El Salvador Fiscal Policy and Expenditure Management Program …pdf.usaid.gov/pdf_docs/PA00MGT9.pdf · · 2017-01-04El Salvador Fiscal Policy and Expenditure Management Program

El Salvador Fiscal Policy and Expenditure

Management Program (FPEMP)

Fifth Year Evaluation Report June 2015 – May 2016

August 2016

This publication was produced for review by the United States Agency for International

Development. It was prepared by DAI Global LLC.

FISCAL POLICY AND EXPENDITURE

MANAGEMENT PROGRAM (FPEMP)

FIFTH YEAR EVALUATION REPORT

JUNE 2015 - MAY 2016

Program Title: Fiscal Policy and Expenditure Management Program

Sponsoring USAID Office: USAID/El Salvador Economic Growth Office

Contract Number: AID-519-11-000001

REQ-519-10-000011

Contractor: DAI

Author: David Hall

Date of Publication: August 2016

The authors’ views expressed in this publication do not necessarily reflect the views of the

United States Agency for International Development or the United States Government.

TABLE OF CONTENTS

ACRONYMS .................................................................................................................................. i

EXECUTIVE SUMMARY ............................................................................................................ 1

CHAPTER 1- INTRODUCTION ................................................................................................. 4

CHAPTER 2 - A STABLE MACROECONOMIC ENVIRONMENT: THE ROLE OF

FISCAL REFORM ...................................................................................................................... 10

CHAPTER 3 - OBJECTIVE 1: ENHANCED PUBLIC EXPENDITURE MANAGEMENT 15

Consolidation of GOES Treasury Operations........................................................................... 16

Development of the Treasury Subsystem and Integration with the SAFI II............................. 17

Supporting IPSAS Adoption ..................................................................................................... 18

Development of the Government Accounting Subsystem and Integration with the SAFI II ... 19

Enhancing the e-procurement system, COMPRASAL II ......................................................... 19

UNAC reform and strengthening .............................................................................................. 21

Transition to Programmatic Budgeting ..................................................................................... 21

Sustainability of Component A Initiatives ................................................................................ 23

CHAPTER 4 – OBJECTIVE 2: IMPROVED REVENUE MOBILIZATION ......................... 25

Improving the Tax Control Environment/Strengthening Tax Evasion Enforcement ............... 26

Development of CSMS II ......................................................................................................... 30

Improving Taxpayer Services through Online services ............................................................ 33

Taxpayer Data Integrity ............................................................................................................ 33

Sustainability of Objective 2 Initiatives .................................................................................... 34

CHAPTER 5 – OBJECTIVE 3: STRENGHTENED PRIVATE SECTOR OUTREACH ... 36

Seeking a National Fiscal Sustainability Agreement in El Salvador ........................................ 37

Improving Fiscal Transparency in El Salvador ........................................................................ 38

Supporting Fiscal Transparency at the Municipal Level .......................................................... 40

Building a stronger culture of performance management ......................................................... 41

Supporting Fiscal Education through the EXPRESATE Center .............................................. 42

Supporting the implementation of a Public Procurement Ombudsman Office ........................ 43

Sustainability of Objective 3 Initiatives .................................................................................... 43

CHAPTER 6 - FINDINGS AND RECOMMENDATIONS ..................................................... 46

Lessons Learned........................................................................................................................ 46

Recommendations ..................................................................................................................... 47

Annex 1: Perception Survey Results............................................................................................. 52

Annex 2: List of Interviews .......................................................................................................... 53

Figures

Figure 1: National GDP Growth ................................................................................................... 11

Figure 2: Government Revenues and Expenditures as % of GDP (2012-15) ............................... 12

Figure 3: Fiscal Deficit as a Percentage of GDP .......................................................................... 12

Figure 4: Total Sovereign Debt 2003-2015, as a percentage of GDP .......................................... 13

Figure 5: Floating Debt 2011-2015............................................................................................... 13

Figure 6: Issuance, Payments and Balance of Short-Term Debt (“Letes”) .................................. 16

Figure 7: COMPRASAL II: Software development sequence ..................................................... 20

Figure 8: Tax (Net) Revenue Collections, El Salvador 2004-2015 (as % of GDP) ..................... 25

Figure 9: Tax Revenue Breakdown by Tax Type ......................................................................... 26

Figure 10: CSMS Roadmap detail ................................................................................................ 30

Figure 11: Massive Flows - CSMSII ............................................................................................ 30

Figure 12: CSMS II Full workflow ............................................................................................... 31

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ACRONYMS

AECID Spanish International Cooperation Agency

AFI Law Organic Financial Administration Law

ATI Addis Tax Initiative

CAFTA-DR Central America and the Dominican Republic Free Trade Agreement

COMPRASAL II e-procurement system

COR Contracting Officer’s Representative

CSMS II Case Selection Management System

DAI Development Alternatives Incorporated

DGA General Directorate of Customs

DGCG General Directorate for Government Accounting

DGEA Administrative General Directorate

DGII General Directorate for Internal Revenue

DGP Budget General Directorate

DGT Treasury General Directorate

DINAFI National Directorate for Financial Administration

DRM Domestic Resource Mobilization

EU European Union Cooperation Agency

FPEMP Fiscal Policy & Expenditure Management Program

GDP Gross Domestic Product

GIZ German International Cooperation

GOES Government of El Salvador

HR Human Resources

ICEFI Central American Fiscal Studies Institute

IDB Inter-American Development Bank

IPSAS International Public Sector Accounting Standards

IT Information Technology

LTO Large Taxpayer Office

MOF Ministry of Finance

NFSA National Fiscal Sustainability Agreement

OTA Office of Technical Assistance of the United States Treasury

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PAAC Annual Procurement Plan module

PFGL Local Government Strengthening Project

PFM Public Financial Management

PPP Public-Private Partnership

SAFI National Financial Management System

SAFIM Municipalities Financial Management System

SIGMUNI Municipal Management Information System

TAIIA Tax Appeals Directorate

TPAR Tax Policy & Administration Reform Project

TSA Treasury Single Account

UNAC National Procurement Unit

USAID United States Agency for International Development

USG United States Government

VAT Value Added Tax

WB World Bank

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EXECUTIVE SUMMARY

With the purpose of strengthening the program cycle, the USAID/FPEMP incorporates in its

monitoring and evaluation approach a performance review of the program on an annual basis.

The expected results presented in this report follow the expected results from FPEMP’s work

plan, which follow the results expected per the program’s contract. These are results anticipated

to arise from counterpart’s achievements which directly support program objectives. While many

factors can affect the achievement of the expected program objectives and results, by evaluating

achievements and delivered outputs on an annual basis, it is possible to ensure a more systematic

review of any challenges while devising a strategy which can keep program activities on track in

progressing towards achieving its objectives and expected results.

The following represent key results obtained in the fifth year of assistance to the GOES, by

component:

COMPONENT A: Enhanced Public Expenditure Management

“Libre gestion” module of the e-procurement system (COMPRASAL II) fully developed

and 14 public sector pilot institutions trained in the use of this new tool. Once completed,

COMPRASAL II will cover all public procurement and represent a significant step in the

fight against corruption, collusion and bid-rigging nation-wide.

40% completion of the IPSAS-compliant Government Accounting Subsystem in the

National Financial Management System of the Government of El Salvador (GOES)

called SAFI II by its Spanish acronym.

42% completion of the Treasury Subsystem in the SAFI II. The new subsystem will

incorporate the advanced TSA system.

359 public sector staff trained in modern expenditure system management techniques

during year five, more than 900 during all FPEMP project lifetime;

Technical foundations for government-wide adoption of IPSAS 70% complete and on

schedule for full completion by the end of the contract period.

Proposed reforms to the Financial Administration System Law to improve overall PFM

provided to MOF authorities.

Public Procurement Regulatory Unit-UNAC fully reformed as proposed and requested by

FPEMP.

MOF adoption of the recommendation made by FPEMP to develop the budget

formulation using a revenue budget based on net revenue.

COMPONENT B: IMPROVED REVENUE MOBILIZATION

USAID public finance investments have both tangible impact on public revenues, but

equally important—though more qualitative—impacts on transparency and legitimacy of

government and its capability to deliver public services. FPEMP activities in

Component B have yielded an estimated $229.2 million from a USAID investment of

$3.6 million since 2011, which means every dollar invested by USAID in this

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component has generated an additional $63.66 in domestic revenues. A minimum of

$135 million in additional revenue was produced through FPEMP assisted

initiatives in Year 5 during the evaluation period.

The “Tax Evasion Crackdown” has produced $129.2 million in additional public revenue

since its inception, with higher amounts expected upon completion.

Taxpayer records and the database containing those records fully cleaned, formatted and

now continuously monitored by the MOF with its own resources.

Tax reform proposal approved by the MOF and now with the Legislative Assembly for

approval.

Achieved technical and political consensus on enforced tax arrears collections in part

through an FPEMP study tour to Colombia to learn from their policy and administrative

set-up for enforced collections. Detailed action plan for creating an enforced arrears

collection unit is complete through project assistance.

Case Selection Management System II (CSMS II) 90% complete and on schedule for

delivery and full handover to the Directorate General of Internal Revenue (DGII, from

the Spanish acronym) by the end of the contract period of performance.

COMPONENT C: PRIVATE SECTOR ENGAGEMENT AND TRANSPARENCY

National transparency portal fully operational and updated by MOF;

The national Fiscal Transparency Portal currently averages 25,445 page visits per month.

Fiscal Transparency white paper, co-funded with GIZ and AECID, presented to the

President’s Economic Council, National Council for Growth and Civil Society;

Facilitated discussions between GOES and the private sector to raise the chances of

reaching a “fiscal pact” to open political space for the MOF to raise adequate revenue;

Near completion of the Public Procurement Ombudsman’s office replicated from

CHILECOMPRAS Ombudsman model demonstrated through an FPEMP-facilitated

study tour;

2131 high school students visit the Tax Awareness “Expresate” Center to learn the

importance of tax compliance and benefits of government expenditures for Salvadoran

youth. More than 7000 students have visited the center since its launch in 2013.

As part of a series of interviews with FPEMP counterpart offices inside the MOF, a brief

customer satisfaction survey was given orally to respondents, requesting feedback on the:

Quality, Timeliness, Flexibility, Communication and General Satisfaction on FPEMP’s technical

assistance. The results from 15 respondents, on a scale of 1 to 5 were on average, as follows:

1 Quality 4.63

2 Timeliness 4.80

3 Flexibility 4.53

4 Communication 4.57

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5 Overall Satisfaction 4.80

Qualitative comments and feedback offered were roundly positive on all fronts of project

assistance, while also offering suggestions for improvement and proposed project responses that

will be discussed in greater detail under the technical area where it applies. It is universally

accepted by all respondents that project activities are directly in line with the MOF’s Strategic

Plan, and has contributed to the achievement of important, broader GOES objectives.

Finally, while substantial progress has been made, nearly all interviewed respondents indicated

significant short and medium-term needs for continuing support. For example, respondents

consistently requested assistance in: further capacity building on new tools and approaches

implemented by FPEMP, completion of the full SAFI II system due to delays on the Budget sub-

system cascading down to FPEMP software development tasks, adoption and capacity building

on IPSAS, development of the COMPRASAL II system to manage contracts and conduct large

procurements over $64,000, developing new online taxpayer services, further strengthening tax

audit and enforcement effectiveness, acquisition of further third-party data sets to enable deeper

data mining and the integration of customs operations under the CSMS II system. Other areas for

requested assistance have been discussed with the FPEMP project team together with

recommended areas for integration in the project work plan.

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CHAPTER 1- INTRODUCTION

Background and Purpose

With the purpose of strengthening the program cycle, the USAID/FPEMP incorporates in its

monitoring and evaluation approach a performance review of the program on an annual basis.

This report continues this cycle with this performance review for the fifth year of implementation

with a specific focus on:

Evaluating key program results;

Identifying factors that facilitate or impede achievement of results, and integrate feedback

into future activities and work plans;

Detect challenges, including technical and/or related to political economy

Provide recommendation of options for adjusting program activities with an aim to

accomplish and/or accelerate results to ensure reaching the intended objective

Pinpoint specific program implementation experiences which relate to learning,

adaptation and collaboration approaches that may be emphasized further in the program.

The FPEMP contract was fully executed by USAID and DAI on June 10, 2011. Since USAID

agreed to exercise the final option year of the contract, a further eight month extension has been

granted through February 2017. Implemented by DAI, USAID/FPEMP contributes to achieving

the objectives of El Salvador’s Five Year Development Plan 2014-2019, and the new Strategic

Plan of the Ministry of Finance; namely, to improve the efficiency of public expenditure

management, enhance tax administration in order to mobilize greater tax revenues, and improve

public-private relations and transparency in order to accelerate economic growth. In this context,

FPEMP supports the MOF’s commitment to transform the GOES into a high performing, result-

driven administration that taxes citizens fairly, spends money wisely, and promotes greater social

inclusion.

Structure of the report

This introductory chapter includes a discussion on the background, purpose and methodology

used to prepare and review the report. The next chapter provides a general overview of El

Salvador’s macro-fiscal trends evaluating the role of FPEMP’s activities in achieving macro-

fiscal stability. Next are three chapters, one for each program objective, which provide a detailed

overview of the activities implemented during the fifth year of the program with a lens on

identifying specific results that can be attributed to the program providing direct or indirect

impact on achieving greater public expenditure efficiency, domestic resource mobilization and

public-private dialog and transparency. The final chapter provides findings and

recommendations for the way forward.

Methodology This evaluation report is the outcome of detailed review of documents, technical studies and

technical deliverables, data and program progress reports as well as consultation and interviews

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with Salvadoran government counterparts, FPEMP staff/consultants and USAID/El Salvador. In

this report, Salvadoran counterparts interviewed included: From the revenues side: General

Directorate of Internal Revenue, Case Selection Unit, Audit, Taxpayer Services Tax Appeals and

the Vice Minister of Revenue. From the expenditure side: DGT, DGCG, DGP, UNAC, DGEA,

DINAFI and the Viceminister of Finance. Each office of the MOF was asked to verbally respond

to a 5 question survey regarding their level of satisfaction with the project on 5 different criteria

(quality, timeliness, flexibility, communications and overall satisfaction). This report is based on

the program’s objectives, expected results, achievements, and work product or deliverables.

Throughout this report, accomplishments are supported with measurable results indicators

wherever possible, but to ensure broad capturing of achievements, we also include qualitative

observations of interviewees and synthesis from the author.

