Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 41183 - PA

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A

PROPOSED LOAN

IN THE AMOUNT OF US$75 MILLION

TO THE

REPUBLIC OF PANAMA

FOR A

FIRST COMPETITIVENESS AND PUBLIC FINANCIAL MANAGEMENT DEVELOPMENT POLICY LOAN

October 24, 2007

Central America Country Management Unit Latin America and Caribbean Region International Bank for Reconstruction and Development This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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PANAMA - GOVERNMENT FISCAL YEAR January 1 – December 31

CURRENCY EQUIVALENTS (Exchange Rate Effective as of Oct. 18, 2007)

Currency Unit Balboa

US$1.00 B./1.00

Weights and Measures Metric System

ABBREVIATION AND ACRONYMS

ACPDC Authority for Consumer Protection and the Defense of Competition BNP National Bank of Panama CAS Country Assistance Strategy CCT Conditional Cash Transfer CEA Country Environmental Analysis CEM/ICA Country Economic Memorandum/Investment Climate Assessment CFAA/CPAR Country Financial Accountability and Procurement Assessment Report CFZ Colon Free Zone CGR Office of the Controller General of the Republic CICYT Inter-Ministerial Council of Science, Technology and Innovation CNC National Competitiveness Center COBE System of Public Works Control CONCYT Commission of Science, Technology and Innovation CPS Country Partnership Strategy CSS Social Security Institute (Caja de Seguro Social) DCP Public Credit Directorate DGCP Public Procurement Directorate DGA General Directorate of Customs DGI General Revenue Directorate DPL Development Policy Loan EGP Electronic Government Procurement FRL Fiscal Responsibility Law FTA Free Trade Agreement FY Fiscal Year GDP Gross Domestic Product GNI Gross National Income GOP Government of Panama IBRD International Bank for Reconstruction and Development IADB Inter-American Development Bank IFARHU Human Resources Institute IFC International Finance Corporation IMF International Monetary Fund INADEH National Training Institute ISN Interim Strategy Note LAC Latin America Region LDP Letter of Development Policy MDGs Millennium Development Goals MEF Ministry of Economy and Finance MINEDUC Ministry of Education

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NFPS Non-Financial Public Sector OECD Organization for Economic Cooperation and Development PanamaCompra Public e-Procurement system PBL Policy Based Loan PCA Panama Canal Authority PCN Project Concept Note PEFA Public Expenditure and Financial Accountability PFIDPL Public Finance and Institutional Development Policy Loan PFM Public Financial Management PIN Public Information Notices PPTAL Public Policy Technical Assistance Loan QAG Quality Assurance Group ROC Regional Operations Committee ROSC Report on the Observance of Standards and Codes R&D Research and Development SDR Special Drawing Rights SENACYT Secretariat for Science, Technology and Innovation SIAFPA Integrated financial management system SIGUEME Document Tracking and Management System SINIP National System of Public Investment SPIG Presidential Secretariat for Government Innovation UNDP United Nations Development Program

Vice President:

Country Director: Sector Directors:

Task Team Leaders:

Pamela Cox Jane Armitage Marcelo Giugale and Stefan Koeberle Pablo Fajnzylber and Manuel Vargas

PANAMA FIRST COMPETITIVENESS AND PUBLIC FINANCIAL MANAGEMENT

DEVELOPMENT POLICY LOAN TABLE OF CONTENTS

LOAN AND PROGRAM SUMMARY ..........................................................................................1 I. INTRODUCTION ........................................................................................................2 II. COUNTRY CONTEXT ...............................................................................................3

A. Recent Economic Developments in Panama......................................................3 B. Macroeconomic Outlook and Debt Sustainability..............................................5

III. THE GOVERNMENT’S PROGRAM........................................................................6 A. The Competitiveness Program ...........................................................................8 B. The Public Financial Management Program ......................................................15

IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM.................................20 A. Link to the Country Partnership Strategy...........................................................20 B. Collaboration with the IMF, Other Bank Operations, and Other Donors ..........22 C. Lessons Learned .................................................................................................22 D. Analytical Underpinnings ..................................................................................24

V. THE PROPOSED OPERATION................................................................................24 A. Operation Description ........................................................................................24

VI. OPERATION IMPLEMENTATION.........................................................................29 A. Poverty and Social Impacts ................................................................................29 B. Environmental Aspects.......................................................................................29 C. Implementation, Monitoring and Evaluation......................................................29 D. Fiduciary Aspects ...............................................................................................30 E. Disbursements.....................................................................................................30 F. Risks and Risk Mitigation...................................................................................30

ANNEXES

ANNEX 1. LETTER OF DEVELOPMENT POLICY ................................................................33 ANNEX 2. MATRIX OF POLICY ACTIONS AND EXPECTED OUTCOMES ....................38 ANNEX 3. FUND RELATIONS NOTE........................................................................................42 ANNEX 4. THE PUBLIC POLICY REFORM TECHNICAL ASSISTANCE PROJECT. ....44 ANNEX 5. PANAMA AT A GLANCE .........................................................................................45 The Panama Competitiveness and Public Financial Management DPL was prepared by an IBRD team consisting of Diomedes Berroa, Pablo Fajnzylber, Enrique Fanta, Ulrich Lächler, Daniel Lederman, Miguel Navarro, Nelson Shack, Luis Tineo, Alexandria Valerio, Manuel Vargas and Antonio Velandia. The team is grateful to the Government of Panama for the close collaboration during loan preparation. Todd Crawford, David Gould and Jessica Poppele supported the team with internal quality oversight. The peer reviewers are Alberto Leyton and Shahid Yusuf.

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LOAN AND PROGRAM SUMMARY

PANAMA

First Competitiveness and Public Financial Management Development Policy Loan

Borrower Republic of Panama Implementing Agency Ministry of Economy and Finance Proposed Amount US$75 Million Terms Fixed Spread Loan (FSL) in US Dollars with level repayments of principal

commitment-linked, payable in 18 years, including a 2 year grace period. Front-end Fee is of 0.25 percent on principal amount, payable not later than 60 days after the Effective Date.

Tranching Single tranche to be disbursed upon loan effectiveness Description

The proposed Loan is the first in a programmatic series of two DPLs, which build upon the Public Finance and Institutional DPL included in the previous Bank interim country strategy, intended to support the Government’s development program as described in its Strategic Vision document. Within this framework, this DPL series focuses on actions aimed at: • Promoting broad-based growth through the enhancement of private

sector competitiveness, by reducing bureaucratic red tape, improving training policies, and increasing investments in innovation.

• Consolidating fiscal sustainability, transparency and efficiency through the modernization of public financial management systems for revenue, debt, fiscal reporting, and public procurement.

Benefits

The actions supported by the proposed DPL series are expected to enhance private sector competitiveness and public financial management, with a view of improving public sector efficiency and effectiveness in a fiscally sustainable fashion, thus influencing the country’s enabling environment for private sector development. The DPL series will also contribute to fiscal stabilization and efficient spending by helping diversify external sources of finance and obtain better financial terms.

Risks

The medium-term outlook is not completely without risks, although macroeconomic vulnerabilities in Panama have fallen since Board presentation of the previous Public Finance and Institutional DPL, as growth has accelerated, debt has declined as a share of GDP, and fiscal balances have improved. As elaborated in section VI (part F), the proposed DPL program takes into account potential risks in three areas: economic, political and institutional strategy.

Operation ID Number P105710

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INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED

FIRST COMPETITIVENESS AND PUBLIC FINANCIAL MANAGEMENT DEVELOPMENT POLICY LOAN TO PANAMA

I. INTRODUCTION

1. This program document describes a single-tranche Competitiveness and Public Financial Management Development Policy Loan (DPL) to the Republic of Panama for US$75 million equivalent. This operation is being proposed as the first of a series of two programmatic operations for the same amount that would support the Government’s program to consolidate fiscal discipline and increase public sector transparency and efficiency, as means for –inter alia– enhancing private sector competitiveness. These two sets of objectives are mutually reinforcing, as public financial management systems that contribute to fiscal discipline, operational efficiency and strategic allocation of resources are critical elements of public sector effectiveness, which in turn can positively influence the country’s enabling environment for private sector development. Moreover, both are critical for achieving progress toward the GOP’s overarching objective of increasing and sustaining broad-based economic growth in Panama, which would in turn contribute to continued fiscal stability. 2. The proposed DPL series would specifically support competitiveness enhancing reforms to reduce bureaucratic red tape and modernize training and innovation policies, as well as reforms aimed at modernizing public financial management by increasing fiscal transparency and improving public procurement, revenue and debt management systems. The efficient and effective operation of these systems is critical for improving both the delivery of public services and the competitiveness of the private sector, a fact that underlines the interconnections between the two areas on which the proposed DPL would focus. 3. The proposed DPL series would continue support toward the medium-term objectives included in the Public Finance and Institutional Development Policy Loan (PFIDPL, FY07) for US$60 million equivalent, which was approved as a stand-alone operation in the context of the Interim Strategy Note for the Republic of Panama (ISN, FY06-07), and supported reforms that advanced implementation of fiscal stabilization and public financial management reforms during the first two years of the Torrijos Administration (2004-2009). As agreed with the Government in the Country Partnership Strategy for the Republic of Panama (CPS, FY08-10), the proposed DPL series would initially support outcomes that could be attained by December 31, 2008, reflecting achievements through the final full fiscal year of the current administration. 4. The proposed DPL series is an important component of the Bank lending program to support Government designated programs under two objectives of the CPS: promoting broad-based economic growth and establishing modern public financial management systems and institutions. These objectives are aligned with the Strategic Vision of Economic & Employment Development Toward 2009 articulated by the Torrijos Administration, which emphasizes fiscal discipline, transparency and greater efficiency as crucial elements for accelerating export-led economic growth, creating more jobs and lowering poverty by one-fifth during its term of office. In the two areas of the CPS

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supported through the proposed DPL series the Government and the Bank have established strong policy dialogue supported by analytical work. Moreover, under the CPS, the Bank will continue providing technical assistance and capacity building support initiated under the ISN and which would be complementary to the proposed DPL series.

II. COUNTRY CONTEXT 5. Panama’s GDP has been growing extremely fast in recent years, averaging over 7.5 percent during 2004-2006. The economy’s medium term outlook is very promising, with average annual growth expected to exceed 8 percent over the next four years. To a large extent, Panama is reaping the benefits of a broad-based reform agenda that was started in the second half of the 1990s, when trade barriers and price controls were largely dismantled, a far-reaching privatization program and anti-trust legislation were introduced, and fiscal reforms coupled to debt-reduction allowed Panama to regain access to international financial markets. The current Government has recaptured the momentum on this structural reform agenda and is placing a renewed emphasis on fiscal sustainability, transparency and improved efficiency, while at the same time exploiting the advantages of Panama’s open trade and investment regime. In particular, the Government has succeeded in moving ahead with a project to expand the country’s famous Canal and has negotiated a new free trade agreement with the United States. These developments are already starting to contribute to the current economic boom in Panama and they are expected to continue providing significant growth momentum for some years to come. 6. The challenge facing Panama, however, is not just one of continuing to grow rapidly, but also of ensuring that economic benefits are more broadly shared. Indeed, Panama’s economic development has been characterized by a high degree of inequality. Growth has traditionally benefited mainly the capital-intensive service sectors concentrated geographically in the Panama and Colon provinces, while generating little economic opportunity for less skilled members of society. Beginning with the 1994-1999 Pérez Balladares administration, however, the Government of Panama (GOP) began implementing many of the critical reforms needed to stimulate broad-based growth. Those reforms were supported by the Bank through several loans and analytical reports. Whereas reform momentum stalled in the early 2000s, progress has since been rejuvenated under the Torrijos administration’s Strategic Vision 2004-2009. A. Recent Economic Developments in Panama 7. Panama’s economy emerged from an economic recession in 2003 and has been booming ever since (table 1). This rise has been led by exports of goods and services, which benefited from a worldwide recovery of trade during this period, and has been accompanied by strong private consumption and investment demand. From a sector perspective, the economic recovery was led by construction, transport, commerce activities, tourism and a recovery in financial intermediation. Two sectors that, until recently, had not exhibited significant signs of recovery since 2002 are agriculture (excluding fisheries) and manufacturing, which traditionally have been among the most protected. In 2006, however, manufacturing exhibited a 5.1 percent real expansion, driven mainly by the production of inputs for the construction industry. Agriculture and fishing also grew by 9.5 percent year-on-year in the first quarter of 2007 due to a rise in non-

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traditional fruit exports, suggesting that the current economic boom is becoming increasingly broad-based.

Table 1: Panama Medium-Term Macroeconomic Framework

(in % of GDP, unless noted otherwise)

2003 2004 2005 2006 2007 2008 2009 2010 ----------------------Actual--------------- ---------------Projection------------------

GDP growth rate (%) 4.2 7.5 6.9 8.1 8.5 8.8 7.9 7.1

Inflation rate (%, average) 1.4 0.5 2.9 2.5 3.7 3.6 3.8 3.9

Gross Domestic Fixed Investment 17.1 16.6 16.8 18.4 22.1 24.3 26.8 28.6

Gross National Savings 20.2 16.7 18.8 17.5 18.0 19.1 19.2 19.1

Open Unemployment (%) 11.4 9.7 8.1 6.8 n/a n/a n/a n/a

Key Nonfinancial Public Sector Indicators

Revenues (excluding PCA) 22.3 21.1 22.3 25.3 25.6 24.6 24.5 24.3

Expenditure (excluding PCA) 27.0 26.0 24.9 24.8 25.1 24.9 24.9 24.6

Overall Balance, excl. PCA -4.7 -4.9 -2.6 0.5 0.5 -0.2 -0.4 -0.3

Primary Balance, excl. PCA -0.3 -0.7 1.8 4.9 4.7 3.5 3.2 2.7

External Sector Indicators and Public Debt

Merchandise Exports (fob)* 7.7 8.1 8.3 8.6 8.1 7.7 7.4 7.2

Merchandise Imports (fob)* 19.0 19.6 20.5 21.7 23.1 24.7 27.4 29.7

Current Account Balance -3.9 -7.5 -5.0 -2.2 -5.4 -6.6 -8.8 -10.6

Total Public Debt (excl. PCA) 63.0 66.0 62.2 57.7 51.7 46.3 41.9 38.0

External Public Sector Debt 50.3 50.9 49.0 45.5 41.7 38.8 38.3 39.7

*Excludes the Colón Free Zone Source: IMF and WB calculations.

