restructuring and Human Development (PEHRD)

5

ECUADOR

EC INSTITUTIONAL REFORM

PROJECT APPRAISAL DOCUMENT

LATIN AMERICA AND CARIBBEAN

LCSPS

Date: May 28,2004 Team Leaders: Edgardo Mosqueira Medina

Country Director: Marcel0 Giugale Sectors: General public administration sector Sector Mangermirector: Ronald E. Myers (50%); Central government administration

(50%) Themes: Administrative and civil service reform (P);Other accountability/anti-corruption (P)

and Kathrin Plangemann

Project ID: P085302 Environmental screening category: Not Required

[X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing (US$m.): 20.00

BORROWER 4.00 0.00 4.00 INTERNATIONAL BANK FOR 10.00 10.00 20.00 RECONSTRUCTION AND DEVELOPMENT Total: 14.00 10.00 24.00

Borrower: Ministerio de Economia y Finanzas Avenida 10 de Diciembre Quito Ecuador

Responsible Agency: Ministerio de Economia y Finanzas Ecuador dmancheno@mef.gov.ec

Estimated disbursements (Bank FY/US$m) ;Y 4nnual hmulative

2005 2006 2007 2008 0 0 0 0 0 4.00 7.00 6.00 3.00 0.00 0.00 0.00 0.00 0.00 4.00 11.00 17.00 20.00 20.00 20.00 20.00 20.00 20.00

I s approval for any policy exception sought from the Board? Does the project include any critical r isks rated “substantial” or “high”? Ref. PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Ref. PAD 0.7

[ ]Yes [XINO

[XIYes [ ] N o

[XIYes [ ]No u

Project development objective Ref. PAD B.2, Technical Annex 3 Customs, procurement, c iv i l service, and selected services are more efficient, effective, transparent, and accountable. Reformed areas constitute models of state modernization to be expanded to other public sector areas.

Project description [one-sentence summary of each component] Ref. PAD B.3.a, Technical Annex 4 Component 1-Customs Reform. The objective i s to enhance efficiency and transparency o f Customs by improving service-delivery for users and strengthening collection, inspection and compliance. Component 2- Procurement Reform. The objective i s to expand access and enhance transparency, efficiency and competitiveness of procurement. Component 3-Professional Civ i l Service Management. The objective i s to enhance efficiency and transparency in the management of the civil service by developing the capacity o f central government to monitor and manage the number, skills, remuneration and professionalism o f i t s employees. Component 4 -Efficiency and Accountability in Selected Public Agencies. The objective o f this component i s to improve efficiency and to simplify service provision and management in selected agencies. To select these agencies, particular eligibility criteria, including fiscal, social, management and efficiency indicators, w i l l be specified in advance. Component 5 -Change Management. The objective i s to create the conditions necessary for successful implementation and sustainability o f the project.

Which safeguard policies are triggered, if any? Ref. PAD 0.6, Technical Annex 10 This project triggers none of the Bank’s environmental or social safeguard policies.

Significant, non-standard conditions, if any, for: Ref. PAD C.7 Board presentation: n/a

Loadcredit effectiveness: Conditions precedent for effectiveness o f the Loan Agreement for this Project are the following: (a) the Operational Manual has been issued and adopted b y the Borrower and approved by the Bank; and (b) the financial management system for the Project has been established and adopted by the Borrower, in a manner satisfactory to- the Bank.

Covenants applicable to project implementation: d a

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

Ecuador i s s t i l l recovering from one of the most serious economic crises in i t s history. Following the Asian crisis, a steep fall in oi l prices, and the negative impact of El Niiio, from 1997 onwards the country had serious problems balancing revenue and expenditures. In 1999, the fiscal deficit reached 6.7 percent o f GDP. Nearly half the banking sector, which in previous years had lent imprudently, collapsed. The severity o f the fiscal crisis, high inflation, a debt default in 1998, and the devaluation of the domestic currency, led the government to officially dollarize in January 2000. The social impact o f the crisis was considerable: unemployment rose from 10 to 15 percent and half a million people emigrated to find jobs abroad. The poverty rate increased by 7 percent in just the first two years o f the crisis (1998-99). Particularly severe was the impact on urban poverty, with the number of poor increasing from 1.1 mill ion to 3.5 million. Frequently changing governments and a high turn-over o f key ministers illustrate the corresponding political instability in the country.

Since 2000, however, Ecuador has achieved important progress in stabilizing the economy by restoring .price stability, growth, and confidence in the financial system. In 2003, growth reached 3 percent and inflation declined from 9.4 percent in 2002 to 6.1 percent. The NFPS primary surplus increased from 4.5 percent of GDP in 2002 to about 5 percent in 2003. As a result, the fiscal surplus doubled to about 2 percent of GDP. Real salary levels and unemployment rates are now back to 1998 levels.

Ecuador i s now at a critical juncture, facing crucial challenges and choices.’ I t can capitalize on the progress achieved in previous years and further commit itself to fiscal discipline, state reform, greater efficiency and transparency in public management, and improved service delivery. Or it can return to fiscal profligacy and speculate that international o i l prices wi l l remain high enough to avoid a new economic crisis.

The GutiCrrez Administration, which took office in January 2003, has committed itself to further economic, political, and governance reforms in the Program for Economic Restructuring and Human Development (PERHD; Annex 1). Under i t s economic pillar, the PERHD seeks to improve fiscal discipline, stimulate production and commerce, improve basic infrastructure, strengthen financial markets, and create more flexible and competitive labor markets. The social pillar pursues reforms in education, health, and social assistance to fight poverty more effectively. Finally, the governance pillar aims at combating corruption, improving public service delivery and transparency, and increasing overall security. The reform agenda i s supported by a Stand-By Arrangement (SBA) with the IMF.

’ See the analysis in the background policy notes prepared as part o f the preparation of this project: “Foundations for Institutional Reform in Ecuador,” Washington, D.C., May 2004.

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Public sector reform and service improvement wi l l be key to overcoming the challenges highlighted in the PERHD. State capture, rent-seeking, weak accountability and transparency have adversely affected growth and poverty outcomes. The government loses an estimated one-third of i t s tax income through corruption, although recent reforms indicate the situation i s improving. Companies report having to pay an additional 15 percent o f total contract cost to win public bids. Low transparency also works as a regressive tax on the most poor and vulnerable which are often most seriously affected by corruption and poor service delivery. Households report paying bribes to public officials for selected public services in 41 percent of cases.2

A civil service marked by inefficiencies and a lack of transparency i s not only a burden for fiscal accounts, but also limits the capacity o f government to improve the coverage and quality o f public services. Dollarization imposes new constraints as fiscal policy i s the only means for steering the economy, underscoring the need to balance revenue and expenditures. If Ecuador wants to achieve economic growth, sustain dollarization, be competitive in the global economy, and reach the MDGs, it has to improve the efficiency and transparency o f public management and the quality of service delivery.

The government has made progress in reforming services in a few “islands o f efficiency.” So far, these efforts have focused on the revenue side. A successful reform has been implemented in the tax administration agency (SRI). The streamlining of procedures, introduction of electronic transactions, and improved services for taxpayers have resulted in heightened tax compliance (e.g. tax revenue in the first quarter of 2003 increased by 7.5 percent compared to the first quarter of 2002). This reform constitutes an important step forward for Ecuador, demonstrating very powerfully that institutional reform i s possible. Based on the PERHD, the Gutikrrez administration now seeks to extend public sector reform to new areas, in particular Customs, procurement, civil service, and other selected public services and organizations (Figure 1).

Figure 1. The Government’s Public Sector Reform Strategy to be supported by the IRP

First-Phase Reform: 2 0 0 0 - 2 0 0 3

Intended Second-Phase Reform: 2004 onwards

Customs Reform: CAE

Procurement Reform: CONTRATANET

Civi l Service Reform: SENRES

Reform o f selected public services, e.g. Civ i l Registry, PETROECUADOR

participation

Management

Authority (SRI)

Seligson, Mitchell A.; Recanatini, Francesca: The Environment and Governance and Corruption, in: Fretes-Cibils, Vicente; Giugale, Marcel0 M.; Lopez-Calix, Jose-Roberto (ed.): Ecuador. An Economic and Social Agenda i n the New Millennium, World Bank, Washington DC, p.411-443.

The reform o f the Ecuadorian Customs Administration (CAE) has a central role in this strategy. The CAE has designed a draft Modernization Plan that includes strengthening the role o f the SRI on the CAE board, greater access to crosscheck import bills and CAE taxpayer information, stiffer penalties for the understatement o f imports, and improved border controls (see Annex 4). These combined efforts w i l l ensure improved service- delivery for Customs clients, in particular for small and medium-sized enterprises that lose resources due to delays in Customs clearance and the payment of bribes. Customs reform wi l l not only reduce fiscal losses ‘due to inefficiencies and corruption, but also facilitate trade integration and competitiveness-a pre-condition to conclude the Free Trade Agreements (FTA) with the United States, MERCOSUR and the EU in 2005.

Another important area of service delivery improvement i s to create a transparent and efficient procurement system, where corruption now leads to a loss of public resources. In 2003, an Executive Decree made the use of the electronic procurement system CONTRATANET mandatory for all public agencies. Developed under the leadership o f the Anti-Corruption Commission (CCCC) - a constitutionally mandated organization composed of c iv i l society representatives - all public institutions now have to publish electronically their procurement offers and the documents underlying the procurement process. Once CONTRATANET i s transformed into a transactional system, bidding documents w i l l be published, and bidders and their offers wi l l be registered. The new draft Procurement Law and the recently passed Law on Access to Information wi l l also help eliminate exemptions and loopholes, and define clear standards and reference prices. The state o i l company Petroecuador, which accounts for 70 percent o f government purchases, has been selected as a pilot entity to introduce the new transactional system.

Personnel management reform i s another key component of the reform agenda. In 2003, Congress approved a Civ i l Service and Salary Unification Law. The National Technical Secretariat for Human Resources Development and Remuneration in the Public Sector (SENRES) and the Human Resources Administrative Units (URHIs) in each government agency are responsible for implementing the new law. Management reforms wi l l help the government to regain control over the wage bill, and contribute to a more effective, efficient, professional and accountable civil service.

The government has also committed to reforming selected services that have a broad- based impact on citizens, such as the civil registry, small business registration, the authorizations provided by the national agency for food and drug administration (Registro Suniturio) and selected social programs. More efficient and transparent service-delivery would not only reduce transaction costs, but also barriers to market entry, particularly for small and medium-sized businesses, leading to greater competition.

While the benefits of state reform are evident, the government’s strategy faces serious challenges. Efficiency-enhancing reform threatens the interests o f those who have a stake in the status quo. Whereas the “losers” of the intended reforms often are a concentrated group, the “winners” - such as general citizens and taxpayers - are dispersed and therefore difficult to mobilize. State reform needs to produce some quick and visible results to demonstrate the feasibility and benefits o f reform. I t requires

8

strategic decision-making, careful sequencing and a close engagement with stakeholders through change management. I t also demands political leadership, commitment and ownership to design, implement, and sustain reform.

2. Rationale for Bank involvement

Bank involvement i s tailored to respond closely both to government requests to support key reforms and to the Bank’s country assistance strategy expressed in the CAS. In particular, three factors have generated a positive momentum for reform and the Bank’s involvement in Ecuador. First, following the SRI reforms, demand i s growing to tackle the expenditure and efficiency side of the public sector, particularly in procurement and civ i l service management. Second, there i s an important shift in the incentive framework facing policy makers. Trade, global competition and dollarization send signals to authorities to reform the public sector and achieve transparency and efficiency, rather than relying mainly on oi l income. Finally, the Ministry o f Economy and Finance -under stronger and more stable leadership than in previous governments - i s committed to state reform, primarily for efficiency and fiscal reasons, helping build strong ownership.

The Bank i s seizing the momentum for reform and w i l l support the government in i t s reform efforts. The close policy dialogue across al l major development areas has been reflected in the CAS, the Ecuador Policy Notes and the expanding lending portfolio, particularly the two Programmatic Loans related to this project. This gives the Bank not only a strong role as a “knowledge bank” in Ecuador, but also the role of a catalyst for further reforms, especially in politically sensitive and complex areas. The Bank can leverage support from other donors, such as U S AID, and w i l l coordinate implementation closely with other agencies such as the IADB (refer to Annex 2). The Bank can also share knowledge and experiences from other countries and foster a debate on new and innovative ways of designing and implementing institutional reforms. Finally, the Bank’s previous involvement in institutional reforms in Ecuador includes important lessons learned from an earlier institutional reform project, MOSTA, carried out from 1996-2000.

3. Higher level objectives to which the project contributes

The higher level objective of the operation i s to contribute to greater transparency, efficiency and accountability by helping to improve public revenue, expenditure management capacity and service delivery. The proposed project supports the Government in the implementation of the PERHD (Annex l), which seeks to fight corruption and improve public service delivery and transparency in Customs, procurement, civil service, and selected services.

The proposed project also supports the objectives o f the 2003 Ecuador CAS. I t i s consistent with the third pillar of the CAS aimed at strengthening governance and helping officials build an accountable and efficient government that provides services accessible to all Ecuadorians. Likewise, i t contributes to i t s f i rst pillar, which aims at consolidating the macroeconomic framework to lay the foundation for sustainable growth and poverty reduction. In addition, i t builds on the CFAA and CPAR recommendations, which have

9

shown that the lack of transparency and efficiency are key obstacles to achieving social and economic development.

Project Development Objective

Key Indicators

B. PROJECT DESCRIPTION

(i) The Customs, procurement, civi l service, and selected services are more efficient, effective, transparent, and accountable. (ii) Reformed areas constitute models o f state modernization to be expanded to other public sector areas. (i) External and internal evaluations and user surveys show improved service delivery in key areas. (ii) Greater access to information, transparency and regular reporting regarding the operation o f reformed areas. (iii) Competitive, meritocratic selection o f human resources in implementation agencies. (iv) Civ i l society monitoring and evaluation mechanisms are used to improve service delivery.

0

0

0

0

0

1. Lending instrument

The proposed lending instrument for this operation i s a Specific Investment Loan. This instrument has been chosen because of the investment focus o f the operation and the flexibility i t provides. Although a Technical Assistance Loan (TAL) would help to build institutional capacity, i t would not allow for the strong investment focus o f this operation and structural reforms i t supports. The proposed investment loan w i l l enable the government to implement reforms to which it has committed itself under the fiscal and social programmatic loans of the Bank. In particular, the proposed loan supports the set of Fiscal Consolidation and Competitive Growth Loans, that aim at establishing institutional sector policy changes, which include Customs, civil service, budget transparency, and procurement reforms.

2. Project development objective and key indicators

The project wi l l also monitor progress towards the Project Development Objective through each of the components. For example, indicators employed are, in the case of the Customs Component, a reduction in Customs clearance time to 10 percent of the baseline as well as a reduction of 75 percent of the differential import gap within three years. In the Procurement Component, progress indicators require publishing 100 percent o f government procurement processes in the second year, and that 100 percent of central government agencies operate with the a new CONTRATANET transactional system in the fourth year (refer to Annex 3 for details).