FPEMP’s Strategic Alignment and Structure

USAID/El Salvador has provided support to the Government of El Salvador (GOES) to improve

its capacity to raise higher levels of tax revenue and manage its expenditures since 2005 with the

Tax Administration Management Program (TPAR), and continues today under the FPEMP

project. USAID assistance has helped the MOF increase its total tax effort from 11.5% of GDP

to 15.1% of GDP at the end of 2015, and a projected 15.4% of GDP at mid-year 2016. This

continuing effort and investment directly aligns with US support in line with the U.S. Strategy

for Engagement in Central America. The US Government is committing significant resources to

all three countries to accelerate broad-based economic growth, improve government performance

and improve security conditions.

In El Salvador, FPEMP directly addresses the Government Performance “Line of Action”,

specifically the “Improving Fiscal Capacity” and “Targeting Corruption” sub-components under

that line. The project’s activities also indirectly impact the GOES’ ability to encourage broad-

based economic growth, particularly as it finances the government’s capability to “Increase

Resilience” and “Reduce Poverty.”

FPEMP also corresponds with the Alliance for Prosperity in the Northern Triangle’s Strategic

Line of Action D: Strengthening Institutions to Increase People’s Trust in the State—Ensuring

the State’s Financial Capacity and Increasing Transparency. The project also directly impacts the

GOES’ ability to finance service delivery nationwide, and thus, its ability to provide an

appropriate enabling environment for economic growth (Strategic Lines of Action A and B).

Project activities have produced tangible results in: 1) increasing the fairness, efficiency, and

productivity of tax administration to increase the share of domestic revenue relative to GDP; 2)

increasing the efficiency, transparency and accountability of public expenditures; and 3)

supporting a political consensus by providing technical advice and resources to civil society and

the private sector on the need for additional public revenue. The results of FPEMP activities

described herein demonstrate the results of this strategic alignment in terms of improved

performance of the MOF to fairly raise, and wisely spend, government resources.

Similarly, this project also aligns with the US Government’s regional strategy to address the root

causes of migration from Central America to the United States—limited employment

opportunities exacerbated by slow economic growth, vulnerability of rural livelihoods to climate

6

change and natural disasters, and pervasive crime and violence heavily impacting already

marginalized communities throughout the country. Direct GOES intervention is required to

effectively counter these macro-level drivers of migration, all of which depend on raising higher

levels of public revenue to provide more efficient services and investments while improving

fiscal performance and closing the current structural deficit equal to 4% of GDP.

The US Government is one of the leading players in the multi-donor Addis Tax Initiative (ATI),

which commits donors to collectively strive to double their assistance to improving the

“Domestic Resource Mobilization” (DRM) of aid-recipient countries. The motivation of the ATI

is to help recipient countries raise their own domestic revenue, thereby financing their own

development needs, thus reducing the long-term need for foreign assistance to finance

development investments and the delivery of essential services. Investing in strengthening tax

policy and administration is a simultaneous investment in providing increased resources for

essential public goods that donors support and all citizens need—health, education, housing,

transport, economic opportunity, adequate food and nutrition, and so on.

FPEMP and its predecessor, the Tax Policy and Administration Reform project (TPAR, 2005-

2010) have directly contributed to an increase in the total tax take of 4% of GDP through entirely

operational improvements resulting from the projects’ assistance and collaboration with

strategically aligned actors in the international community, principally the German and Spanish

International Cooperation Agencies (GIZ and AECID, respectively) and the IDB. Tax policy

reform is important, but political economy factors have made such reforms difficult to enact, and

despite that, USAID’s investments have delivered results from within the existing policy

framework, providing a powerful example for the potential of DRM technical assistance in other

countries.

FPEMP’s goal is to “create a stable macroeconomic environment that fosters inclusive, broad-

based economic growth through enhanced transparency, accountability and more efficient use of

public resources.” The program goal is expected to be achieved, in part, by reaching the three

program objectives discussed in the next chapter. FPEMP has three explicit objectives comprised

in three components. These objectives are as follows:

Objective 1: Enhanced public expenditure management (through improved efficiency in the use

of resources and stronger public financial management);

Objective 2: Improved revenue mobilization (through sound tax policy and better revenue

administration);

Objective 3: Strengthened private sector engagement (through greater outreach, enriched

communication mechanisms and transparency).

The three components work areas are:

Component A: Public expenditure management

Component B: Tax revenue mobilization

Component C: Private sector outreach

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Each of the components has a team that works with a defined annual work plan, with dedicated

staff working within counterparts’ facilities. The program’s cross-cutting team, including

program management and administration, outreach, and Information Technology (IT) helps

ensure that FPEMP’s component teams have the tools and support necessary to meet the

program’s objectives and expected results.

Expected Results, Achievements and Delivered Outputs The expected results presented in this report follow the expected results from the FPEMP

contract. These are results anticipated to arise from counterpart’s achievements, which follow

directly from program activities. While many factors can affect the achievement of the expected

program objectives and results, by evaluating achievements and delivered outputs on an annual

basis, it is possible to better attribute FPEMP’s interventions in relationship to broader outcomes,

while devising a strategy which can keep program activities on track toward achieving its

objectives. All achievements mentioned in this report are attributed to the counterpart agencies in

the MOF and the GOES via the support of USAID. Achievements are changes in behavior or

capacity of counterparts, improvements to laws or regulations or processes that have a direct

impact on results. Additionally, not all of FPEMP’s counterparts’ achievements might be

documented in this report. Instead, the report focuses on achievements that have a direct

relationship to both the program’s objectives and results. USAID-funded FPEMP provides a

variety of outputs including: technical assistance, human and institutional capacity building, IT

and other equipment, systems, advisory assistance, outreach mechanisms, technical reports, and

advocacy that altogether help support counterparts’ achievements and improvements that lead to

expected results.

International Donor Assistance and Coordination

The GOES is advancing its fiscal reform agenda with support from multiple international

agencies. In a change from the previous year, DPEF, in coordination with other units of the

MOF, now leads the efforts of international assistance coordination from: USAID, German

International Cooperation Agency (GIZ), European Union Cooperation Agency (EU),

International Monetary Fund (IMF), Inter-American Development Bank (IDB), World Bank

(WB), Spanish International Cooperation Agency (AECID), and U.S. Department of Treasury

Office of Technical Assistance (OTA).

Sustainability of Assistance

The USAID Global Health Bureau’s definition of sustainability is “the capacity of a host country

entity to achieve long-term success and stability and to serve its clients and consumers without

interruption and without reducing the quality of services after external assistance ends.” In

Governance reform, achieving sustainability in government transparency, accountability, and

service delivery is a long-term investment that typically requires longer than 5 year commitments

that characterize the normal program cycle. USAID/El Salvador recognized as much and has

been investing in strengthening the tax system and Public Financial Management (PFM) since

2005 with impressive results from near-continuous assistance throughout that time.

8

The four key dimensions of sustainability, per USAID guidelines adapted from the Global Health

Bureau, are as follows:

Political Ownership and Stewardship. Host country (public and private sectors) is the

architect that fully implements and provides oversight of national plan to achieve results.

Donors support concept of local ownership.

Institutional Ownership. Host country institutions constitute the primary vehicles

through which PFM reforms are executed and take responsibility for each program.

Capabilities. Host country has effective workforce, organizations and systems at all

levels able to perform activities and carry out responsibilities that achieve priority fiscal

outcomes.

Mutual Accountability. Explicit roles and responsibilities are described with appropriate

management of performance in place.

In brief, FPEMP progression toward sustainability of reform in each of the four dimensions has

been substantial. We include a summary with supporting examples below:

1. Political ownership and stewardship. At the political level, a range of proposed policy

reforms that would improve fiscal performance have not yet been adopted for complex

political economy reasons. FPEMP has aligned its assistance with the clearly articulated

needs of the MOF as the strategic and operational institution executing fiscal functions.

The program offers policy advice to the MOF when requested, and the MOF itself uses

this advice to advocate for the change it desires. This is the program’s approach to

generate a greater degree of political ownership, through the beneficiary institution that is

better positioned within the political economy context to advocate for meaningful change

than FPEMP as an external actor. It is an important aspect of USG’s approach to the

polarized political environment in El Salvador to remain politically neutral and avoid the

appearance of favoring a political interest, and the program has sought to faithfully

maintain that neutrality.

2. Institutional Ownership. At a strategic level, FPEMP was designed in alignment with

the Partnership for Growth negotiated at a high level between the GOES and USG. Its

Components align directly with the stated needs of the MOF to raise additional tax

revenue, increase the efficiency of public spending, and initiate a more productive public-

private dialog to raise the level of mutual understanding thereby improving the policy

development process.

At an operational level, the program enjoys a high level of cooperation and commitment

from the MOF. This is particularly demonstrable now with the MOF Strategic Plan, is

possible to see that FPEMP initiatives are directly executing—or building capacity to

execute—projects within the 4 Strategic Objectives of the MOF. FPEMP project

leadership in partnership with USAID COR Martin Schultz, are active participants in a

donor coordination roundtable to align project resources with the needs of the institution,

and secure the commitment of MOF for its activities. All project initiatives are ultimately

conducted in partnership with a Directorate within the MOF, including private sector

engagement which is coordinated by the Directorate for Economic and Fiscal Policy.

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Capacity building is an integral and ongoing part of project implementation that increases

the MOF’s capability to own and carry forward reform efforts that FPEMP supports.

For example, the program has helped the MOF to open 3 different call centers—all of

which now function without project assistance, and have improved their performance

year after year. For example, the Tax Collections Call Center was started in 2012 and

yielded $1 million in revenue resulting from follow-up calls to tax payers just in its first

year. The call center’s most recent collections numbers are $16 million in additional

revenue produced through the call center’s effort. Similar things could also be said

regarding the CSMS, which is now managed by the Case Selection Unit within the MOF,

which has its own team of 17 managing the databases and operations of the system.

3. Capabilities. See point 4.

4. Mutual Accountability. Given the range of activities that FPEMP executes, and thus the

necessary capabilities and mutual accountability needed for sustainability, this report

contains separate sections under each Project Objective dedicated to a discussion on the

sustainability of initiatives and activities under technical areas.

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CHAPTER 2 - A STABLE MACROECONOMIC

ENVIRONMENT: THE ROLE OF FISCAL REFORM

In 2009-10 following the global financial crisis, policy initiatives to lower fiscal deficit,

including two IMF-sponsored Stand-By Arrangements, have contributed to some improvements

but they have been insufficient to ensure fiscal consolidation and sustainability. Economic

growth continues to be stagnant, public debt was 64% of GDP at the end of 2015, though with a

small dip to 58.6% of GDP in May 2016.

President Sanchez Ceren’s administration has published its five-year plan 2014-19, which in

chapter 7 continues to commit to deep fiscal reforms, including vowing to increase economic

growth to 3 percent and to take austerity measures to non-essential government spending to

create fiscal space for more social outlays. Public expenditure has come down 1% of GDP to just

over 21% since 2013, but tax revenue remains flat at 16% of GDP, and total revenue at 19%. The

GOES has obligated itself to top-up public pension payments out of the general fund, which

accounts for more than half of the total fiscal deficit—a top priority for reform for policymakers

along with public security.

Achieving fiscal sustainability in the medium and longer term is essential in order to ensure

government spending and investments in key sectors, particularly those that benefit the most

vulnerable and the poor. Fiscal reform permeates all areas of government as it provides the

resources necessary to provide basic health and education, social assistance programs, fight and

prevent crime and violence, among others. Promoting a fiscally sustainable environment where

the resources are raised and spent in an equitable, efficient and effective manner is key to

tackling the most important challenges in El Salvador today, which include:

1. Economic growth measured through real Gross Domestic Product (GDP) has been lower

than pre-global crisis levels struggling to reach 2 percent annually.

2. Tax revenue mobilization has contributed to providing important resources for

government spending, however, it has not been enough. Keeping up with the sustained

increase in tax revenue to GDP of 4 percentage points of GDP over the last decade will

require additional tax reforms that tackle informality, tax evasion and empowering the tax

administration to enforce collection of tax arrears.

3. Public debt levels have risen 25 percentage points over the last decade reaching 60% in

2015.

4. Although unemployment has been low at 6.2 percent in 2014, minimum wages are low

compared to others in the region. Salvadorans continue to migrate to the U.S. in search of

better economic opportunities, exacerbating social problems where a large number of

children grow up without their parents and look to gang-related activities for survival in a

society where crime and violence impacts all economic activity either directly or

indirectly through higher input costs.

5. The quality of public spending on social services in education, health, water, housing and

others continue to provide questionable value for money with large gaps in access to

basic services at the macro level.

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Achieving fiscal sustainability requires commitment to ongoing fiscal reform activities.

Following a sound and sustainable fiscal framework will contribute to greater mobilization of

domestic resources, which are then subsequently spent in an effective and efficient manner.

Besides all ongoing fiscal reform activities, the GOES should look to additional revenue and

expenditure measures to achieve the needed adjustments. While the draft Fiscal Responsibility

Law (FRL) provides a framework for fiscal sustainability, additional tax reforms and expenditure

measures should be considered such as an update to the tax procedures law to tackle tax evasion,

expanding the tax base to include a concept of worldwide income, eliminating the indexation of

the “escalafon” (a scheme that provides certain public sector workers with large automatic wage

increases, not linked to performance), rationalization of subsidies, pension reform, and the

introduction of a fully-fledged property tax.

Recent Economic and Fiscal Trends

El Salvador’s economic performance after the 2008 financial crisis has been poor, as real GDP

growth has not caught up to the growth rates experienced prior to the 2008 crisis. 2015 offered

some reason for measured optimism with an increase to 2.5% growth from 1.4% in 2014.

Figure 1: National GDP Growth

The expansion of tax revenue collections in 2012 and 2013 was driven by the tax reform

effective in 2012, in addition to significant ongoing improvements in tax administration. With

non-tax revenue holding constant at 3.2% of GDP (included as part of current revenues below),

tax revenue has only been able to keep pace with a slow growth rate. Judgments of

unconstitutionality of 3 different taxes (including the alternative minimum income tax of 1% on

gross revenue) negatively affected the further expansion of tax revenues this past year. GOES

liquidity problems have intensified to the extent revenue forecasts continue to be over-optimistic.

Although treasury operations have been optimized and consolidated into a TSA, the liquidity

problem driven by inadequate budgeting practices, continues to cause the ongoing reliance on

short-term debt (“letes”) in order to meet government current spending.