8. An important concern after year 2000 was the deteriorating trend of fiscal balances resulting in primary fiscal deficits in 2003 and 2004. This decline reflected a weakening in the finances of the central government and in the accounts of the social security institute (CSS). The fiscal package adopted by the newly elected Torrijos Administration in February 2005 succeeded in reducing the overall fiscal deficit to 2.6 percent in 2005 and achieving a surplus of 0.5 percent in 2006, while primary fiscal balances exhibited surpluses of respectively 1.8 and 4.9 percent of GDP in those years. Moreover, the parametric changes contained in the pension reform approved in June 2005 generally point toward greater fiscal consolidation and, thus, are expected to arrest the patter of increasing CSS deficits that was predicted in the absence of reform over the medium term, thereby complementing the process of fiscal consolidation promoted by the Fiscal Reform. The recent increases in tax revenues have been the combined result of the tax reform of 2005, the strong growth of economic activity and more effective tax collection efforts. The positive fiscal results have been reflected in a reduction in the public debt, from a peak of 66.0 percent of GDP in 2004 to an estimated 57.7 percent of GDP in 2006. 9. After reaching a deficit of 7.5 percent of GDP in 2004, the current account deficit declined to 2.2 percent of GDP in 2006. Indeed, growing exports of canal-related services, tourism and re-exports from the Colón Free Zone have offset profit remittances and

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interest payments. Meanwhile foreign direct investments in the financial, commerce, and housing sectors have continued to increase, reaching 17.8 percent of GDP in 2006, including the purchase of a domestic Bank for about 10 percent of GDP. B. Macroeconomic Outlook and Debt Sustainability 10. Economic growth in 2007 is projected to be around 8.5 percent, led by financial intermediation, transportation, tourism, construction, and agriculture and fueled by significant capital inflows. As the current dynamism of the real estate market levels off to more sustainable levels, investment activities associated with the Panama Canal expansion are expected to take over as the main growth impulse, together with new private investments in complementary activities. A study commissioned by the Panama Canal Authority estimates that the Canal expansion will raise economic growth by roughly one percentage point per year over the next 25 years. In parallel, the Panama-U.S. Trade Promotion Agreement (TPA) signed in Washington on June 28th of 2007 was ratified by Panama’s National Assembly on July 11th, and is still to be submitted to the U.S. Congress for ratification. The TPA should gradually begin to exert an effect in terms of encouraging export development and foreign direct investment. Based on these developments, GDP growth is projected to peak at 8.8 percent in 2008 and falling gradually thereafter reaching 7.1 percent in 2010 (table 1). This reflects the expectation that the current economic expansion will slow before the bulk of the canal investments will take place in 2009-11. The expanded canal, expected to be operational in 2014, will bring with it a supply-driven growth impulse. 11. It is worth noting, however, that to the extent that the current economic expansion is being fueled by external resource inflows, especially in the real estate market, there is a possibility that the economy could overheat and that non-tradable goods inflation and wage growth could rise above levels supported by productivity growth. Whereas this would have negative consequences on private sector competitiveness and growth, these risks are mitigated by the fact that the Government is taking actions to maintain and even increase the degree of trade openness of the Panamanian economy. Moreover, a debt sustainability analysis carried out in early 2006 under fairly conservative medium-term growth projections had concluded that Panama’s consolidated public debt, which stood at 62.2 percent of GDP at the end of 2005 (down from 66.0 percent in 2004), would be sustainable (in the sense of placing the public debt ratio on a steadily declining trajectory) as long as the government is able to maintain a primary fiscal surplus of 1.6 percent of GDP. Under the current macroeconomic settings, with growth well above the 4 percent used in baseline simulations and with the primary surplus well above 1.6 percent, Panama’s debt ratios are projected to continue declining, possibly at much faster rates than previously anticipated. 12. These positive views are shared by IMF staff, whose latest projections, revised in July 2007 taking into account developments since the Article IV consultation report (January 2007), suggest that consolidated public debt would fall to 42.2 percent of GDP in 2010 (38.0 percent excluding the estimated PCA canal debt). A frequently raised question in this context is whether Panama's sovereign debt rating will be adversely affected by the proposed Canal expansion project. It should not be. The authorities have excluded the balances of the Panama Canal Authority (PCA) from the public sector fiscal accounts and have indicated that they do not intend to provide sovereign guarantees for any debt that

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may be issued by the PCA to finance part of the Canal expansion project.1 Thus, given Panama’s positive growth outlook and the strong indications that its public debt is on a steadily declining trajectory, the country’s overall macroeconomic framework can be considered adequate for the purposes of the proposed operation and conducive to achieving its objectives.

III. THE GOVERNMENT’S PROGRAM 13. President Torrijos assumed office in September 2004 with a strong political mandate that gave his party’s coalition a majority in the Legislative Assembly. In early 2005, the GOP launched its ambitious medium-term development strategy (Strategic Vision, Box A) which gives renewed attention to poverty reduction and reinvigorates the structural reform program initiated during the 1990s. This comprehensive development program encompasses policies aimed at reducing poverty and improving the income distribution, fostering economic growth and employment creation, reorganizing public finances, developing human capital, and modernizing the state. Box A. GOP Strategic Vision of Economic and Employment Development Toward 2009

The Strategic Vision is comprised of five pillars:

Pillar I - Reduce Poverty and Income Inequality encompasses four dimensions: stimulate growth and expand employment opportunities, especially for youth; build human capital of the poor; pioneer a flagship conditional cash transfer program (Red de Oportunidades) which brings together efforts to improve education, health, nutrition and basic infrastructure access, targeting the poorest areas; and invest in productive activities in rural areas, including land tenure security

Pillar II - Foster Economic Growth and Employment focuses on efforts to open the economy to international competition and promote export-led growth, including through free trade agreements, development of export infrastructure (roads, ports, etc.), removal of distortions and unfair sector incentives, and targeted complementary investments in Canal expansion, irrigation, and urban transport.

Pillar III - Reform Public Finance includes actions to reduce public debt, achieve fiscal sustainability and modernize public financial management, including fiscal and pension reform, measures to improve the accuracy and transparency of national accounting systems, modernization of procurement and tax administration, and improvements in budget management.

Pillar IV - Develop Human Capital seeks to improve the competitiveness of Panama’s labor force and reduce inequality through investments in education and health. Initiatives will support national curriculum reform, expanded coverage of preschool and secondary education, effective worker training, preventative and occupational health programs, and expanded health, water, and sanitation infrastructure in rural and indigenous areas.

Pillar V - Reform and Modernize the State supports activities to help the public sector and public institutions become better facilitators of countrywide development. Measures will be taken to reduce corruption, improve private participation in infrastructure, increase competition in the electricity and transport sectors, and foster decentralization of service-delivery.

14. In the context of this strategic vision, the GOP has already taken some major steps to strengthen the overall foundations for sustained broad-based economic growth, including the passage during 2005 of a fiscal reform package and a politically difficult pension reform, together with measures to increase fiscal transparency, improve budget management and modernize public procurement. The above reforms were supported by the 1 Preliminary estimates indicate that the net surplus currently generated from the canal operations are enough to service the increase in PCA debt currently envisaged under the expansion project.

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Bank through the Public Finance and Institutional Development Policy Loan (FY07) and can be considered important steps toward the objectives of restoring fiscal sustainability and further improving public financial management. The proposed DPL series would support the GOP’s continued progress towards these objectives. The principal issues and government plans with respect to these areas are discussed further below in some depth as they form the background to the specific actions supported by this DPL series in the area of public financial management. 15. Another important Government action, toward the objective of increasing broad-based economic growth, was the negotiation of a free trade agreement with the United States.2 Besides expanding market access for Panamanian companies, this FTA is expected to boost investor confidence and open up previously protected sectors of the economy, thus helping to diversify Panama’s sources of growth. To maximize the benefits of this and other FTAs, complementary actions will be needed to address key constraints to private sector competitiveness. In this context, in order to facilitate the economy’s adjustment to FTAs and increase the shared benefits of trade, the GOP is implementing a so called “complementary agenda” of reforms, aimed at enhancing competitiveness and taking advantage of the opportunities offered by Panama’s increasing degree of trade integration.3 This policy agenda includes actions aimed at improving the efficiency and transparency of the State as a facilitator of private investments by means of reducing bureaucratic red tape, improving human capital through vocational and entrepreneurship training programs and promoting increases in private sector productivity by fostering technology adoption and innovation. The proposed DPL series would support progress toward these competitiveness-enhancing objectives, which are critical for increasing the productivity of Panamanian businesses. The main issues in each of these areas and the corresponding Government plans are described further below, as background for the specific actions supported by this DPL series in the area of competitiveness enhancing policies. 16. The GOP is taking other major steps in the context of its Strategic Vision to foster broad-based growth but they are not elaborated here in detail as they lie beyond the scope of the proposed DPL series. They include, notably, the expansion of the Panama Canal to accommodate larger ships, and the launch in 2006 of a conditional cash transfer (CCT) program, “Red de Oportunidades.” The Canal expansion project, which received overwhelming support in an October 2006 referendum, should help strengthen Panama’s comparative advantage in the traditionally dynamic service sectors associated with the Canal. In parallel, the GOP is seeking to increase private participation in various major infrastructure projects in the ports, urban transport, sewerage, and power sectors. As for the CCT program, supported by the Bank and the IADB through investment operations, it is expected to improve the targeting of social assistance, increase the poverty impact of social expenditures and allow more Panamanians to benefit from the country’s favorable growth performance. Finally, in the context of the trade-complementary and competitiveness enhancing reform agenda the GOP is working with the IADB in the modernization of the 2 The agreement was signed in June 2007 but is still to be ratified by the U.S. Congress. 3 In September 2006, through the Cabinet Decree 37, the GOP created the Council of Ministers for the Complementary Agenda and Competitiveness (“Consejo de Ministros para la Agenda Complementaria y la Competitividad”) to develop policies and programs for improving Panama’s competitiveness in order to take advantage of opportunities derived from increased market access. The council is composed of the Ministers of Trade and Industry, Economy and Finance, Agriculture, Foreign Affairs and Labor. See GOP web page: http://www.agendacomplementaria.gob.pa.

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agencies in charge of implementing international trade agreements, as well as on the design of temporary financing and technical assistance mechanisms to support the adjustment of private enterprises directly affected by FTAs. 17. The proposed DPL series was prepared in close dialogue with Panamanian authorities, in parallel with the development of the CPS. The proposed series supports specific components of the Government program, which is the outcome of national democratic policymaking processes. Indeed, in addition to democratic elections – which indicate public preferences for the policy platforms of parties and candidates – the GOP makes use of various means of consultation to develop reforms and reach agreement. Recent examples include the multi-party negotiations undertaken to conclude the pension reform, the national referendum on the Panama Canal and the on-going National Dialogue for Development.4 The consultations done for the CPS, of which the DPL series is an integral part, stressed messages contained in the proposed DPL program, particularly: (i) the importance of promoting broad-based economic growth and competitiveness as a way to reduce poverty and promote employment creation; (ii) the importance of strengthening the effectiveness of key public institutions, including supporting reforms and initiatives to promote the establishment of more modern and transparent public financial management systems; and (iii) the role played by improvements in the efficiency and transparency of Government spending both in enhancing the delivery of social services and in improving the investment climate. A. The Competitiveness Program 18. Panama’s main challenges in enhancing the competitiveness of its private sector are related to the improvement of public sector governance and regulatory frameworks, and to the human capital and innovation policy agenda. These are the areas that offer the largest potential payoffs in terms of increasing the productivity of Panamanian businesses by means of closing the country’s gaps with respect to international best practices. Indeed, Panama’s shortcomings with respect to other emerging countries appear larger in those two areas, relative to those of infrastructure and access to finance, in which Panama’s performance is closer to that of OECD countries than to the average for the Latin America Region (LAC). The World Economic Forum (WEF), for example, rates the quality of Panama’s infrastructure above the average for LAC. Moreover, domestic credit to the private sector as a fraction of GDP is about three times as high in Panama than in the rest of Latin America. In contrast, the World Bank’s Doing Business reports indicate that in Panama the procedures to comply with tax and labor regulations and those needed to enforce contracts are more burdensome, while levels of regulatory non-compliance and informality are higher than in the rest of LAC and the OECD. Moreover, according to WEF and Transparency International the incidence of corruption in Panama is similar to that found in the rest of Latin America, which in turn lags considerably behind the OECD. 4 The main goal of this national dialogue – the “Concertación Nacional Para el Desarollo” – has been that of prioritizing the use of additional revenues to be generated by the expansion of the Panama Canal, in the context of the overarching objective of eradicating poverty in Panama. The process, which has been facilitated by UNDP, has had the participation of representatives from Government and a wide range of civil society and private sector organizations. The Government’s programs on Economic Growth and Competitiveness and Institutional Strengthening were among the focal areas discussed by the working groups.