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3. Project components

The project has five components: (1) Customs Reform; (2) Procurement Reform; (3) Professional Civ i l Service; (4) Efficiency and Accountability in Selected Public Agencies; and (5) Change Management (see Annex 4 for a detailed description o f components).

The first four components are the key investment pillars. The complementary fifth component i s designed to ensure effective project implementation across components and to help mitigate risks and to support project sustainability. I t includes overall project management, monitoring and evaluation, civil society participation and specific change management instruments, including consensus-building and communication strategies.

a. Description of Components

Component 1. Customs Reform

The objective i s to enhance efficiency and transparency of Customs by improving service-delivery for users and strengthening collection, inspection and compliance. In particular, this component aims to: (a) strengthen control and internal auditing systems and procedures, including greater control of merchandise and technological upgrades to detect VAT evasion, contraband and fraud; (b) promote greater coordination with SRI on joint auditing of large taxpayers; (c) improve human resource management systems, and establish a “retirement plan” for the current inspection team in order to bring in qualified auditors; (d) enhance coordination between Customs and the Port Authority to improve Customs oversight and establish port-security systems; (e) reduce valuations and gradually eliminate the existing pre-shipment certificates; and (f) establish an oversight commission on Customs reforms for c iv i l society organizations to monitor reform progress (Obsewatorio Aduanero).

The target group focuses on officials of the Customs Authority and users of Customs services. As a result (outcome), users w i l l receive more effective and efficient services and Customs w i l l improve collection systems and taxpayer compliance. The inputs are automation and technological upgrades, port security systems and technical assistance for organizational reforms, streamlining of procedures and the preparation o f a draft Customs restructuring law and the Customs modernization plan (Annex 4). The outputs wi l l be effective control, auditing and human resource systems, and a c iv i l society observatory.

Component 2. Procurement Reform

The objective i s to expand access and enhance transparency, efficiency and competitiveness of public procurement. This component w i l l (a) provide technical assistance to support the enactment o f key legislation, such as a revised Procurement Law (reforms to Law No. 95) and an Electronic Public Transactions Law (including the implementation of some of the measures o f the 2000 reform package); (b) provide training on project administration and electronic procurement, including the

11

establishment of a national knowledge-sharing expert network; (c) elaborate and help implement an Ethics Code for procurement; (d) expand coverage of the CONTRATANET (software built-in) by converting it from an informational to a transactional procurement system, and fully implement the National Contractor Register system by including all institutions with transactional public services; (e) establish performance audits with a focus on pre-contractual stages; (f) provide training on new forms of procurement; (8) improve the national system o f accreditation on procurement, including both the private and public sectors; (h) establish a procurement regulatory agency, including strengthening coordination between various agencies involved in procurement by creating a Consejo de Compras (with membership of CCCC, Comptroller General’s Office, Attorney General’s Office, and MEF); (i) audit the annual and multi-annual procurement plans of public entities; and (i) audit payments and crosscheck with bids under the system of “licitaciones ”.

Employees in charge of procurement in each public agency as well as the users of this service constitute the main target group. The result (outcome) of this component wi l l be an improved ratio of cost/quality of goods and services purchased by government. The inputs to the component are software development for a new transactional system, training o f staff in implementing agencies and of users in the use of the system, and technical assistance for organizational reforms in procurement (including performance audits, accreditation and the design of a new legal framework). Expected outputs include a transactional procurement system (including greater coverage and access), a revised legal framework, and a functioning public procurement regulatory agency.

Component 3. Professional Civil Service Management

The objective i s to enhance efficiency and transparency in the management of the c iv i l service by developing the capacity of central government to monitor and manage the number, skills, remuneration and professionalism of i t s employees. This component seeks to: (a) develop a human resource management (HRM) database system linked to select personnel procedures, to SIGEF, and to the electronic payroll system established by the Central Bank; (b) strengthen professional human resource selection, evaluation and oversight mechanisms, by implementing c iv i l service reforms in four pilot departments, in particular through their URHIs; and (c) improve transparency and access to information through dissemination of summary statistics through the SENRES websi te.

The target group i s the human resource agency SENRES and the officials in charge o f human resource management in each public agency. As a result (outcome), central government officials w i l l be able to access real time data on staff composition, estimate future staffing needs, evaluate the fiscal impact o f proposed salary changes, monitor personnel selection and evaluation procedures, define capacity-building needs, and manage staff allocations. The inputs to the component include software development, IT hardware, and training in human resource management. The output wi l l be a modern human resources management (HRM) database and oversight o f staff selection and evaluation procedures in pilot departments for replication throughout central government.

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The government has also signaled interest in funding severance payments for public employees through this operation. The World Bank wi l l coordinate with the government and IADB to ensure that this request i s duly considered.

Component 4. EfSiciency and Accountability in Selected Public Agencies

The objective of this component i s to improve efficiency and to simplify service provision and management in selected agencies. To select these agencies, particular eligibility criteria, including fiscal, social, management and efficiency indicators, wi l l be specified in ad~ance.~ Candidate agencies wi l l develop a reform plan consistent with the guidelines set forth in the Operational Manual. The component w i l l support: (a) simplification of administrative procedures; (b) institutional reengineering; (c) a change of management style towards greater client-orientation; (d) human resource and procurement reforms; and/or (e) citizen evaluation mechanisms, where applicable.

Public officials of these agencies and agency users w i l l constitute the key target group. As a result (outcome), selected entities wi l l operate more efficiently and transparently and provide improved service delivery. The inputs to the component are procedural and/or organizational reforms, e-government, and training for enhanced institutional capacity. Expected outputs are reduced transaction costs, more effective and efficient service delivery, and management improvements resulting in greater fiscal savings.

Component 5. Change Management

The objective i s to create the conditions necessary for successful implementation and sustainability of the project. The component supports (a) project management; (b) monitoring and evaluation; (c) civil society participation; and (d) change management. The target group includes public officials in charge of implementing the project, both at the political as well as technical level (those delivering services), and other internal and external stakeholders, including from both the private sector and civil society. The result (outcome) wi l l be that the project i s managed and monitored effectively and that a greater consensus for reform i s built and sustained.

The inputs include training, workshops, consultancies, M&E support and communication strategies. The outputs include a project management unit that effectively manages the project, a well-functioning M&E system, greater participation o f civil society in project design, implementation and monitoring, and effective change management strategies that help create, communicate and institutionalize greater support for reforms.

Examples of requests for agencies to be reformed under this loan are the Civil Registry, the Sanitary Registry, Office for Business Licenses, and the state enterprise PETROECUADOR.

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b. Selection of Components: Strategy

Table 2. Criteria Component

1: Customs Reform

2: Procurement Reform

~

3: Professional Civi l Service

4: Efficiency and Accountability in Selected Public Agencies

or Selection of Compo Incentive for Reform

Trade integration. Competitiveness. Fiscal revenue. User demands for better and faster services. Expenditure control. Greater demands for quality improvements and more competition in private sector with improved access to mb l ic contracts. Payroll control. Need for institutional strengthening of key institutions.

Need for more efficient management, simplified procedures, greater transparency. Users demand better service delivery.

ents Strategic Importance

Reform implies important victory over a captured agency. Success gives the government political credibility to enter other areas of state reform. Reform severs symbiotic relationship between government officials and certain well-placed private enterprises.

Reform implies management changes within the state apparatus, which help to improve service delivery. Reform promises government quick results in highly visible areas to be replicated elsewhere. Can create broader support from stakeholderskitLzens.

Stakeholders of Reform

MEF. SRI. Small- and medium- sized enterprises.

MEF. cccc. Small- and medium- sized enterprises.

MEF. SENRES. Directors of public agencies.

Management and users o f selected agencies. All citizens.

The strategy of the proposed project i s to capitalize o n the progress made in improving tax administration and fiscal management and to expand to other re form areas, particularly on the expenditure side. The S R I constitutes a key entry point, not only because of i t s l inks to Customs (overseen by the jo in t SRI-CAE board), but also by the progress demonstrated in human resource management and service-delivery in the previous reforms. On this basis, the following high impact areas have been selected: (i) Customs, where the government loses important f iscal revenue; (ii) human resource management, the largest recurrent expenditure and a key area fo r improv ing service delivery; (iii) procurement, where government loses precious resources due to l imi ted transparency and efficiency; and (iv) selected areas, where improved service-delivery wi l l create positive fiscal and social impacts and wil l engender cit izen support for reforms.

Greater efficiency and transparency in publ ic sector management wi l l help not on ly to generate more revenue, but also to improve the quality of publ ic expenditure and to promote higher growth and competitiveness. I t also make the state more responsive and accountable to the needs of the citizens and improve service delivery, ult imately leading to greater poverty reduction.

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The strategy of the project reflects the fact that state reform requires strong champions. The idea i s to create winners of reform - efficiency and transparency champions - that have an interest in maintaining the changes promoted. The operation takes into account the fact that the private sector (particularly small-and medium sized enterprises) and specific public agencies such as the Anti-Corruption Commission (CCCC) and MEF are key players with an interest in transparency and efficiency reforms. Once these stakeholders obey the new rules o f the game, they w i l l raise the cost for those players who have incentives to break the new rules. The involvement of civil society i s intended to create and expand pressure for reform implementation. B y creating civil society oversight committees and monitoring tools (such as citizen scorecards in procurement and selected service-delivery), and by promoting the use o f participatory Public Expenditure Tracking Surveys (PETS), users and citizens at large w i l l have formal means to increase their leverage over policymakers and hold them accountable for the results produced.

State reform also requires sufficient capacity and demand for change. Civ i l service reform wi l l improve this capacity within the public administration. Both internal and external change thus need to work in coordinated fashion to ensure that incentives are mutually reinforcing. This requires a careful sequencing o f reforms, based upon an incremental strategy, starting in a few high impact reform areas and then expanding to other areas on the basis of visible reform progress. The goal i s to create sustainable reform and, through institutional strengthening and change management, help government achieve the intended second-level o f reform - one that not only focuses on raising more revenue, but also on a more effective deployment o f expenditures.

Given the expected high level of vested interests and potential opposition, the operation i s applying innovative reform management tools to build greater consensus and buy-in for the proposed reforms through a strong emphasis on change management (Component 5). On the basis o f a diagnostics o f the status quo, obstacles and the creation of a sense of urgency, this component w i l l help engage key different stakeholders to develop a shared vision of reforms. I t w i l l also build greater consensus and communicate the benefits and progress of reforms to institutionalize reforms, ultimately helping create greater sustainability o f on-going and increase demand for additional reforms.

c. Sector Issues

The operation tackles the principal problems o f inefficient provision o f services and the loss of fiscal revenue due to inefficiencies and corruption. In Customs, procurement, and select public services efficiency w i l l be promoted through the streamlining of procedures and organizational reengineering. This w i l l create savings in service delivery and reduce opportunities for corruption. This i s complemented by the use o f electronic instruments and procedures (HRM database, E-government, E-services) that reduce the possibility for individuals to alter or evade the rules of the game, thus raising the cost of corruption.

At the same time, the reforms w i l l create and enhance competition and thereby reduce rent-seeking opportunities that originate in lack o f transparency. B y broadening access to services, in particular with regards to procurement, small and medium-sized enterprises

15

wi l l benefit from their participation in doing business with the state. Customs reform i s also intended to achieve more trade and competitiveness in the domestic arena. The resulting competition w i l l create incentives to adhere to clearly defined rules o f the game.

Lessons learned In-depth analytical work i s needed to ensure high quality and relevance o f project design.

The operation w i l l also heighten taxpayer compliance by promoting stronger enforcement and closing loop-holes. In the Customs component, for instance, joint audits by SRI and CAE wi l l make tax evasion more difficult for companies. In procurement, bidders can only qualify if they have paid all taxes that are due. The creation o f social accountability mechanisms such as civil society oversight committees, public expenditure tracking surveys (PETS), management contracts and citizen scorecards w i l l help give greater voice to civil society and increase demand for reforms.

Application in project preparation Extensive policy notes have been prepared parallel to project preparation.

4. Lessons learned and reflected in the project design

In a high-risk environment, i t i s necessary to design and implement a strong strategy to reduce risks and to build project sustainability.

The project pioneers change management in Ecuador through a strategy o f stakeholder engagement to reduce resistance, risks and enhance sustainability of reforms.

I reform in the executive and judiciary.

~~

Broad-based reforms are often too ambitious and need to The project focuses on key agencies instead of broader be better targeted.

Institutional reforms, especially in an environment marked by strong state capture, need to be tackled incrementally.

Improving the supply side o f reforms through institutional strengthening in selected reform agencies should be supplemented by increasing demand for reforms through by engaging civil society and other stakeholders.

~ ~~~

The operation i s built on a sequencing strategy that i s based on achieving and expanding visible early results.

The project has a highly participatory approach in each of i t s components and as part o f project management, , including different M&E and oversight mechanisms and a

, targeted approach to private sector engagement.

To optimize project design and draw on lessons learned, the team has invested in extensive analytical work undertaken parallel to project preparation: background notes on “Foundations for Institutional Reform in Ecuador.” For each component - Customs, Procurement, Civ i l Service - a detailed analysis was prepared b y team members and external experts, which highlight the opportunities and constraints o f reform. This was complemented by papers on the broader conditions o f state reform, anti-corruption strategies, the role of civil society, and the lessons o f past state reforms in Ecuador (including the MOSTA and SIGEF projects).

5. Alternatives considered and reasons for rejection

In the course o f preparing the project several alternative approaches were considered. One alternative was a project with a strong anti-corruption focus. The team decided not to opt for this alternative because o f the limited opportunities for tangible results and the expected resistance to implement reforms. A second alternative consisted of a broader

16

public sector reform, including the Comptroller General's Office, but impacts would have been limited due to a lack of focus and the proposed incremental approach would have significantly raised implementation challenges. A third alternative would have been a project focusing exclusively on Customs or civil service reforms. However, such an approach would have been too narrow to create necessary reform synergies and would not have generated the same demand for additional, broad-based reforms.

C. IMPLEMENTATION

1. Partnership arrangements

In preparation for this operation, the Bank has engaged in a close dialogue on institutional reforms with other donors and civil society, including the participants o f the "Mesa de Gobernabilidad". As a result o f this donor coordination, specific partnership arrangements w i l l be created to support the proposed project. USAID wi l l work in close cooperation with the Bank and w i l l support the Plan for Customs Cooperation. The Bank and the IADB wi l l coordinate closely their work on civil service reforms. The Bank w i l l also cooperate with COSUDE (which financed the f i rs t stage o f the CONTRATANET) in procurement reforms. Other partners include the CAF, GTZ and the EU. The close cooperation with other donors wi l l help to provide broad and strong support to key reforms and w i l l reinforce and the Bank's reform program through greater efficiencies and synergies, as explicitly requested by the MEF and CAE (see Annex 6).

The Bank also has been active in seeking involvement of civil society in project preparation, and has carefully assessed the strengths and weaknesses of civil society in Ecuador. Project design has benefited from regular meetings with civil society organizations and two major civil society consultations (see Annex 15).

2. Institutional and implementation arrangements

A Project Coordination Unit (PCU) w i l l be set up within the Ministry of Economy and Finance (MEF), under the leadership of the Subsecretary of Political Economy. I t s organization and functions w i l l be detailed in an Operational Manual, satisfactory to the Bank. The PCU wi l l coordinate the activities o f the implementing agencies, which w i l l sign an implementation agreement with the MEF, satisfactory to the Bank.