1.7 2.3 2.3

1.9

3.6 3.9 3.8

1.3

-3.1

1.4

2.2 1.9 1.8

1.4

2.5

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015% G

row

th

El Salvador's GDP Growth

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Figure 2: Government Revenues and Expenditures as % of GDP (2012-15)

Figure 3 details the structural fiscal deficit since 2003 that has led up to the critical status of

sovereign debt. A return to 2012 deficit levels has alleviated some of the pressure, and the fiscal

deficit is on a positive trajectory since President Sanchez Ceren took office. However, there is a

serious risk of default on the Government’s floating debt this year (see Figure 5), and so the

gradual pace of deficit reduction may not be fast enough to maintain creditors’ willingness to

lend to the government. Total stock of sovereign debt stands at 58.6% of GDP as of May 2016

(latest data in line with Figure 4).

Figure 3: Fiscal Deficit as a Percentage of GDP

Source: “El Salvador en Búsqueda de un Acuerdo de Sostenibilidad Fiscal” (USAID/AECID/GIZ).

17.5%

18.0%

18.5%

19.0%

19.5%

20.0%

20.5%

21.0%

21.5%

22.0%

22.5%

2012 2013 2014 2015

Revenues vs. Expenditures

Current Revenues Net Expenditures

-559

.9

-378

.8

-510

.0

-546

.6

-395

.3

-683

.4

-1,1

71.6

-917

.8

-906

.6

-813

.9

-979

.4

-907

.0

-851

.7

-3.7

-2.4

-3.0 -2.9

-2.0

-3.2

-5.7

-4.3 -3.9

-3.4

-4.0

-3.6-3.3

-6

-5

-4

-3

-2

-1

0

-1,200

-1,000

-800

-600

-400

-200

0

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Porc

enta

je d

el P

IB

Mill

ones

de

USD

Déficit fiscal Porcentaje del PIB (eje derecho)

13

Figure 3 above highlights the continuing structural, fiscal deficit of between 2-6% annually. The

chart below shows the upward trajectory of sovereign debt (Figure 4), and the chart beneath that

shows the current floating debt (Figure 5). The floating debt is the major concern for solvency of

the Government, and immediate actions on revenue generation and a likely need for austerity

measures on the expenditure side to reverse the trend to a position with which foreign and

domestic creditors are comfortable. IMF assistance is a possible avenue, but the GOES would

need to negotiate a resolution to outstanding action items from its previous Stand-By

Agreements with which the government did not previously comply.

Figure 4: Total Sovereign Debt 2003-2015, as a percentage of GDP

Figure 5: Floating Debt 2011-2015

40.5% 40.7% 39.8% 40.0% 37.1%

39.7%

50.3% 51.7% 51.9% 57.1% 57.0% 58.9% 60.8%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Total Floating Debt, $972.90

$-

$200.00

$400.00

$600.00

$800.00

$1,000.00

$1,200.00

2011 2012 2013 2014 2015

Mill

ion

s (U

SD)

Total Floating Debt

14

The current reform process in revenues, expenditures, fiscal transparency, and public financial

management is accompanied by the proposed Fiscal Responsibility Law, and considerations for

achieving a fiscal sustainability agreement. FPEMP also helped develop the Administrative Tax

Arrears Enforcement Collection Law and expect to gain legislative approval by the end of 2016.

The FPEMP program supports the GOES in all of these areas, and will provide support as

needed in debt management or other areas of potentially urgent need, currently supported with

short-term assistance by the US Treasury Office of Technical Assistance.

15

CHAPTER 3 - OBJECTIVE 1: ENHANCED PUBLIC

EXPENDITURE MANAGEMENT

The GOES’ MOF has embarked in a systematic modernization of its public financial

management systems, in a commitment to achieve greater effectiveness and efficiency of

revenue and expenditure management, as well as improving accountability and transparency in

the public sector. While there has broadly been a growth trend in tax revenues and public

expenditures over the last 6-7 years, improvements in access to and quality of public services

need to accompany such increases. The MOF attempts to bridge this gap through efforts to

improve the budget planning, execution and oversight processes and various other aspects of

public financial management to ultimately improve service delivery that Salvadorans need.

Additionally, the GOES has developed a proposal for a Fiscal Responsibility Law aiming to

exert discipline and put limits on discretionary fiscal policy, leading to credibility in the

management of public finances.

Technical assistance to the GOES from the various donors in this area has allowed the MOF to

strategically plan the reform. The MOF’s main objectives of the reform in this area include5: (1)

improve the efficiency in the use of public resources, increasing access and financing services

within a framework of fiscal sustainability; (2) improve the allocation of resources based on

priorities and the country’s development objectives; (3) transform the public budget into a

management instrument leading to greater transparency and accountability; and (4) create the

fiscal resilience to successfully confront economic and environmental shocks.

FPEMP’s technical assistance supports all of these objectives. The public expenditure

management component focuses on modernizing the entire budget process (i.e. planning,

execution, monitoring and evaluation), one that is driven by results, within a medium term

framework and an upgraded platform of government financial management information system.

Moreover, FPEMP supports the GOES in adopting a new treasury management system including

instituting a TSA; introducing government accounting practices in compliance with the IPSAS;

strengthening and upgrading the integrated financial management information system (SAFI or

SAFI II, as it is known in El Salvador) to conform to the new budget system and all other PFM

reforms; implementing a programmatic budget system focused on results; upgrading the public

procurement processes and procedures introducing a cutting-edge platform for e-procurement

(COMPRASAL II); and improving fiscal transparency and accountability by publicly providing

budget information to which citizens are entitled regarding public finances at the national and

subnational levels (more on this as part of Component 3).

Assistance in the above-mentioned areas result from coordinated efforts among 8 different

donors, including USAID, GIZ, EU, IDB, OTA, WB, IMF, AECID, and at least eight different

departments at the MOF, now led by the counterparts at the Fiscal and Economic Policy

Directorate, which apportions tasks under the MOF Strategic Plans to different donor supporters

active in the MOF, currently USAID, GIZ, IDB, OTA, WB and soon to be the EU. GIZ funding

is scaling back and WB funding is scheduled to terminate this September.

16

Consolidation of GOES Treasury Operations

FPEMP supports the modernization of the DGT through the implementation of the Treasury

Single Account (TSA) and the treasury subsystem for integration into SAFI II. The treasury

operations modernization agenda contributes to the goal of achieving fiscal sustainability and is

essential for consolidating and managing the GOES’ cash resources, minimizing borrowing

costs, and strengthening controls for meeting payment obligations. The modernization of

treasury operations, once integrated into the SAFI II allows effective aggregate control over

government cash balances, contributes to improved financial programming by minimizing

transaction costs during budget execution, allows rapid payments of government expenses,

facilitates reconciliation between banking and accounting data and introduces efficient controls

and monitoring of funds.

Over the past year, FPEMP has helped DGT complete Phase 1 of the transition to a TSA. All

central budget institutions are now integrated under the TSA and their cash is under central

control. The most immediate benefit of the TSA is that by centralizing cash management, GOES

minimizes the extent to which it requires short-term debt (“Letes”) to finance expenditures.

While the stock and flow of letes continues to increase due to the continuing structural deficit,

the TSA has limited the impact and improved GOES’ fiscal position relative to the

counterfactual scenario without consolidated cash management.

Figure 6: Issuance, Payments and Balance of Short-Term Debt (“Letes”)

0

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

700,000,000

800,000,000

900,000,000

1,000,000,000

2011 2012 2013 2014 2015 2016*

USD

Letes Balance

Principal

Interest

17

Key outputs and their status under this area of assistance include:

Development of the Treasury Subsystem and Integration with the SAFI II

Development of the core treasury subsystem is an important milestone for the implementation of

SAFI II. It enables the integration and exchange of information from various subsystems and

agencies (e.g. DGT, DGII, DGA, Central Bank). Since 2011, the FPEMP has been supporting

the development of the treasury subsystem for integration into SAFI II. Design, development and

implementation of the treasury subsystem has required government commitment and

management support at the highest levels, strong inter-agency coordination and user involvement

in the system design. In the process, FPEMP has enabled the building of institutional capacity

and technical skills within the Ministry of Finance and the DGT, ensuring the cohesive

implementation and sustainability of the new system.

The treasury system includes the following components:

1. Budget execution and monitoring

2. Accounting (general ledger, management of payments and receipts)

3. Cash Management

4. Financial Reporting

5. Purchasing / Commitment

6. Asset / Inventory Management

7. Operational support to spending units (UFIs)

The Treasury subsystem is 42% developed, but is currently stalled waiting for completion of the

Budget subsystem. FPEMP has developed 39 use cases within the treasury module and 69 more

are ready for software development on their own, but the FPEMP IT team is waiting on further

customization to ensure compatibility and integration between the Treasury, Accounting and

Budget subsystems. Completion of the Treasury subsystem will stretch beyond the life of the

FPEMP contract, and will require further external support to complete and ensure sustainability.

Assesment and recommendations for the TSA implementation Completed

Development of the TSA conceptual model Completed

Seminars on TSA Completed

Study tour to Argentina to learn about the Argentinian TSA Completed

IT procurement for the DGT Completed

Support the implementation of the TSA Completed

Training on use cases design to DINAFI, DGP, DGCG, and DGT Completed

SAFI II treasury subsystem use cases design Completed

SAFI II treasury subsystem software development In Progress

SAFI II Public Treasury Call Center established Pending

18

Other key outputs under this area of assistance include:

Supporting IPSAS Adoption

The benefits of adopting IPSAS are numerous. IPSAS helps improve accountability through

complete and accurate view of government accounts; provides greater transparency over the use

of resources; enhances credibility of the budget; improves overall management and planning;

supports a results-based approach to budgeting; and harmonizes government financial

information and reporting that facilitates more effective monitoring and evaluation of the budget.

IPSAS has 35 international standards, of which 32 are currently available in Spanish.

With the decision to adopt IPSAS, the GOES is also progressing toward the full adoption of

accrual-based accounting which contributes to providing more useful information for long‐term

assessment of public policies' financial sustainability. FPEMP’s assistance to the adoption of

IPSAS began in 2011, supporting the DGCG. Working with a dedicated working group of 13

officials from the DGCG, the FPEMP’s assistance in this area is successfully making progress in

the adoption of IPSAS. Full adoption of IPSAS by the GOES is expected to be completed by

2020.

During Year 5, FPEMP provided two IPSAS training types. One training on IPSAS general

accounting policies for some non-financial assets to 32 DGCG and 5 Audit Court staff along

with one advanced IPSAS training to all GOES entities (IPSAS 11,12,16,17,21,27,31 and 32) for

another 162 GOES officials.

Some immediate challenges to IPSAS implementation include:

Mandatory Adoption of IPSAS: in order to continue with the IPSAS adoption DGCG

must issue several accounting rules to make mandatory for all GOES entities the new

public accounting conceptual module, the new chart of accounts and the chart of accounts

description manual.

Government Accounting Cleansing: the legal framework needs to set the mandatory

accounting clearance processes, establish accounting policies and procedures, including

procedures for cleansing accounts with inconsistencies to be cleared by the Court of

Accounts by January 2017.

Clarify legal authorities. IPSAS best practice should lead to centralized authority for all

government accounting within the DGCG; eliminating the divided authority currently in

statute with DINAFI.

Assistance of the program during Year 5 has helped DGCG complete 19 government accounting

matrices in line with their chart of accounts, conceptual model and framework, and which govern

Development of the financial administration system of ES reform proposal Completed

Study tour to Colombia to learn about GRP systems Completed

Study tour to Argentina to learn about GFMIS systems Completed

Study tour to Argentina to learn about budget M&E, budget programs formulation and

result oriented buget Completed




SAFI II accounting subsystem use cases design Completed

SAFI II budget execution module use cases design Completed

Support the review of the SAFI II budget formulation use cases design Completed

Study tour to Peru to learn about budget execution Completed

Study tour to Argentina to learn about the payroll and human resources system within

the finantial administration system operation Completed

Support the use cases design of the COMPRASAL II modules In Progress

Software development of the PAAC module of COMPRASAL II Completed

Support training on COMPRASAL II PAAC module to GOES insttituions and municipalities Completed

Software development of the "libre gestion" module of COMPRASAL II Completed

Support training on COMPRASAL II "Libre Gestion" to 14 pilots institutions In Progress

Study tour to Chile to learn about public procurement system Completed

Support training on COMPRASAL II modules to public sector providers In Progress

Software development of the "Licitaciones y Concursos" module of COMPRASAL II Pending

Support the public procurement law regulation (RELACAP) reform proposal approval In Progress

19

more than 200 required use cases for programming into the Accounting subsystem—of which 24

have already been developed. Of the remaining use cases, 23 are currently in development, 110

are blocked due to the problems with the Budget Module, 69 are not in development phase yet

and the final 3 are not applicable. Continuing work on use cases, approval of the chart of

accounts description manual, updating of conceptual model as use cases are developed, and

capacity building in the use of the IPSAS transparency manual published by the IMF will

continue to be priorities during the software development work stoppage referenced previously.

In other words, functional work will continue while software programming waits to be integrated

with the pending completion of the budget subsystem. The Accounting subsystem is currently

40% complete, and completion of the Accounting subsystem will likely require support beyond

the life of the contract.

Key outputs under this area of assistance include:

Training on IPSAS adoption and implementation to all GOES institutions Completed

Advance IPSAS training to GOES entities (IPSAS 11,12,16,17,21,27,31 and 32) Completed

Development of the charts of accounts under IPSAS Completed

Development of the charts of accounts description manual In Progress

Support the development of the accounting policy manual Pending

Development of the Government Accounting Subsystem and Integration with the

SAFI II

Similar to treasury operations’ linkage with the new Treasury subsystem within SAFI II, the

FPEMP team is also helping to develop a new, IPSAS compliant Government Accounting

Subsystem within the broader SAFI II development. The project has helped the DGCG develop

its use cases, chart of accounts, and is now completing a full conceptual model for software

development. Once deployed, the system will fully enable electronic accrual accounting

throughout national government, and introduce new functionality for performance management,

monitoring and evaluation. For example, the new system will maintain a comprehensive

government asset registry that does not currently exist. Most importantly, the Accounting

Subsystem will enable higher quality of financial data through consistent and automated

application of PFM standards and regulations.

The Accounting subsystem is currently 40% complete, and is awaiting integration with the

Budget subsystem under development by DINAFI, expected to be delayed due to the cessation in

World Bank funds in September 2016.