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19. The GOP, however, is addressing the above challenges through a number of policy actions. In the area of tax administration, the Government expects to increase tax performance by means of improved filing, audit and collection procedures, which should translate into an increased enforcement of tax regulations but also facilitate tax compliance. These reforms are described in more detail further below in the context of the Government’s public sector financial management program supported by this DPL. With regard to the impact of labor regulations on labor market outcomes, as described below the GOP is emphasizing actions aimed at improving the skills of the labor force, so as to increase labor productivity and contribute to reducing the incidence of informal employment. In the area of contract enforcement, with support from the IADB, UNDP and bilateral aid agencies, the GOP is implementing an ambitious program of reform of the justice system aimed at increasing its independence, transparency and efficiency. This judicial reform program, coupled to other policy actions to increase public sector transparency and efficiency by modernizing the Government’s financial management systems, is expected to help reduce the incidence of corruption and create further incentives for regulatory compliance. 20. Red tape reduction. To complement the above policy actions, however, the GOP is placing a large emphasis on measures aimed at eliminating excessive bureaucratic red tape as an important avenue for increasing the transparency and efficiency of the public sector, as well as for reducing transaction costs and increasing the competitiveness of private companies. In particular, the GOP is streamlining Government procedures and putting on-line those transactions that are most critical for the enterprise sector and the population in general. This should have the effect of reducing opportunities for the use of discretionality on the part of public officials. Moreover, these reforms should make it less onerous for firms to comply with government regulations. In this respect, the GOP’s program to reduce excessive red tape should contribute to reducing informality among smaller firms, which in turn would facilitate their access to markets and government services. 21. It is worth noting that Panama already performs relatively well, in an international perspective, in terms of the burdens created by excessive bureaucratic red tape. However, achieving excellence in this area is seen as a priority for strengthening the country’s comparative advantages in internationally integrated service activities – e.g. linked to the Canal and Panama’s International Banking Center – for which low transaction costs are critical. In other words, by implementing among the most efficient procedures for registering new businesses and trading across borders, the GOP expects not only to increase public sector transparency and stimulate regulatory compliance, but also to further increase the country’s attractiveness as an international logistics hub and financial center. 22. Training and innovation. In order to boost private sector competitiveness, however, it is also critical that Panama advances its international standing in the areas of human capital and innovation. Especially outside the modern service sector, Panamanian firms tend to invest less in workers’ training and in innovation than do their counterparts from other emerging countries. Moreover, in comparison with the rest of Latin America, Panama currently invests less in research and development (R&D) activities as a percent of GDP, and employs fewer researchers as a share of the population. Reducing these gaps is important both for facilitating the diversification of Panama’s sources of growth in the

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wake of the country’s FTAs and for taking advantage of new investment opportunities associated with the Canal expansion project. 23. In particular, the continued development of non-traditional exports – e.g. new types of fruits, whose share in merchandise exports grew from 2 to 14 percent between 2000 and 2005 – is already requiring increased investments in technology adoption and innovation. These are needed to promote increases in productivity and competitiveness, taking advantage of Panama’s climatic conditions and its expanded access to international markets. Similarly, improvements in the skills of the labor force are a necessity to support the rapid growth of the tourism and construction sectors. Finally, an expanded pool of highly qualified workers is critical to continue attracting foreign direct investment into service activities with higher technological content, which benefit from the transportation and telecommunications infrastructure available in the Canal area.5 24. The GOP has recognized these challenges and, as described further below, it has recently begun implementing ambitious reform programs to modernize both its worker training and innovation policies. In the case of training, the ongoing reforms are expected to allow for the supply of training services to respond more closely to current and emerging needs in the labor market, particularly in light of the canal expansion and other investment projects in the pipeline. In the area of innovation, the Government has introduced efficient and transparent mechanisms to finance, through matching grant funds, both public and private investments in R&D and innovation. It has also expanded scholarship programs aimed at creating a critical mass of local researchers. 25. The Government program in the areas of training and innovation should help Panama close its current gaps in education and technology and boost the long-term productivity of its private sector. Moreover, these policies should be complementary to the GOP’s efforts to improve the coverage and quality of education. Indeed, improvements in the formal educational system will probably take time to have a notable effect on the schooling of the labor force, and will likely have a limited impact on current generations of Panamanian workers. Moreover, improvements in the quality of tertiary education will be directly linked to the development of the country's own scientific and technological capacity, and to the development of a critical mass of well trained researchers and university professors. Increasing business competitiveness by reducing transaction costs

5 Examples include the establishment in Panama of regional headquarters of multinational corporations, which the Government is promoting through a streamlined tax, migration and regulatory framework, and the development of new value-added services linked to the country’s transformation into a regional logistics hub, ranging from shipyards to aircraft maintenance centers.

26. As noted above, a primary focus of the GOP’s competitiveness enhancing policy agenda is its program to reduce the time and cost required for completing various bureaucratic procedures, both for facilitating private sector development and for increasing public sector transparency and efficiency. This program is an integral part of the

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Government’s agenda to develop electronic government – e.g. including through reforms in public procurement and tax administration, as described below. 27. Simplifying Government Procedures. The GOP’s program to reduce excessive bureaucratic red tape has been led by the “Secretariat of the Presidency for Governmental Innovation” (SPIG), with technical support provided by the Governments of Chile and Korea, as well as through the Bank’s Public Policy Reform Technical Assistance project. As a first critical step, SPIG has prepared a detailed inventory of bureaucratic procedures in all Government institutions, including detailed data on the requirements to be met by users, hours of operation, costs, etc. In this context, a key action has been the launch, in May 2006, of an internet portal – “Panama Tramita” – that provides all the above information. 28. In a second stage of the reform process, SPIG is gradually incorporating the option of completing selected procedures on-line. By June 2007, “Panama Tramita” already allowed for completing 75 administrative procedures through the internet. In this respect, an important milestone has been the passage of Law 5 of January 2007, which was implemented in July 2007 through the launch of a new internet portal – “Panama Emprende” – that allows for the on-line registration of most firms.6 This reform is likely to place Panama among the countries with the most simplified and efficient procedures for starting new businesses. Another critical action that the Government intends to take during the next year is the design and the beginning of the implementation of an electronic one-stop shop for import and export procedures, which would allow for significant reductions in the corresponding transaction costs faced by businesses. 29. It is important to note that in order to establish the administrative procedures to be prioritized during this reform process SPIG has performed consultations with various civil society, private sector and government organizations represented at the National Competitiveness Center. A higher priority has been given to those procedures that are more frequently used and for which administrative improvements such as the elimination of unnecessary steps or the possibility of completing the corresponding transactions on-line, would be expected to have a larger impact on the enterprise sector or the general population. 30. Electronic government and commerce. There are important synergies between the GOP’s program to reduce red tape and its actions to foster the development of electronic commerce. The latter is important because it should contribute to increase domestic competition and thus promote private sector competitiveness. Synergies between the development of electronic government and that of electronic commerce are related to the fact that some of the technical developments and regulatory changes needed to allow businesses to transact electronically with the Government can also facilitate on-line transactions between private parties. Most notably, establishing a modern regulatory framework to govern the use of electronic signatures is key both for facilitating on-line transactions involving government agencies – e.g. related to electronic procurement, on-line export and import procedures, etc. – and for fostering the development of electronic commerce. In this respect, in consultations with various relevant stakeholders, including

6 The new registration system does not apply to firms for which environmental or other public safety concerns imply the need for prior government inspections.

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representatives of the private sector, the GOP has already drafted legislation which Congress is expected to examine during the current legislature. Complementary efforts are also being made to modernize the legal framework governing electronic commerce and electronic storage. Improving labor productivity by upgrading workers’ skills 31. The GOP has recently made important efforts to modernize its policy and institutional framework in the area of worker training. These reforms should contribute to Panama’s international competitiveness by upgrading the skills of the workforce and consequently increasing labor productivity. In particular, the new framework should allow the public and private supply of training services to respond more closely to changing private sector and labor market needs. These include the expected increase in the demand for semi-skilled and skilled labor resulting from investments associated with the canal expansion project and the FTA with the U.S. 32. Policy and institutional framework. Through its Decree Law 8 of February 2006, the Government has set a new framework for promoting and strengthening the supply of training services. Decree Law 8 establishes that national training policies need to be formulated and implemented under the principles of pertinence to the needs of the private sector and the labor market, diversity of public and private supply, efficiency, transparency and accountability. The Law also mentions the need to respect the principles of equity and social inclusion, mandating the need for training policies to offer opportunities for workers and entrepreneurs at all levels and in all sectors of the economy, with a special emphasis on those affected by poverty, unemployment and informality. 33. The new framework gives a leadership role to a restructured National Training Institute (“Instituto Nacional de Formación Professional y Capacitación para el Desarrollo Humano,” INADEH), which is put in charge of the design and implementation of national training policies, and is to be governed by a Board where the Government, employers and workers have equal representation. Some of the key responsibilities attributed to INADEH are the implementation of new systems for the evaluation and accreditation of public and private providers, and for the certification of workers participating in competency-based training. To fund the implementation of the new training policy, the Government has consolidated all public training resources in a new National Fiduciary Training Fund, to be managed by INADEH. So far, INADEH’s overall budget has been increased from about $ 8 million in 2005 to $88 million in 2007, with the bulk of the increase allocated to the upgrading and rehabilitation of infrastructure and equipment. 34. Program implementation. After the establishment of INADEH’s tripartite governing Board and the appointment of a General Director – who was confirmed unanimously by the National Assembly – a first key action has been the launch, in October 2006, of the National Plan of Technical Training. This Plan is aimed at providing short-term training courses to 200,000 workers in selected priority areas which were determined on the basis of public consultations, and include tourism, construction, agriculture, transport and other services. By August 2007, 145,768 workers had already been trained in the context of this Plan, which represents a significant increase with respect to the 42,000 workers that were trained by INADEH during 2006.

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35. In the context of INADEH’s quality assurance program, the institution has already performed preliminary external evaluations of 105 private training providers under the supervision of the National Commission of Quality Assurance which was created by Decree Law 8. INADEH has also launched a plan to re-design curricula and rehabilitate physical spaces in public sector training centers. These will compete with private providers in the areas where the latter find it profitable to operate, but will keep a critical role in the provision of courses to the most disadvantaged segments of the population. 36. With regard to the development of a competency-based training system, INADEH is collaborating with a bipartite non-governmental organization governed by labor and private sector representatives – the Labor Foundation (“Fundacion del Trabajo”). Building upon the experience developed by this Foundation through a pilot program financed by IADB, INADEH intends to develop a first group of labor competency standards during the next year. The development of these standards, which should cover selected occupations from strategic sectors of the economy – e.g. tourism, construction, and agro-industry – is a first key step for launching a broader competency-based training and certification program. 37. In order to fulfill its responsibilities under the framework created by Decree Law 8, INADEH has established various other partnerships with public and private sector organizations. With the National Canal Authority, for example, INADEH has signed an agreement to train workers for the Canal expansion project. In this context, 400 heavy machinery operators have already been trained and internationally certified.7 INADEH has also established a partnership with the National Competitiveness Center (CNC), to identify the most pressing private sector needs in the area of training and create mechanisms to facilitate the labor market insertion of training graduates. Finally, a key action taken by INADEH in 2007 is the signing of a cooperation agreement with the Ministry of Education (MINEDUC) to establish mechanisms for better articulating Panama’s training and formal educational systems – e.g. to create better options for graduates of training courses to re-enter formal educational programs. In particular, INADEH’s National Plan of Technical Training is being implemented to a large extent using MINEDUC’s secondary technical education centers. Moreover, INADEH is currently investing US$17.6 million in the improvement of the infrastructure of those centers, to be used both for worker training and formal technical education programs. A key future action in this context is the expected completion, in the first semester of 2008, of new technical training facilities in 22 technical education centers managed by MINEDUC.8 Increasing business productivity by fostering innovation 38. In December 2005 the GOP issued its National Strategic Plan for the Development of Science, Technology and Innovation 2006-2010, which was based on consultations, by means of thematic and transversal working groups, with representatives from government, academia and the private sector.9 The Plan aims at accelerating productivity growth and 7 Similar agreements have been signed with the chambers of industry for the tourism and construction sectors, as well as with individual private companies (e.g. Tata, Toyota, Carterpillar). 8 The new technical training and educational facilities will cover the areas of construction, welding, electricity and mechanics. The 22 centers in which they are located are distributed across Panama’s nine provinces. 9 After being approved by the National Commission of Science, Technology and Innovation (CONCYT) and the Inter-ministerial Council of Science, Technology and Innovation (CICYT), the Plan was officially

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enhancing competitiveness by increasing Panama’s relatively low investments in innovation and expanding the country’s human resources involved in research and development (R&D) activities. The Plan recognizes that the State has an important role to play in financing public investments in R&D – e.g. in universities and research centers – as these allow for developing human resources and a physical infrastructure that are critical for facilitating private sector investments in innovation, including those aimed at absorbing knowledge generated abroad which is especially important for a small open economy such as Panama. The Plan also argues for an active role of the State in co-financing private sector investments in innovation and promoting cooperative projects involving private firms together with local or foreign research institutions. 39. Support for R&D and Innovation. Among the most critical actions contemplated in the Plan is the expansion of matching grant funds to finance R&D and private sector innovation projects, and of scholarship programs aimed at increasing the number of local researchers. The Plan emphasizes the use of transparent technical evaluation mechanisms for selecting R&D and innovation projects subject to public financing. Similarly, merit-based mechanisms are to be used for selecting the beneficiaries of scholarship programs. The proposed matching grants for R&D and innovation are similar to successful programs implemented in Chile, Mexico and Costa Rica, as well as in other regions of the world – e.g. Finland.10 40. Another key aspect of the Plan is the proposed creation of a National Research System which would establish monetary incentives aimed at strengthening the country’s principal research centers and at increasing the number and the quality of professionals dedicated to research and development activities. Draft legislation to create this system has already been sent to Congress. The mechanisms to promote research activities that are incorporated in the proposed legislation are similar to those already implemented in Argentina, Chile, Colombia, Mexico and Brazil. The funds to be destined to the new system would be allocated using transparent technical evaluation mechanisms similar to those used for selecting the R&D and innovation projects financed through matching grants. Complementing the above actions and with the objective of strengthening Panama’s human resources for R&D, the Plan also includes efforts to attract top Panamanian and foreign researchers to the country by means of offering temporary research grants, as well as a program to improve the teaching of sciences in schools, in cooperation with the Ministry of Education. 41. Program Implementation. The implementation of the Plan has been assigned to the National Secretariat for Science, Technology and Innovation (SENACYT), under the supervision of an Inter-Ministerial Council. To that end, the GOP has significantly increased the budget allocation for SENACYT’s R&D and innovation activities, from

adopted by the Council of Ministers through its Resolution 104 of December 21 of 2005. The consultations that led to the preparation of the Plan included working groups in the areas of agriculture, industry and energy, health, education, engineering, biosciences, basic sciences, and social sciences. 10 The allocation of public resources based on scientific merit as evaluated by expert peer reviewers was incorporated in the new Public Procurement Law (Law 22). Matching grant programs such as those proposed in the Plan have been considered best practices by World Bank analyses – e.g. Maloney and Perry (2005), pp. 36-37.