A Steering Committee wi l l be constituted to oversee project implementation. Under the leadership o f the Minister of Economy and Finance the Steering Committee w i l l be composed o f the heads of the CAE, SENRES and CCCC and w i l l provide strategic leadership to guide project implementation. The Steering Committee w i l l be supported by a Technical Body, composed o f coordinators in each implementing agency, to oversee and direct project implementation in each component. In addition, an Advisory Board to the Steering Committee w i l l include national and international experts on the specific components, including representatives from civ i l society, to provide technical advice and support to the implementing agencies.

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3. Monitoring and evaluation of outcomeshesults

Risk Mitigation Measures R i S k S

Crucial for the goal of achieving strong results i s a sharp focus on a sound monitoring and evaluation (M&E) system for the project. Responsibility for M&E i s shared by the PCU and implementing agencies. Monitoring instruments include progress reports with process, progress, outcome, and results indicators; a combination of ex ante and ex post monitoring; impact evaluations and user surveys. Internal and external independent progress reviews w i l l be complemented by participatory M&E carried out by civil society organizations. Monitoring and evaluation results wi l l feed back into the decision-making analysis to improve project performance. The set-up of the M&E system wi l l require some institutional strengthening, for which the Bank w i l l also collaborate with U S AID.

Risk Rating with Mitigation

4. Sustainability

Intended reforms activate latent stakeholder resistance to block reform.

Financial sustainability of the project i s expected as project costs w i l l be more than compensated by improved managerial capacity generating fiscal savings and efficiency gains, including increased taxpayer compliance, higher efficiency and transparency in the management o f Customs and procurement, greater control over the wage bill, and improved efficiency in selected agencies. Institutional sustainability w i l l be strengthened through a focus on enhanced intra- and inter-institutional coordination, including through the Steering Committee. Technical sustainability w i l l be enhanced through technical assistance for institutional strengthening, capacity-building, and implementation and through the support of the Advisory Board (and in collaboration with other donors, where applicable). Social sustainability wi l l be promoted through a highly participatory approach with civil society and stakeholder engagement in al l project stages, including oversight bodies and participatory M&E instruments. Finally, the change management strategy in itself i s a powerful instrument to ensure project sustainability in all i t s aspects.

Change management will provide elements to H anticipate and address stakeholder resistance. Close monitoring and supervision with progress indicators will signal viability for reform.

5. Critical risks and possible controversial aspects

Policymakers cannot convince the officials responsible for implementing reforms o f the benefit of reforms.

The project i s a high risk project. The most significant risks to the project concern the political environment and the vested interests o f stakeholders. Component - specific risk mitigation measures w i l l be reinforced b y a focus on change management as an overall risk mitigation strategy.

Civil society oversight will create additional demands and pressure for reform from outside the state apparatus.

To project development objective 1

H

Publication and dissemination of reform targets will help to hold officials accountable for progress.

While the “losers” of reform (e.g. agency directors, private companies that often win procurement contracts) are concentrated, the “winners” of reform are dispersed (e.g. taxpayers, citizens). The “winners” may be difficult to mobilize in support of the reform, thereby threatening sustainability.

The project involves key civil society organizations (for instance chambers of commerce) that will help overcome collective action problems. Change management, particularly widespread communication and dissemination o f reform success in specific areas will help raise broad awareness.

H

~~

There are no short-term successes to enhance the credibility of the reform program.

Civil society groups may lose interest and disengage during reform implementation.

Component 4 i s designed in a flexible way to select those institutions where success i s likely

during supervision will help to ensure their continued involvement.

To

The government cannot transfer Customs administration to civilian authorities (Component 1).

:omponent results

The civil society oversight committee will create external pressure for effective reform. Close supervision and monitoring of progress will take place.

Administrative autonomy granted to agencies with the objective to facilitate implementation of reform provides new opportunities for capture (in particular with regards to Component 1).

Steering Committee provides institutional framework for mutual monitoring and supervision. Implementing agencies depend on MEF for disbursement of funds.

Civil service reform (Component 3) i s not a visible area and implies that change i s achieved only from within the state apparatus.

The Bank i s unable to signal to implementing agencies their responsibility for project implementation and ownership of reform.

Publication and dissemination of targets of reform to civil society.

~~ ~

Bank supervision must signal to government its responsibility in carrying out reform. Training in change management will contribute to creating ownership of reform.

Overall Risk Rating: H

H

S

S

H

Risk Rating: H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)

6. Loadcredit conditions and covenants

Conditions precedent to Effectiveness o f the Loan are the following: (a)

(b)

the Operational Manual has been issued and adopted by the Borrower and approved by the Bank; and the financial management system for the Project has been established and adopted by the Borrower, in a manner satisfactory to the Bank.

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D. APPRAISAL SUMMARY

1. Economic and financial analyses

The proposed project i s considered cost-effective. The economic impact w i l l be realized largely through effectiveness gains. The project’s financial impact i s considered sustainable, as the project costs should be more than compensated by improved managerial capacity reflected in fiscal savings and efficiency gains. Quantitative estimates of the fiscal savings, effectiveness and efficiency gains w i l l be elaborated during appraisal. (See Annex 9)

2. Technical

The technical analysis i s based on prior in-depth analytical work, including notes on different aspects of public sector reform (refer to Annex 12 for details). The selected approach reflects international experience and best practices in public sector management, including an analysis of risks and risk mitigation. International references for the operation include: for Customs, Bolivia, Chile, Mexico, and Peru; for procurement, Chile and Mexico; for civil service reform, Bolivia, and Brazil; and for selected services, Argentina, Mexico and Peru. Experts from these countries who have been involved in these reforms w i l l advise implementing agencies regularly. Project design wi l l also benefit from technical assistance and institutional strengthening, change management mechanisms, and close monitoring and supervision.

3. Fiduciary

A Financial Management Assessment (FMA) o f the Sub-secretaria de Politica Econdmica and Sub-secretaria Administrativa of the Ministry of Economy and Finance (MEF) was performed to evaluate the proposed financial management arrangements and the Project Coordination Unit’s capacity to provide the Bank with accurate, reliable and timely information regarding resources and expenditures. The joint assessment (performed on site from March 29 to April 1, 2004) with the Procurement Capacity Assessment was conducted in accordance with OP/BP 10.02 and the Guidelines for Assessment of Financial Management Arrangements in World Bank Financed Projects. As a result of the assessment, a consolidated time-bound Financial Management (FM) and Procurement Action plan has been proposed.

Procurement wi l l be carried out in accordance with World Bank guidelines and the provisions stipulated in the Loan Agreement. The proposed thresholds for prior review are based on the procurement capacity assessment o f the PCU and summarized in Table B, Annex 8. The PCU wi l l be in charge of preparing all bidding documents, carrying out bid openings, shopping procedures, and selecting and contracting consultant services for all contracts above and below prior review threshold. The technical staff of the PCU wi l l be responsible for the quality o f technical documents and products delivered by consultants, or physical inputs financed under the project.

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The Operational Manual for the project wi l l specify the duties and responsibilities of al l the institutions involved in the implementation of the project. I t w i l l also include the procurement procedures, the Standard Bidding Documents to be used for each procurement method, and model contract for goods procured on the basis of three quotations or shopping.

Disbursements wi l l be transaction based (Le., against Statements of expenditure (SOEs), full documentation, direct payments or special commitments). Deposits into the Special Account and replenishments up to the authorized allocation set out in the legal agreement wi l l be made on the basis o f applications for withdrawals prepared by the PCU in MEF and accompanied by the supporting documentation in accordance with Bank disbursement procedures.

4. Social

The project w i l l produce positive social impacts by generating greater efficiency in the utilization of public resources. There i s no direct negative social impact to be expected from implementation of Component 4, Professional Civ i l Service. However, the HFW database w i l l enable the government to reduce the negative impact o f an indiscriminate personnel reduction, should government decide to reduce public employment.

5. Environment

Given the project objective to strengthen the management capacity of the government and to improve public service delivery in Customs, procurement, civil service and select public services, the project w i l l not affect the existing environmental framework. N o environmental study or analysis w i l l be required and none o f the environmental or social safeguard policies wi l l be triggered. The Project i s rated as Category “C”.

6. Safeguard policies

This project triggers none of the Bank’s environmental or social safeguard policies.

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OD 4.20, being revised as OP 4.10) Forests (OP/BP 4.36) Safety of Dams (OP/BP 4.37) Projects in Disputed Areas (OP/BP/GP 7.60)* Projects on International Waterways (OP/BP/GP 7.50)

* By supporting the proposedproject, the Bank does not intend to prejudice the final determination of the parties‘ claims on the disputed areas

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7. Policy Exceptions and Readiness None.

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Annex 1: Country and Sector or Program Background

ECUADOR: EC Institutional Reform

In recent years Ecuador has tried to remake itself, both economically and politically. The country has changed - and i s s t i l l changing - but these changes have not been able to reduce the key constraints on social and economic development posed by a weak state and inefficient services. Although attempts at state reform are numerous, their outcome and impact have been fairly limited at best.

The reasons for this under-performance are embedded in the political, economic and social structure of Ecuador. Since the early 1970s buoyant revenue from o i l has allowed most governments to live with inefficiencies. O i l income impeded policy makers from recognizing underlying economic and fiscal constraints. After 1979, this dilemma became more complex: democratization provided groups access to arenas where policy was debated and enacted - Congress, the Executive, Judiciary - and they seized this opportunity to gain access to o i l rents. With l i t t le incentive to tax, but with a strong need to serve their clientele, all governments contributed to state growth by expanding public employment and investment. Efficiency concerns were not given priority.

After 1990, some incentives to reform the state emerged. The percentage of o i l in total government revenue declined, heightening distributional pressures. More openness and regional integration have created more competition and incentives for efficiency. In 1995, the National Modernization Council (CONAM) was founded and in the following years it launched several ambitious reform programs that focused mainly on privatization. But so far, the outcomes of these reform programs are limited. Although there were some incentives to improve services, those with a stake in maintaining inefficiencies have outmaneuvered those with a genuine interest in making the public sector more effective.

The financial and economic crisis of 1999 represents a sharp break with this past. With the international price of o i l plummeting to 7 USD per barrel, the weather phenomenon El NiAo devastating crops in coastal lowlands, and the collapse of private banks, there was no other opportunity for government than to reform the state. The dollarization regime adopted in January 2000 as a response to this crisis provided a significant budget constraint: fiscal policy remained as the only tool for economic policy. Whereas before currency devaluations were a comfortable means to disguise inefficiencies, now revenue needed to be raised from voters and taxpayers. For the f i rs t time, policy makers had a real incentive to tax. The Revenue Authority (SRI) was given the managerial autonomy to simplify procedures, impose sanctions, and serve their clients. As a result, tax revenue increased significantly when measured as a percentage o f GDP. For f irst time in more than 30 years, the share of tax revenue was higher than non-tax revenue (mainly oil) (Figure 2). Citizens now have a powerful argument to hold politicians accountable for their actions. This i s a key entry point for state reform.

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Figure 2. Tax and Non-Tax Revenue of Central Government (% GDP) and Important Tax Reform Efforts, 1964-2002

18

16

14

12

10

8

6

4

2

0

Years

1-Tax Revenue -Nan-Tax Revenue 1 Source: World Bank, based on data from Central Bank of Ecuador (2002).

The years following dollarization in 2000 were tough, but government achieved progress in important areas. Inflation fell to single digits and growth has been restored. Reported unemployment decreased as well as urban poverty. As a result o f this positive development, the government has improved i ts fiscal position. The Bank has supported the government in achieving this through the Fiscal Consolidation and Competitive Growth Structural Adjustment Loan (FCCGL-I) (Table 4).

Table 4. Progress in the Government’s Program supported by FCCGL-I in 2003

Policy Goal

Improved price stability and growth recovery

Higher fiscal revenue

Strengthen

Main Quantitative Results between 2002 and 2003

0

0

End-year inflation rate fel l from 9.4 to 6.1 percent and growth was 3 percent i n 2003. Unemployment fel l from 10 to 9.3 percent. NFPS surplus doubled to 1.9 percent o f GDP. Current account balance improved from -4.9 percent to -1.9 percent, and excess reserves rose from US$396 mln to US$4SS mln. Active interest rates fel l by about 1 .S percentage points in 2003. EMBI+ spread fel l by about 1,000 basis points between December 2002 and 2003.

Annual tax revenue collected by IRS increased by 7.8 percent.

Primary spending fel l from 21.7 to 20.8 percent o f GDP.

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spending management

Civil service reform

0 Primary fiscal surplus increased from 4.5 to 4.9 percent of GDP.

Increased budget transparency

Lower subsidies in the oil sector

Labor market reform

Annual increase in the wage bil l reduced to 0.2 percent of GDP (from 1.3 percent in 2002). Congress approval of key Civil Service and Wage Unification Law. About 40 percent of public servants went under a unified salary scale, and the number of redundant public personnel for 2004 was capped at 1 percent of the economically active population. MEF initiates publication of regular consolidated reports on budget execution An e-procurement system, CONTRATANET, was set up and became functional.

Fuel prices for domestic consumption were increased and subsidy to Petroecuador budget was cut by about US$200 million.

Minimum salary adjustment for 2004 was in line with the projected floor inflation rate for 2004.

A single public sector investment database was created. Public debt ratio declined from 58.3 to 53.4 percent of GDP. Al l 2002 external and domestic arrears were cleared. FEIREP started functioning and cumulated US$107 million i n 2003, of which

Enhanced debt management

70 percent have been allocated to debt buyback. I

Trade reform COMEXI unified import licenses, and eliminated about 8 percent of previously existing ones, while setting-up a pilot electronic system to approve import licenses.

Power sector reform

Electricity tariffs reached no less than 85 percent of average costs.

Telecom reform ANDINATEL and PACIFICTEL had operational surpluses and awarded a third mobile telephony license to Telecsa, while transferring i t s management to a private administrator.

Despite important progress in the economic area and in some “islands of efficiency,” more in-depth and rigorous state reform i s needed to achieve broad-based development. In fact, when analyzing governance indicators i t appears that progress in political reform i s diametrically opposed to the economic progress achieved in recent years. As Table 5 indicates, Ecuador’s ability to govern i s weak and has deteriorated over the last 6 years (Column I V presents changes in point estimates over 1996-2002 period; all indicators show a decline in performance). Ecuador also ranks third (of 30) from the bottom of the scale in Latin America and the Caribbean for “government effectiveness” (Figure 3). I t also ranks in the bottom third of the world distribution for “rule of law.” Confidence in government (37 out of scale of 100) i s among the lowest in Latin America and more than 75% of the Ecuadorian population believes that corruption i s very common to somewhat common, according to the WBI survey^.^

Seligson, Mitchell A.; Recanatini, Francesca: The Environment and Governance and Corruption, in: Fretes-Cibils, Vicente; Giugale, Marcel0 M.; Lopez-Calix, Jose-Roberto (ed.): Ecuador. An Economic and Social Agenda in the New Millennium, World Bank, Washington DC, p.411-443.