Enhancing the e-procurement system, COMPRASAL II

The third and final subsystem of SAFI II under FPEMP provision is a fully transactional

electronic procurement (e-procurement) system called COMPRASAL II. The graphic below

describes the 11 modules included in the full e-procurement system that will be required for all

Public Sector spending units including all 262 municipalities—covering all public procurement

once complete. The green chevrons are already completed; light green are in or will be in

20

development during the final year of FPEMP; and the blue chevrons are required modules

needing support beyond the life of the contract.

Figure 7: COMPRASAL II: Software development sequence

The traditional procurement methodology is done on paper and over email with significant

weaknesses in the internal control environment. Centralizing a number of duties in one person

creates a risk for internal malfeasance within the MOF; a total lack of vendor tracking opens the

GOES to the risk of fraudulent or poor performing vendors to continue winning government

work; collusion within vendors is more difficult to spot; audit trails are incomplete either

deliberately or through loss of physical files; and finally the process is simply slow and

inefficient. COMPRASAL II addresses—and in many cases solves—each of these problems by

institutionalizing internal controls through a rigid IT system that requires the full workflow,

including internal checks and audit trails, to be followed according to the law and in line with

separation of responsibilities required by internal control standards.

Already, progress toward automating procurement has yielded significant impact. Procurements

under $6,000 do not require competition, but instead the vendor compliant with the terms of

selection can be selected by the procurement officer. Once they receive the approved requisition,

procurement officers choose from an approved list of government vendors offering the good or

service, and then make the purchase order in a format similar to online shopping outlets. In 2015,

$132.8 million in public expenditure was spent on purchase orders under $60,000—all of which

will now be fully executed by COMPRASAL II through the libre gestion module with an

electronic audit trail. This amount makes up 13.43% of the total cost of public procurement, and

92.4% of all government issued procurements. In an unexpectedly positive turn of events,

MSMEs (8,800 of 9,200 registered vendors in COMPRASAL II) are receiving more

opportunities to provide goods and services to the public institutions thanks in part to the

COMPRASAL II vendor’s registry. It is expected that they will received more positive impacts

once the “libre gestion” module is completely used by all the public sector since 40% of all the

public procurement under $60,000 are provided by MSMEs.

FPEMP staff expects to be able to complete the licitaciones y concursos and contratacion directa

modules. Licitaciones y concursos cover procurements of more than $60,000. Completion of this

module will enable COMPRASAL II to cover another $708.1 million (71.6% of total public

procurement) in total expenditures. Additionally, “contratacion directa” will make up another

148.5 million (15.01% of total public procurement) which will enable COMPRASAL II to

finally cover the 100 percent of the public procurement.

PAAC Planning and Execution

CDP “Libre

Gestion” Incidents

Solicitations and

Competitions

Contract Administratio

n

Direct Contraccting

Guarantee payment

custodianship

Contract Management

Sanction Proceedings

Vendors

21

Thus, with FPEMP’s assistance, $132.8 million in public expenditure will be now far less prone

to fraud, misuse, malfeasance or other forms of corruption or mismanagement once the “libre

gestion” module is completely used by all the public sector. With further support to MOF beyond

the life of FPEMP, USAID’s investment can cover 100% of all procurements through

COMPRASAL II, which will electronically govern compliance with procurement laws of $989

million in expenditures based on 2015 numbers—a significant contribution to transparency and

accountability of government expenditure.

UNAC reform and strengthening

As a key aspect of improving public procurement performance, FPEMP has invested in

strengthening the Central Procurement Unit (UNAC). The project has provided technical

assistance to UNAC staff to restructure their internal organization, strengthen internal legal

capacity, provide international learning experiences, offer IT development services for

COMPRASAL II (see above) and help supply basic office furnishings.

FPEMP helped the UNAC Legal Counsel develop revisions to the public procurement law’s

implementing regulations (RELACAP), which have already been approved by the Minister. The

project also helped UNAC to train its own staff to implement these changes, and added the

reforms to training materials provided to spending ministries outside of MOF. FPEMP helped

UNAC to train 350 GOES officials (outside the MOF) in 14 pilot institutions to utilize the libre

gestion module of COMPRASAL II.


Transition to Programmatic Budgeting

Activities during Year 5 with the Budget General Directorate (DGP) were limited to the

proposed functional re-organization of the DGP in preparation for its transition to programmatic





Support training on COMPRASAL II "Libre Gestion" module to 14 pilots public institutions In Progress





Developed the UNAC administrative and functional reform proposal and gained approval

from the MOF Completed

Support training on administrative law penalties provisions for the UNAC staff Completed

Strengthen UNAC functional and administrative capacities In Progress

Support the creation of a Public Procurement Call Center In Progress

UNAC office furnishing In Progress

22

budgeting. According to the Director, the proposal for re-organization was accepted and

appreciated. The DGP has made revisions to the proposal to reflect its own interpretation of its

needs and available resources, and is preparing to submit the revised structure to the Minister for

approval.

Other tasks related to the transition were apportioned to other donors supporting the MOF,

specifically GIZ and the World Bank. However, given the breadth and depth of the task at hand

and the scaling back of funding from GIZ to the DGP, a space for increased participation by

USAID has opened. Programmatic budgeting has the potential to enforce performance standards

on public institutions by making future budget allocations contingent upon strong performance

from previous allocations. Transitioning from the current financial and document management

focus of budget planning, execution, monitoring and evaluation to a more results-focused

approach could generate tremendous gains in both efficiency and service delivery. The project in

partnership with USAID should consider increasing its engagement with the DGP.




IT procurement for the DGP Completed

Development of DGP functional administrative reform proposal Completed

Support the DGP functional administrative reform implementation Completed


result oriented budget Completed




Support the budget programs design based on a results for the Ministry of Economy and

DGP Completed

Support the budget programs design based on a results for the Ministry of Agriculture

and DGP Completed

Support the budget programs design based on a results for the Ministry of Health and

DGP Completed

Strengthening of the DGP M&E Unit capacities Completed

Study tour to Chile to learn about budget M&E Completed



Study tour to Argentina to learn about GFMIS systems Completed


result oriented buget Completed




SAFI II accounting subsystem use cases design Completed

SAFI II budget execution module use cases design Completed

Support the review of the SAFI II budget formulation use cases design Completed








Support training on COMPRASAL II "Libre Gestion" to 14 pilots institutions In Progress





23

Sustainability of Component A Initiatives

SAFI II. While the commitment of the MOF to SAFI II is not in doubt, FPEMP’s role in

development of the Government Accounting and Treasury Subsystems has been

significantly delayed by a relative lack of progress on the Budget Subsystem with which

Accounting and Treasury must closely integrate to have the desired effect on the system

as a whole. With current signs pointing to the World Bank funded Budget Subsystem not

being completed on time, it is highly likely that the SAFI II system will not be complete

and ready for handover to MOF by the end of the contract period. The project’s capability

to complete the remaining work will continue to depend on progress of the Budget

Subsystem, and so a definitive date cannot be offered without greater certainty on the

completion date from DINAFI.

Once complete, USAID will need to provide assistance to MOF software developers to

format their teams to compensate for relatively low compensation levels for programmers

relative to the compensation in the private sector. FPEMP has proposed a smaller team of

senior, contracted staff coupled with a partnership with a local university or universities

to host a co-op program of approximately 10 junior developers who can both do the work

the MOF needs, but use those developers to replace the inevitable turnover from the more

senior ranks in a way that guarantees continuity of expertise within the MOF software

development environment. Such reorganization would facilitate FPEMP’s current efforts,

and future USAID efforts to build greater capacity for the MOF to write its own code in

harmony with the rest of SAFI II’s back end (Oracle) system.

E-Procurement. While COMPRASAL II is part of SAFI II, it is treated differently due

to the impact of the budget subsystem delays, whereas Government Accounting and

Treasury subsystems are effectively halted. COMPRASAL II as an IT system is off and

running with the PAAC and libre gestion modules fully operational and licitaciones y

concursos and contratacion directa planned for completion by contract’s end. FPEMP

has supported the functional and physical reorganization of the UNAC office to provide

more effective technical support, and built the capacity of the legal counsel, management,

and IT developers from UNAC that will maintain the system moving forward. In terms of

future needs to solidify sustainability, COMPRASAL II will require support beyond the

life of FPEMP to complete the full set of modules to create a truly end-to-end system.

Likewise UNAC will need capacity building to effectively train line ministries in their

use of the system. Also, UNAC will need to develop greater expertise to manage large

public works procurements or Public Private Partnerships (PPPs) that come with a much

more complex set of interdisciplinary challenges and contingent liabilities for MOF.

IPSAS Adoption. MOF is fully committed to a high level of compliance with IPSAS

accounting standards, but even in the best of circumstances, the transition is lengthy and

labor intensive for government accounting offices. In the course of developing the

Accounting Subsystem, FPEMP IPSAS experts have helped create a new chart of

accounts, generate a new conceptual model and conceptual framework, and have assisted

the DGCG to generate 24 of the most complex use cases for the subsystem. Support to

consolidating IPSAS reform in all its detail and complexity will stretch well beyond the

life of FPEMP, but will be championed by DGCG without project assistance—though

24

they will have fewer resources to acquire the necessary international expertise to support

their efforts, and thus progress will likely slow-down considerably without external

support.

Treasury Single Account. All central government institutions are covered by the

Treasury Single Account, marking a major achievement in cash management and overall

PFM for the GOES. When funds are available at DGT, approved payments have been

reduced from a wait time of 10 days for a check or electronic transfer to 2-3 hours until a

direct wire transfer is made to the recipients account. 27 institutions are now covered by

the TSA, and idle bank balances have been minimized, subsequently reducing the need to

take out short-term financing because of inefficient, decentralized cash management.

FPEMP, OTA and the IMF collaborated to achieve the current advances. Nevertheless,

the current treasury subsystem within SAFI I was developed by DINAFI and have serious

performance issues, requiring manual procedures and an onerous number of system

corrections. The DGT is eager to have the SAFI II Treasury Subsystem up, running and

handed over. The Treasury Subsystem that FPEMP is developing incorporates significant

advances for an advanced TSA, which will then be able to handle cash management for

central and decentralized government institutions for 100% coverage of all government

cash. DGT is managing the system and its functional requirements well, with minimal

requests for maintenance support.

25

CHAPTER 4 – OBJECTIVE 2: IMPROVED

REVENUE MOBILIZATION

El Salvador has achieved important progress in mobilizing greater tax revenue in the past

decade. Net tax revenue has increased from 11.5 percent of GDP in 2004 to 15.1 percent in 2015

with projections of 15.4 percent for 2016— nearly a 4 percentage point increase—overcoming

the effects of the global financial crisis and achieving a consistent growth trend, but plateauing

over the last three fiscal years. Three tax policies including the alternative minimum tax were

struck down as unconstitutional, harming revenue performance. Low levels of economic growth,

high levels of tax evasion, combined with potentially diminishing returns to administrative

improvements without combining that strengthened capacity with more powerful tax policies.

However, since 2013 tax revenue to GDP has plateaued around 15 percent of GDP. Non-tax

revenue makes up 3.2% of GDP bringing total revenue to 19.8% in both 2014 and 2015.

To better understand the dynamics of the difference between the revenue capacity of the tax

system and actual results (the “Tax Gap”), a thorough Tax Gap Analysis would determine the

extent of future revenue potential in tax administration improvements, and thus realistic targets

for revenue improvements with and without tax policy reform in the medium term.

Figure 8: Tax (Net) Revenue Collections, El Salvador 2004-2015 (as % of GDP)

USAID’s assistance since 2005 through the predecessor project TPAR and the FPEMP has been

vital in supporting the GOES’s tax revenue mobilization achievements. In the first two years of

assistance, the FPEMP supported the DGII to implement the Treasury’s Collections Call Center

for tackling tax arrears; redefining the Large Taxpayer’s Office from 1,500 to 639 largest

taxpayers and improving their services and focus; improving taxpayer services to medium and

small taxpayers; cleaning and updating of the Taxpayer Current Account; cleaning and updating

of the Taxpayer Database; and supporting rigorous and fair audits through the enhancement of

the CSMS.

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

% o

f G

DP

Net Tax Revenue (2004-2015)

26

Taxes from the value added tax continue to be the largest component of tax revenue representing

nearly half of collections, but taxes from income and corporate profits have been consistently

growing by nearly 25 percent since 2011 with the introduction of a fiscal reform package in

2012. Since that reform, the GOES, with support from FPEMP, has continued efforts to mobilize

additional tax revenue through tax administration activities such as massive, targeted, and risk-

based audit plans implemented through the state-of-the art Case Selection Management System

II (CSMS II) and a FPEMP-supported crackdown on tax fraud and evasion.

Figure 9: Tax Revenue Breakdown by Tax Type

FPEMP’s assistance in the fifth year focused on the contribution to a new tax reform that updates

procedures and the tax code to empower the tax administration to collect tax arrears, developing

an operational plan for an enforced arrears collections office, developing a fully functional e-

filing system and implementation of final remaining modules of the CSMS II. These activities

continue a layered strategy that FPEMP has pursued that blends initiatives that will yield

immediate increases in revenues combined with activities that invest in long-term voluntary

compliance, as well as transparency and accountability of the tax administration itself. In sum,

FPEMP’s approach focuses as much effort on increasing tax revenue as it does on how that

revenue is collected.

Improving the Tax Control Environment/Strengthening Tax Evasion Enforcement

Reform of the Tax Control system. The FPEMP project developed an extensive diagnostic on

the technical, procedural and operational capacities for tax investigations in the DGII, in order to

determine a strategy that will help improve these capabilities and to support the Vice Ministry of

Revenue in the development of a plan against tax evasion to improve collection. This diagnostic

identified structural problems in the tax control environment ranging from the lack of

exploitation of third party information by the DGII for data mining, sub-optimal research

practices, weak law enforcement and others. Based on this diagnosis, a program was designed to

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2010 2011 2012 2013 2014 2015

% o

f G

DP

Special Taxes

"Other" taxes

Excise Taxes

Trade Tariffs

Income Tax

VAT

27

strengthen tax control by using the data mining capabilities of the CSMS II along with other

control strategies while training was provided to auditors.