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about $1 M. to $14 M between 2005 and 2007.11 In particular, the value of the R&D and innovation projects approved for financing through matching grants has increased from $0.88 M in 2004-2005 to $5.0 M during 2006 and the first eight months of 2007.12 Similarly, funding for the graduate scholarship programs managed by SENACYT has increased from $0.3 M. in 2005 to $4.6M. in 2007. It is worth noting that the very selective technical and merit-based evaluation mechanisms used by SENACYT have been reflected in the approval of only a fraction of the applications that have been received for these various programs. 42. Given that investments in science and technology have a long maturation process and since SENACYT’s matching grant and scholarship programs were introduced fairly recently – e.g. only 2 innovation projects and 8 R&D projects financed by SENACYT had been completed by June 2007 – it is probably too early to assess the impact of these programs. However, SENACYT estimates that most if not all the projects supported under the innovation program will generate technological innovations in the form of new products, new services, or significant improvements in existing products or services. Moreover, the R&D projects supported through matching grant funds have already generated one patent, 7 research articles and 28 scientific products. B. The Public Financial Management Program 43. As noted earlier, addressing challenges in public financial management (PFM) will help to enhance the environment for investment and business development. It will also contribute to sustaining fiscal discipline and increasing the impact of public spending. To support that endeavor, the World Bank and the Inter-American Development Bank recently completed a Country Financial Accountability and Procurement Assessment Report (CFAA/CPAR, FY07), which looked into the performance of PFM systems (Box B).

11 These figures include the budget for graduate scholarship programs managed jointly with the Human Resources Institute (IFARHU): the “Programa Nacional de Investigadores” and the “Excelencia Profesional” programs. It is worth noting that SENACYT’s managerial efficiency has also increased significantly, as illustrated by the fact that between 2005 and 2006 the institution’s overhead costs dropped by 5 percent while investment expenditures increased by 150 percent. 12 This includes the “Innovacion Empresarial” and “Investigacion y Desarrollo” programs.

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44. Two pillars (reform of public finance and modernization of the State) of the GOP’s Strategic Vision lay out the key areas of PFM strengthening and transparency. The Government’s program to regain fiscal stability consists, among other measures, of (i) the rationalization of public expenditures, including avoiding unnecessary expenses, with transparent, effective and efficient public procurement and contracting mechanisms, (ii) tax reform geared to capturing more resources through a fairer tax structure and a more effective tax administration; (iii) improved management of the budgetary system geared to achieve more productive investments, (iv) provision of accurate fiscal information through transparent accounting standards and responsible management of accounts payable. The State reform and modernization area includes actions in various fronts, including (i) ensuring transparency and eradicating corruption from the public sector, and (ii) redesigning the government’s functions by eliminating obsolete activities, simplifying and reducing bureaucratic dealings, and modernizing administration through improved staff professional training. 45. The CFAA/CPAR provides a comprehensive view of the status of public financial management systems and institutions in Panama. The following paragraphs, in turn, present information on selected aspects of the GOP’s reform program that are directly related to the proposed DPL operation.

Box B. Public Financial Management

The performance of public financial management (PFM) systems including public procurement is a critical factor for fiscal discipline, strategic allocation, operational efficiency and transparency in use of public funds. The Bank’s 2007 Country Financial Accountability and Procurement Assessment Report (CFAPAR) concludes that the PFM system in Panama possesses a number of strengths that contribute to fiscal discipline control, such as legal powers to contain budgeted expenditures, timely monitoring of budget execution data and cash flows, centralization of revenues, and adequate debt management. However, as implied by the Government strategy, certain key institutional issues require and are also now getting attention.

With respect to the fiscally sustainable strategic allocation of resources, the initiatives underway to develop a medium-term budget framework should continue, with particular emphasis on the operational and transparent reconciliation of the “top-down” fiscal framework and the “bottom-up” budgeting process (i.e., costed strategic plans with aligned investment programs), and on better control of in-year budget modifications to enhance the credibility of the original budget as the main tool for policy implementation.

In terms of operational efficiency, government procurement could be optimized under the framework of a comprehensive public procurement strategy comprising, among others, cost reduction strategies (price benchmarking, consolidation for economies of scale) and more efficient procedures (including basic tools such as standard documents, manuals and guidelines). The Government is actively moving in that direction with the aid of a recently approved modern legal procurement framework. On the other hand, transactional controls (both ex-ante fiscal control and the entities’ own procedures) could be streamlined and applied on the basis of risk management considerations, and complemented by strengthening external audit capacity. The Office of the Controller’s General (CGR) is paying increasing attention to modernization of ex-ante and ex-post controls as central pieces to its multi-annual strategic plan. The Ministry of Finance, in turn, is strengthening treasury and information systems to reduce payment arrears.

Concrete actions have been taken recently to enhance transparency of public finances, such as the increase in information that is made publicly available and the legal protection given to rights of access to that information. These are good foundations to continue improving public financial information, with a view to reaching convergence with international practice, in areas such as tax and payment arrears, quality of financial statements, and coverage of financial audits. Progress has also been made with the operation of the electronic procurement system (Panamacompra), which, under the adoption of a strategic plan to complete its development and implementation, will help ensure a smooth transition to an electronic public procurement marketplace.

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Consolidating fiscal reform through improved revenue and debt policy and management 46. As noted earlier, the fiscal package implemented in 2005 with the approval of the Fiscal Equity Law (Law 6, February 2005) and its implementation rules (October 2005), contributed –along with other key factors– to relevant short-term outcomes, such as bringing the NFPS deficit below 1 percent of GDP in 2006 and the consolidated public debt below 58 percent of GDP in 2006. The fiscal correction helped to set the ground for other medium-term efforts on the administrative side, both for revenue and debt management. 47. Tax administration. During this decade, MEF’s General Revenue Directorate (DGI) has increasingly enhanced the operation of tax information systems with a view of facilitating taxpayer compliance and assessment, objectives that aim at both reducing private sector transaction costs and incrementing efficiency in the collection of government revenues. In terms of tax filing, the DGI recently undertook significant efforts to foster on-line presentation of income taxes, including an upgrade of the information system (e-Tax) coupled with an awareness campaign and user training programs. In 2006, the fraction of income tax declarations presented on-line increased to 24 percent for persons (up from 8 percent the previous year) and 36 percent for firms (up from 18 percent the year before). Looking ahead, and building upon the early successful experiences with on-line tax declaration, the DGI intends to foster and increase on-line tax payments. Plans are also initiating to overhaul the system for recovery of tax arrears, including actions to clean the databases on historic arrears. 48. In the audit and investigation front, the DGI adopted a new tax audit strategy under an organized framework that differentiates selective, structured, sectorial, and massive audit approaches in response to coverage and cost targets. The implementation tools and correlated skills for more effective audit planning and execution are being built. 49. DGI’s overall modernization program, supported by IADB, comprises other activities under six areas of work: enhancing institutional planning and management, implementing effective controls to combat tax evasion, strengthening information technology resources, improving institutional communication policies, promoting improvements in staff training, taxpayer services, and operational capacity, and strengthening internal controls. In a similar fashion, the General Directorate of Customs (DGA) is undertaking a reform program to enhance its services, operating efficiency and transparency. 50. Debt management. Recent Bank analyses suggest that in general, and particularly in comparison with other developing countries, the debt management capacity of MEF’s Public Credit Directorate (DCP) is high. As a concrete result, it is worth mentioning its capacity to take advantage of favorable conditions in international financial markets, by engaging in debt exchange and buyback operations that extended average debt maturity and lowered the exposure to interest rate and refinancing risk on external liabilities. 51. With a view of sustaining progress made and expanding its potential, the DCP plans to develop in the medium term a formal and comprehensive debt management strategy formulated on the basis of a detailed cost/risk scenario analysis, and taking into

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account considerations for development of the domestic market. The DCP has rightly approached development of the strategy as a knowledge and learning process that will enhance its debt management skills in the short term, as foundation for longer term outcomes in the reduction of risks and costs of public debt. The Bank is providing technical support to the DCP on this critical process. Discussions are also underway between DCP and CGR to improve debt management governance arrangements, by consolidating the responsibilities in the DCP with the transfer of debt servicing -which is still handled by the CGR. Enhancing fiscal transparency and financial management governance 52. Fiscal transparency. Both the MEF and the CGR issue on a timely basis the budget documentation, budget execution reports, and financial statements (complemented with information on debt and payroll), and make them available through public means such as the internet. In order to broaden the scope of those reports, the MEF and the CGR decided recently to publish on a periodical basis the calculation of fiscal balances and correlated clarifying remarks. In a healthy step towards the improvement of governance arrangements, the function of consolidating budget and accounting records was transferred effective January 2007 from the CGR (who audits the financial statements) to the MEF. Looking ahead, the GOP plans to improve the content of budgetary and fiscal data with a view of converging with international best practices. 53. The MEF has taken steps toward developing a medium term fiscal and budgetary framework, including the preparation of macroeconomic and fiscal projections, and the requirement to budget entities to develop medium-term aggregate projections of revenues, capital and recurrent expenditures with performance indicators (2007 Budget Policy). An exercise to develop multiannual sectorial investment programs is also underway. These initial efforts represent a significant overhaul of the budgeting system, which has traditionally relied upon an annual time span that is too short for strategic public investment and expenditure planning. However, as is normal in this type of undertaking, gradual implementation is called for before the medium-term frameworks are institutionalized. 54. The GOP’s plan to revise the Fiscal Responsibility Law in the near future opens a window of opportunity to support and sustain efforts to develop transparent medium-term fiscal frameworks and comprehensive fiscal information closer to international standards.13 But, in parallel to the revision of the law, the executive holds the capacity and alternate means to strengthen transparency in fiscal reporting on its own.

13 In addition to its effects on fiscal transparency, the ongoing revision of the Fiscal Responsibility Law (FRL) provides a good opportunity to root the fiscal situation within the government deficit and debt objectives. This law is aimed at providing a comprehensive legal framework as a way of ensuring that fiscal accounts remain under control and that the debt-to-GDP ratio would trend downward as long as economic growth is maintained. The positive fiscal outcomes of 2006 confirm that a fundamental change in Panama’s fiscal responsibility has happened. The credibility of a revised FRL will depend on the medium-term fiscal targets to be set, which should be ambitious enough to reduce fiscal vulnerability. Panama’s authorities are aware that the design of the FRL should avoid ambiguities and be widely understood. To that end, the Panamanian authorities have taken the time to build the political consensus to implement the needed structural reforms before the FRL would be reinstated. The credibility of this strategy would be assured since the implementation of the fiscal reform adopted in 2005 has already shown positive results.