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Table 5. Governance Indicators for Ecuador (World Bank Institute, WBI) I Iv I

Source: D. Kaufmann, A. Kraay, and M. Mastmzzi. 2003. Govemance Matters III: Govemance Indicators for I996- 2002. Note: The six governance indicators are measured in units ranging from about -2.5 to 2.5, with higher values corresponding to better governance outcomes. Point estimates for each governance measure are constructed by aggregating several different related indicators. Governance estimates are normally distributed with a mean o f zero and a standard deviation o f one in each period.

Figure 3. Government Effectiveness (LAC, 2000-2001)

The Gutierrez Administration, which took office in January 2003, is wel l aware o f the challenges to state reform. I t has recognized that efficient services are key to capitalize on and sustain economic reform so as to reap the benefits achieved. The roadmap for achieving this i s the Program for Economic Restructuring and Human Development (PEHRD) which lays out a foundation to achieve an effective state at the service o f i t s citizens: anticorruption policies, modernization o f the state, pro-transparency and citizen participation programs are part o f this program (Box 1).

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Box 1. The Program for Economic Restructuring and Human Development (PEHRD)

The new Administration announced the PEHRD upon taking office on 15 January 2003. I t originally had three main pillars: economic, redistributive, and institutional policies. I t recognized the precarious fiscal situation and the urgent need for short- and medium-term structural reforms to sustain economic recovery and reduce poverty. I t targeted 11 social indicators for 2003-07.

Short-term economic policies encompass (a) an austerity Presidential Decree, “Norms for Patriotic Savings,” which restrains public expenditure to attack the immediate liquidity problem; a 2003 budget consistent with such austerity norms; and an increase in fuel prices; (b) a tax reform; (c) a restructuring o f the corruption-prone Ecuadorian Customs Corporation; and (d) the setting up o f FEIREP for debt reduction and countercyclical fiscal policy. Medium-term structural economic policies include (a) c iv i l service reform; (b) completion of the financial sector reform; (c) creation o f a Banking Liquidity Fund; (d) full liquidation of closed banks; and (e) new incentives to attract foreign investment, in particular in telecommunications, electricity, and the o i l industry, starting with tariff adjustments. Social policies include (a) the raising o f the Bono Solidario (cash subsidy) from US$11.5 to US$15 per month; (b) the increase o f pensions o f retirees by US$5 per month; (c) the approval o f a minimum pension o f US$15 per month for people over 68 years o f age who were not receiving the Bono Solidario; and (d) actions in the social sectors and the social security system, especially benefiting indigenous and rural populations. Institutional reforms contain (a) anticorruption policies, (b) modernization of the state, and (c) pro-transparency and citizen participation programs. To do so, the GOE organized Mesas de Didlogo and also announced i ts intention to revise the decentralization framework, while engaging civi l society in the design and monitoring o f the public budget.

Source: Initiating Memorandum for FCCGL-11.

One year later, the GOE has refined the PERHD with a clear view to implementing lagging reforms on the economic (structural), social, and governance fronts. In January 2004, President GutiCrrez reviewed the PERHD’s f i rs t year. The primary achievements included price stability, short-term fiscal consolidation, and redistributive policies. However, there were clearly delays in attracting foreign investment, in completing the financial sector reform agenda, in passing telecommunications and power state companies to a private manager, in fill ing the structural social gap - especially education - and in implementing an effective anticorruption agenda. The GOE added two new pillars (environment and security) to i t s poverty reduction agenda, while deepening i t s previous efforts on economic, social, and governance policies.

Key state reform efforts are now pursued in four areas: Customs, c iv i l service, procurement and selected areas. Reform along these lines w i l l allow the government to achieve an important second step in raising revenue and improving the quality of expenditures, which w i l l help improve public sector management and service-delivery. Success in these areas w i l l showcase the possibilities o f state reform and help create greater demands for reform in other areas, thereby making reversal of reform less likely.

27

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ECUADOR: EC Institutional Reform

Table 6: Related Wor Project

Completed Public Sector Management Project PO0700 1

Completed: MOSTA “Modernization o f the State - Technical Assistance” (PO07 136) Completed: Programmatic Fiscal Consolidation and Equitative Growth Loan I (P082739)

SIGEF: Financial Management (P074218)

Programmatic Human Development (P0082395)

Health Modernization MODERSA (Project No.4342)

I Bank Projects Donor

World Bank

World Bank

World Bank

World Bank

World Bank

World Bank

How related to Project Development

Objective Project objectives were: improving efficiency public investment and strengthening the organizational and financial structures o f selected public enterprises. Project pursued public sector reform, including financial management.

Project contains specific benchmarks and triggers related to Customs (Component l), Procurement (Component 2), and Civ i l Service Reform (Component 3). Project pursues development and introduction of financial management system, thereby contributing to transparency. It i s being considered that Component 4 (Improvement o f Services in Key Areas) may touch upon specific social programs and make them more efficient (no decision has been taken as of yet). Project intends to improve health reform. Possible coordination required

IP and DO Ratings

Project completed in 1993.

Project completed in 2000: rated “satisfactory” in the ICR.

Project completed: “S” in ICR (February 2004).

Ip: “S” DO: “S”

IP: “S” DO: “S”

28

in Component 4 (selected services) if social sector reform i s considered.

Project

Program “Modernization o f the State”

SALTO (Structural Adjustment and Liberalization Task Order)

Decentralization, Democracy and Development (3D)

S i Se Puede

I

How related to Project Development Donor

German Technical Cooperation (GTZ)

USAID

USAID

USAID

Objective 3TZ project provides technical assistance :o Ministry o f Economy and Finance :MEF), among others, for responsible ’iscal management o f central and local ;overnments; it entails transparency o f Fiscal accounts and dissemination o f mdget data. Project encompasses macro and micro xonomic reforms. On the macro economic front, SALTO supports public finance, by strengthening MEF, Customs, and IRS. Project also tackles Trade Agreements and support to the US-Ecuador Free Trade Negotiations. MEF i s being restructured internally to meet the challenges imposed by i t s mandate; i t wi l l receive approximately 1.5 million in technical assistance for fiscal policy implementation. Customs has received and wi l l continue to receive funding for selected purposes, in coordination with World Bank, and IRS wi l l continue to receive funding for the last 18 months in key areas o f tax administration. Project entering third year o f operation. Project seeks to support governance by: (1) strengthening local governments and their capacity to implement projects; (2) supporting fiscal decentralization tools and procedures at MEF; (3) promoting participation o f c iv i l society and constituents in definition o f public budgets and projects, thereby requesting accountability from public officers. Project entering third year o f operation. Project to support anti corruption through: (1) Access o f Information, (2) Support to Control entities and journalists in their

29

Program for Decentralization

Anti corruption’ training for journalists

Trade Sector Facility

British Cooperation

Judicial Reform

~

Democracy

IADB

IADB

IADB

European Union

Governance UNDP

Governance CAF

investigative capacity (3) Transparent Municipal Governments. Project in initial implementation phase, and components might change slightly in their scope after USAID’s f irst revision. The project aims to support administrative decentralization (CONAM) and provide tools for fiscal decentralization (MEF).

The project w i l l create “Trade Capacity” in five public entities, including MEF. MEF wi l l create a “Foreign Operations” Unit to formulate and monitor public policies in trade- related areas. It w i l l also support the Foreign Trade Agreement negotiations. Project approved by IADB in April 2004. Project i s at “definition” phase. I t aims to reform the judicial system by: (1) strengthening key institutions in judicial administration (2) support the application o f the Co’digo de Procedimiento Penal (3 ) finance c iv i l society projects that aim at improving access to the judicial system, legal education, and others. Project likely to be approved in November 2004. Project works with three NGO’s to promote the rights of citizens in human rights and democracy and focuses on training and dissemination o f information to some focal groups. Training for local journalists in anti corruption with Fundacio’n El Universo (public diplomacy challenge fund) Four Seminars Governance Seminars: accountability, access o f information (in Mexico and Peru). Project to support local governments and local organizations in managing their budgets with transparency and accountability. Project executed with George Washington University and two local Universities (Cato’lica de Quito y de Guayaquil) whereby local authorities are trained in governance issues. Three Modules. Two oromotions have m-aduated thus far.

f i

30

Annex 3: Results Framework and Monitoring

ECUADOR: EC Institutional Reform

Customs, procurement, and c iv i l service and selected service-delivery areas are more efficient, effective, transparent, and accountable. Reformed areas constitute models o f state modernization to be expanded to other public sector areas.

I Component One: Customs service-delivery, collection systems and taxpayer compliance has improved.

I

Results Framework

Outcome Indicators

Internal and external performance reviews and user perceptions show improved service delivery in key areas. Access to information and regular reporting regarding the operation o f reformed areas.

0 Competitive selection of human resources in implementing agencies. M&E mechanisms for service-delivery by civil society are used and help improve project implementation.

Component One: 0 Reduction o f Customs

clearance time5: (i) to 50% o f baseline within 6 months; (ii) to 25% of baseline within 18 months; (iii) to 10% within 36 months. The differential import gap6 identified in the baseline has been reduced by 25% within 12 months; by 50% within 24 months; by 75% within 36 months.

fiscal impact have increased from the current

Inspection findings’ with

Use of Outcome Information

YR 1 : Determine improvement Ln service delivery, efficiency md transparency. YR 2: Determine level o f sccountability o f government through improved management systems and increased c iv i l society oversight. YR 4: Determine demand o f other reforms and design and implementation o f such additional reforms.

Use of Results Monitoring

Component One: YR 1-4: Determine if users receive a more efficient service and improved collection and compliance. After YR 2: Determine fiscal impact o f Customs reform.

~~

Clearance time = from arrival o f goods to port o f entry until made available to importer. Differential import gap = difference between declared exports in country o f origin and registered

Inspection finding = difference between declared and inspected merchandise. merchandise at destination.

31

Component Two: The ratio of costlquality o f goods and services purchased by government has improved and clear responsibilities for procurement are in place.

1% to 3% of the total o f inspected goods within 12 months, to 5% of the total o f inspected goods within 18 months; to 8% within 36 months . At least 2 monthly joint audits with Revenue Authority (SRI) have been conducted within 12 months; at least 3 monthly audits within 24 months; at least 4 monthly audits within 36 months.

Intelligence and Audit Unit within the Customs agency after 12 months and follow-up to cases.

Operation o f an

Component Two: 1 st yeadwithin 12 months:

Regulations to the new Procurement Law have been approved, officially published " and effectively implemented. Full disclosure and dissemination o f procurement processes8 and results by at least 50% of central government agenciesg through CONTRATANET. Design o f transactional system for CONTRATANET.

2"d yeadwithin 24 months: At least 3 agencies have adopted the new CONTRATANET transactional system on a pilot basis. 100% of government procurement processes

Component Two: YR 1-4: Determine reduction o f opportunities for corruption and savings in procurement due to greater transparency and efficiency.

Procurement process = includes al l steps of purchasing process (excludes direct purchase). Central government agencies = sector ministries and autonomous agencies. lo Assuming that CCCC has transferred CONTRATANET to the implementing agency.

32

Component Three: Central government officials access real time data on staff composition, estimate future staffing needs, monitor

have been published. The procurement process has been (i) audited by an international, independent firm and (ii) monitored by civi l society organizations including CCCC''. The results have been disclosed and disseminated.

3rd yeadwithin 36 months: 30% of number of biddings work under the new CONTRATANET transactional system. 30% of total value o f central government purchases have been realized with the new CONTRATANET transactional system. 50% of central government entities operate with the new CONTRATANET transactional system. A permanent auditing system, based on international standards, i s in operation. It i s monitored by the private sector and c iv i l society including CCCC. I t s results have been presented to the public, discussed and disseminated.

4Ih yeadwithin 48 months: 0 100% of central

government agencies operate with the new CONTRATANET transactional system.

Component Three: Within 24 months HRM personnel data module installed in at least 95% of central government

Component Three: YR 1: Ensure that system design i s suitable for stated SIGRH-SENRES functions. YR 2: Tracks gradual

33

personnel selection and evaluation procedures, evaluate the fiscal impact o f proposed salary changes, define capacity building needs, and manage staff allocations.

Component Four: Selected public entities have streamlined Drocesses and/or

agencies covered by the Civi l Service and Wage Unification Law. Within 24 months personnel information for at least 95% of central government personnel covered by the Civil Service and Wage Unification Law included in personnel database. Within 24 months employees o f at least 50% o f HR units covered by the Civi l Service and Wage Unification Law trained in use o f the HRM personnel data module. These modules operational in these agencies, as monitored by SENRES. Within 36 months select employees o f at least 95% o f HR units covered by the Civi l Service and Wage Unification Law trained in use o f the HRM personnel data module. These modules operational in these agencies, as monitored by SENRES. Within 36 months HRM modules for personnel selection and evaluation installed in 4 pilot departments, and HR unit staff trained in their use. These modules operational in these departments, as monitored by SENRES. Within 24 months the SENRES website w i l l present summary data covering public administration employment and pay.

Component Four: Reengineered processes and/or organizational

jevelopment o f SIGRH- 3ENRES and flags mplementation bottlenecks. 4fter YR 2: Ensure that selection and evaluation nodels support xofessionalization o f c iv i l service.

Component Four: YR 1-4: Determine if reform has reduced opportunities for

structures for more effective 1 restructuring have been I corruption, led to more service delivery. implemented in selected

agencies. Simplified administrative

procedures (trdmites) in selected agencies result in cost/time/qualit y improvements in the delivery of services and higher user satisfaction.

efficiency, and improved services. YR 2: Show if services are operational in all i t s extent. YR 4: Determine if reformed processes andor structures have not been reversed or altered.

35

I

(r

h

4

d

c

4

3 30

0

0

0 d

In n

VI n

3 VI

3

3

3

3

3 d

Annex 4: Detailed Project Description

ECUADOR: EC Institutional Reform

Component 1. Customs Reform- US$1.6 million

SRI, CAE and MEF, supported by the World Bank and USAID developed a Customs Modernization Plan in early 2004. I t s main objectives are to (i) increase tax collection and supervision, and to avoid underrate fraud and contraband; and (ii) reduce the costs for users in processes related to Customs, especially in the process o f merchandising imports. To comply with the goals of the Modernization Plan, the following areas are being supported as part of this operation.

(a) Internal Audit. The objective i s to strengthen internal audit and control o f corruption.

0

0

0

0

0

0

0 Develop an ethics code.

Re-design the Audit and Internal Affairs Units and create a new unit responsible for investigation, audit procedures and preventive audit. Establish an agreement between CAE and CCCC to exchange information on cases and practices of Customs corruption. Design a control system to manage cases of corruption and monitor the ordinary justice of the cases. Diagnose and prepare an action plan for IT security systems. Design o f a model of internal audit account. Design o f annual public account o f audit and transparency.

(b) Coordination of Customs Agency (CAE) and Revenue Authority (SRI). The objective i s to improve coordination between CAE and SRI in order to supervise foreign trade activities.