The tax control strategy is a multi-faceted approach to strengthening the culture of tax

compliance by making a strong, focused effort to enforce the tax code to make it clear to

taxpayers that the DGII is strengthening its stance against tax evasion and fraud. The two goals

of the strategy are 1) to increase short-term collections, and 2) to increase voluntary compliance

in the coming years by stepping up the level of overall tax control throughout the system. The

strategy includes the following elements:

Issue Response

Tax Fraud Impunity 1) Reform tax criminal code

2) Reform procedural code

Weak presumption and transfer pricing

rules

Strengthen presumption rules and transfer pricing

Tax evasion/avoidance Enshrine anti-evasion/avoidance rules in the tax code

Limited powers of the tax administration Strengthen administrative and audit/enforcement

powers; require information exchange between DGII

and other government agencies

Recovery of Tax Arrears Facilitate coercive tax enforcement and collection by

the tax administration

Reforming Income Tax 1) Introduce the principle of worldwide income

2) Introduce a simplified income tax regime

In 2015 actual production (tax revenues generated by the actions of control) was equivalent to

$90.1 million. The Tax Control Plan was pursued to increase revenue using the CSMS II to

improve collections, inspections, and increase the efficiency of collections compared to

assessments between January and April 2016 collections equal to $19.4 million. Also, as a result

of the Tax Control Plan, arrears collection increased $120 million, equivalent to 0.5% of GDP. In

addition, in 2014 (the last year before the implementation of the Tax Control Plan) the amount of

scheduled cases was 45,310. During 2015 (first year of implementation of the Plan) the number

of cases scheduled amounted to 68,630 (enabled through automated functionality of the CSMS

II), and in the first months of 2016 (period January-April) the amount of scheduled cases has

reached the figure of 68,300, almost the same number of cases scheduled which made throughout

2015.

Tax Fraud Regulatory Reform. FPEMP helped the MOF to draft a proposal to modernize the

tax system and help raise more revenue without the need to increase tax rates. The reform

proposal includes procedural code reforms on transfer pricing practices and empowerment of the

DGII to enforce collections of tax arrears in keeping with international best practices—

demonstrated through a consensus-building study tour to Colombia to observe and learn from

their arrears enforcement system. The ministry decided to move forward with administrative

arrears enforcement, which could increase total revenue by up to 1% of GDP. In addition, the

package of reforms strengthens deterrent punishments in the criminal code against tax evasion

28

and provides the MOF with increased powers to investigate cases of tax fraud and build

individual cases for prosecution by the Attorney General.

Weak Presumption Rules and Transfer Pricing Rules. A common practice for international

companies is the practice of internal purchasing of goods and services between legally related

companies. For instance, if a Salvadoran affiliate of an international accounting firm pays for the

expert services of an American employee of the American affiliate of the same firm—the

transfer price is the amount that the Salvadoran affiliate compensates the American affiliate.

Done properly in accordance with IPSAS rules, transfer pricing enables proper accounting for

costs and revenues. However, transfer pricing becomes highly complex with very large multi-

national companies with complicated cost structures—raising the possibility of inaccurate

accounting for costs and revenues from one affiliate to the next.

A common legal tax avoidance strategy is to transfer price internally to artificially suppress

declared profits in high-tax locations and move those profits into offshore holding companies.

Clarifying transfer pricing rules in line with international best practice will enable the DGII to

more thoroughly investigate multinational companies’ transfer pricing practices, and hold them

accountable for taxes due on income earned in El Salvador.

Key outputs under tax policy reforms include:

Tax Evasion/Avoidance. As part of the broader effort to crack down on tax evasion, and more

clearly defining legal tax avoidance, FPEMP is supporting the MOF in technical analysis and

legal drafting to enshrine proposed reforms into a modified tax code. The revisions are included

in the proposed reforms expected to receive legislative approval by September 2016.

Limited Powers of the Tax Administration. Even though the DGII has greater productivity and

effectiveness than the courts in collecting taxes due from delinquent taxpayers, it does not have

the legal empowerment to effectively enforce arrears collection (see below), nor does it make the

best use of available third party data. Through the development of CSMS II, FPEMP has enabled

DGII to use third party data sources to cross-reference with their own using sophisticated data-

mining software to help identify audit cases and aid investigations. Stepping up the integration of

other data sets—for example, forging a link between Customs and DGII—will provide more

powerful tools to augment the capability of the tax administration to enforce the law. CSMS II is

already capable of data mining through FPEMP support, the program challenge is now to help

them expand their access to data and better utilize the results of data mining exercises to

mobilize greater revenues.

Training on 2011 tax reforms Completed

Study tour to Colombia to learn about administrative tax collection enforcement system

for five diputados Completed

Development of the tax reform proposal Completed

Delivere a conference to the Congress on the new tax reform proposal Completed

Delivere a conference to the CAPRES Legal Advidors on the new tax reform proposal Pending

Delivere a conference for civil society on the new tax reform proposal Completed

Training on transfer pricing audit techniques Completed

Study tour to Ecuador to learn about transfer pricing audit techniques Completed

Train MOF staff on the implementation of the new fiscal reform Pending

29

Enforced Arrears Collection. Existing tax arrears equal 0.8% of GDP, and that amount has

remained constant for several years, demonstrating a significant pool of foregone revenue that

the DGII does not have the capacity to collect. Simply speaking, required fiscal adjustment of

3% of GDP to resolve the country’s structural deficit would be 33% resolved if DGII was

empowered to collect taxes due.

Currently, the system of collecting existing tax arrears gives powers to the DGT to pursue

“persuasive” (voluntary) debt collection methods for a period of six months, after which the debt

is sent to the prosecutor for the judicial collection. This system of judicial recovery is extremely

inefficient in the sense the tax debt that is in the process of judicial collection is equivalent to

$127 million, and the Office of Persuasive Collections is $65 million, but the recovery rate from

prosecution annually is $2.5 million whereas the DGT is $30 million.

In this context the reform of the current system is changing; giving the Ministry of Finance the

power of coercive collections (in practice, this means the repossession of a taxpayer’s assets to

cover their debts) using administrative rather than judicial autonomy is necessary. FPEMP

convinced the Viceminister of Revenue and the Minister of Finance to move forward with a tax

reform to provide statutory power to the MOF to collect tax arrears through coerced

administrative enforcement (i.e. asset reclamation), following international best practices.

FPEMP drafted the legal reform and submitted it to the Minister of Finance. The MOF has

already sent this proposal to the Legislative Assembly, and FPEMP, in coordination with the

IDB, organized a study tour for five members of the treasury committee in the Legislative

Assembly (including the Vice President of that committee) to the Ministry of Finance in

Colombia for them to gain exposure to the Colombian experience of applying administrative

enforcement powers. The FPEMP program continues to support the Ministry of Finance in

seeking approval of this legislative initiative, which is expected to be approved by the end of

2016.


Support the large taxpayer office conceptual model Completed

Study tour to Chile to learn about the Chilean Large Taxpayer Directorate Completed

Setting up the new large taxpayer office front and back office Completed



Support the DGT collection call center conceptual model Completed

Setting up the new DGT collection call center Completed

Taxpayer self service kiosk system implementation Completed

Assessment and recommendations to strengthen DGII tax control Completed

Implementation of the first phase of the DGII tax control reform program Completed

Assessment and recommendations to strengthen DGII internal audit units Completed

Implementation of the second phase of the DGII tax control reform program Pending

Deliver training on tax control strategies Pending

Support the large taxpayer office conceptual model Completed

Study tour to Chile to learn about the Chilean Large Taxpayer Directorate Completed

Setting up the new large taxpayer office front and back office Completed



Support the DGT collection call center conceptual model Completed

Setting up the new DGT collection call center Completed

Taxpayer self service kiosk system implementation Completed

Assessment and recommendations to strengthen DGII tax control Completed

Implementation of the first phase of the DGII tax control reform program Completed

Assessment and recommendations to strengthen DGII internal audit units Completed

Implementation of the second phase of the DGII tax control reform program Pending

Deliver training on tax control strategies Pending

30

Development of CSMS II

Figure 10: CSMS Roadmap detail

Case Selection

Payment Management – DGT / Taxpayer Current Account Interphase

Taxpayer Hearings(UAT)

Administrative Appeals(TAIIA)

(Interphase)Trails in Judicial Supreme Court*

Notifications

Appraisal

Tax Unfulfillment (SIT)

Other Sources

Other Sources

Refunds

Complaints

Preventive plans

Roadmap - CSMS

DGII Audit (Integral

and detailed)

Fiscal Compliance

DGA sub-modules

1 Audit

2 Special Rules

3 Legal Procedures Department

Completed

In Progress

Pending

Risk Matrix

Audit Paperwork

E-Notebook

DGT collect call center

Results of “Fiscalizacion masiva.” As for “Massive” tax control, leveraging the data mining

capabilities of CSMS II and the Tax Compliance Call Center grossed $1.7 million in additional

revenue. In 2014 the figure rose to $4.3 million, while in 2015 the figure reached $6 million.

Finally from January-May 2016, these strategies have directly resulted in $14 million.

The CSMS II enables several stages of risk identification and automated communications with

taxpayers flagged as stop-filers or non-filers for direct contact through email, phone or direct

mail using their contact information in the taxpayer database. CSMS II also produces audit plans

based on the databases available and risk matrix established by the Audit department. Each of

these steps is meant to send a clear message to taxpayers that the authorities are watching their

declarations and payments for inaccuracies, and they can get in touch to rectify any mistakes—

intentional or unintentional, starting with a more friendly corrective stance (preventive), to more

serious, and finally to official notifications of an audit or investigation begun against the

taxpayer when fraud/evasion are suspected. The chart below shows the layers of different types

of automated communications enabled by CSMS II.

Figure 11: Massive Flows - CSMSII

31

Figure 12: CSMS II Full workflow

In all, the MOF attributes a minimum of $34.2 million in additional collections to the additional

functionality of CSMS II, and the system has still not maximized its full potential. The cost of

system development to USAID is expected to be $1.5 million once the TAIIA module is

completed (the final module for DGII, see above). With a revised risk matrix, direct data

exchange between DGII and Customs (DGA), and acquisition of additional third party data

sources, additional revenue growth through improved audit case selection and strengthened

evidence and investigations is highly likely. In addition, with the passage of stronger tax

regulations, the CSMS II could also offer support to enforced collections by accurately

identifying the assets of delinquent taxpayers, identify potential illicit international financial

flows, and provide a more complete third-party data set to identify irregularities in transfer

pricing from Salvadoran companies.


USC

Fiscalización

Call Center

UAT

UAT -Incumplimientos

Plan Masivo

DGII - Traslado

Análisis Gestión de Cartera

Fiscalización

Cobranzas

RegímenesEspeciales

UGR

Operaciones

Contribuyente

DPJ

Mini UAT

TAIIA

DGII (Internal Revenue) TAIIA (Appeals)

DGA (Customs)

DGT (Treasury)

Notificaciones

Fiscalización Masiva

32

Tax Collections Call Center. Uncollected tax arrears represent a great challenge for the GOES’

tax administration, as in many countries, accumulating at a rate of $15-20 million per year. Since

August 2012, with support from FPEMP, the Treasury’s Collection Call Center was inaugurated

contributing to improve tax arrears collection, surpassing the annual goal for debt recovery since

its implementation. Establishing a two-way (initiating calls and answering calls) call center,

phone operators contact delinquent taxpayers to collect tax debt, to remind about payment

coming due on pre-established payment plans, and to answer any inquiries taxpayers have with

regards to their past due tax liabilities.

Located at the DGII building within the stop-filers call center, the Treasury call center began

operations initially with three staff members from the “Tax Collections Division,” who on a

monthly rotational basis, would serve in the call center. At the end of one month’s service they

would be reincorporated to their normal functions. This arrangement was implemented through

February 2015. Since then, an alternative staffing structure initiated with six interns who were

trained by the Tax Collections Division staff, and who to this day continue to serve as call center

operators. The Treasury Call Center was equipped through FPEMP assistance and has capacity

to accommodate up to seven operators with fully equipped computer stations.

Since the Treasury Call Center’s implementation in August 2012 the overall impact on tax

arrears recovery has been noteworthy. Collecting an additional $10 million in tax arrears than in

previous years just in the first year of the Call Center’s implementation, the Call Center has been

able to maintain tax arrears collection amounts above $20 million on an annual basis (see Figure

below). Furthermore, the Treasury Call Center has contributed to mobilizing additional tax

revenue by improving the debt recovery rate from taxpayers with arranged payment plans from

60% prior to the call center’s implementation and over 90% recovery since 2012.

2011 was the last year the DGT did not have the Collections call center, and that year there was a

tax amnesty that allowed delinquent taxpayers to reconcile any unpaid taxes from previous years

Support the design of the CSMS II development strategy Completed

Training program on use cases design to DGII Completed

Support the CSMS II modules use cases design Completed

Software development of the CSMS II selector module Completed

Software development of the CSMS II management module Completed

Software development of the CSMS II fiscal compliance module Completed

Software development of the CSMS II fiscal audit module Completed

Software development of the CSMS II portfolio management module (gestion tributaria y

grandes) Completed

Software development of the CSMS II notary (fedatario) module Completed

Software development of the CSMS II punto fijo module Completed

Software development of the CSMS II special plans audit module Completed

Software development of the CSMS II call center module Completed

Software development of the CSMS II UAAP module Completed

Software development of the CSMS II TAIIA module In Progress

Support the implementation of the CSMS II modules In Progress

Deliver of the CSMS II to the DGII IT Unit Pending

33

without needing to pay any fines—significantly driving up payment rates of taxpayers contacted

via mail to 90%. The year prior in 2010 without a call center and with no amnesty, the rate was

60% contacted via mail paid their taxes in full. Since 2012 and the launch of the Collections call

centers, there have been no tax amnesties, yet recovery rates have stayed between 88-93% and

total revenue performance has been higher than 2011. Even compared with the amnesty year,

the FPEMP intervention of the Collections call center has yielded $17 million in additional

revenues. When compared to the most comparable year (2010 with no tax amnesty), the

call center has yielded $28.5 million in additional revenue.

Improving Taxpayer Services through Online services

The DGII has already developed the electronic filing system for income tax and VAT. In

October 2015, the Ministry of Finance has developed a system of online tax returns within the

Taxpayer Service System (SSC). So far the program has drawn 16 of 23 use cases of first

registration applications and excise taxes. With this module it is expected that the taxpayer can

process imported vehicle registration filing (“primera matricula”), excise tax payments from the

website of the Ministry, and update other related personal information. Enabling remote payment

will increase the efficiency and lower the administrative costs both for the Ministry and the

taxpayer. The DGII expects a legal resolution to make it mandatory for large and medium

taxpayers the use of the e-filing service from October 2016 and for small and medium taxpayers

in January 2017. FPEMP support will make those targets possible from a technical perspective—

with contributions on taxpayer education from GIZ and the MOF itself.