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55. In other relevant areas, the MEF remains committed to restricting payment arrears, with a target of paying accrued expenditures within 60 days, thus enhancing the accuracy of fiscal reporting and providing more certainty for the private sector in its business transactions with the State. End-of-fiscal-year outstanding accruals already show significant reductions from the 2004 levels. The program to strengthen the National System of Public Investment (SINIP) also continues, with an emphasis on the development of the investment portfolio information system and the preparation of methodologies for project identification, formulation, assessment, control and monitoring. 56. Fiscal oversight. The CGR is aware of the constraints imposed by the ex-ante fiscal control system, and has accordingly issued guidelines and verification checklists, which aim at an orderly and consistent application of the ex-ante reviews. The document tracking and management system (SIGUEME) intends to enhance accountability and performance through the measurement of financial transaction times, such as payment delays. And, the project of electronic endorsements (e-Fiscaliza) will help reduce the times related to the physical transfer of documentation. Finally, the system of public works control (COBE) was recently rolled out to enhance monitoring of civil works contracts. 57. In terms of next steps, the CGR plans to strengthen its ex-post audit capacity by developing methodologies and building skills for the application of risk assessment and quality standards for audit planning and execution, in line with international good practice. This critical process will be aided in the short term through the initial use of computer-assisted audit techniques (CAATs) in 2007. In the medium term, the CGR also intends to design a risk-based framework for a more selective and efficient application of ex-ante fiscal controls. This revision of the fiscal control model will be a critical action towards the intended medium and long term reductions in transaction costs, both within the government and in its transactions with private sector providers of goods and services. Improving expenditure efficiency and transparency through public procurement reform 58. Public procurement represents an important share of total government expenditure and, accordingly, the GOP has prioritized procurement reform to streamline public administration and increase the efficiency of public spending. Worth highlighting are the implementation of a new Procurement Law, reform of the Public Procurement Directorate (DGCP), development of a procurement reform strategy, and support for e-procurement. 59. Regulatory framework. Under the recently enacted Public Procurement Law (Law 22 of June 27, 2006) and the swift approval of its Regulations (Executive Decree No. 366 of December 28, 2006), the DGCP has a stronger mandate. As importantly, it enjoys political support to drive the reform process. In addition to those allocated by the Government, adequate resources to support the initial phase of the reform are available through the World Bank’s Public Policy Technical Assistance Loan (PPTAL) (Annex 4), which has a specific component for this purpose. 60. The new procurement regulatory framework contains several improvements, since it has: (i) eliminated parallel frameworks applicable to several agencies (with exception of the Social Security Institute (CSS), the Panama Canal Authority (ACP) and municipal entities), which in the past hampered the application of a consistent public procurement

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system; (ii) created an autonomous DGCP, as the entity responsible for the interpretation of the law; and (iii) established several procedures and systems for promoting efficiency, economy and transparency. These procedures and systems include: (a) establishing a framework for cost reduction strategies (e.g., price benchmarking, consolidation for economies of scale), (b) creating an independent administrative tribunal to review and decide on procurement-related protests and complains, and (c) establishing a sound framework for the implementation of an e-procurement system. With a view of strengthening institutional capacity for handling procurement among the contracting agencies, during the first quarter of 2007 more than 3,500 government officials were trained on the new legal framework, including use of e-procurement system. 61. Electronic procurement. The new e-procurement system (PanamaCompra) was released in October 2005 with the objective of promoting transparency and competition in public procurement. As of early 2007, public procurement processes in all the central government and a number of decentralized entities were already taking place through the system. Since Law 22 became effective, more than 2.8 million visitors have visited the portal and more than 5,600 companies have been registered in PanamaCompra to receive business opportunities notifications as potential providers, thus benefiting the development of enterprises of different size and nature. 62. As more information is generated by the electronic procurement system, the DGCP plans to strengthen its analytical capacity to feed into procurement strategies, aided by the development of procurement monitoring & evaluation systems with performance indicators. The DGCP has also launched an outreach campaign to collaborate more effectively with the private sector and civil society organizations (e.g. with the local chapter of Transparency International), and developed a methodology to conduct surveys to determine private and public sector perceptions of the procurement system. 63. Cost savings. The DGCP has recently implemented innovative public procurement process (framework contracts) for the provision of key services and goods for the central government that, in the past, were procured in a fragmented manner. According to information estimated by the DGCP, during 2005-2006, the framework contracts produced savings for the central government of around US$30 million, while increasing competition, promoting greater transparency, and increasing the quality of the products and services. It is important to note that some of the services, such as telecommunications, were never awarded before through competitive processes. Building upon the experience with the first framework contracts, the DGCP plans to develop formal cost-reduction strategies with price benchmarking. Additionally, with a view of reducing transaction costs and enhancing procurement transparency in the medium to long term, the DGCP plans to design in the short term standard documents and other procedures to be applied by all entities subject to Law No. 22.

IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM A. Link to the Country Partnership Strategy

64. The Country Partnership Strategy (CPS) aims to provide selective, demand driven assistance that deepens the Panama-Bank partnership and helps the Government achieve its poverty and inequality reduction goals. The CPS supports four objectives which are

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aligned with the pillars and goals of Panama’s 2004-2009 Strategic Vision (Table 2). As requested by the GOP, the Bank will provide technical, financial, analytical and capacity building assistance to specific Government policies and programs which contribute to the partnership objectives. The program is designed to focus on a limited number of interrelated objectives and to make institutional capacity building a cross-cutting theme. In addition, the program anticipates that there will be a change in Government on July 1, 2009 and is set up to help provide the new Government with information on policy issues as well as access to immediate financial and technical support to bridge until a new Partnership Strategy is agreed.

Table 2: CPS Program Objectives and Select Areas of Action Panama 2004-2009 Strategic Vision

Pillar I Reduce Poverty and

Inequality

Pillar II Promote Economic Growth

and Employment

Pillar III and V Reform Public Finances and

Modernize the State

Pillar IV Develop Human

Capital

Broad objectives to which the CPS will contribute Reduce poverty, especially among rural poor and indigenous groups

Promote broad-based economic growth

Establish modern PFM systems and institutions

Improve health, nutrition, and education attainment of the poor

Selected Programs for Support • Poverty monitoring &

social assistance targeting/administration

• Red de Oportunidades program

• Land tenure security and access for the rural poor

• Competitiveness of small-scale rural producers, including access to rural finance

• Sustainable use of the Atlantic Mesoamerican Biological Corridor

• Reduce costs for doing business and improve competition through streamlined procedures and on-line processing

• Market-oriented worker training

• Technical innovation support

• More efficient urban transport in Panama City including mass transit for the urban poor

• Sustainable tourism outside Panama City

• Fiscal sustainability • Financial management

systems and fiscal transparency

• Comprehensive public procurement reform

• Efficiency and effectiveness of fiscal oversight

• Debt management and debt market development

• Tax administration

• Water and sanitation coverage for the rural poor

• Supply of integrated package of basic health and nutrition services

• Quality and coverage of preschool, basic and secondary education

Cross-cutting themes

Strengthen institutional capacity in Government entities executing Bank-financed projects to plan more strategically through improved monitoring, to execute projects effectively through more efficient public financial management systems and practices and to strengthen project sustainability. Plan for and engage through the national Government transition with analysis and offers of financial and technical support.

65. The proposed CPS lending envelop of $390-465 million over FY08-10 aims at a balanced program with about 40 to 50 percent of new lending to be channeled through the proposed programmatic Development Policy Loan series, and the remainder devoted to [7] new poverty-focused investment projects and one new policy reform technical assistance loan. Each annual DPL will support staged progress in the form of prior actions towards medium-term program outcomes related to two CPS objectives: promoting broad-based economic growth by means of measures designed to enhance Panama’s competitiveness, and establishing modern public financial management systems and institutions.

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B. Collaboration with the IMF, Other Bank Operations, and Other Donors 66. The Bank’s country team has been collaborating with the IMF in the review of macroeconomic developments, including through the sharing of Article IV Consultation documents,14 Reports on the Observance of Standards and Codes (ROSC) and Bank analytical work. The proposed DPL program is consistent with the IMF’s recent policy advice (January 2007) regarding tax policy and administration, as well as competitiveness enhancing policies associated with improvements in the business climate. 67. Comprehensive multilateral aid for Panama has been provided by the IADB, the Bank and UNDP, followed by more modest and targeted support from bilateral aid agencies. In terms of lending and technical assistance operations, the Bank and the IADB are supporting several complementary areas of the GOP’s development strategy. Thus, the Bank’s Public Policy Reform Technical Assistance Project and an IADB loan to Strengthen and Modernize Economic and Fiscal Management provide support to most of the Government initiatives aiming to improve fiscal transparency and public financial management. In addition, the proposed DPL series is complementary to a policy-based loan (PBL) that was approved by the IADB in February 2006 and a technical cooperation loan approved by the IADB in July 2006 to support investment climate and trade-related reforms. Moreover, the IADB is currently preparing an investment loan aimed at helping Panama implement trade adjustment policies in the context of the GOP’s trade-complementary policy agenda. As part of the consultations for preparation of the CPS, the Bank and IADB have gone through the CPS program to identify areas of potential synergy and agreed on collaboration approaches in both lending and non-lending activities. In the area of worker training, based on preliminary agreements with the Government, the Bank’s forthcoming Third Basic Education Project (FY08) is expected to incorporate a subcomponent aimed at providing technical assistance to INADEH in order to support the implementation of the policies outlined in Decree Law 8, and to ensure that adequate links are developed between the formal education and training systems. C. Lessons Learned 68. The Bank was one of Panama’s major development partners over much of the 1990s, a period in which the country made steady progress on structural reforms to open the economy and improve competition, strengthen fiscal sustainability and modernize the state. The Bank’s engagement dropped off dramatically between 2000 and 2004 as the Government turned away from the Bank and left much of the previous Country Assistance Strategy (FY99-01) unimplemented. The lessons learned from two adjustment loans to Panama during the 1990s15 are consistent with several general lessons captured by the former Operations Evaluations Department in its evaluations of Policy Reform Loans in the 1990s. In particular, • Multi-tranching contributes to slow program implementation, particularly if it

makes the operation overly complex. • Classical ex-post conditionality weakens reform ownership.

14 Panama is on the standard 12-month Article IV consultation cycle. 15 An Economic Recovery Loan (approved in 1992, US$120 million,) and a Public Policy Reform Adjustment Loan (1998, US$61 million).

23

• Rapidly changing policy environments are difficult to anticipate in loan design. 69. The Panama-World Bank partnership was successfully rejuvenated through the ISN (FY06-07), which was driven by the Government’s priorities and supported selected aspects of the new administration’s development strategy. An assessment completed in April 2007 by the World Bank’s Quality Assurance Group (QAG) gave high marks to the ISN analytical work for “strategic relevance” and “coherence and integration” and rated the program’s overall “internal quality” and “likely impact” to be satisfactory. QAG noted the central role the analytical reports played in shaping the lending operations and commended the significant technical assistance that took place during preparation of several reports. 70. The success of the ISN, however, is best judged by the fact that the GOP has asked that the program continue, that annual lending be increased and that the Bank expand its presence by opening a representative office in Panama. In particular, the Government has praised the responsiveness of the Bank to the administration’s development strategy and the contribution of analytical and technical assistance from the Bank. The proposed DPL series, in particular, builds on the on-going policy dialogue and World Bank support to the Government fiscal consolidation and public financial management reform program initiated through the Public Finance and Institutional Development Policy Loan. With these strong foundations, the GOP and the Bank are now ready to engage in medium-term programmatic development policy lending. As explained above, the new DPL series addresses next steps and broadens the scope in public financial management reform, and takes on important challenges to improve the country’s competitiveness. 71. The lessons learned through the Bank’s previous engagement in Panama, as well as the latest thinking on Development Policy Lending for well performing middle income countries (see Box C), have influenced the design of this DPL, which is premised on the following underlying principles: • Upfront action instead of ex-post conditionality: This loan is motivated by the

Government’s commitment to move forward in specific components of its comprehensive development program; and by specific and significant actions towards those ends.

• Support of reform program instead of specific conditionality: The DPL and the programmatic approach will support two critical Government reform programs. Within those comprehensive programs, lack of progress in a specific area can be compensated with actions in others if the overall reform programs remain on track.

• Aligning program loans with budgetary cycle. The proposed programmatic approach is designed to become a predictable low cost source of financing for the Government.

Box C. Good Practice Principles on DPLs

Principle 1: Reinforce Ownership. The operation is based on the GOP’s medium-term development strategy, Strategic Vision of Economic and Employment Development Toward 2009, which results from Panama’s engagement of democratic processes in the development of public policy. The DPL, as part of the CPS, responds to GOP requests to support specific programs and areas which reflect the outcome of national policymaking processes. The passage of a fiscal reform package and a politically difficult pension reform,

24

together with the strategic actions recently taken in the competitiveness and public financial management fronts (which form the basis for the first programmatic DPL), attest to the administration’s good track record of policy implementation. The DPL program focuses on selected policy areas that benefit from broad support, which is not to say it is exempt from risks. Risk mitigating measures have therefore been identified. The process developed with the GOP to select the focused areas of DPL support responds, in large part, to the strong policy dialogue undertaken recently around extensive analytic work. Principle 2: Agree up front with the government and other financial partners on a coordinated accountability framework. The Bank’s support is summarized in a brief and focused policy matrix, agreed with the GOP, which provides the accountability framework for the operation. The DPL program is consistent with IMF’s recent policy advice, and it supplements and reinforces the Bank’s Public Policy Reform Technical Assistance Project and IADB’s Program to Strengthen and Modernize Economic and Fiscal Management. Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances. The MEF has indicated that it intends to fill its multilateral “budget support” needs over the next years through the proposed DPL program, complementing the investment lending portfolio of other donors and the Bank. The programmatic series approach, as well as the tentative timing of each operation, was requested by the GOP. The selected policy areas covered by the DPL program are derived from the GOP’s Strategic Vision of Economic and Employment Development Toward 2009. Accordingly, the specific actions and intended outcomes also enjoy technical and political support in their respective sectors. The relevance and soundness of said actions have been assessed through Bank analytical work and follow-up activities. Principle 4: Choose only actions critical for achieving results as conditions for disbursement. The prior actions form part of an agreed accountability framework that focuses on GOP’s critical actions for achieving the program objectives, as assessed through Bank analytic work. Considering that the operation supports two large GOP programs, the matrix has been limited to the number of triggers (7) considered necessary to maintain the coherence of policy dialogue and benefit from complementarities towards the intended outcomes. Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support. The programmatic series approach and the tentative timing of each individual operation respond to the GOP’s stated financial needs. The MEF will exercise leadership in coordinating the monitoring and evaluation arrangements. Accordingly, the Bank’s supervision effort will be documented through semi-annual reviews, which will take into account progress made towards the selected outcomes and indicators in the policy matrix. D. Analytical Underpinnings 72. The focus of this lending operation is consistent with the CPS objective of helping the GOP achieve its development goals by means of providing selective, demand driven assistance to the main pillars of the Government’s Strategic Vision. As noted above, the Bank has undertaken several recent studies, including the Panama Country Financing Accountability and Procurement Assessment Report (CFAA/CPAR, FY07), that underscore the criticality of the key aspects of the Government program supported through the proposed DPL series.