Form a team of supervisors made up o f auditors of CAE and SRI for joint auditing of large tax contributors, to be coordinated by SRI. The target i s to perform three monthly audits and, after six months, perform at least nine joint monthly audits. Expand the use o f the foreign trade base in SRI on a pilot stage. Allow joint auditors to access this information base and cross-check information so as to establish a risk profile o f tax contributors. The goal i s to reach a tax compliance rate in 80 percent, of the selected cases, as determined by the data base. Create a mandatory registration o f importers for any import of merchandise. The condition i s that the importer must be recorded in the tax contributor data base of SRI. The goal of the SRI i s to audit 100 percent of companies that are registered for f i rs t time in this tax contributor data base.

0

0

0

(c) Exit of Inspection Enterprises. The objective i s to gradually eliminate the participation of inspecting enterprises, so that in 18 months, they stop performing operations of certification of pre-shipment.

43

0

Establish a valuation base within 4 months that contains those items covering 90 percent of the total value of the imports”. Establish cross-information channels with international agencies and information and software supplying enterprises to obtain prices and values of sensitive merchandise.

(d) Institutional Reform. The objective i s to transfer Customs administration from the military to civilians. A human resources program should be implemented, aiming at the professionalization of staff.

Design and implementation of a human resource management system, with complete registry of the CAE’s officials’ information.

0

0

0

e Select system of improvement. 0 Develop a retirement plan of Customs officials, which includes financing of

Design o f training program and its curriculum. Develop a permanent evaluation system and description of posts for CAE. Develop and apply a permanent system of official performance evaluation.

compensations.

(e) Coordination of Port Authorities and CAE. The objective i s to establish a greater degree of coordination among the Port Authorities and the CAE.

0 Form a joint commission for Customs-port supervision among Port Authority and CAE (by presidential decree).

0 Conduct a study on joint legal faculties for CAE and Port Authorities so as to delegate or complement powers among both entities.

0 Develop a plan for joint supervision. 0 Develop a plan for port security and i t s execution. 0 Re-design manifests control system and perform cross-checks with the statements of

importation. Evaluate financing mechanisms o f CAE and develop a new model.

(f) Valuation of foreign trade merchandise. The objective i s to achieve greater effectiveness of control as well as smaller costs related to import and export activities. This entails a reduction o f valuations and gradual elimination of pre-shipment certificates.

Establish “risk profiles” for the selection of valuations and eliminate those performed b y inspecting enterprises. The goal i s to reduce valuations from the present 70 percent o f operations to 40 percent within six months, and to 20 percent within twelve months. The effectiveness of the valuations of 1 percent should be increased to 5 percent within twelve months. Reduce total Customs clearance time from an average of 27 days to 15 days within six months and no more than six days in the following twelve months. l2

0

0

I t i s estimated that a l i s t o f 100 tariff items covers more than 90 percent o f the total o f the value. A t present the average time in which merchandise i s held by Customs and inspecting enterprises i s 13 days. The

remaining 14 days o f the total o f 27 o f Customs clearance time i s due do the involvement o f other control agencies, including agricultural control and control of narcotics.

44

(8) Civil Society Oversight. The objective i s to create an “Observatory of Customs Reform”, led by the Civ i l Anti-Corruption Commission (CCCC), which w i l l be linked to the management of CAE and i t s decisions. The Observatory w i l l be integrated by independent c iv i l society organizations such as CLD, the Fiscal Observatory, the Guayaquil University and the Universidad Politknica.

0

0

0

0

Define monitoring indicators and set a baseline. Define and implement participatory monitoring mechanisms. Determine and adopt performance standards based on international experience. Track progress of the reform and issue regular progress reports. Disseminate to national authorities and to the public and encourage that recommendations from progress reports are being used for project improvement.

Component 2. Procurement Reform - US$1.9 million The reform of the procurement system takes a central role in the government’s state reform plan. The central activity to be supported by the operation i s to transform the electronic procurement system CONTRATANET into a full-fledged transactional system.

(a) Technical Assistance for Legal Reforms. Provide technical assistance to the enactment of key legislation, such as a revised Procurement Law (reforms to Law No. 95) and an electronic public transactions law. This also entails implementation o f some of the adopted measures in the package of reforms approved in 2000.

(b)Training. Provide training on project administration and on electronic procurement, including the establishment of a national network o f experts for sharing o f best practices provide training on new forms of procurement, concessions, and privatization options.

(c) Ethics. Elaborate an Ethics Code for procurement on behalf of CCCC.

(d) Coverage. Expand coverage of the CONTRATANET (software build-in) by converting it from an informational to a transactional procurement system and include all institutions in transactional public services to fully implement the National Register of Contractor system.

(e) Auditing. Establish performance audits with emphasis on pre-contractual stages; audit the public entities annual and multi-annual procurement plan; audit payments and crosscheck with bids under the system of “licitaciones”.

(0 Accreditation. Improve the national system of accreditation on procurement, including the private and the public sector.

(g) Institutional framework. Establish a public procurement regulator (establish the administration of the Consejo de Compras). This entails strengthening coordination between various agencies involved in procurement by creating a Consejo de Comprus (which w i l l include CCCC, Comptroller General’s Office, Attorney General’s Office, and MEF).

Particular emphasis w i l l be put on civil society oversight o f procurement. To this end, this component wi l l also support a permanent and independent monitoring committee led by the

45

CCCC as the supervisory body of the procurement processes and integrated by civil society institutions with expertise on the subject. To enhance efficiency and effectiveness of the system, the committee w i l l conduct an ongoing process of evaluation of CONTRATANET, which w i l l consist o f

0 User-evaluation o f overall-performance of CONTRATANET (quality, efficiency, user- friendliness, perceived level of integrity), through users’ report-cards.

0 An analysis of the data gathered through the user-enquiries and the inclusion of the results into a broad evaluation, which wi l l also comprise issues l ike connectivity and access to CONTRATANET, business opportunities opened to small-size and local providers, and the effective commitment o f public agencies to subscribe to CONTRATANET and use i t for 100 percent o f their procurement processes. Systematic meetings with heads of involved public agencies to discuss and evaluate findings, and the dissemination of these findings through the media.

0

Component 3. Professional Civil Service - US$6.3 million

With the Civ i l Service and Administrative Career and Wage Unification and Harmonization of Public Sector Remunerations Law approved in October 2003 (and amended in January 2004) the GOE took a crucial step to regain control of the wage bill and to promote a more meritocratic public administration.

The Organic Law establishes a new autonomous body within the Presidency (SENRES) with responsibility for issuing a l l civil service regulations and determining any salary increases (within wage bill parameters set by MEF). However, the data and management tools required to effectively perform these roles - including data on all public employees, their pay, training, posts and performance evaluations - are not presently available with SENRES or any other central government agency. The Organic Law assigned to SENRES the responsibility for establishing a human resource management (HRM) database. However, SENRES does not have the budget or technical expertise to carry out this task.

This loan component would assist SENRES to develop a National Information System o f Institutional Development, Human Resources and Public Sector Remunerations (SIGRH- SENRES), in fulfillment of i t s mandate.

While the SIGRH-SENRES HRM database may later be expanded to cover all government institutions, in i t s initial form the HRM system wi l l cover approximately 506 central government ministries, departments, and agencies (MDAs). This excludes schools (1,957) and local governments (983), but covers more than 90 percent of all central government personnel and expenditures.

Activities to be carried out w i l l include: 0 Develop software and system design: A design and implementation plan w i l l be devised

by an inter-ministerial working group composed of policy and IT specialists from SENRES, MEF, SIGEF, Ministry of Labor, and the Central Bank, to ensure that SIGRH- SENRES responds to the needs of these various public sector bodies. Data validation w i l l be carried out by staff of the Human Resources Units.

46

0

0

0

Implement information technology in designated MDAs. Link SENRES to central government agencies (MDAs). Train staff of human resource units for the operation of SIGRH-SENRES. The staff across all 506 MDAs wi l l receive training in the core personnel module o f the SIGRH- SENRES. In addition, staff of 4 pilot departments wi l l also receive training in the staff selection and staf f evaluation modules.

Component 4. Efficiency and Accountability in Selected Public Agencies- US$8.2 million

This component i s aimed at improving efficiency and accountability in selected public agencies. The selection process w i l l be demand-driven and w i l l consider the following eligibility criteria:

0 Public Agencies with high fiscal (efficiency) impact (e.g. Petroecuador) or broad-public coverage ( e g selected social programs).

0 Public Agencies seeking broad-based organizational, and/or functional reforms that require support in the design and implementation phases, and have resources to partly implement the reform so as not to exceed the funding capacity of the IRP and make the reforms more sustainable.

0 Products/processes where different agencies interact: business and import permits office; motor vehicle registry, sanitary registry are some of the examples where processes are heavily bureaucratic and many institutions interact to provide this service to the final customer. In these cases, the project can help define the optimal supply and value creation chain; redefine and streamline processes; negotiate scope of work o f each institution involved; and help implement the new processes and structures. The CCCC has gained experience in this type of reform, and on the basis o f complementary international experience can be instrumental in the selection and implementation process.

Organizational reforms are aimed at: (i) organizational restructuring and strengthening, including process reengineering for greater client orientation and transparency, and simplification of administrative procedures; (ii) human resource professionalization, including job descriptions of al l positions, strengthening reporting responsibilities; and (iii) change management.

The process would follow the sequence detailed below:

a) Diagnostic reviews of the vision, mission, structures, and functions of the selected agency. Based on the main weaknesses detected, suggest the area(s) to be tackled with a view toward:

0 Develop a shared vision and mission. 0 Create a sense of urgency for reforms. 0 Help streamline processes and structures. 0 Identify and minimize duplication and fragmentation. 0 Reduce opportunities for corruption due to cumbersome processes within the agency or

related to other institutions that participate in the flow for the production of a selected outcome.

47

b) Action Plan and Sequencing of institutional reforms. This Plan should frame the reform process in the context of the objectives and results to be achieved, and should detail the scope and the sequencing. Among others, the following could be addressed:

0 Carry out a functional and organizational review. 0 Introduce andor improve information systems, where necessary and adapt them to the

new mandate, structures and processes. 0 Achieve a match between personnel profile and new process requirements. e Perform personnel profile analysis. 0 Carry out strategic communication within the entity and outside. 0 Design process implementation and sequence. 0 Establish benchmarks for institutional and staff performance.

c) Monitoring. The feasibility o f proposed reforms and their progress w i l l be analyzed and approved by the Steering Committee of the Project; the Civic Control o f Corruption Commission (CCCC), and the Bank.

Implementation w i l l require evidence of commitment and ownership of the selected agencies. The project would provide incentives to pilot agencies meeting the targets of the operational plan. When necessary, the project could fund technical assistance and training.

e

0

This sub-component also includes and active participation of civil society organizations, in the design and oversight o f reforms. As a performance monitoring mechanism the project w i l l support Citizens’ Report Cards to measure user satisfaction for a set o f selected agencies (agencies such as the civil registry and national Food and Drug Administration Registro Suniturio, as well as-if selected-key social services in the areas o f health, education and social programs meeting the conditions for the use o f this methodology). In particular, this sub- component w i l l support:

0 The implementation of national surveys conducted by an independent and qualified NGO every six months for the duration o f the project. The surveys w i l l measure the level of users’ satisfaction regarding a set of attributes of the selected services, including transparency. Stakeholders through focus groups previously prioritize these M&E criteria. The delivery o f report cards for each of the services based on the information gathered by the surveys. The report cards evaluate the quality of each of the services and i ts attributes at the national and, if applicable, subnational levels, and compare level of satisfaction across provinces and across services. Discussions led by the CCCC and the implementing NGO with managers of the selected services and other national authorities to take stock o f lessons from the results of the Report Cards, evaluate their respective progress report, and identify actions to improve the performance o f each o f the servi~es’~.

0

0

l3 B y systematically gathering and disseminating public feedback, they serve as a “surrogate for competition” for state-owned monopolies that sometimes lack the incentive to be as responsive as private enterprises to their client’s needs.

48

0 The dissemination of the Report Cards to the public and the organization of workshops (piloting Community Scorecards in selected municipalities). The fora and workshops discuss and validate results, and recommend actions to improve accessibility and quality of the services upon evaluation.

In addition, and depending on the services identified for reform, this component could support Participatory Public Expenditure Tracking Surveys (PETS), in coordination with the set of Human Development Programmatic Loans. PETS would gather information on public expenditure chains, outputs (services delivered) and coverage in those services, as well as their level of transparency and efficiency. Findings of PETS would then be made available to CCCC, local governments, communities and civil society organizations as an input to local monitoring initiatives. Production of baseline information and data flows to track progress of reforms based on reiterated applications of the Report Cards and PETS would also be supported.

Component 5. Change Management - US$5 million

The objective i s to create the conditions necessary for successful implementation of the project. To this end, this component i s comprised of four sub-components:

a) Project management. 0

0

0

0

Develop an operational manual to be used in the Project Coordination Unit. Set up the Project Coordination Unit and train officers, where necessary. Design instruments for effective project management, including financial management and procurement. Create adequate project oversight through Steering Committee.

b) Monitoring and evaluation. 0

0

0 Carry out impact evaluations. 0

0

Design and implement a M&E system for project monitoring, including an integrated financial monitoring system. Determine a baseline for each component and detailed progress indicators, including clear monitoring responsibilities.

Ensure dissemination o f M&E results and their continuous integration into project implementation. Promote the use of participatory M&E, such as through user surveys and scorecards.

c) Civil Society Involvement. Promote civil society participation in all components and major stages o f project implementation. Establish civil society observatories for specific components (such as Obsewatorio Fiscal). Strengthen joint capacity-building of government and civil society in relevant project activities. Foster an active dialogue between civ i l society and other sectors, and promote c iv i l society monitoring capacity.

0

0

0

0

49

d) Change management. 0

0

0

0

0

0

Create a sense o f urgency for reform based on in-depth diagnostic and leadership. Develop shared vision and integrated change management strategy. Engage stakeholders and elaborate and carry out communication strategies to disseminate the benefits and first results o f reforms and address specific resistance to reform. Create first visible and high-impact results to generate stronger support o f reforms. Expand support and consensus on reforms in broader circles to consolidate and institutionalize reforms. Monitor change management results and create continuous change management culture.

50

Annex 5: Project Costs

ECUADOR: EC Institutional Reform

Note: Detailed costing for the project i s currently being prepared. The figures presented below are estimates.

Local Foreign Total U S $million U S $million U S $million Project Cost B y Component and/or Activity

Component 1 : Customs Reform 0.8 0.8 1.6

Component 3: Professional Civ i l Service 3.8 2.5 6.3 Component 4: Efficiency and Accountability in 4.2 4.0 8.2 Selected Public Agencies Component 5: Change Management 3.7 1.3 5.0 Total Baseline Cost 13.5 9.5 23.0

Component 2: Procurement Reform 1 .o 0.9 1.9

Physical Contingencies (5%) 0.5 0.3 0.8 Price Contingencies (5%) 0 0 0

Total Project Costs' 14.0 10.0 24.0 Interest during construction

Front-end Fee 0 0.2 0.2 Total Financing Required 14.00 10.00 24

'Identifiable taxes and duties are US$2 million, and the total project cost, net of taxes, i s US$22 million. Therefore, the share o f project cost net of taxes i s 91.66%.