Current e-filing rates of just under 40% for income taxes and 23% for VAT mean that mandatory

e-filing will realize considerable efficiency gains for the Taxpayer Services and Returns

Processing departments. E-filing will eliminate the need for error-prone manual data-entry that

currently takes over 100 full time positions within the MOF. It will also eliminate in-person

contact between tax officials and taxpayers, which follows international best practices in

professionalization and anti-corruption efforts of tax services. Once realized by the end of this

year, 100% e-filing rates—even if just for large taxpayers—will be a major step forward in

productivity and the fight against corruption within DGII.


Taxpayer Data Integrity

FPEMP helped the Ministry of Finance to clean up/correct the current accounts of 21,523

taxpayers. Additionally, FPEMP convinced the Ministry of Finance to institutionalize regular

current account cleaning through an automated process within CSMS II, now implemented by

Presented the e-filing proposal to the Vice Ministers and gained approval for its

implementation Completed

E-filing system use cases desing In Progress

Development of the e-filing system In Progress

Implementation of the e-filing system Pending

34

DGII without FPEMP support. Since June 2014, the Ministry performs regularly checks and

updates, which provides significantly more reliable information about individual taxpayers.

Similarly, FPEMP helped the Ministry of Finance to maintain a Single Taxpayer Registry with

high data quality by updating profiles 7,730 taxpayers. FPEMP convinced the MOF to

institutionalize this activity as well in a similar form. A clean taxpayer registry and current

accounts has led to more efficient operations and has allowed DGII to execute a range of actions

including targeted taxpayer communications, auto-filled declarations, more successful audit

planning and outreach, and ultimately higher collections for less effort by the DGII.

Key outputs under this sub-objective include:

Training program on use cases design to DGII Completed

Development of the TRS application update first phase Completed

Development of the TCA application update first phase Completed

IT procurement for DGII (TRS and TCA cleaning) Completed

Development of the TRS cleaning Completed

Development of the TCA cleaning Completed

Support the TRS and TCA web services implementation In Progress

Support the TRS cleaning institutionalization Completed

Support the TCA cleaning institutionalization Completed

Support the implementation of the DGII and DGT interphase In Progress

Develop an assessment on web services implementation between the MOF and banks Completed

Sustainability of Objective 2 Initiatives

Tax audit, enforcement, and reduction of tax evasion; CSMS II. CSMS II is the system at the

heart of FPEMP efforts to improve revenue mobilization through improved tax administration.

As of this writing, the final stage of CSMS II—the Tax Appeals module—is in the final stages of

testing with the Appeals Unit before being rolled out. Once rolled out, CSMS II will be complete

and will cover all internal revenues in the country. CSMS will be handed over to MOF in the

coming months for their full control, and capacity building has already taken place to enable a

smooth transition—and final orientation/training on the system will happen on-the-job after the

handover.

Integration of Customs is the final step toward a complete case selection management system

with powerful data mining capabilities for the national level bodies responsible for revenue

mobilization (DGII and DGA). Both of those institutions’ respective data sets are

complementary and can aid both accuracy and investigative power for both institutions, and

ultimately raise compliance by requiring that private sector actors be in good standing with both

Customs and Internal Revenue in order to carry on with their business. Future support to this

area would be a lucrative investment of a relatively small amount of resources.

Call Centers. Taxpayer Service and Treasury collections call centers are both established and

demonstrating business results, justifying their own usefulness simply by the results attributed to

them in improved customer satisfaction, efficiency and productivity in collections. The call

35

centers supported by FPEMP have proven successful, but have also provided a model for citizen

communications that can be replicated in other areas throughout GOES to enable more cost-

effective compliance with services ranging from tax collections—such as with FPEMP—to

public services like water quality, weather reports for farmers, and appointment reminders from

the Ministry of Health, to name just a few potential areas that call centers would have high

impact. The call centers supported by FPEMP are fully owned and operated by MOF and seek

support for expansion or cost-sharing for relatively inexpensive technology or furnishings that

enable operations.

Taxpayer Data Integrity. Year 5 saw only “maintenance” support to MOF in continuing to

utilize its automated registry and taxpayer current account quality checks. The account and

database was systematically cleaned, and is now in an ongoing maintenance phase supported

entirely by MOF—securing these efforts’ sustainability.

Tax policy reform. In conjunction with efforts under Objective 3, FPEMP has provided expert

assistance to the MOF to propose tax policy reform ranging from fundamental reforms of the

income tax system, to regulatory and procedural reforms that would provide DGII with the tools

and capabilities to maximize revenue mobilization within the confines of current tax policy.

These efforts are not yet secured, but the political and technical consensus gained through careful

analysis and a study tour to Colombia that has apparently broken a political logjam with highly

influential members of the Legislative Assembly. Once the tax evasion reforms are passed, the

MOF will be ready to create the new General Collections Directorate and implement its part in

the changes to the criminal code resulting from painstaking work from FPEMP short-term

advisors.

More fundamental reform of rates, however, is further afield politically than anything within

FPEMP’s manageable control. The Program has contributed to non-partisan efforts to deepen

and better inform the public debate around fiscal policy (see activities and discussion under

Objective 3).

36

CHAPTER 5 – OBJECTIVE 3: STRENGHTENED

PRIVATE SECTOR OUTREACH

The third main objective of FPEMP assistance is to bridge differences and build consensus

between the Government and the private sector. Part of the strategy that FPEMP has taken to

achieve this is to help GOES to more proactively publish information, solicit private sector

feedback, and demonstrate its own commitment to greater transparency and to work together

with other donors (AECID and GIZ) in developing and disseminating a fiscal sustainability

paper to call GOES, private sector and civil society attention on the urgency of working all

together in a fiscal sustainability plan that guarantee the country a proper fiscal and economic

environment. To this end, the GOES must be able to demonstrate its commitment to more

efficient, effective, and transparent management of the country’s fiscal affairs and the current

fiscal situation is a key matter on the relation between GOES, private sector and civil society.

There is a critical need to improve the public-private dialogue that provides a mechanism for

fostering greater tax compliance and increasing tax revenues.

In the first year of assistance, FPEMP facilitated a joint public-private forum culminating in the

development of 15 strategic areas incorporated into a national fiscal transparency policy. FPEMP

has been supporting the implementation of specific tasks based on the 15 strategic areas for

promoting greater fiscal transparency. The second year of FPEMP assistance contributed to

advancing the implementation of some of these areas, including: revamping the MOF’s fiscal

transparency portal; supporting fiscal education for youth through the EXPRESATE center. At

the end of 2014 the renewed Fiscal Transparency Portal is launched significantly improving the

quantity and quality of the information provided. FPEMP continues to support improvements in

fiscal transparency through IT support for linking fiscal data of municipalities through the

Municipalities’ Financial Management System (SAFIM) and processing of information to be

facilitated and made public through the Municipal Management Information System (SIGMUNI)

system.

During Year 5, the major FPEMP activity under Objective 3 was to present the Fiscal

Sustainability White Paper to the national Economic Council, in collaboration with the Spanish

and German donors and coordinated by regional think-tank, the Central American Institute for

Fiscal Studies (ICEFI), to offer comprehensive analysis of the current macro-fiscal realities and

recommendations on policy and public administration approaches. FPEMP specifically

developed the Chapter of the white paper on Public Revenue, and supported the outreach to

government and the private sector to present the paper’s analysis. Other activities this year

included ongoing monitoring of the national fiscal transparency portal, and continuing

development of the municipal transparency portal. The project also followed-up on the status

performance and human resource management system. Finally, the project also supported UNAC

to develop a concept for transparent and accountable public procurement procedures through

strengthening intra-governmental oversight; specifically, replicating the concept of a Public

Procurement Ombudsman, taken directly from an FPEMP-supported study tour to Chile.

37

Seeking a National Fiscal Sustainability Agreement in El Salvador

After failed previous attempts to adopt a fiscal pact between the public sector and the private

sector and civil society (Social and Economic Council in 2011 and the Fiscal Sustainability

Agreement in 2012), new efforts are now sought pursuing the challenge to implement a renewed

National Fiscal Sustainability Agreement (NFSA). While El Salvador has improved its fiscal

stance in recent years through improved revenue mobilization and significant increases in social

sector spending, these have been insufficient to tackle the macro-fiscal sustainability risks arising

from sluggish GDP growth, depressed labor markets, low capital investment, persistent fiscal

deficit and increasing debt levels, and the need to improve access and quality of key public

services.

Supporting the GOES through a joint effort from the donor community including AECID, GIZ

and USAID, a comprehensive assessment and evaluation of the macroeconomic and fiscal

situation culminated in a renewed strategy for promoting fiscal sustainability in the medium and

longer term. Development of the NFSA document was led by the Central American Fiscal

Studies Institute (ICEFI) but integrates input from various other agencies as follows:

Diagnosis of the Fiscal Situation in El Salvador 2004-2013, by ICEFI (AECID-funded);

Evaluation of Government Revenue in El Salvador, by USAID/FPEMP;

Assessment of public spending in El Salvador, by ICEFI (GIZ-funded);

Element of a strategy for reaching a National Fiscal Sustainability Agreement in El

Salvador, by ICEFI (AECID-funded).

The NFSA documents points toward the need to continue pursuing a national agreement that is

led by the MOF and the Office of the Presidency while promoting inclusion of the public sector,

private sector, civil society, churches and others. Promoting such national agreement should have

a clear inclusive and participatory platform for dialog that fosters credibility and trust among

stakeholders. Failed attempts to reach such a national agreement should inform a more effective

process, including the success of the 1992 Peace Accord. The NFSA document systematically

describes the serious, immediate fiscal stability issues and risks in the country, and presents a

comprehensive series of recommendations to overcome those risks. The fiscal issues arise from

both revenue and expenditure sides affecting:

GOES liquidity;

Opportunities for improved performance of the tax administration within current rates;

“Fiscal privileges” including tax expenditures;

Efficiency and effectiveness of public spending, including subsidies;

Fiscal transparency;

Unsustainable public borrowing; and

An urgent need for pension reform.

The new strategy for fiscal sustainability document lays out important findings with

accompanying options and recommendations. While the GOES continues to strive to reach a

national agreement there are specific actions that do not need to wait until a national agreement

38

is reached. For example, following the development of the NFSA document and FPEMP’s

evaluation of the options for tax revenue mobilization, FPEMP currently supports the Ministry of

Finance to pursue some of the recommendations brought about from these efforts. As such,

FPEMP supports the legal drafting of an important revamping of the tax legislation. Not one

where tax rates are increased, but instead a tax reform that tackles procedural and tax code issues

that limit the tax administration’s ability to mobilize greater revenue. The final document can be

found online (in Spanish) here: http://www.aecid.org.sv/wp-

content/uploads/2016/04/Documento-En-la-búsqueda-de-un-acuerdo-nacional-de-sostenibilidad-

fiscal.pdf?82a9e7

The White Paper was presented to the President’s Economic Commission, the National Council

for Economic Growth (private sector), and to interested civil society groups. Both the final

product and process of developing the white paper were praised throughout interviews for this

evaluation. The White Paper offered the MOF a space to take a step back from the operational

details and short-term pressures they face to recognize the high-level challenges that the country

faces, specifically its structural deficit and a looming debt crisis. The public consultation process

also opened space for a more evidence-based policy dialog that demonstrates the immediate

necessity for fiscal reform to both sides of the political debate—where fiscal reform is a topic

that evokes visceral reactions to opposing political parties, and therefore the topic is most often

avoided in the political dialog.

Leveraging the White Paper, USAID and its projects that work with other parts of the GOES can

calibrate their recommendations with the knowledge and understanding of the national fiscal

situation. USAID itself can also use the White Paper’s analysis and positions in its discussions

with GOES and with other donors to encourage short, medium and long-term planning and

policy-making that more rapidly brings about fiscal sustainability and avoids adverse economic

shocks. In the final year of the project, FPEMP will continue to disseminate the White Paper

through in-country networks and relationships with other USAID projects, local think tanks and

civil society—in addition to its continuing commitment to offer fiscal advice to the MOF.


Improving Fiscal Transparency in El Salvador

There are several measures of fiscal transparency but none provides satisfactory information on

certain issues including whether fiscal data are available for all of general government, or

government reports are based on a cash or accrual basis, or whether the information is provided

on a user-friendly format for an ordinary citizen to access, all of which affect the degree of fiscal

transparency in a given country. An IMF (2015) report on Trends in Fiscal Transparency

analyzes the comprehensiveness of countries’ reporting on the Government Finance Statistics of

the IMF and finds that El Salvador is among the top four countries to report the most fiscal data

on general government. This involves six pieces of information: (i) liabilities, (ii) financial

Development of the Fiscal Sustainability Whitepaper Completed

Present the fiscal sustainability white paper to the Economic Growth National Council Completed

Present the fiscal sustainability white paper to the Presidential Economic Commission Completed

Present the fiscal sustainability white paper to the Salvadoran civil society Completed

http://www.aecid.org.sv/wp-content/uploads/2016/04/Documento-En-la-búsqueda-de-un-acuerdo-nacional-de-sostenibilidad-fiscal.pdf?82a9e7



39

assets, (iii) nonfinancial assets, (iv) the statement of the sources and use of cash; (v) the

statement of government operations; and (vi) the statement of other economic flows. However,

this measure only covers one aspect of fiscal transparency, namely the comprehensiveness of

aggregate government finance statistics.

By comparison with the Open Budget Index ranking in 2015, El Salvador has a relatively low

ranking—though trending upward from 43/100 in 2012 to 53/100 in 2015, in part due to the

extent and depth of budget data and information published by MOF on the fiscal transparency

portal. Key recommendations for improving budget transparency and accountability according to

the International Budget Partnership, which publishes the Open Budget Index, is to improve

budget information listed by appropriate classifiers (which is being addressed by FPEMP

supported IPSAS reforms), publish comparative analysis on forecasts vs. actuals, and creating

more formal spaces and opportunities for public participation in the budget process (which

FPEMP is also addressing through data published by the transparency portals and events

convened around fiscal sustainability).

One issue raised that FPEMP will work to address in the final year of the project is that some of

the published data is not immediately available in machine-readable formats. Many reports and

data published on the portal are in PDF format rather than in Excel or a database format that

would permit deeper economic analysis by non-government researchers—one of the key benefits

to more transparent data is enabling a stronger body of research outside of government.