V. THE PROPOSED OPERATION A. Operation Description 73. The proposed Competitiveness and Public Financial Management Development Policy Loan is the first in a programmatic series of two annual single-tranche operations

25

(US$ 75 million each). The interrelated development objectives of the DPL program are to promote broad-based growth through the enhancement of private sector competitiveness and to consolidate fiscal sustainability and public sector transparency and efficiency through the modernization of public financial management systems. The proposed program supports selective and critical actions in two major areas: (i) enhancement of competitiveness through red tape reduction, improved training policies and increased investments in innovation; and (ii) modernization of public financial management through enhancements in revenue and debt management, fiscal transparency and governance, and public procurement. The actions supported by the DPL series have been assessed through the Bank’s analytical work and, as noted elsewhere in the document and in the Government’s Letter of Development Policy (Annex 1 –pending-), they form an integral part of the Government’s economic and social development plan and the Bank’s CPS, under the objectives of promoting broad-based economic growth and establishing modern public financial management systems and institutions. 74. The proposed DPL series would support outcomes that could be attained by December 31, 2008, reflecting achievements through the final full fiscal year of the current administration. The series would provide continued support toward the medium-term objectives included in the Public Finance and Institutional Development Policy Loan (FY07), approved under the ISN on the basis of fiscal stabilization and public financial management reforms during the first two years of the Torrijos Administration (2004-2009). The programmatic framework was explained in Section III and is summarized in the matrix in Annex 2. 75. Policy actions. The key aspects of the Government program to be supported through the proposed DPL series are presented in Table 3. The table describes first a set of actions that have already been completed and which, as agreed with the Government, would be supported through the first Competitiveness and Public Financial Management Development Policy Loan (DPL). The table also presents a set of future actions that the Government intends to take during the next year, and which would be supported through the second DPL in the series. .

26

Table 3: Key Aspects of the Government Program to be supported by DPL Series

Policy Objectives

Actions Completed (before DPL I)

Future Actions (expected before DPL II)

I. Promote broad-based growth by enhancing private sector competitiveness 1. Reduce

bureaucratic red tape

2. Improve

worker training policies

3. Increase

investments in innovation

• The addition of 75 on-line Government transactions (by June 16, 2007) to the Panama Tramita internet portal (launched in May 2006).

• Approval and implementation of Law 5 (January 2007) which facilitates rapid on-line business registration through the Panama Emprende internet portal.

• Implementation of Decree Law 8 of

February 2006 as illustrated by the training of 145,000 workers during the first eight months of 2007, the completion of external evaluations of 105 training providers, and the signing of a cooperation agreement with the Ministry of Education to better articulate Panama’s training and formal educational systems.

• Increased funding for promoting

innovation through SENACYT’s matching grant programs for enterprise innovation and R&D, and graduate scholarship programs managed jointly by SENACYT and IFARHU.

• Beginning the implementation of a new system to allow for on-line completion of export and import procedures (“Ventanilla Unica Digitalizada”).

• Implementation of legal and regulatory reforms to govern the use of electronic signatures.

• Issuance of labor competency standards

for at least nine key occupations. • Modernization of training facilities in 22

technical education centers managed by the Ministry of Education

• Implementation of a National Research

System aimed at strengthening the country’s principal research centers and at increasing the number and the quality of researchers in Panama.

II. Consolidate fiscal sustainability and public sector transparency and efficiency 1. Consolidate fiscal reform through improved revenue and debt management 2. Enhance fiscal transparency and financial management governance 3. Improve expenditure efficiency and transparency through public procurement

• As part of its Modernization Program, the DGI adopted a new tax audit strategy and improved the systems to facilitate taxpayer compliance, as evidenced by the year-on-year increase in on-line filing of income tax declarations.

• The Government improved financial

management governance, as evidenced by the transfer of responsibility over consolidated financial statements from the CGR to the MEF.

• The CGR improved management of control transactions, particularly payments, as evidenced by the launch and implementation of the SIGUEME tracking system.

• The Government consolidated the

procurement framework with the issuance of Regulations to the Procurement Law, resulting inter alia in full publication in PanamaCompra of procurement notices by all central government and several decentralized entities.

• Implementation by the MEF of scenario analysis for measuring cost and risk of financing strategies, as support to the development of a debt management strategy.

• Strengthened fiscal transparency and

planning norms through the revised Fiscal Responsibility Law or alternate means.

• Modernized audit function through the use of computer-assisted audit techniques in financial audits of at least five entities.

• Issuance by the DGCP of standard

procurement documents for public sector entities subject to Procurement Law No. 22

27

76. Intended medium term outcomes. The measures supported by the proposed DPL series represent important steps toward achieving medium-term objectives of selected components of the Government program. The intended end-of-series outcomes resulting from the DPL Program, which are consistent with the CPS outcomes, are presented in Table 4, together with the corresponding indicators to be measured.

Table 4: Expected Program Outcomes and Indicators

Medium term CPS outcomes to which the DPL directly contributes (by end 2008)

Indicative Outcome Indicators

I. Competitiveness • Reduced time to comply with government

regulations. • Increased coverage of the Panama Tramita

internet portal (200 on-line transactions made available by end 2008, up from 75 in June 2007).

• Reduced costs of Doing Business in Panama as measured by the WB through end 2008 (time needed to start a business reduced from 19 to 5 days , time for exporting reduced from 16 to 12 days).

• Expanded worker training programs adapted to emerging labor market needs.

• Increase in the yearly number of workers that complete training courses funded by INADEH, from 42,000 in 2006 to 200,000 in 2008.

• Training programs for certifying labor competencies offered by accredited providers for at least 9 occupations from the sectors of hotels and tourism, construction, manufacturing and agro-industry.

• Increased investments in R&D and innovation. • Increase in Panama’s per capita R&D from $11.8 in 2005 to $20 in 2008 (excluding the Smithsonian Institution).

• Increase in the number of full time researchers in Panama, from 312 in 2005 to 410 in 2008 (excluding the Smithsonian Institution).

• Increase in the share of R&D personnel with master or PhD. degrees, from 23.5% in 2005 to 33.3% in 2008 (excluding the Smithsonian Institution).

II. Public Financial Management • Improved debt sustainability. • Total consolidated NFPS debt reduced to 54% of

GDP or less. 16 • Enhanced performance of tax administration

resulting from improved filing, audit and collection procedures.

• Progress in PEFA indicator No. 14. • Reduction in Doing Business sub-indicators for

the time spent filing and paying taxes. • Improved capacity to manage debt. • Formal debt management strategy and a

consolidated system for public debt management in the MEF.

• Public availability of medium-term fiscal framework and fiscal information, closer to international standards.

• Progress in PEFA indicators Nos. 6, 12, or 25.

• Reduced payment arrears. • Outstanding accruals do not surpass 10% of central government expenditures.

• Increased efficiency of internal controls. • Decreases in CGR’s average processing times for

16 This is a Government target that is supported by the actions recognized under the DPL series. Evidently, there are other macroeconomic factors that will influence the decline of the debt-to-GDP ratio, as well as some risks discussed in Section VI (Part F).

28

expenditure operations. • Improved capacity to conduct audits. • Use of CAATs in at least five audit engagements. • Improved participation of enterprises in public

procurement. • Increments in registered bidders in

PanamaCompra. • Improved public procurement management with

a view of reducing transaction costs. • Issuance of standard documents.

• Increased savings in publicly procured goods and services.

• Reduction in average unit cost of key items.

77. To help measure performance in the area of competitiveness enhancing policies the DPL Program will take advantage of the following data sources:

• The Doing Business reports produced by the World Bank; • Ad-hoc reports to be prepared by SPGI and INADEH, and SENACYT. • SENACYT’s annual report on Indicators of Scientific and Technological Activities. 78. To help measure performance in public financial management, the DPL Program adopts international frameworks of reference, as follows: • the Public Financial Management Performance Measurement Framework

developed by the Public Expenditure and Financial Accountability (PEFA) group, an international partnership including, among others, the World Bank and the IMF;17

• the sound practice benchmarks documented in the “Guidelines for Public Debt Management” by the World Bank and the IMF;18 and

• the Baseline Indicators Tool developed by the OECD/DAC-World Bank Round Table on Strengthening Procurement Capacities in Developing Countries.19

79. Expected Benefits. As noted, the actions supported by the proposed DPL program are expected to benefit Panama by contributing to macroeconomic stability, increasing economic growth through improvements in competitiveness, and enhancing the impact of Government programs through strengthened public financial management. These outcomes should contribute to building investor confidence and improve the foundations for sustained broad-based growth. 80. The DPL series is also expected to help Panama obtain better financial terms for its public borrowings and diversify its external sources of finance. Indeed, while Panama is a creditworthy country with ample access to world capital markets, the terms and conditions on IBRD loans tend to be significantly better than the terms that are currently available to Panama in private financial markets. Access to IBRD finance, therefore, would help reduce Panama’s debt servicing burden. Moreover, the proposed DPL series would help diversify Panama’s sources of finance and thus reduce the potential volatility of changing financial market conditions.

17 The Framework includes a set of 28 indicators to support the government and other stakeholders in monitoring the performance of country PFM systems, processes and institutions over time, and accordingly contributing to the PFM modernization process (PEFA, 2005) (www.pefa.org). 18 (http://treasury.worldbank.org/web/pdf/guidelines_2001_english.pdf). 19 The indicators intend to provide a standardized instrument for developing countries and donors to assess the quality and effectiveness of national procurement systems.

29

VI. OPERATION IMPLEMENTATION

A. Poverty and Social Impacts 81. Whereas the specific actions supported by this DPL are not likely to have direct significant poverty and social consequences, they are expected to help strengthen the microeconomic and good governance foundations for sustained broad-based economic growth in Panama. Thus, through its effects on growth, the program could have important spillover effects on poverty reduction that would emerge over the long term, as the economy expands in response to increased private sector competitiveness and improved public financial management. Moreover, the policy actions supported through the proposed DPL are a critical component of a broader Government program which has, among its core objectives, the significant reduction of poverty in Panama. In other words, the proposed DPL series is an important complement to on-going and planned investment projects that are directly targeted at nearer-term gains in poverty reduction. In particular, with Bank support through other components of the CPS, the GOP is implementing actions to improve the targeting of social expenditures, including by means of a Conditional Cash Transfer program that is intended to increase access to education and other social services among the poor. Moreover, the Bank is also committed to support the Government’s efforts to promote sustainable and broad-based rural development by means of investment projects in the areas of land administration, rural productivity and microfinance. B. Environmental Aspects 82. Specific actions supported by this DPL are not expected to have significant effects on the environment, forests or other natural resources. It is worth noting, in any case, that the CPS contemplates the preparation of a strategic Country Environmental Analysis (CEA) for FY08, with the objective of helping to strengthen Panama’s national institutional capacity to identify and address overall environmental policy and regulatory issues. C. Implementation, Monitoring and Evaluation 83. The Ministry of Economy and Finance (MEF) will be responsible for the implementation of the proposed DPL as well as for coordinating the actions among the concerned line agencies and decentralized institutions, especially the Presidential Secretariat of Government Innovation (SPIG), the National Training Institute (INADEH), the National Secretariat for Science, Technology and Innovation (SENACYT), the Office of the Controller General (CGR), and the General Public Procurement Directorate (DGCP). Together with MEF, these institutions will be accountable for collecting the necessary data to assess implementation progress and reporting it to the Bank, both with regard to the subsequent actions of the Government’s program and in terms of the goals and monitoring indicators of the program. As noted earlier, certain international frameworks of reference will be used to help measure achievement of intended DPL outcomes. 84. Semi-annual reviews will take place between the MEF and the Bank Team, aimed at identifying areas of strengths and weaknesses, and possible assistance needed to

30

maintain momentum toward the planned medium-term outcomes and address possible downside risks. A mid-term review will be made in the context of the CPS Progress Report preparation, when the Government and the team will jointly evaluate progress towards achieving the outcomes laid out for the DPL program and the CPS at large. D. Fiduciary Aspects 85. In general, the public financial management and public procurement systems are adequate for this operation. As noted earlier, the Bank recently prepared a CFAA/CPAR to document the current state of public financial management in the country, including the actions taken by the current administration to further increase transparency. While challenges remain -hence the DPL focus-, the Government is moving ahead to further strengthen its public fiduciary control framework, as described previously in Section III (part B). In connection to this process, the Bank is engaged in policy dialogue with the Government to follow up on priorities identified in the CFAA/CPAR. Drawing from this work, and as is made evident in Section IV and the policy matrix in Annex 2, the DPL program supports key actions to continue strengthening public financial management. E. Disbursements 86. The Bank would make the single loan disbursement to the MEF’s Treasury Single Account (“Cuenta 210”). Since this account centralizes government revenues for financing of government spending, upon its deposit the DPL disbursement will become available to finance budgeted expenditures. The account is denominated in US Dollar, which has legal tender in the country, and is held in the National Bank of Panama (BNP), which is the financial agent of government. Based on the review of external audit reports and the experience with special accounts for investment lending, nothing came to the attention of the Bank that would indicate that the banking control environment into which the loan proceeds will flow is other than adequate.20 Upon the Bank’s request, the MEF would provide the Bank with a written confirmation of the described transaction. F. Risks and Risk Mitigation 87. The staged approach of stepped up partnership with Panama, building from an Interim Strategy (FY06-07) to a full Country Partnership Strategy, and from a stand-alone DPL operation to the proposed programmatic series, has facilitated the tailoring of program commitments to evolving developments while reducing risk. Panama is in a stronger macroeconomic position than it was when the ISN was agreed, and the political situation has also proved conducive to advancing on policy reforms in line with the administration’s Strategic Vision. In addition, the majority of activities proposed in the CPS, including the present DPL series, have a strong foundation in on-going policy dialogue supported by extensive analytical work. 88. Though macroeconomic vulnerabilities have diminished as growth has accelerated, debt has fallen as a share of GDP, and fiscal balances have improved, the medium-term

20 An unqualified (“clean”) audit opinion was issued by external auditors on BNP’s financial statements as of December 31, 2005, which was prepared in accordance with International Financial Reporting Standards.