Financing Plan by Financier

The The World

Government Bank Total Amount Amount Amount u s $000 % US$OOO % u s $000 %

I. Foreign 1/ 0.0 0.00% 10.00 41.67% 10.00 41.67% 11. Local (Excl. Taxes) 2.00 8.33% 10.00 41.67% 12.00 50.00%

111. Taxes 2.00 8.33% - - 2.00 8.33%

4.00 16.66% 20.00 83.34% 24.00 100.00%

11 Includes front-end fee in the amount of US$200,000.

51

Annex 6: Implementation Arrangements

ECUADOR: EC Institutional Reform

Component 1 : Customs Reform 2: Procurement Reform

In table 13, implementing agencies for individual components are shown. Counterpart w i l l be the Ministry of Finance. The project structure i s shown in table 14. Counterpart wi l l be the Ministry of Finance. A Project Coordination Unit wi l l be set up under the leadership of the Subsecretary for Economic Policy. A Steering Committee wi l l be created, composed of an executive, technical and advisory level.

Institution Executing Agency Customs Agency (CAE) Sub-secretary o f Economic

Customs Agency (CAE) Ministry o f Economy and

3: Professional Civ i l Service Finance (to be confirmed) Civi l Service Agency

Policy (to beconfirmed) Civi l Service Units in public

4: Efficiency and Accountability in Selected Public Agencies

(SENRES) institutions (URHI’s) Selected Agencies Selected agencies (candidates:

Petroecuador, Civ i l Registry, Sanitary Registry, among

5: Change Management others) Technical Coordinating Unit Ministry o f Economy and

Finance

Table 9. Project Structure

Executive

Technical I I ! !I I AdvisorvBoard I

I I I

PROJECT COORDINATION

UNIT (MEF)

Technical Coordinator

Finance and Administration

52

Annex 7: Financial Management and Disbursement Arrangements

ECUADOR: EC Institutional Reform

A Financial Management Assessment (FMA) o f the Sub-secretaria de Politica Econo’mica and Sub-secretaria Administrativa within the Ministry o f Economy and Finances (MEF) in Ecuador was performed in order to evaluate the proposed financial management arrangements and the Implementing Entity’s capacity to provide the Bank with accurate, reliable and timely information regarding resources and expenditures. The joint assessment (performed on site from March 29 to April 1, 2004 with the Procurement Capacity Assessment) was conducted in accordance with OPBP 10.02 and the Guidelines for Assessment o f Financial Management Arrangements in World Bank Financed Projects.

Field work included discussions with government officials and financial staff, and encompassed a review o f the proposed organizational structure and staffing o f both units, flow of funds arrangements, accounting policies and procedures, budgeting, information systems, internal controls, financial reporting and monitoring, auditing systems and the impact of procurement arrangements.

Overall Summary and Conclusion:

Subsequent to the assessment visit the project has continued working to define the basic features of the arrangements, and the terms of reference and professional profiles of key positions have been submitted to the Bank for review.

The key capacity constraints which increase the project risk profile include 1) the lack of an integrated financial and monitoring system, which would adequately support monitoring and control during implementation, and 2) very limited experience in managing Bank- financed investment projects.

Financial Management staff w i l l continue to work with the project to provide necessary guidance in order to ensure that the necessary corrective actions are taken to ensure adequate arrangements prior to effectiveness.

Country Financial Management Capacity:

A challenging political environment, conflicting interests and strong regional divisiveness have precluded successive governments from any significant commitment of reform that could permit this resource-rich nation to achieve its potential growth and reduce poverty.

Ecuador i s slowly but progressively making advances in financial management reform and transparency. Legislative reforms began as early as the ‘70s and the LOAFYC, the financial administration legislation, was considered a pioneer. However, since the ‘80s there has been a rapid proliferation of laws and norms, which has caused “normative chaos”- the framework i s fragmented and incomplete.

53

CFAA preliminary results indicate:

Budgetin% Overall the rules that govern the budget process are not clearly defined and this has resulted in unrealistic budgets, which fail to reconcile policy objectives and available resources. Accounting and Financial Reporting;: The GOE does not have access to timely, complete and accurate accounting information which reflects the financial health of the government and which can be used as an indispensable tool for decision making and management control. This leads to problems in assessing impact of expenditures and targeting future expenditures on poverty reduction. Internal Control and External Audit: Audit functions are not directed towards efficiency gains but rather towards ex-ante and ex-post compliance. No external audits of the National Consolidate Accounts have ever been performed b y the CGE or other private firm. Independent Oversight of Public Financial Administration: There i s insufficient pressure for improvement of the quality of public expenditure and an increased risk of mismanagement and fraud.

Reliance of Country Systems:

Integrated System of Financial Management (SIGEF). Since the early 1990’s successive Governments have viewed the modernization of public financial management as crucial to aligning expenditure more closely with policy priorities. Through the Bank-financed MOSTA project which closed in March 2001 and the WB SAL referred to above, SIGEF was designed, a debt management system was implemented (SIGADE), national budgets are being constructed with inputs from spending ministries and the Ministry o f Finance has established an office to coordinate the financial management system in the public sector.

The implementation of the SIGEF has advanced, and has expanded to over 60 entities including line ministries and their provincial offices, autonomous entities, sub-national governments and affiliated entities. An information consolidation program has been completed and this module has been used to prepare consolidated financial accounts as well as the last two national budgets.

In February of 2002, the World Bank Ecuador Public Sector Financial Management operation (US$ 13.3 MM) was approved to support the consolidation of reforms in financial management and control. This operation became effective in September 2003 and the main objectives are to (1) expand the coverage o f the SIGEF (2) upgrade the technological base (3) develop the CGE’s audit capacity and (4) establish organizational functional support to ensure sustainability of the reform. In order to progressively move towards reliance on country systems, the PCU wi l l implement the SIGEF loan module and work to identify existing capacity constraints of this module, which can be modified in future versions o f the system.

Mitigation of Capacity Constraints:

As a result of the assessment and the various interviews conducted, a time-bound Financial Management (FM) action plan has been proposed in order to address the capacity constraints and

54

mitigate the risks identified. Such considerations led us to define the project risk (inherent and control) profile as high and recommend a close supervision and monitoring, at least during the appraisal mission and leading up to effectiveness, so as to ensure that the necessary actions are taken. Notwithstanding, successful completion of the FM Action Plan prior to effectiveness would result in an upgrade of the project risk profile to moderate. The following action items are therefore considered critical:

a Prior to effectiveness: 1) hnplementation of Financial Management System; o 2) Finalization of the Operations Manual; and o 3) Satisfactory implementation of the other FM Action Plan items including .

. . a) Fine tuning o f the institutional arrangements and mechanisms for

coordination between the agencies involved in implementation; b) Submission of terms of reference for the financial audit; and c) capacity to generate Financial Monitoring Reports.

Supervision During Implementation. The project should be monitored on a semi- annual basis in the first two years of implementation and thereafter through at least one supervision visit each year. Furthermore, the audit reports w i l l be relied upon and the Annual Audit Report Review wi l l highlight the adequacy o f internal controls, integrity o f financial reporting and efficiency in the use of projects funds. Desk reviews w i l l also be performed on the semi-annual FMRs, prepared in form and substance acceptable to the Bank, which would be submitted not later than 45 days after the end of each six-month period.

Audit Arrangements. The annual audit reports, covering the project financial statements shall be prepared in accordance with terms of reference acceptable to the Bank and would be furnished to the Bank not later than six months after the end of each year. The terms of reference shall be prepared in accordance with current regional guidelines. The process of selection and contracting shall be overseen by the Controller General, who w i l l coordinate to ensure selection of eligible audit firms, delivery of acceptable reports within the time frames set out in the legal agreement and adequate quality control.

Disbursement Arrangements. Disbursements w i l l be transaction based (i.e. against Statements of expenditure (SOEs), full documentation, direct payments or special commitments). The project wi l l have access to funds advanced by the Bank to an Special Account (SA) which w i l l be maintained and operated by the project PCU in MEF at the Central Bank in United States dollars (called TE Account within the Central Bank) for processing disbursements to beneficiaries for those eligible expenditures under the project activities. Nonetheless, given that, at present, the Republic of Ecuador has a pending refund to the Bank for SA advances made under another closed loan, the project w i l l need to receive a notification from the Bank authorizing the opening o f such SA to proceed requesting Bank’s funds. At such time, the Bank may deposit, upon borrower’s request, an amount o f $2,000,000 as authorized allocation. This amount should be limited to the amount of $1,000,000 until the disbursements from the loan account exceed $5,000,000.

Deposits into the SA, and payments made from the SA should be made in accordance with the provisions set out in the Legal Agreement. In the case o f replenishments of the SA authorized

55

allocation, the project should submit monthly withdrawal applications, or at a minimum on a quarterly basis at beginning of implementation.

Amount in US$ million Expenditure Category

To facilitate payments, which could not be made directly from the SA using the automatic paymentkransfer banking system, the borrower may open other account in a commercial bank to which transfers from the SA could be made for immediate payments to consultants or suppliers of goods and services.

Financing Percentage

The project PCU in MEF wi l l prepare and consolidate eligible expenditures in withdrawal applications accompanied by the supporting documentation in accordance with Bank disbursement procedures, which w i l l be submitted to the Bank on a regular basis.

1. Goods 2. Consultant Services 3. Training 4. Unallocated

Total Project Costs with Bank Financing Front-end fee Total

Upon request from the Borrower, and subject to the Bank’s approval, withdrawal applications, for amounts above 20 percent of the deposit in the SA, for direct payments could be requested to the Bank for payments to consultants and suppliers of goods and services o f project activities.

4.0 90% 12.5 85 % 2.5 85% 0.8

19.8 0.2 20

Use of Statement of Expenditures (SOEs). Withdrawal from the loan account could be made on the basis of SOEs for the following expenditures: (a) goods under contracts not exceeding $250,000 equivalent; (b) consulting services from individuals and f i r m s under contracts not exceeding $50,000 and $100,000 equivalent respectively; and (c) all training activities.

All supporting documents for which withdrawal applications from the loan account are made on the basis o f SOEs, the borrower w i l l retain full documentation (including contracts, purchase orders, invoices, receipts and any other documents evidencing such expenditures) and make them available for review and examination by Bank staff in supervision missions and to the external auditors when performing the audit of the project accounts.

Table A: Allocation of Loan Proceeds

56

Annex 8: Procurement Arrangements

ECUADOR: EC Institutional Reform

A. General

Procurement for the proposed project would be carried out in accordance with txle Woi 1 Barlk’s “Guidelines: Procurement Under lBRD Loans and IDA Credits” dated May 2004; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004, and the provisions stipulated in the Legal Agreement. The general description of various items under different expenditure category i s described below. For each contract to be financed by the Loadcredit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan w i l l be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Procurement of Goods: Goods procured under this project would include: computer equipment, purchase of software and licenses and related services and data connections. The procurement w i l l be done using Bank’s SBD for all ICB and National SBD agreed with (or satisfactory to) the Bank.

Procurement of non-consulting services: The Project w i l l procure services for implementation of a communication strategy, including the dissemination and publication of reform outcomes in order to address resistance to such reforms. Logistics services for organization and conducting of dissemination workshops, conferences, seminars and staff training w i l l be procured following price comparison (shopping) procedures of at least three quotations from qualified local providers, and using project standard documents acceptable to the Bank. Contracts for procurement of non-consulting services are not expected to be greater than $100,000 equivalent per contract.

Selection of Consultants and Training: The project w i l l hire consulting f i rms and individuals for the implementation of specific project components such as Custom Reforms, Civ i l Service Reforms and Procurement Reforms. Consulting services w i l l be procured for the design, development of customized software (which w i l l be intellectual property o f the government) and implementation o f information management systems at different public entities; provision of technical assistance and preparation o f technical studies for specific sector reforms; training of public staff to be engaged in the implementation of custom reforms and civ i l service reforms (SENRES), and management and operation of the E-Government procurement system (CONTRATANET). Other consulting services for the carrying put of user surveys, focus groups and the performance of annual project financial and procurement audits w i l l be procured out of selection of consultant processes for employment o f firms and individual consultants. Training w i l l include also technical visits to several countries in the Region with successful experiences at the implementation o f E-Government procurement systems and control systems for their likely adoption, including the performance of specific feasibility studies prior to selection and such adoption. Consulting services for employment o f f i r m s w i l l be procured with the use o f QCBS

57

methods, while services for hiring of individual consultants through the Individual Consultant method following the procedures set forth in paragraphs 5.1 to 5.3 of the Consultant Guidelines.

Short l i s ts of consultants for services estimated to cost less than $200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

Operational Costs: Operational Costs wi l l include costs incurred by the project executing agencies and the PCU for expenses regarding systems maintenance and equipment insurance. The professional staff assigned to the PCU to carry out technical and administrative tasks and services of a continued nature in support o f project management and coordination w i l l be mostly financed by the government as counterpart funding for project coordination and administration. The government w i l l hire project staff only with prior approval of IBRD. The loan w i l l not finance other operational costs. These would be covered with counterpart Funds.

B. Assessment of the agency’s capacity to implement procurement

Procurement activities w i l l be carried out b y the Ministry of Economy and Finance (MEF). The agency wi l l be staffed by a Project Coordinator, two Procurement Officers, three Financial Management Officers and a Legal Specialist. The Project Implementation Manual w i l l include, in addition to methods and procurement procedures, and prior-review requirements, the SBDs to be used for each procurement method, as well as model contracts for goods procured and wi l l include specific provisions on fraud and corruption on project procurement documents.

An update of assessment of the capacity o f the Implementing Agency to implement procurement actions for the project was carried out by Keisgner D. Alfaro, Sr. Procurement Specialist, on March 29-3 1, 2004. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staf f responsible for procurement Officer and the Ministry’s relevant central unit for administration and finance.

Most of the issues/risks concerning the procurement component for implementation o f the project have been identified and include: i) limited prior experience o f the PCU and project beneficiary agencies in the implementation o f Bank-financed projects and insufficient knowledge of Bank procurement guidelines and procedures; ii) limited skil led and experienced staff to manage Bank-financed procurement; iii) some degree of uncertainty on both the PCU’s capacity and beneficiary agencies’ to manage efficiently procurement processes, as provided in the Bank Guidelines; and iv) unavailability o f an integrated project management information system to carry out monitoring, control and reporting tasks for efficient project coordination and decision making. Corrective measures have been agreed and are described in a Procurement Improvement Action Plan attached as Annex 1 to the Agency Capacity Assessment Report. This plan was updated during the appraisal mission with targets set for negotiations and effectiveness.

The overall project risk for procurement i s HIGH.

58

C. Procurement Plan

The Borrower, at appraisal, developed a Procurement Plan for project implementation, which provided the basis for contract estimated prices, the procurement thresholds and prior-review thresholds. This plan has been agreed between the Borrower and the Project Team on May 14, 2004 and i s available at the World Bank Headquarters, I Building, Room 8-122. I t w i l l also be available in the Project’s database and in the Bank’s external website. The Procurement Plan wi l l be updated in agreement with the Project Team on an annual basis and/or, as required, to reflect the actual project implementation needs and improvements in institutional capacity.

D. Prior Review Thresholds

Thresholds for Bank prior review are indicated in Table B below. They correspond to those assigned to high risk agencies, consistent with thresholds issued by the RPA Office for LAC Countries.