That said, significant improvements to the portal include:

Availability of time series data on budget execution in 4 modules: expenditure execution,

public debt, public investment and government revenue.

Tools for downloading information in different format including pdf, excel, word, etc.

Expenditure execution is available by type of institution, by type of expenditure, for a

time series from 2010 to 2015.

Public investment data is presented by type of financing resources, by sector, and

provides a comparison between the budget plan and implementation status.

Public Debt data is provided by type of creditor (bilateral, multilateral, bonds, and

others).

Tax Revenue data is published on a monthly basis by type of tax, by economic sector, by

department and municipality, allowing the user to obtain detailed and up-to-date

information.

Full technical and functional control has now been passed to the MOF to maintain and update

after necessary capacity building from FPEMP. The website continues to be updated with the

most recent data and has adequate capacity to handle its web traffic. FPEMP will explore ways

to better utilize the portals in its communications efforts, as well as to raise awareness of the

portal within the international community and with new USAID/El Salvador projects coming

online. So while the capacity and will to sustain this investment by MOF is clear, the program

will help to solidify its contribution on the “demand” side to ensure the existence of a non-

government constituency committed to advocating to the MOF to continue maintaining the site

and updating available data.

40


Supporting Fiscal Transparency at the Municipal Level

Now that the MOF has control over the national level fiscal transparency portal, the program is

working in collaboration with the World Bank’s Local Government Strengthening Project

(PFGL) to further develop a similar transparency portal, but at the municipal government level

(called SIGMUNI). SIGMUNI will work in a similar manner to the national fiscal transparency

portal, except that the “back-end” data will be pulled from the SAFIM system rather than SAFI.

Since SAFIM is a voluntary system for municipalities and it does not have 100% participation,

the data will not be comprehensive. Making SIGMUNI comprehensive is a broader issue that

would involve a political decision to require municipalities to utilize SAFIM, which is not

anticipated in the near-term. However, 104 municipalities are currently utilizing SAFIM—nearly

doubling the 53 municipalities active by the end of Project Year 4—and thus a significant

increase in available fiscal data from the municipal level will soon be available.

SIGMUNI is a product of collaboration between FPEMP and PFGL. FPEMP agreed to develop

the data loading mechanism that links to SAFIM enabling current data availability, while PFGL

is developing the user interface on the website. FPEMP has completed the data mechanism—

after defining the scope of municipal data to be included with GOES—and so PFGL is now

working with the Subsecretary for Territorial Development and the DGCG to design the “front-

end” with parameters that the data can fulfill. The project anticipates completion and launch of

the SIGMUNI portal to the public by the end of 2016, and will provide any updates as needed to

FPEMP’s contribution.

The data and related performance indicators of municipal finances to be included in the

SIGMUNI portal include the following:

Local Government Revenue

Savings rate (current revenue minus current expenditure)

Fiscal autonomy

Tax collection efficiency

Support the development of the fiscal transparency strategic lines Completed

Presentation and validation forum of the fiscal transaprency strategic lines Completed

Fiscal transparency strategic lines incorporated in the GOES Transparency and Anticorruption Policy Completed

Assessment and recommendation to modernize the fiscal transparency portal Completed

Design the strategy for data loading and dynamic data model of the fiscal transparency portal Completed

Launch of the Trilateral Cooperation on Fiscal Transparency Completed

Workshops on Fiscal Transparency Completed

Redesign of the fiscal transparency portal Completed

Study tour to Brazil to learn about fiscal transparency portals Completed

Launch of the new fiscal transparency portal Completed

41

Local Government Expenditure

Expenditures per capita

Administrative efficiency

Investment effectiveness

Capital expenditure levels

Infrastructure investment

Debt service levels

Local borrowing

Borrowing trends and ceilings


Building a stronger culture of performance management

The FPEMP supports the MOF and the public financial modernization reforms underway,

through a program aimed at improving human resource utilization. The goal is to improve the

operational efficiency and productivity of professional staff, strengthening their technical

capacities, outlining a clear professional career path, improving employee’s performance

evaluation, and providing capacity building and training for professional development.

FPEMP continues supporting the implementation of the MOF Human Resources system based

on competencies, but with great challenges. While it was expected that at least five functional

units would undertake the performance evaluation process in 2014-15, this has been met with

great resistance from the MOF employees union, who have met this as a threat rather than as an

opportunity for career advancement and professional development.

The details of FPEMP assistance in this area were provided in the previous year’s evaluation

with respect to the numbers of employee profiles assessed (314), the conceptual model for a

revised human resource framework, which then enabled the FPEMP-supported MOF Human

Resources system. During Year 5, the project continued to offer support to the Administrative

General Directorate (DGEA) to deepen the substantive use of performance evaluations for

management decision-making on individual employees. Demographic concerns continue to be

raised by Directors of offices within the MOF; referencing the entrenched nature of long-serving

civil servants as a barrier to implementing technology-based reforms, transparency and anti-

corruption initiatives, and a change in mindset in areas like programmatic budgeting or

investigations focused audits flagged by data-mining. Use of this performance management

Launch of the Trilateral Cooperation on Fiscal Transparency Completed

Launch of the Fiscal Transparency Initiative for Municipalities Completed

Study tour to Brazil to learn about fiscal transparency portals for municipalities Completed

Support the strategy for data loading and dyanamic data model of the fiscal transaprency portal for municipalities Completed

Launch of the fiscal transaprency portal for municipalities Pending

42

system is intended to provide a resource to those Directors and Managers, but institutional

barriers to deepening its usage continue.

The project will work closely with the DGEA to identify opportunities to support this initiative.

A recent follow-up visit from FPEMP Human Resources (HR) expert Lee Niederman advised

the project to wait for a more permissive institutional environment before investing greater

resources into this area. The initiative remains of vital importance, but the HR system that has

already been developed by the project remains under-utilized and the MOF should first

demonstrate its own commitment to a culture of performance before FPEMP can expect stronger

results for its effort.


Supporting Fiscal Education through the EXPRESATE Center

Officially launched in March 2013, EXPRESATE, the GOES tax awareness program for youth

has become renowned world-wide as an innovative program promoting outreach and fostering

public-private interchange through the youth population. Targeted at high school students within

15-20 years of age, EXPRESATE (to express yourself) is aimed at creating tax awareness,

promoting fiscal responsibility and tax compliance among the youth. The center is a playful area

where young visitors take a fun walk around six sections. Each section has its own specific goals

intended to promote analysis, discernment and learning of the activities regarding the GOES

functions and responsibilities. EXPRESATE also promotes the importance for understanding and

participating in the country’s development, linking the payment of taxes with the country’s

investments and economic growth.

Assessment and recommendations for the Training Department (DECAMH)

modernization Completed

Training on the methodology to elaborate training curricula Completed

Institutional reform of the Training Department (DECAMH) Completed

Workshops on technical area profiles development for DGP, DGT, DGICP, DGII, DGA, UNAC

and HR Department Completed

Development of the technical area profiles of the MOF Completed

Training on course development and train-the-trainers Completed

Workshops on curricula development for DGP, DGT, DGICP, DGII, DGA, UNAC and HR

Department Completed

Development of the curricula of the MOF Completed

Training on train-the-trainers and training on performance evaluation based on

competencies Completed

IT procurement for the Training Department (DFDMH) Completed

MOF HR system based on competencies implementation workshop Completed

Development of the MOF HR system based on competencies Completed

Support the implementation of the MOF HR competencies based system In Progress

Setting up the Training Department (DFDMH) computer lab Completed

43

In Year 5, the EXPRESATE center remains open particularly to school groups and has provided

education in fiscal responsibility and tax awareness to 2,131 high school aged youth. Since its

launch in 2013, more than 7,000 students have visited the center. The MOF recently decided to

open the museum to elementary school students, broadening the potential impact to a larger

number of young people. FPEMP has handed over responsibility for the EXPRESATE center to

the MOF, and continues to monitor the performance and usage of the center, while resources for

future educational programs are now provided by MOF.

Supporting the implementation of a Public Procurement Ombudsman Office

The project has also inspired the creation of the Ombudsman’s office through a study tour with

UNAC, fully owned and championed by UNAC and the MOF itself. FPEMP plans to provide

limited technical support, but UNAC plans to move forward with replicating the Chilean model

on its own.

Chile Study Tour to learn about CHILECOMPRA’s Ombudsman experience. During year

5, a study tour to Santiago was organized by FPEMP for the Chief and technical staff of UNAC.

The objective was to meet with and learn about Chile’s Public Procurement Ombudsman, and

consider options for El Salvador’s own modes of ensuring transparency and accountability for

following its procedures defined in statute. After a week of meetings, discussions and strategic

planning, UNAC officers committed—and upon their return secured internal MOF agreement—

to replicate Chile’s Ombudsman model. The Ombudsman will work in coordination with the

Audit Court and Attorney General’s Office. The Ombudsman will be responsible for receiving

and acting on citizen and vendor complaints and seeking resolution or restitution on their behalf

in case the law is not followed. This is one of several cases of a study tour leading directly to the

establishment of a productivity or accountability enhancing operational reform. UNAC is proud

to launch the Public Procurement Ombudsman Office, and they have already received requests

from four other countries in the CAFTA-DR signatories for assistance in their own procurement

reform efforts.

Sustainability of Objective 3 Initiatives

Fiscal Sustainability. Closing the fiscal deficit and staving off default through pension reform

and a strengthened political commitment to a stronger tax control environment have taken much

greater primacy in the political dialogue over the past 12 months. Along with civilian security,

pension reform is now a top political priority with strengthened tax control powers for the MOF

expected to follow later in the year. As is the case in many countries, opportunities for genuine

tax reform and consensus-building on far-reaching fiscal reforms are rare. Given the political

economy realities and the relative ease with which a project such as FPEMP, or a donor such as

USAID, can be easily linked with a political ideology or party—the program leadership has

worked closely with USAID to maintain a position of political neutrality as technical advisors to

the government. In that vein, FPEMP worked in partnership with other donors and a regional

think tank (ICEFI) to develop the Fiscal Sustainability White Paper, in the recognition that

genuine fiscal sustainability will require policy change beyond the scope of administrative

improvements internal to the government.

44

As such, FPEMP interventions under Objective 3 have focused on providing the evidence and

analysis needed for a better informed policy dialog with an appropriately calibrated level of

urgency. Interventions under Objectives 1 and 2 focus on operational/administrative

improvements to the actions of government to make meaningful contributions that enable GOES

to create fiscal space under its current policy constraints by building its capacity for efficiency

and productivity of operations. Objective 3 takes those contributions, builds apolitical

partnerships with the international community, and conducts data-driven analysis such as the

Fiscal Sustainability White Paper to raise the level of dialog around the need for fiscal reform to

prevent negative economic shocks stemming from the structural deficit.

While FPEMP and its partners have succeeded in raising the importance and urgency of fiscal

reform at the national level, such a focus is transitory by nature and must be maintained through

disciplined policies at the political level and management at the MOF. In the words of leading

fiscal economist Richard Bird, even the ideal fiscal reform will likely suffer the effects of “fiscal

termites” (special interests seeking to decrease their tax bills) that eat away at a simple, direct

fiscal regime over time. Thus we can say the impact of activities intended to bring the GOES and

private sector together around a common table to discuss fiscal issues of great national import

have been successful. However, that dialog still needs to be deepened and broadened until

adequate political consensus is reached to permit policy reforms that offer the GOES the legal

powers and platform it needs to balance its books over the medium term.

AECID is planning to shift its assistance to focus on being a convener of a policy dialog between

the public and private sector, which FPEMP will support wherever possible with analysis in its

final year. However, continuing support to build capacity of both the MOF to provide policy

analysis, as well as advocacy for publishing accessible data to enable a more evidence-based

policy analysis, will be useful contributions to critical policy discussions in the years to come if

policy reform does not pass by early 2017.

Fiscal Transparency. Similar to Fiscal Sustainability, a commitment to Fiscal Transparency is

an orientation of a number of institutions rather than a single activity or commitment. However,

FPEMP activities directly contribute to institutionalizing such a commitment. The Tripartite

Transparency Agreement between GOES and the Governments of Brazil and the U.S.—

facilitated by FPEMP—commit GOES at a political level, while the national and municipal

transparency portals have created established avenues by which citizens and organizations can

access data and hold the government accountable. An added benefit of SAFI and SAFI II is that

the data within can be tailored and extracted by tools and pushed out to the public with minimal

effort or maintenance on the part of MOF once the tool is developed.

MOF is now in full control over the national transparency portal and is actively updating the data

in the comprehensive structure of the site. While additional functionality should be added to

make the site friendlier to external researchers, the information provided is highly appreciated by

civil society and national policy organizations.

Improved Human Resource Management. Support to improved HR management and

developing a culture of performance management has not yet taken hold, but the performance

management IT system that FPEMP supported is in use. Managers currently assign ratings to

their direct reports—theoretically based on performance, but in practice there is little training on

how to assign ratings, little oversight on whether or not managers are following the guidelines,

45

and overall the impact of the system has been small, to date. In order to truly take root,

leadership, directors and managers must lead and maintain consistency with their message

downward that accountability for individual performance will be documented by the HR system,

but will ultimately be expressive of a more comprehensive norm of performance feedback.

Individual and team accountability is often challenging to enforce in government bureaucracies,

and the MOF particularly struggles given the varying levels of prestige and earning power that

accompany different jobs within the MOF.

Norms and institutional culture will not change overnight, and there continue to be vocal

opponents of instituting the HR system in all of its functionality. Instituting this system would

mean a more rigorous and well documented incentive system that rewards tangibly strong

performance, and just as importantly, provides consequences for poor performance or corruption

of employment termination and could identify evidence for further sanctions of behavior

ventures into criminality. FPEMP will continue to stand ready with support as the political

economy of change evolves over time. Once the space opens to expand the reach of performance

management at the MOF, a multi-year capacity building and change management initiative will

be needed from top to bottom within ministries, from the individuals being evaluated all the way

to the Minister. Once the opportunity to provide such support is present, sustainability will be

within reach.

EXPRESATE Center. In recognition of the cultural aspects of tax compliance, the

EXPRESATE center is a long-term investment in Salvadoran youth to make a stronger case for

paying taxes as an act of citizenship, backed by the force of law to enforce their compliance. For

many in older generations, tax evasion is a societal norm, whereas young people have not made

decisions on the types of social norms they will accept as adults. For the older generation,

ramped up audit and enforcement may be the only thing they respond to that compels them to

pay taxes, whereas the MOF is seeking a tax base that depends more on voluntary tax

compliance backed by the implicit threat of audits.