31

outlook is not completely without risks. The CPS and DPL strategies take into account potential risks in three areas: economic, political and institutional capacity. 89. Economic. Panama is currently experiencing a major economic boom, in part fueled by external resource inflows, especially in the real estate market. This raises the possibility of overheating the economy and of introducing various distortions, including non-tradable goods inflation and wage growth, above levels supported by productivity growth, which would have negative consequences on the competitiveness of the Panamanian economy. However, by keeping the economy open and extending the openness through free trade agreements, including with the United States, the pressures on the economy are expected to be relieved. The Bank is supporting the Government in analysis of economic challenges and possible actions in the Country Economic Memorandum, a draft of which will be discussed with Government in late 2007 for completion in 2008. In addition, just as the country’s openness and economic structure have allowed Panama to benefit from the recent global upturn, the country is vulnerable to an economic global slowdown which could have a negative impact on canal trade, exports and related economic activities. 90. Although the DPL program is not financing the canal expansion project, this large undertaking brings the risk that completion of the project will exceed the budget, or that Panama Canal Authority revenues will fall short. This could potentially increase borrowing needs and increase demand for materials and labor in what is already expected to be a tight market. However, the authorities are confident that this risk is mitigated by the thorough preparation of the project, which aims to ensure that construction costs will not surpass projections. The budget estimates include contingencies of 20 percent to deal with unforeseen events and price escalations. In addition, effective July 1, 2007, the Canal Authority raised its tolls, which will generate an estimated $1.3 billion in additional revenue during 2007-2014 (beyond original financing plans), while still leaving scope for future toll increases as needs arise. Moreover, the Bank will support the Government in monitoring fiscal sustainability and potential vulnerabilities through the Country Economic Memorandum/Investment Climate Assessment (CEM/ICA) and the DPL series. 91. Another potential source of vulnerability is Panama’s relatively high level of external debt. This potentially renders the country vulnerable to increases in international interest rates or otherwise tighter capital market conditions. This risk, however, is offset to a considerable extent by three factors: • The GOP’s sound fiscal management which has led to substantial primary

surpluses causing debt to decline. The Bank will continue to support the Government in these areas through the DPL series.

• Panama has considerable reserves and assets which offset its debt liabilities. For example, Panama’s Trust Fund for Development (Fondo Fiduciario), which was established in 1995 with funds collected from the privatization of public enterprises and the sale of some reverted areas had assets equivalent to 8.5% of GDP in 2004. The Canal itself is another significant Government asset. These assets contribute to a substantially lower net debt.

• The GOP has been improving debt management and will continue these efforts with technical assistance from the Bank’s Treasury.

32

92. Per Bank policy, future DPLs in the proposed programmatic series can only go forward in the context of an appropriate macroeconomic framework, which will therefore be re-assessed as a subsequent operation in the series is prepared. 93. Political: President Torrijos enjoys wide popularity and is supported by a majority in the Legislative Assembly. His Government will complete its term of office on June 30, 2009. Under Panama’s Constitution, the president may not be elected to a consecutive term. Traditionally, new administrations have upon taking office made substantial changes within the civil service, especially in line ministries. These staffing changes can make an orderly transition challenging and can be disruptive to the sustainability of on-going programs, including those supported by the DPL series. The Bank is, of course a small actor in this process. As recommended by QAG, the Bank will support the transition by preparing a set of policy notes to provide presidential candidates with an additional source of information about development challenges and on-going policies and programs. In addition, the Bank will coordinate with the new administration on training needs, especially with respect to project implementation. 94. Institutional capacity. Given traditional limitations in the capacity of public sector institutions, including civil servants’ comfort in maintaining the status quo, the GOP’s drive to sustain the reform agenda may be slowed down. Despite these capacity constraints, a number of champions of reform showing already a good track record -with critical support from authorities- have been identified. The Bank is strongly supporting through policy advice and technical assistance these leaders. In the process, synergies between the policy agenda supported by the DPL and the investment lending operations by the Bank and partners have been identified and are being exploited. This effort will be complemented by the GOP’s own mechanisms to raise awareness of the issues to be addressed and potential impact of reforms.

33

ANNEXES ANNEX 1. LETTER OF DEVELOPMENT POLICY

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egul

ator

y re

form

s to

pro

mot

e th

e de

velo

pmen

t of

elec

tron

ic

com

mer

ce, f

or e

xam

ple

by is

suin

g ne

w le

gisl

atio

n on

ele

ctro

nic

sign

atur

es.

Act

ion

Indi

cato

r: L

aw p

assa

ge o

r al

tern

ate

mea

ns to

reg

ulat

e th

e us

e of

ele

ctro

nic

sign

atur

es.

Red

uced

bur

eauc

ratic

red

tape

for

pr

ivat

e bu

sine

sses

as

illus

trat

ed b

y:

• A

t lea

st 2

00 o

n-lin

e tr

ansa

ctio

ns

mad

e av

aila

ble

thro

ugh

Pan

ama

Tram

ita (

from

75

in J

une

2007

).

• R

educ

tion

in D

oing

Bus

ines

s in

dica

tor

for

the

time

need

ed to

st

art a

bus

ines

s to

less

than

5 d

ays

(fro

m 1

9 da

ys in

Jan

uary

200

7).

• R

educ

tion

in D

oing

Bus

ines

s in

dica

tor

for

time

for

expo

rtin

g to

12

day

s (f

rom

16

days

in J

anua

ry

2007

).

2. I

mpr

ove

labo

r pr

oduc

tivity

by

upgr

adin

g w

orke

rs’

skill

s

•

Impl

emen

tatio

n of

Dec

ree

Law

8

of F

ebru

ary

2006

as

illus

trat

ed b

y:

a) th

e pr

ovis

ion

of tr

aini

ng c

ours

es

to m

ore

than

145

,000

wor

kers

In a

ccor

danc

e w

ith D

ecre

e L

aw 8

, IN

AD

EH

will

: a)

issu

e la

bor

com

pete

ncy

stan

dard

s fo

r at

leas

t ni

ne k

ey o

ccup

atio

ns f

rom

the

Impr

oved

wor

ker

trai

ning

pol

icie

s as

in

dica

ted

by:

• In

crea

se in

num

ber

of w

orke

rs

trai

ned

from

42,

000

in 2

006

to

39

duri

ng th

e fi

rst e

ight

mon

ths

of

2007

(in

com

pari

son

with

42,

000

wor

kers

in 2

006)

; b)

the

com

plet

ion

of e

xter

nal p

relim

inar

y ev

alua

tions

of

105

priv

ate

trai

ning

pr

ovid

ers

by S

epte

mbe

r 20

07; c

) th

e si

gnin

g of

a c

oope

ratio

n ag

reem

ent w

ith th

e M

inis

try

of

Edu

catio

n to

bet

ter

artic

ulat

e Pa

nam

a’s

trai

ning

and

for

mal

ed

ucat

iona

l sys

tem

s.

sect

ors

of h

otel

s an

d to

uris

m,

cons

truc

tion,

man

ufac

turi

ng a

nd

agro

-ind

ustr

y; b

) co

mpl

ete

the

mod

erni

zatio

n of

trai

ning

fac

ilitie

s fo

r th

e ar

eas

of c

onst

ruct

ion,

w

eldi

ng, e

lect

rici

ty a

nd m

echa

nics

in

22

tech

nica

l edu

catio

n ce

nter

s m

anag

ed b

y th

e M

inis

try

of

Edu

catio

n. A

ctio

n In

dica

tors

: ap

prov

al o

f sta

ndar

ds b

y N

atio

nal

Com

mis

sion

of C

ompe

tenc

y St

anda

rds;

del

iver

y by

IN

AD

EH

of

mod

erni

zed

trai

ning

faci

litie

s to

the

Min

istr

y of

Edu

catio

n.

200,

000

in 2

008.

•

Tra

inin

g pr

ogra

ms

for

cert

ifyi

ng

labo

r co

mpe

tenc

ies

are

bein

g of

fere

d by

ext

erna

lly e

valu

ated

pr

ovid

ers

for

at le

ast 9

oc

cupa

tions

fro

m th

e se

ctor

s of

ho

tels

and

tour

ism

, con

stru

ctio

n,

man

ufac

turi

ng a

nd a

gro-

indu

stry

(s

uch

labo

r co

mpe

tenc

y st

anda

rds

and

corr

espo

ndin

g tr

aini

ng

prog

ram

s ar

e no

t yet

ava

ilabl

e in

20

07).

3. I

ncre

ase

busi

ness

pr

oduc

tivity

by

fost

erin

g in

nova

tion

•

Incr

ease

d fu

ndin

g fo

r pr

omot

ing

inno

vatio

n th

roug

h: a

) m

atch

ing

gran

t pro

gram

s m

anag

ed b

y th

e N

atio

nal S

ecre

tari

at fo

r Sc

ienc

e,

Tech

nolo

gy a

nd I

nnov

atio

n (S

EN

AC

YT

), w

hich

in 2

007

fina

nced

ent

erpr

ise

inno

vatio

n an

d R

&D

pro

ject

s to

talin

g $3

.8 M

, co

mpa

red

to $

1.2

M in

200

6, $

0.7

M in

200

5 an

d $0

.18

M in

200

4

(“In

nova

cion

Em

pres

aria

l” a

nd

“Inv

estig

acio

n y

Des

arro

llo”

prog

ram

s, in

clud

ing

“clu

ster

s”);

b)

incr

ease

d bu

dget

for

gra

duat

e sc

hola

rshi

p pr

ogra

ms

man

aged

jo

intly

by

SEN

AC

YT

and

the

Hum

an R

esou

rces

Ins

titut

e (I

FAR

HU

), f

rom

$0.

3 M

. in

2005

to

$3.

1 M

. in

2006

and

$4.

6M. i

n 20

07 (

“Pro

gram

a N

acio

nal d

e In

vest

igad

ores

” an

d “E

xcel

enci

a Pr

ofes

iona

l” p

rogr

ams)

.

• In

acc

orda

nce

with

the

Scie

nce,

T

echn

olog

y an

d In

nova

tion

Nat

iona

l Str

ateg

ic P

lan

(200

6-20

10),

the

Gov

ernm

ent w

ill

impl

emen

t a N

atio

nal R

esea

rch

Syst

em a

imed

at s

tren

gthe

ning

the

coun

try’

s pr

inci

pal r

esea

rch

cent

ers

and

at in

crea

sing

the

num

ber

and

the

qual

ity o

f re

sear

cher

s in

Pa

nam

a. A

ctio

n In

dica

tor:

Law

pa

ssag

e or

alte

rnat

e m

eans

to

crea

te a

Nat

iona

l Res

earc

h Sy

stem

in

Pan

ama.

Incr

ease

d in

vest

men

ts in

inno

vatio

n as

mea

sure

d by

: •

Incr

ease

in R

&D

exp

endi

ture

s pe

r po

pula

tion,

fro

m $

11.7

6 in

200

5 to

$20

in 2

008

(exc

ludi

ng th

e Sm

ithso

nian

Ins

titut

ion)

. •

Incr

ease

in th

e nu

mbe

r of

ful

l tim

e re

sear

cher

s in

Pan

ama,

fro

m

312

in 2

005

to 4

10 in

200

8 (e

xclu

ding

the

Smith

soni

an

Inst

itutio

n).

• In

crea

se in

the

shar

e of

R&

D

pers

onne

l with

mas

ter

or P

hD.

degr

ees,

fro

m 2

3.5%

in 2

005

to

33.3

% in

200

8 (e

xclu

ding

the

Smith

soni

an I

nstit

utio

n).

40

II. C

onso

lidat

e fi

scal

sus

tain

abili

ty, t

rans

pare

ncy

and

effi

cien

cy th

roug

h m

oder

nize

d pu

blic

fina

ncia

l man

agem

ent s

yste

ms

1.

Con

solid

ate

fisc

al r

efor

m

thro

ugh

impr

oved

re

venu

e an

d de

bt

polic

y an

d m

anag

emen

t

• A

ppro

val o

f Fi

scal

Equ

ity L

aw

(Law

6, F

eb. 2

005)

and

its

impl

emen

tatio

n ru

les

(Oct

. 20

05).

• A

s pa

rt o

f its

Mod

erni

zatio

n Pr

ogra

m, t

he D

GI

adop

ted

a ne

w

tax

audi

t str

ateg

y an

d im

prov

ed th

e sy

stem

s to

fac

ilita

te ta

xpay

er

com

plia

nce,

as

evid

ence

d by

the

year

-on-

year

incr

ease

in o

n-lin

e fi

ling

of in

com

e ta

x de

clar

atio

ns.

• In

acc

orda

nce

with

ME

F’s

Publ

ic

Cre

dit m

oder

niza

tion

plan

s, a

kn

owle

dge

and

lear

ning

pro

gram

w

ill b

e im

plem

ente

d to

sup

port

de

velo

pmen

t of

the

debt

m

anag

emen

t str

ateg

y. A

ctio

n In

dica

tor:

The

impl

emen

tatio

n of

sc

enar

io a

naly

sis

for

mea

suri

ng

cost

and

ris

k of

fina

ncin

g st

rate

gies

.