59

Table B: Thresholds for Procurement Methods and Prior Review'

Contract Value Contracts Subject to

(US$ thousands) (US$ thousands) Expenditure Category Threshold Procurement Method Prior Review

Works (not financed) -- -- _- 2.Goods and Services

Contract = > 500 ICB

Contract < = 100

3. Consultant Services and Training

100 < Contract < 500 NCB

Firms Contract = > 100

Individuals

Contract < 100

Contract = > 50

Contract < 50

All contracts.

Each contract estimated to cost $250 equivalent or more; and first two contracts. Post review: random sample o f contracts and review o f procurement plan.

Shopping S (N) First two contracts, and annual review o f procurement plan. Post Review: random sample o f contracts.

QCBS

QCBS

I C

I C

All TOR, RFP, short l is ts o f firms, full review o f evaluation reports, and draft contract for contracts with estimated value o f $100 equivalent or more.

Only TORS Post review: random sample o f contracts, and review o f selection plan.

All TOR, CVs and form o f agreement for contracts estimated to cost $50 equivalent or more.

Only TOR.

Post Review: random sample o f contracts and review o f selection plan.

60

'Thresholds generally differ by country and project. Consult OD 1 1.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance.

Total value o f contracts subject to prior review: US$14 million

E. Frequency of Procurement Supervision

In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended one supervision mission every six months to visit the field and to carry out post reviews and annual audits of procurement actions.

Attachment 1

Details of the Procurement Arrangement involving international competition.

1. Goods and non-consulting services.

(a) L i s t o f contract Packages, which wi l l be procured following ICB and Direct contracting:

1

Ref. No.

2.1.8

3.3.1

2

Contract (Description)

Equipment and software (Local server, personal computers, printers and software, including licences, communications and mirror systems). Computer servers and re 1 at e d equipment, including personal computers, materials to install room appropriate for

SENRES equipment.

SIGRH-

3

Estimated cost

600,000

1,627,000

4

Procurement Method

ICB

ICB

5

P-Q

NO

h

Domestic Preference (@no)

YES

7

Review by

Bank (Prior I Post) Prior

PRIOR

8

Expected Bid -

Opening Date

YEAR 3

YEAR 3

9

Comment

Acquisition of equipment and materials.

61

(b) NCB Contracts estimated to cost above 250,000 per contract; the two first contracts awarded under NCB procedures; the two first contracts awarded under Price Comparison (Shopping); and al l Direct contracting wi l l be subject to prior review by the Bank.

2. Consulting Services.

(a) L i s t of Consulting Assignments with short-list of international f irms.

~ Assignment

Diagnostic and action plan for Customs IT

I /\“‘em. development o f security measures and training.

implementation o f system for judicial

plan.

and training of Information

3

Estimated cost

230,OOC

90,00(

60,00(

40,00(

30,00(

500.00(

4

Selection Method

QCBS

QCBS

QCBS

QCBS

QCBS

QCBS

Review by Bank (Prior I Post)

PRIOR

PRIOR

PRIOR

6

Expected Proposals Submission Date

YEAR 1

YEAR 1

YEAR 1

YEAR 2

YEAR 2

YEAR 1

7

Comments

Study and preparation o f m action plan for IT system, includes the selection of consulting firm. The consulting firm has to design the procedures that w i l l be applied. The PCU wi l l contract a consultant firm. The task includes design or modification o f existing software, and i t s implementation. If the task i s to modify an existing software, the proposal could include the software cost. The consultant firm must haw knowledge o f the judicial procedures o f Ecuador as well as o f legal and regulatory aspects related to Customs services.

The plan includes: (i) cos for retirement for personnel, (ii) number o f personnel to be included ‘in the retirement plan, l(iii) legal aspects, (iv) ‘strategies. I t could be lassigned to an individual

The task includes the software design and implementation, the

62

I-

YEAR 1

YEAR 2

Ref. No.

1.5.4

1.5.5

2.1.7.3

2.2.2

2.3.1

Training for the employees or professionals who wi l l bc assigned to the institutiot The task includes all

Description of Assignment

YEAR 1-4

ecurity systems and ontingency plan.

consulting firm specialized in design and implementation of an Integrated Solution. This includes: (i) the software and i ts applications; (ii) the strategy for i t s implementation, based o the relevant studies to be prepared; (iii) recommendations for the acquisition of the necessary hardware, as well as i t s quality and quantity, and (iv) trainin for subsequent implementation in other entities. One contract, beginning i n year 2 and ending at year 5. Technical assistance for the CNC. The task would include the following activities: - evaluation of the implementation and operational aspects; - recommendations for the improvement o f operational aspects base

~~

inalysis and nplementation of :ustoms processes and rocedures.

Ither studies.

'raining for Customs lfficials.

Iesign and development If software (registry o f aoviders, security, up- ;rading o f statistics).

?ethnical audits for :ONTRATANET ystem operation.

3

Estimated cost

240,OOC

200.00c

20,ooc

350,00(

200,00(

1

Selection Method

QCBS

QCBS

QCBS

QCBS

QCBS

5

Review by Bank [Prior I Post)

PRIOR

PRIOR

PRIOR

PRIOR

Sxpected 'roposals iubmission )ate

YEAR 3

Comments

design of administrative procedures. I t wi l l be assigned to a consulting firm.

Itraining costs. lThe PCU will contract a YEAR 3

63

1

YEAR 1-4

YEAR 2-4

Ref. No.

on statistics and reports; - technical assistance to the CNC for improvement o f i t s operational performance. This step involves the contract o f a specialized consulting firm. The task includes the design of database modules and procedures for the integration of IT Systems in other government agencies. The PCU will contract a

- .1.1

YEAR 2-4

‘L2.1

- 1.2.2

- i.5.1

- ’. 1.1.1

and HR-personnel (approx. 2,000 people).

Technical Assistance and training for SENRES and URHIs, including database specialists and support for implementation of Law NO. 2003-17 (R.O. NO.

’. 1.1.2

2

Description of Assignment

Design o f SIGRH- SENRES database nodules, including ntegration with major government IT systems; support in mplementation phase.

Licenses, software, :ethnical support, installation, testing, aanuals, software :raining for SENRES and HR staff (an integral solution wi l l be :ontracted).

rraining i n software and systems.

rechnical assistance for SENRES and URHIs.

3perational diagnostics md reform design for Petroecuador xocurement system. [mplementation of ieforms.

3

Estimated cost

300,OOC

2,500,OOC

1 ,ooo,ooc

660,OOC

300,OOC

600,OOC

4

Selection Method

QCBS

QCBS

QCBS

QCBS

QCBS

QCBS

L J

Review by Bank (Prior I Post)

PRIOR

PRIOR

PRIOR

PRIOR

PRIOR

PRIOR

6 17 I

Expected Proposals Submission Date

Comments

necessary. YEAR 1-3 ]Training for SENRES

64

Various contracts for about 21 processes. Various contracts for about 21 processes. Various contracts for about 21 processes. This sub-component includes different contracts and audit contracts, based on the results of the previous studies.

prepare the score card. Surveys in different cities and institutions involved in the program. The program will involve approximately 20 small- scale contracts within four years (this includes surveys, focus groups and other methodologies).

PRIOR The consultant will

1.2.4.1 Business process I reengineering for land

1

Ref. No.

I. 1.2.1

1. 1.3.1

1.1.3.2

1.2.1.1

1.2.1.2

1.2.3.1

1.2.3.2

1.2.4.1 ]Business process

2

Description of Assignment

Design and development of software and training for Petroecuador enterprise resource planning. Operational diagnostics and reform design. Implementation of reforms. Business process reengineering for civil registry reorganization and service delivery modernization. Implementation.

Business process reengineering for Pension Payments in IESS. Implementation.

Review by Bank (Prior /

implementation of a results-based monitoring system (including performance audits).

Expected Comments Proposals Submission

I i.3.2 /Scorecards (Citizen

Estimated cost

3,000,000

200,000

400,000

30,000

30,000

30,000

30,000

30,000

30,000

960,000

960,000

320,000

1,000,000

300,000

Selection Method

QCBS

QCBS

QCBS

QCBS

QCBS

QCBS

QCBS

QCBS

QCBS

QCBS

QCBS

QCBS

QCBS

QCBS

I - I '

I I

1.2.4.3 Training.

PRIOR

PRIOR

65

Ref. Description of No. Assignment

i.3.4 Design and implementation o f civil society monitoring instruments.

i.4.1 Diagnostics, integrated change management plan, stakeholder engagement, communication strategies, M&E, Iconso%dation.

i.4.2.1 /Publications to disseminate project activities and impacts.

Method Review Expected Comments by Bank Proposals (Prior I Submission Post’) Date

PRIOR The number of contracts depends on the results of the application o f other instruments and

I I

[Publications (designs).

(b) Services provided by individual consultants and estimated to cost above US$ 50,000 per contract, and sole source selection w i l l be subject to Bank prior review. Services for employment of consultants f i r m s estimated to cost $100,000 equivalent or more, and single source selection of consultants (firms) w i l l be subject to Bank prior review.

(c) Short l i s ts of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 of the Consultant Guidelines.

66

Annex 9. Economic and Financial Analysis

INSTITUTIONAL REFORM PROJECT

Present Value of Flows14 Economic Financial Analvsis Analvsis

Fiscal Impact Taxes Subsidies

Project Costs: US$20.0 million

Summary of benefits and costs:

4

NA NA NA NA

The proposed operation w i l l focus on institutional strengthening and it i s therefore difficult to quantify the project’s outputs and benefits. In the same vein, i t s cost effectiveness i s associated with improvements in public management through greater efficiency and transparency, as measured through fiscal savings, effectiveness and efficiency gains. However, these are difficult to quantify. Direct fiscal savings only materialize significantly in the medium term; effectiveness gains are the result of a combination of reforms, not a single action; and efficiency gains can only be approximated using broad estimates of the reduction o f administrative costs per unit of output.

The most noteworthy economic impact i s effectiveness gains. These w i l l result from (i) Customs reform that w i l l permit a more effective revenue management and more effective monitoring, control and auditing o f financial flows; (ii) procurement reform, which w i l l reduce transaction costs, leakages and other inefficiencies in the use of public resources and lead to a higher cost- quality ratio in procurement through the establishment of a transactional procurement system (iii) a civil service management system to avoid misallocations and leakages in the wage bill; (iv) organizational reforms of selected public agencies to enhance their efficiency, transparency and service-delivery capacity, leading to a more effective resource allocation and saving; and (v) closer scrutiny o f public performance from civil society groups resulting in a more transparent and results-oriented management of public resources.

The financial impact can be measured through a mix of fiscal savings and efficiency gains. Efficiency gains are reduced administrative costs incurred for obtaining a given unit of output. Most of these are also related to the Customs, procurement and civil service reforms and the extension of selected reforms to key public agencies. The financial impact i s discussed in the following table, which also includes the social gains of the project per component.

14. The difference between the present value of financial and economic flows cannot be estimated, and much less explained by taxes and subsidies.

67

Financial Impact of the Institutional Reform Project

Components 1. Customs Reform

2. Procurement Reform

Fiscal Imnact Increased revenue, trade, and competitiveness due to heightened taxpayer compliance, lower inventory requirements due to reduced time o f imports in Customs, lower costs of imports and exports and reduced corruption. At present the import gap amounts to roughly US$ 1500 million dollars, which could generate 90 mill ion dollars in duties (6% average duty) and US$ 180 mill ion dollars in VAT (import gap measured by MEF). Current daily revenue in Customs i s approximately U S 5 million dollars per day. A 10% percent increase in revenues due to reform efforts would represent 500,000 dollars per day. Increased savings from efficient, transparent and competitive selection o f bidders, due to the elimination of unproductive investment and wasted resources from corruption and transaction costs.

According to MEF, central government procurement w i l l be approximately US$ 110 mill ion dollars in 2004 (excluding Petroecuador and other autonomous entities). Along these lines, savings of 20% due to efficient and transparent selection of bidders could result in 22 mill ion dollars in savings, aside from other benefits. According to WTO, 10 to 15% of GDP i s spent

Efficiencv Gains Improved control and auditing and streamlining o f processes w i l l result in enhanced performance through decreased administrative costs per unit o f output.

Improved performance and effectiveness o f procurement system through clearer responsibilities and transformation into electronic transactional system; decreased operational costs per unit o f output.

Social Gains Zustoms observatory w i l l monitor reforms 2nd can increase support for reforms; more effective and sfficient Customs wil l benefit the population as a whole, including the poor.

Reduced transaction costs and more competitive procurement allows access to procurement to earlier disadvantaged bidders; reduction o f corruption frees resources for social investment; transparent procurement makes state more accountable to citizens.

68

4. ESJiciency and Accountability in Selected Public Agencies

Management

regularly in public sector procurement, excluding defense exDenditures. Increased savings from an enhanced capacity to manage human resources through an HRh4 database. Current government expenditure in public sector payroll amounts to roughly U S $ 2 billion, almost 30% of total government expenditures. A US$20 dollar increase in the teacher payroll had a cost o f US$ 173 mill ion to the budget (according to the Fiscal Observatory). This i s only one example where payroll costs could be reduced if govemment possessed a trustworthy database. Savings due to organization reengineering for leaner structures and streamlined processes result in reduced administrative costs, greater management efficiency and improved service delivery and reduced transaction costs for users. In Petroecuador alone, according to some experts, the institution did not materialize gains o f the order o f US$2100 mill ion dollars due to poor decisions in the allocation o f resources. Savings due to productive, cost-effective and sustainable investments in four substantial project components.

Enhanced productivity gains from the adoption o f a modern management technology tool and timely access to decision-making information; streamlined procedures ensure greater administrative efficiency.

Reduced operational and administrative costs in service delivery, greater effectiveness and efficiency o f service delivery through organizational reforms.

Greater performance and enhanced management o f four substantial components through M&E, change management and c iv i l society participation.

hcreased iccountability and support o f civi l jervice reforms.

Greater user satisfaction with service delivery and greater support o f reformddemand for additional reforms.

Increased civi l society engagement, access to information in decision-making processes, consensus and ownership over the reform agenda.

69

Annex 10: Safeguard Policy Issues

ECUADOR: EC Institutional Reform

This project triggers none of the Bank’s environmental or safeguard policies.

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [I [XI

Natural Habitats (OP/BP 4.04) [I [XI

Pest Management (OP 4.09) [I [XI Cultural Property (OPN 1 1.03, being revised as OP 4.1 1) [XI

Involuntary Resettlement (OP/BP 4.12) E l [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI

Forests (OP/BP 4.36) 11 [XI

Safety of Dams (OP/BP 4.37) [I [XI

Projects in Disputed Areas (OP/BP/GP 7.60)* [I [XI

Projects on International Waterways (OP/BP/GP 7.50) [I [XI

11

[I

* By supporting the proposed project, the Bank does not intend to prejudice thefinal determination of the parties‘ claims on the disputed areas

70

Annex 11: Project Preparation and Supervision

ECUADOR: EC Institutional Reform

Planned Actual PCN review 11 March 2004 Initial PID to PIC 10 March 2004 Init ial ISDS to PIC 10 March 2004 Appraisal 22 April 2004 27 April 2004 Negotiations 29 April 2004 17-20 May 2004 Board/RVP approval 22 June 2004 Planned date of effectiveness December 2004 Planned date of mid-term review December 2006 Planned closing date December 2008

Key institutions responsible for preparation of the project: Sub-secretary of Economic Policy in the Ministry of Economy and Finance (MEF).

Bank funds expended to date on project preparation: 1. Bank resources: USD 180,000 2. Trust funds: USD 0 3. Total: USD 180,000

Estimated Approval and Supervision costs: 1. Remaining costs to approval: (USD -20,000) 2. Estimated annual supervision cost: USD 120,000

71

Annex 12: Documents in the Project File ECUADOR: EC Institutional Reform

A. Project Implementation Plan Customs Modernization Plan (CAE, 2004) Human Resources Modernization Plan (SENRES, 2004) Procurement Plan

B. Bank Staff Assessments MOSTA Completion Report (ICR) Country Financial and Fiduciary Analysis (CFAA) Country Procurement Assessment Report (CPAR) Poverty Assessment Report (2004) Initiating Memorandum for Fiscal Consolidation and Competitive Growth Structural Adjustment Loan (FCCGL-11) Publication “Foundations for Institutional Reform in Ecuador”:

Civil Service & Human Resource Management (Jeffrey Rinne) 0 Anti-Corruption in Customs Agency (Enrique Fanta) 0 Public Procurement (Enrique Fanta) 0 The Costs of Corruption (Nancy Brune)

A Note on the Political Background to Public-Sector Reform in Ecuador (Geoffrey Shepherd)

0 Civil Society Organizations (Jorge Salazar)

C. Other Civi l Service Law Procurement Law

72

Annex 13: Statement of Loans and Credits

ECUADOR: EC Institutional Reform

Original Amount in US$ Millions

Difference between expected and actual

disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

PO63644 2002 EC Power&Comm.Sect Modemiz.&Rural 23.00 0.00 0.00 0.00 0.00 20.08 14.61 0.00

PO72527 2002 EC-Power&Comm.Sctrs Modmiz.&Rural 0.00 0.00 0.00 2.84 0.00 2.75 1.52 0.00

PO74218 2002 EC Public Sector Financial Management 13.86 0.00 0.00 0.00 0.00 12.18 8.40 0.00

PO39437 2002 EC RURAL POVERTY (PROLOCAL) 25.20 0.00 0.00 0.00 0.00 21.90 -3.30 0.00

PO49924 2001 EC Rural Water Supply & Sanitation 32.00 0.00 0.00 0.00 0.00 21.52 18.66 0.00 PO64045 2000 EC Fin Sector TA Ln 10.00 0.00 0.00 0.00 0.00 8.18 7.85 0.00

Services

Services

PO39084 1998 EC- HEALTH SERVICES 45.00 0.00 0.00 0.00 0.00 25.90 25.90 24.30

PO07135 1998 EC AGRIC CENSUS & INFO 20.00 0.00 0.00 0.00 0.04 1.10 -3.66 0.00

PO07131 1997 EC AG RESEARCH 21.00 0.00 0.00 0.00 1.20 4.84 6.04 4.84

Total: 190.06 0.00 0.00 2.84 1.24 118.45 76.02 29.14

MODERNIZATION PROJ.

ECUADOR STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions of U S Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

1998/03 Favorita Fruit 15.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 1999 La Universal 8.20 0.00 5.00 0.00 8.20 0.00 5.00 0.00

2004 SFB 2.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00

1997 Agrocapital 3.50 0.00 0.00 0.00 3.50 0.00 0.00 0.00 1998 Concessionaria 11.50 0.97 0.00 15.00 2.93 0.00 0.00 3.82

1999 FV Ecuacobre 3.13 0.00 4.00 0.00 3.13 0.00 4.00 0.00

Total portfilio: 43.33 0.97 9.00 15.00 29.76 0.00 9.00 3.82

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

Total pending committment: 0.00 0.00 0.00 0.00

73

Annex 14: Country at a Glance ECUADOR: EC Institutional Reform

POVERTY and SOCIAL Lat in Lower-

America middle- Ecuador & Carib. income

2002 Population, mid-year (millions) t 3 l 527 GNIpercapita (Atlasmethod, US$) $450 3,280 GNI (Atlas method, US$ billions) 19.0 1,727

Average annual growth, 1996-02

Population ph) 19 15

M o s t recent es t imate ( latest year available, Poverty (%ofpopu vertyline) Urban population r 64 76 Life expectancyat bi 70 71 Infant mortality (per ~OOOlive births) 27

9 Access to an improved water source fiofpopulatlon) 86

Laborforce ph) 3.0 2.2

Child malnutrition (%of children under5)

Illiteracy (%ofpopulationage is+) 8 n Gross pnmary enrollment (%of school-age population) 115 t30

Male 115 t31 Female 115 P8

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001

GDP (US$ billions) P,305.5 213.1 210 Gross domestic investment/GDP 252 212 25.7 Eports of goods andservicesiGDP 211 315 26.7 Gross domestic savings/GD P 25.0 20.9 Gross national savingslGDP 778 18.6 20.4

Current account baiance/GD P 0 0 -0.1 -2.4

Total debtlGDP 0 1 5.8 662 Total debt service/exports 85 26.1 216 Present value of debtlGDP . 690 Present value of debt/exports 202.6

Interest payments/GDP 0 0 0.2 3.3

2,411 1,390 3,352

1.0 12

49 69 30 11

81 13 in in la

2002

24.3

-5.0 2.7

1982-92 1992-02 2001 2002 2002-06 (average annual gro uth) GDP 5.2 18 5.1 3.0 5 2 GDP percapita 27 -02 3 2 12 3.4 - . . "

STRUCTURE of the ECONOMY

(%of GDP) Agriculture Industry

Services

Private consumption General government consumption Imports of goods and services

Manufacturing

(average annualgrowth) Agriculture Industry

Services

Private consumption General government consumption Gross domestic investment Imports of goods andservices

Manufacturing

1982 1992

P.1 P.7 40.3 39.3 17.8 22.0

47.6 48.0

63.1 67.7 14.0 7.2

23.3 27.7

1982-92 1992-02

4.9 4.3 4.1 0.6 22 19 5.9 2.1

4.7 I 9 1.8 0.0

4.7 -16 5.6 1.8

2001 2002

9.0 29.4 11.7

616

68.9 13.1 31.4

2001 2002

0.7 5.1 2.9 6.0

5.4 0.5

36.8 7.2

levelopment diamond'

Life expectancy

;NI Gross er apita nrollment

Access to improved water source

-Ecuador Lo wr-middle-income group

Economic ra t ios* 1 Trade

Investment Domestic savings

Indebtedness

-Ecuador Lo wer-middle-income group I Indebtedness

-Ecuador Lo wer-middle-income group

Growth of inves tment and GDP (%)

-GDI -GDP I I

i Growth of expor ts and impor ts (%)

20

0 2

-20

-40

74

Ecuador PRICES and GOVERNMENT FINANCE

Domestic prices (“A change)

Implicit GDP deflator -1.3

1982

Consumer prices -6.3

Government finance (%of GDP, includes current grants) Current revenue Current budget balance Overall surplus/deficit

TRADE

(US5 millions) Total exports (fob)

Oil Bananas Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (B95=WO) Import price index(B95=WO) Terms of trade (B95=WO)

BALANCE of P A Y M E N T S

(US$ millions) Exports of goods and Services Imports of goods and services Resource balance

Net income Net current transfers

1982

2,x)8 1,257

193

1,981

83 7 8

159 111

144

1982

2,489 2,704

-215

-783 m

Current account balance -981

Financing items (net) Changes in net reserves

642 339

M e m o : Reserves including gold (US$ millions) 429 Conversion rate (DEC, locaVUS5) 1.20E-3

EXTERNAL DEBT and RESOURCE FLOWS

(US5 millions) Total debt outstanding and disbursed

1982

7,705 IBRD 774 IDA 36

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments

2,144 32

1

14 -155

41 40

0

96 41 B

~

1992

54.3 -40.4

24.6 5.9 -11

1992

3,x)2 1260 683 374

2,431

x)1 977

x38 86 8 6

1992

3,7m 3,016 702

-944 P O

-P2

146 -24

1,034 6.14E-2

1992

8,271 783 30

981 0 7

1

83 72

-203 l78

0

89 63 75

2001

37.7 25.5

24.7 6.2

-0.5

2001

4,678 1,900 865

1247 5,383

297 1681

114 81

140

2001

5,697 6,130 -403

-1,772 1,665

-5x)

404 136

1,074 t O

2001

t3,913 889 20

1,550 0 9

1

73 31 10

1,330 1

32 e 4 76

2002

8.5 8.4

25.9 7.4 1.0

2002

5,000 1,839

981 1,291 6,431

284 2,022

115 83 0 8

2002

8,081 7,264 -183

-1,622 1,590

-1,215

1,038 777

1,008 1.0

2002

Inflation ( O h ) i 150

100

50

0

-50

I ---GDPdeflator -CPI 1

Export and import levels (US$ mill.)

7.500 T

96 97 98 99 00

Exports Imports

Current account balance to GDP ( O h )

:omposition o f 2001 debt (US$ mill.:

G:1.500 B:20

\ - IBRD E- Bilatwai 3 - IDA D - Other nnltilaterzd F. Private : - IMF G - Short-tai

75

Annex 15: Multistakeholder Consultations ECUADOR: EC Institutional Reform

On March 9 to 10, 2004, formal consultations were held in the two major cities of the country, the capital Quito and the coastal city of Guayaquil. The consultations were held around the Ecuador IRP and the closely linked Fiscal Adjustment and Competitiveness Growth Loan (FCCGL-II). The consultation process built on a stakeholder dialogue initiated under the concurrent FCCGL-I” and expanded the dialogue initiated in preparation o f the FCCGL-I1 and IRP16 to a broader array of stakeholders and sectors, comprising 160 participants from civil society (representatives of NGOs, indigenous and afro-descendant organizations, small-farmers’ associations, trade unions, religious leaders, and private sector associations), universities and governmental institutions. The geographical reach of the consultations was also expanded by holding meetings in two cities and by inviting representatives from surrounding regions.

A total of 300 stakeholders from 112 institutions were invited to the consultations, of which 53 percent (160) attended the events. 47 percent of participants were from civ i l society, 27 percent from government institutions, 10 percent from universities and think tanks, 8 percent from the private sector, 4 percent from the media, 4 percent from bilateral and multilateral institutions, and 1 percent from churches / religious leaders. The attendance was high in both cities (85 participants in Quito and 75 in Guayaquil). Civ i l society participation was significantly higher in Guayaquil (53%) than in Quito (35%), whereas Government and private sector representation was roughly equal in both cities, although national institutions were more represented in Quito than in Guayaquil, which understandably had a higher attendance of municipal representatives.

The consultations allowed for an open dialogue on the main elements of the proposed reforms between key stakeholders, the Government and the Bank. Through a combination o f plenary sessions and working groups, the consultations provided the opportunity for the Government to present the proposed reforms, for the Bank to convey the rationale and objectives o f the operations, and for the participating stakeholders to question, obtain more information, and provide comments, concerns and recommendations. The working groups were divided into the three main areas o f the reforms supported by the two loans (Budget, Public Expenditures, Fiscal and Tax Policy and Fiscal Transparency (FCCGL-11) Policies for Economic Growth: Trade Policy, Competitiveness and Labor Policy (FCCGL-11); Customs Reform, Procurement Reform, Professional Civ i l Service and Efficiency and Accountability in Selected Public Agencies (Institutional Reform Project). The working group sessions aimed at fostering a multi- stakeholder dialogue on the main elements of the reforms and operations, and at encouraging feedback and recommendations from the stakeholders on the content o f these. These recommendations were then reported out to the plenary and discussed among all participants. The discussions in the working groups generated a number of general and specific recommendations that w i l l be described below.

l5 The consultations for SAL I, in which civi l society representatives were invited to discuss the main thrust o f the reforms supported by the loan, were held in March 2003 in Quito.

The consultation process for SAL I1 and IRP included a series o f preliminary dialogues and meetings with the Government and with c iv i l society organizations in the initial preparation stage, which helped to identify key stakeholders to be invited to the subsequent consultations.

76

In the discussion around Customs reforms, all participants in Quito and Guayaquil agreed on the fact that the inefficiency and corruption that have affected Customs in Ecuador significantly increase transactions costs of trading goods. This situation adversely affects the competitiveness of Ecuadorian economy and has a direct impact on consumers through a higher cost of imported goods, and on public revenues through the evasion of Customs taxes. There was a consensus that reforms of the current Customs management are necessary. However, there was disagreement among participants on whether these reforms require international loans or should be undertaken with Ecuadorian resources based on exchange of experiences with other Latin American countries. Stakeholders recommended the project should: (i) strengthen the new organic Customs law and i t s regulations, including stronger mechanisms for control and sanctions, (ii) improve transparency of Customs management through control and oversight, as well as ongoing participatory monitoring and evaluation (M&E), carried out by an independent observatory including civil society organizations (CSOs), (iii) develop, based on results of M&E, user manuals defining norms on internal processes which become binding for personnel and Customs officials, (iv) concession and privatize Customs management and create a sound institutional framework deciding which part of the revenue goes to the concessionaries and which part goes to the state, (iv) enhance the professionalism as well as the autonomy o f Customs management from political favors through training measures, adequate remuneration based on merit principle and transparency in posting job vacancies, (v) transfer new technologies to detect tax evasion, contraband and fraud.

In the area of public procurement, all stakeholders identified as main deficiencies of the recently initiated e-procurement system CONTRATANET, missing political support and deficient access. As a requirement for enhanced effectiveness and efficiency o f public procurement, participants recommended the effective commitment of public agencies to subscribe to CONTRATANET. Specific recommendations included: (i) the definition of a law and an institution which manages public procurement processes; (ii) a campaign for information dissemination, awareness and capacity building around the CONTRATANET; (iii) improved access to CONTRATANET for small and medium enterprises b y reducing the minimum bidding amount required, building their capacity to use CONTRATANET, and by improving connectivity o f the country; and (iv) independent and ongoing monitoring and evaluation of quality, efficiency, user-friendliness, perceived level o f integrity and commitment o f public agencies to use the CONTRATANET for 100% of their procurement processes.

In the discussion concerning human resources and institutional reforms, stakeholders agreed on the fact that reforms are necessary especially in key social areas l ike education and health. Another area of concern pointed at strengthening institutions and policies to support food security and production. Furthermore, all participants perceived the need for law enforcement and increased transparency on all levels o f government as crucial. Consequently, participants recommended the development o f a comprehensive reform program to address governance, public sector reform, as well as economic and social reform issues, and include the strengthening of local institutions l ike juntas parroquiales, municipalities, and sectional governments which directly respond to citizens demands. I t was recommended that the project help: (i) to improve professionalism of public administration employees through ongoing training measures; (ii) to enhance transparency of the human resource agency SENRES, through strengthening of oversight and control mechanisms; (iii) civi l society participation in monitoring and evaluating

77

quality o f and access to information of SENRES; (iv) to improve public and social service delivery through participatory monitoring and evaluation of performance o f key public agencies; and (v) civil society participation in budgeting and public expenditure monitoring.

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MAP SECTION