The sustainability of the initiative is now firm. The Center is established, staffed and operational

with MOF resources alone with FPEMP only monitoring progress but not providing

programmatic support after helping with the up-front costs to establish the center. The greater

impact of the Center on the tax compliance of future generations is a long-term proposition

that—when combined with better taxpayer services, clear policy and a strong tax control

environment—will lead to increases in voluntary compliance over time, reducing the need for

adversarial audit and enforcement actions.

46

CHAPTER 6 - FINDINGS AND RECOMMENDATIONS

This report provides an analysis of FPEMP’s fifth year of assistance to the GOES in advancing

its fiscal reform agenda in the areas of public expenditure management, tax revenue mobilization

and private sector outreach. Through a detailed review of program reports, technical

deliverables, and interviews with GOES counterparts, the FPEMP team, and USAID, findings

reveal important achievements through the first five years of FPEMP assistance. This evaluation

helps identify challenges going forward and areas requiring additional assistance in order to

ensure the implementation of a sustainable fiscal reform.

Lessons Learned

There are key lessons that can be extracted from the implementation of fiscal reform in El

Salvador. Particularly the following:

Embeddedness of the project team requires constant vigilance for professionalism,

maintaining the decorum of the Ministry as occupants of its office space, and also

maintaining high standards for capacity building and avoiding the replacement of MOF

capacity with project resources. MOF and the program both benefit from the physical

proximity in the professional relationships—both formal and informal—that such

proximity permits, and how those relationships ease communications. Despite that,

several specific areas for improvement in communications channels have been identified,

reminding the project team that such communication and coordination is of the utmost

importance especially when in a position as embedded advisors.

Continuing the project’s practice of offering capacity building beneath the management

level to operational staff should be replicated and scaled in the future, particularly as

FPEMP has helped develop a number of modernized IT systems (SAFI II and CSMS II)

and significantly modernized functional work flows (IPSAS accounting, programmatic

budgeting, technology-enabled audits/investigations) that will be used by

specialists/analysts as much, if not more, than management level staff.

Study tours have been important in promoting political will for reform. GOES officers

have visited other countries in the Latin America and the Caribbean region with

experience implementing the various PFM reforms, exposing them to the experience, and

providing important input in the design and implementation of such reforms in El

Salvador. The project’s approach of (1) securing substantial MOF cost-shares, (2)

limiting involvement to small groups of the principal actors involved in a given reform,

(3) communicating clear expectations regarding a full-time work schedule for participants

and post-trip deliverables, and finally (4) having a knowledgeable facilitator with in-

country knowledge, experience and professional networks are all necessary for a

productive experience. For example in Year 5:

o An UNAC study tour to Chile facilitated by FPEMP inspired the creation of

Central America’s first Public Procurement Ombudsman’s office, replicating an

internal transparency and accountability mechanism used by the Government of

Chile. Along with the COMPRASAL II system, this is a significant commitment

to internal assurance of accountability of public procurement, with UNAC

crediting that experience as a “tipping point” for creating such an office.

47

o Several respondents commented that a recent study tour with 5 members of the

Legislative Assembly to observe Colombia’s enforced arrears collection unit and

discuss policy matters cemented political consensus from the Treasury

Commission within the Assembly. Legislative passage is now expected later in

2016 and is critical for the collection of up to 1%/GDP in revenue owed to the

Treasury year-to-year in uncollected tax arrears.

As technical service providers, the project needs to maintain a flexible posture toward the

evolving requirements of the beneficiary (MOF), even if previously understood

agreements change mid-stream such as the current situation with the development of

SAFI II. While such events create management challenges and call for retrospective

inquiry and reaching new solutions, the decision to maintain flexibility to the needs of the

MOF was the best available course of action. The project was complimented roundly for

its flexibility, but the need to maintain such a posture was emphasized as a top priority

for FPEMP as technical advisors.

A focus on short and medium-term modernization of public administration and regulatory

reform can still yield significant and concrete results—such as increases in tax revenue

and tighter control over public spending—even in a political climate where

comprehensive reforms requiring legislative approvals are unlikely.

Regular performance monitoring combined with annual evaluations such as this

contributes to an internal accountability for the project team—requiring project

leadership to be open to constructive feedback and continuous learning and flexibility to

continue providing consistently high levels of service to clients and achieving prioritized

results.

Recommendations

USAID and the FPEMP team should continue to work in close coordination with the government

counterparts and other donor assistance programs to ensure the GOES’ continuous, sustainable

progress towards results, relying on much needed donor technical assistance to overcome the

complex and interlinked nature of operational reform efforts throughout the ministry. We

provide a series of detailed recommendations for project management as a whole and divided by

Component and sub-activity.

Cross-Cutting

Provide progress reports and quarterly results of no more than 2-pages to the

Viceministers in Spanish, translated from the Quarterly report. This is in response to

a request for greater clarity on the results of activities and short-term consulting

assignments by the Viceminister of Finance. The project produces such highlights in its

quarterly report in English, so these can be translated and provided to MOF as a brief

update with highlights on recent results and major activities.

48

COMPONENT A: Public Expenditure Management

Government Accounting and IPSAS implementation

o Provide technical assistance to finalize the conceptual framework and help the

Directorate secure Ministerial approval for the revised chart of accounts;

o Connect the Directorate with IPSAS technical support from the IMF on its

published transparency manuals;

o Offer capacity building support from international consultants provided to the

Directorate in the recent past as the needs and absorptive capacity within this

office has exceeded the project’s budgeted resources for IPSAS implementation;

o Carefully calibrate the investment of project resources in IPSAS initiatives against

more immediate, short-term strategic priorities that will more directly yield

tangible reform on either the revenue or expenditure sides.

Treasury Operations

o Investigate the technical needs and IT capacity of the current Treasury system

(under CSMS I) to accommodate the desired Phase 2 of the TSA.

Development of SAFI II

o Shift resources to development of COMPRASAL II and CSMS II if software

development of the Budget subsystem continues to delay further developments on

the Government Accounting and Treasury subsystems. Also consider dedicating

resources to preparing the foundation for Phase 2 of the Treasury Single Account.

o Provide monthly progress reports to the Viceminister of Finance and Director of

DINAFI on FPEMP progress on development of the Treasury, Accounting and

Procurement subsystems;

o Offer support if needed on systems integration, and remain open, flexible and

available to push SAFI II development forward whenever the opportunity arises.

Transition to Programmatic Budgeting

o Determine available project resources to lay foundations for increased

engagement with the DGP on programmatic budgeting as the FPEMP proposed

office reorganization is imminent, and GIZ assistance is scheduled to be reduced;

o Request an operational meeting with the Director and Subdirector of Budget.

Public Procurement

o Investigate internal controls within UNAC and COMPRASAL II system. One

comment from a highly placed MOF official stated that while the system

increases external competition, there still appear to be insufficient internal checks

and balances to protect the government against collusion or bid-rigging;

o Continue to develop COMPRASAL II, targeting completion of the Contract

Management and Direct Contracting modules in the scheduled workflow.

Fiscal Policy Analysis

o Provide capacity building to build analytical skills to more effectively utilize the

Medium Term Fiscal Framework and Medium Term Expenditure Framework to

inform policy discussions and more accurately reflect GOES strategic plans.

o Work with Directorate General or Fiscal and Economic Policy to define the

parameters for the Tax Gap Analysis and work with MOF analysts to conduct the

study to also build their capacity to repeat the same type of study in the future,

data availability permitting.

49

o Provide flexible support in this office’s role as donor coordinator, offering project

institutional memory and networks to other strategically aligned projects.

o Consider supporting the Directorate General of Investment and Public Credit on

optimizing debt management through the use of state of the art tools such as a

Medium Term Debt Strategy. Rising debt and recent dependence on domestic

creditors is increasing the risk of crowding out private investment, along with

concerns about a potential default on floating debt levels. Optimizing debt choices

will not reverse debt dynamics, but can mitigate potential negative outcomes and

offer MOF more fiscal space and flexibility to most effectively govern fiscal

dynamics.

Component B: Tax Revenue Mobilization

Strategic Planning

o Given flat tax revenue outcomes over the past three years and the lack of tax

policy reform, the project should conduct a thorough Tax Gap Analysis to

determine the additional capacity of the tax system to generate higher levels of

revenue from the economy, data permitting. A Tax Gap Analysis is critical to

validate the underlying assumption of the project’s strategy under Component B,

namely, that tax effort still lags behind tax capacity, and thus the project should

focus on operational improvements in tax administration. Once such an

assessment is conducted, and if that assessment validates FPEMP’s strategy, the

study will provide the analytical basis for where the project should focus the bulk

of its resources, as well as where future programming in DRM should focus. For

instance, observing that VAT revenues are holding steady while income taxes are

improving in its performance, it would be valuable to understand if that effect

results from the maturation of the tax system—other middle and high income

countries also see an increasing revenue base from income taxes versus

consumption taxes as the economy grows and tax administrations become more

effective—or due to declining diligence in VAT collections. As observed by an

interviewee, Customs VAT collections have recently increased while Inland VAT

collections have decreased, which if the VAT is being collected appropriately is

impossible. Thus, some irregularity must exist, either in the data or in the

collections performance of DGII. Similarly, FPEMP should request access to the

Tax Expenditure Study recently conducted by the IDB in collaboration with the

Fiscal and Economic Policy Directorate to identify weaknesses in the tax system

and plan future activities accordingly.

Support to Tax Audit and Enforced Collections

o Continue to encourage MOF leaders to keep enforced arrears collections at the top

of their policy agenda;

o Encourage and contribute, as needed, to the completion of the Risk Matrix for risk

based audit (currently a GIZ task).

Support to Taxpayer Services

50

o Ramp up support to e-filing to provide sufficient technical capacity to

accommodate 100% e-filing for large taxpayers for both VAT and Income taxes,

and a significant influx of filings from small and medium taxpayers;

o Provide capacity building to the Taxpayer Services call center to enable better

triaging of cases by complexity to more or less experienced operators;

o Support other online services.

Completion of CSMS II

o Complete TAIIA testing and handover;

o If additional resources are diverted from the SAFI II software development,

initiate first steps toward defining more specific needs with the Customs

Directorate;

o Flexibly support the integration of more third-party data sets to deepen and

strengthen data-mining efforts.

DGII’s IT Migration

o Once enabled by DINAFI to transfer to the JBoss system, support migration of 10

critical modules from the SAFI to SAFI II environment.

Component C: Strengthened Private Sector Outreach

External Communications

o Contract a junior/mid-level Salvadoran communications specialist focused on

connecting civil society groups focused on service delivery and Salvadoran

research institutions with the resources generated by the project;

o Task this person with follow-up on the project’s intellectual credibility to share

knowledge and potentially leverage resources from other donors, other USAID

projects, and offering an avenue to national non-government actors into better

understanding the current fiscal climate and future fiscal needs.

National Fiscal Transparency

o Encourage the MOF to post fiscal statistics in machine-readable formats that

enable external analysis (currently most files available only in .pdf format);

o Connect new USAID Anti-Corruption and Higher Education projects with

resources that FPEMP has generated and help create synergies between projects,

for example with anti-corruption and the development of COMPRASAL II—a

significant contribution to reducing the abuse of government procurement funds;

o Complete a “How To” video for the fiscal transparency portal;

o Establish a social media presence for fiscal transparency resources in coordination

with the MOF to call greater attention to available resources on the portal to civil

society and private sector groups.

Municipal Fiscal Transparency

o Complete stabilization of the municipal transparency portal and connection with

the SAFIM.

Support Private Sector roundtable proposed by the Spanish government

51

o Maintain a strictly neutral technical advisory role on fiscal policy, such as in areas

like follow-up presentation or advocacy on the fiscal sustainability white paper;

o Support private sector outreach efforts in favor of a fiscal pact, such as the current

efforts of the international community to convene a private sector roundtable with

a main area of focus being on the need for GOES to raise greater tax revenue.

Provide technical analysis and advice to this and other such groups in close

coordination with USAID.

52

Annex 1: Perception Survey Results

Avg Score Dir

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Gen

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1 Quality 4.63 5 5 5 5 5 5 4 5 4.5 4.5 5 5 3 4 4.5 4.63

2 Timeliness 4.80 5 5 5 4 5 5 5 5 5 5 5 5 4 4 5 4.80

3 Flexibility 4.53 5 5 5 5 5 5 4 5 5 5 5 4 3 3 4 4.53

4 Communication 4.57 5 5 5 4 5 5 5 5 5 3.5 5 5 3 3 5 4.57

5 Overall Satisfaction 4.80 5 5 5 5 5 5 5 5 5 5 5 5 3 4 5 4.80

5 5 5 4.6 5 5 4.6 5 4.9 4.6 5 4.8 3.2 3.6 4.7 4.67

53

Annex 2: List of Interviews 1) USAID: Martin Schultz (FPEMP COR); Teresa Miller (Deputy Director of Economic

Growth)

2) FPEMP: Enrique Giraldo (COP), Carlos Quiteno (M&E Specialist), Renato Bonilla (IT

Manager), Sandra Urazan (Revenue Advisor); Alex Rivera (IT Project Manager,

COMPRASAL II)

3) MOF: Carmen de Mancia (Taxpayer Services); Alfredo Diaz (DG of DGII); Jose David

Lopez (Audit Chief); Jeremias Aguilar (Case Selection Unit Chief); Alejandro Riveria

(Viceminister of Revenue); Juan Murillo (DG of Treasury); Inmar Reyes (Director of

Government Accounting) Jose Candido Perez Hernandez and Luis Antonio Campos

(Government Accounting Subdirectors); Carlos Ortiz (Director of Administration);

Edelmira Montejo (Public Procurement Chief); Roberto Solorzano (Viceminister of

Finance); Nelson Fuentes (Director of Economic and Fiscal Policy); Jose Ovidio Cardoza

(Director of IT and Innovation); Carlos Salazar (DG of Budget); Mario Villatoro

(Subdirector of Budget);

4) International Community: Ignacio Nicolau Ibarra (Director of Aid Coordination-

Spanish Embassy); Angel Marcos (Senior Advisor-AECID); Sonia Jurado (Technical

Advisor-GIZ); Juan Pablo Ortiz (Fiscal Team Lead-IDB)

Documents

El Salvador Fiscal Policy and Expenditure Management Program …pdf.usaid.gov/pdf_docs/PA00MGT9.pdf · · 2017-01-04El Salvador Fiscal Policy and Expenditure Management Program