• Im

prov

ed d

ebt s

usta

inab

ility

, as

mea

sure

d by

the

redu

ctio

n in

tota

l co

nsol

idat

ed N

FPS

debt

to 5

4%

of G

DP

or le

ss, f

rom

65.

9% in

20

04.

• E

nhan

ced

perf

orm

ance

of

tax

adm

inis

trat

ion

resu

lting

fro

m

impr

oved

fili

ng, a

udit

and

colle

ctio

n pr

oced

ures

, as

mea

sure

d by

pro

gres

s in

PE

FA

indi

cato

r N

o. 1

4 (f

rom

D+

to C

or

bette

r) an

d re

duct

ion

in D

oing

B

usin

ess

sub-

indi

cato

rs f

or ti

me

spen

t fili

ng a

nd p

ayin

g ta

xes.

•

Impr

oved

cap

acity

to m

anag

e de

bt, a

s ill

ustr

ated

by

an a

ppro

ved

stra

tegy

and

a c

onso

lidat

ed

syst

em f

or p

ublic

deb

t m

anag

emen

t in

the

ME

F (u

p fr

om

curr

ent l

ack

of a

for

mal

str

ateg

y an

d a

frag

men

ted

syst

em).

2.

Enh

ance

fi

scal

tr

ansp

aren

cy a

nd

fina

ncia

l m

anag

emen

t go

vern

ance

• T

he M

inis

try

of F

inan

ce (

ME

F)

and

the

Off

ice

of th

e C

ontr

olle

r’s

Gen

eral

(C

GR

) st

arte

d to

pub

lish

fisc

al b

alan

ce

repo

rts

on a

sem

estr

al a

nd

quar

terl

y ba

sis.

•

End

-of-

fisc

al-y

ear

outs

tand

ing

accr

uals

wer

e re

duce

d fr

om

13.1

% o

f ce

ntra

l gov

ernm

ent

expe

nditu

res

in 2

004

to 5

.8%

in

2005

. •

A m

ediu

m-t

erm

bud

get

fram

ewor

k (2

007-

2010

) w

as

• T

he G

over

nmen

t im

prov

ed

fina

ncia

l man

agem

ent g

over

nanc

e,

as e

vide

nced

by

the

tran

sfer

of

resp

onsi

bilit

y ov

er c

onso

lidat

ed

fina

ncia

l sta

tem

ents

fro

m th

e C

GR

to

the

ME

F.

• T

he C

GR

impr

oved

man

agem

ent

of c

ontr

ol tr

ansa

ctio

ns, p

artic

ular

ly

paym

ents

, as

evid

ence

d by

the

laun

ch a

nd im

plem

enta

tion

of th

e SI

GU

EM

E tr

acki

ng s

yste

m.

• In

acc

orda

nce

with

ME

F an

noun

cem

ent,

fisc

al tr

ansp

aren

cy

and

plan

ning

nor

ms

will

be

stre

ngth

ened

thro

ugh

a re

vise

d Fi

scal

Res

pons

ibili

ty L

aw. A

ctio

n In

dica

tor:

Law

pas

sage

or

alte

rnat

e m

eans

to s

tren

gthe

n fis

cal

tran

spar

ency

nor

ms.

•

In a

ccor

danc

e w

ith C

GR

’s s

trat

egic

pl

an, a

udit

func

tions

will

be

mad

e m

ore

effi

cien

t and

eff

ectiv

e w

ith th

e ai

d of

tech

nolo

gica

l too

ls. A

ctio

n in

dica

tor:

Com

pute

r-as

sist

ed a

udit

• Pu

blic

ava

ilabi

lity

of m

ediu

m-

term

fis

cal f

ram

ewor

k an

d fi

scal

in

form

atio

n, c

lose

r to

in

tern

atio

nal s

tand

ards

, as

mea

sure

d by

pro

gres

s in

PE

FA

indi

cato

rs N

os. 6

, 12,

or

25 (

from

C

, D+,

D+

to a

t lea

st B

, C o

r C

re

spec

tivel

y).

• R

educ

ed p

aym

ent a

rrea

rs, a

s m

easu

red

by o

utst

andi

ng a

ccru

als

that

do

not s

urpa

ss 1

0% o

f ce

ntra

l go

vern

men

t exp

endi

ture

s (f

rom

13

.1%

in 2

004)

.

41

form

ally

intr

oduc

ed, a

s ev

iden

ced

by th

e re

quir

emen

t in

the

2007

Bud

get P

olic

y to

pr

epar

e a

Mul

ti-Y

ear

Bud

get

with

agg

rega

te p

roje

ctio

ns o

f re

venu

es, c

apita

l and

rec

urre

nt

expe

nditu

res.

tech

niqu

es (

CA

ATs

) in

use

in

finan

cial

aud

its o

f at l

east

five

en

titie

s.

• In

crea

sed

effi

cien

cy o

f in

tern

al

cont

rols

, as

mea

sure

d by

de

crea

ses

in C

GR

’s a

vera

ge

proc

essi

ng ti

mes

for

exp

endi

ture

op

erat

ions

.21

• Im

prov

ed c

apac

ity to

con

duct

au

dits

, as

illus

trat

ed b

y th

e us

e of

C

AA

Ts

in a

t lea

st f

ive

audi

t en

gage

men

ts (

from

non

e in

200

6)

3. I

mpr

ove

expe

nditu

re

effi

cien

cy a

nd

tran

spar

ency

th

roug

h pu

blic

pr

ocur

emen

t re

form

• T

he E

xecu

tive

Bra

nch

laun

ched

th

e e-

proc

urem

ent s

yste

m

(Pan

amaC

ompr

a) w

ith D

ecre

e 98

of

Sept

embe

r 2,

200

5.

• A

mod

erni

zing

Pub

lic

Proc

urem

ent L

aw (

No.

22)

was

en

acte

d on

Jun

e 27

, 200

6.

• T

he G

over

nmen

t con

solid

ated

the

proc

urem

ent f

ram

ewor

k w

ith th

e is

suan

ce o

f R

egul

atio

ns to

the

Proc

urem

ent L

aw, r

esul

ting

inte

r al

ia in

ful

l pub

licat

ion

in

Pana

maC

ompr

a of

pro

cure

men

t no

tices

by

all c

entr

al g

over

nmen

t an

d se

vera

l dec

entr

aliz

ed e

ntiti

es.

• In

acc

orda

nce

with

DG

CP’

s pu

blic

pr

ocur

emen

t mod

erni

zatio

n pr

ojec

t, im

plem

enta

tion

tool

s w

ill b

e de

velo

ped

with

a v

iew

of

redu

cing

tr

ansa

ctio

n co

sts.

Act

ion

indi

cato

r:

Issu

ance

by

the

DG

CP

of s

tand

ard

proc

urem

ent d

ocum

ents

for

publ

ic

sect

or e

ntiti

es s

ubje

ct to

P

rocu

rem

ent L

aw N

o. 2

2.

• Im

prov

ed p

artic

ipat

ion

of

ente

rpri

ses

in p

ublic

pro

cure

men

t, as

mea

sure

d by

incr

emen

ts in

re

gist

ered

bid

ders

in

Pana

maC

ompr

a. 1

• Im

prov

ed p

rocu

rem

ent

man

agem

ent w

ith a

vie

w o

f re

duci

ng tr

ansa

ctio

n co

sts,

as

mea

sure

d by

the

avai

labi

lity

of

stan

dard

doc

umen

ts.

• In

crea

sed

savi

ngs

in p

ublic

ly

proc

ured

goo

ds a

nd s

ervi

ces,

as

mea

sure

d by

red

uctio

n in

ave

rage

un

it co

st o

f ke

y ite

ms.

1

21 B

asel

ines

to b

e de

velo

ped.

42

ANNEX 3. FUND RELATIONS NOTE

43

44

ANNEX 4. THE PUBLIC POLICY REFORM TECHNICAL ASSISTANCE

PROJECT (financed by World Bank)

This project was approved by the World Bank Board of Executive Directors in FY02. The

objective of the project is to consolidate and deepen the reforms needed to accelerate growth and reduce poverty, by strengthening the government's economic monitoring and planning, policy formulation and execution capacity in four areas: (i) promoting trade reform and liberalization; (ii) contributing to fiscal sustainability and public sector efficiency by strengthening the overall capacity of the government to monitor economic data and improve macroeconomic policy formulation and implementation; (iii) improving the quality of poverty data and information on social expenditures so as to increase the relevance, efficiency and targeting of social programs; and (iv) improving the efficiency and transparency in public procurement.

The public procurement component is supporting three areas of reform: (1) Improving the

public procurement legal framework. Under the TA operation, the World Bank supported GOP’s actions aimed at implementing the new legal framework, such as the regulations of the Law 22. (2) Building institutional capacity for handling procurement; and (3) Developing a public procurement system. This sub-component supports the establishment of a Public Procurement Information System and setting the basis for Electronic Government Procurement (EGP). The project has financed technical assistance, training and equipment for the development if this system.

The GoP has recently negotiated an additional financing for the TA (AF-TA) increasing the

original financing and extending the operation for 3 more years. Under the AF-TA, the Bank and the GoP plan to continue working together on supporting the ongoing procurement reform, in particular in key areas such as: (i) develop and implement standard procurement documents; (ii) design and implement relevant strategies: cost-reduction strategy with price benchmarking and e-procurement; (iii) develop and implement M&E systems with performance indicators; (iv) achieve an interoperable procurement system with other government systems, including contract management modules by CGR. The AF-TA also contemplates assistance to modernize fiscal oversight in the CGR and strengthen fiscal transparency.

45

ANNEX 5. PANAMA AT A GLANCE

46

47

MAP SECTION

BOCASBOCASDELDEL

TOROTORO

C H I R I Q U ÍC H I R I Q U Í

N G O B EN G O B EB U G L EB U G L E

V E R A G U A SV E R A G U A S

LOSLOSSANTOSSANTOS

D A R ID A R I É N

K U N A YA L A

EMB E R A

HE

RR

E R A

PA N A MPA N A M ÁC O LC O L Ó N

ChepoChepo

YavizaYaviza

YapeYape

CañitaCañita

Boca deBoca deLimónLimón

Santa FéSanta Fé

PiriáPiriá

CañazasCañazas

TocumenTocumen

La ChorreraLa Chorrera

El ValleEl ValleSoloySoloy

El CopéEl CopéSanta FéSanta Fé

DívisaDívisa

OcúOcúSonaSona

GuabaláGuabalá

PedregaPedrega

La ConcepciónLa Concepción

MacaracasMacaracas

TucutíTucutí

PenonomePenonome

SantiagoSantiago

DavidDavidChichicaChichica La PalmaLa PalmaCordi l lera Central

Cordi l lera de San Blas

Cerro PirreCerro Pirre(1445 m)(1445 m)

CerroCerroChucantiChucanti(1439 m)(1439 m)

CerroCerroPeña BlancaPeña Blanca(1314 m)(1314 m)

Cerro SantiagoCerro Santiago(2826 m)(2826 m)

Vulcán BarúVulcán Barú(3475 m)(3475 m) CerroCerro

ChorchaChorcha(2238 m)(2238 m)

Santa Maria

Chucunaque

Teribe

Panama

PanamaCanalCanal

LagoLagoGatúnGatún LagoLago

BayanoBayano

San

Pabl

o

Serranía del Darién

C O C LC O C L É

COSTACOSTARICARICA

COLOMBIACOLOMBIA

Salud

Portobelo

Chepo

Yaviza

Yape

Cañita

PuertoObaldía

Puerto Piña

GarachinéBoca de

Limón

Santa Fé

Piriá

UstupoYantupo

Cañazas

Chiman

Tocumen

La Chorrera

El Valle

Rio Hato

Coclédel Norte

SanCristóbal

Calovébora

Cusapin

ChiriquíGrande

Soloy

El CopéSanta Fé

Aguadulce

Dívisa

Ocú

PuertoMutis

El Tigre

Sona

Guabalá

Pedrega

La Concepción

Elena

Changuinola

Almirante

PuertoArmuelles

Macaracas

Los Asientos

Tonosí

Tucutí

Colón

Penonome

Santiago

DavidChichica

Chitre

Las Tablas

Bocas del Toro

El Porvenir

La Palma

PANAMÁ

BOCASDEL

TORO

C H I R I Q U Í

N G O B EB U G L E

V E R A G U A S

LOSSANTOS

KUNA DEMADUNGANDI

KUNA DEWARGANDI

EMBERA

D A R I É N

K U N A YA L A

EMB E R A

HE

RR

E R A

PA N A M ÁC O L Ó N

C O C L É

COSTARICA

COLOMBIA

Santa Maria

Chucunaque

Teribe

PanamaCanal

LagoGatún Lago

BayanoLago Chiriquí

San

Pabl

o

Car ibbean Sea

PACIFIC OCEAN

Golfo dePanamá

Bahía dePanamá

Golfo de losMosqui tos

To Corredor

To Uatsi

Cordi l lera Central

Cordi l lera de San Blas

Isla deCoiba

Isladel Rey

Serranía del Darién

CerroTacarcuna(1875 m)

Cerro Pirre(1445 m)

CerroChucanti(1439 m)

CerroPeña Blanca(1314 m)

CerroCambutal(1400 m)

Cerro Santiago(2826 m)

Vulcán Barú(3475 m) Cerro

Chorcha(2238 m)

83°W 82°W 81°W 80°W 79°W 78°W

77°W

83°W 82°W 81°W 80°W 79°W 78°W 77°W

8°N

9°N

10°N

7°N

8°N

9°N

10°N

PANAMA

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 80604020

0 20 40 60 Miles

100 Kilometers

IBRD 33462R

JUN

E 2007

PANAMASELECTED CITIES AND TOWNS

PROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES