Report No. 31497-DO Dominican Republic Country Fiduciary Assessment (In Five Volumes) Volume I: Fiduciary Assessment Report April 18, 2005 Caribbean Country Management Unit Regional Operations Department 2 Operations Support Unit State and Civil Society Programs Latin America and the Caribbean Region Division (RE2/SC2) The World Bank Inter-American Development Bank Document of the World Bank, the Inter-American Development Bank and the Government of the Dominican Republic FIDUCIARY ASSESSMENT REPORT PREAMBLE The Technical Secretary of the Presidency, on behalf of the Dominican Government, presided by His Excellency Dr. Leone1 Fernhndez Reyna, i s pleased to present, in joint coordination with the World Bank and the Inter-American Bank of Development (IADB), the Country Fiduciary Assessment Report of the Dominican Republic and the Fiduciary Workshop Report. The corresponding work with respect to these studies, carried out in a joint effort by a team from the World Bank and the IADB, began in February 2004, at a time during which the country found itself emerged in a profound economical and financial crisis. While it is certain that this crisis has posed a threat in terms of political and social stability, it has also evidenced the needfor the implementationof stronger reforms. In this regard, the importance of these studies directs itself toward the institutional strengthening of the country, in the sense that they contribute in defining new initiatives related to the strengthening of the financial management and procurement processes, which constitute one of the primary elements within the vision of the current government authorities, - a modern and competitive state in par with the demands of a transparent economy. Additionally, the studies emphasize the necessity for the continuation of the ' reorganization and homogenization processes and the putting in place of appropriate regulatory measures, which will result in improved efficiency and transparency in the management and administration of public sector resources. This analysis is summarized in three volumes. The first presents questions from the public sector, applicable to the financial management system, including strong and weak systemic aspects, the political economy surrounding the effort of state modernization and the obstacles and incentives with relation to the public financial management reform. Volumes two and three, respectively refer to the Country Financial Accountability Assessment and the update of the Country Procurement Assessment Report. The second volume contains the following observations: a.) to strengthen the Ministry of Finance and the intervening entities in the Public Financial Management process; b.) to increase efficiency in the control environment, which implies capable and motivated human resources, timely presentation of the financial and operational reports and an effective focal point process; c.) to improve the legal and regulatory framework; increase the capacity of the Civil Service and e.) to give continuity to the automization and modernizationprocess of Public Financial Management. The objective of the third volume consists in updating the Country Procurement Assessment Report, carried out for the Dominican Republic by the World Bank and the IADB in 1999. Both institutions have provided similar results and recommendations in this case. The current joint report indicates that the reform of the procurement system FIDUCIARY ASSESSMENTREPORT does not show any advances, nevertheless, it identifies new opportunities which might lead to positive results. With regard to the Inter-American Development Bank and those loan agreements previously granted by it, we are pleased to informthat we have already begun the process of incorporating the suggestions resultingfrom the analysis, inthe area of procurement. Further more, the Fiduciary workshop, which took place on the loth and llth of November 2004, not only made known the contents of the Country Fiduciary Assessment Report, but also provided an excellent opportunity for an open dialogue between representatives from the Government, Civil Society, the Donor Community, the World Bank and the Inter-American Bank of Development. On the occasion, these representatives discussed the Government's prime objectives of the financial management and procurement reforms. From this exchange the Government has derived four Action Plans: 1.) Accounting and Preparation of Financial Reports; 2.) Debt and Cash Flow; 3.) Controls and Audits and 4.) Procurement. Regarding these points, we have committed to prepare a Strategic Plan inorder to initiatethe action plans. The groundwork has been laid for the continuation of these efforts. The Government i s of the opinion that a continuous revision serves not only to determine how successful we have been in the achievement of objectives, but also to facilitate the implementation of corrective measures, as needed, and the planning of future actions. The occasion i s propitious for a joining of efforts, supported by the World Bank, the Inter-American Development Bank, the Pontificia Universidad Cat6lica Madre y Maestra and the Japanese Agency of International Cooperation (JICA), in consideration of the upcoming inauguration o f the Public InformationCentre (PIC). We hope this disclosure may serve as yet another example of the political will of the Government, headed by Dr. Leone1 Femindez Reyna, to strengthen the institutional capacity in an effort towards additional transparency in the management and administration of the state's financial resources. Ing.JuanTemistoclesMontAs Secretary of the Presidency DominicanRepublic DOMINICANREPUBLIC FZDUCZARYASSESSMENT REPORT Volume I: FiduciaryAssessment Report Volume 11: Country Financial AccountabilityAssessment (CFAA) Volume111: Country ProcurementAssessment Report (CPAR) - Update VolumeIV: Annexes VolumeV: Fiduciary WorkshopReport DOMINICANREPUBLIC FIDUCIARY ASSESSMENT REPORT VOLUME I FIDUCIARYASSESSMENT REPORT VOLUME I - TABLE OF CONTENTS Preface.................................................................................................................... .i Executive Summary.. ........................................................................................... ii CHAPTER 1. PUBLIC SECTOR MANAGEMENT INTHE DOMINICANREPUBLIC BASICISSUES......................................................................................................... I CHAPTER2. POLITICAL ECONOMY AND LEGAL INSTITUTIONS OF THE MARKET ECONOMY.................................................................................................... 2 CHAPTER 3. DONOR-SUPPORTEDREFORMINITIATIVES....................................................... 11 CHAPTER4. CREATINGAN ENABLINGENVIRONMENT FORFIDUCIARY REFORMS..................13 FIDUCIARY ASSESSMENT REPORT VOLUME I - PREFACE This report was preparedjointly by World Bank (IBRD) and Inter-American Development Bank (IDB)country fiduciary teams andthe Government of the DominicanRepublic representedby the Financial Management Reform Program's implementing unit. The report's preparation was jointly task managed by Enzo de Laurentiis, Senior Procurement Specialist, Patricia Hoyes, Financial Management Specialist (IBRD), Roberto Camblor, Procurement Specialist, and Stephen Doherty, Senior Social Development Specialist (IDB). Among several other very valuable members of the joint IBRDIIDB team, key contributions were provided by Auguste Tan0 Kouame, Senior Country Economist (IBRD) and Deborah Sprietzer, External Control Specialist (IDB). Maria Felisa Gutierrez (Ministry of Finance) coordinated the government's contributions and provided major inputs.Significant contributions were also made by Catherine Abreu (IBRD), Enrique Cosio-Pascal, Barbara Friday, Ulises Guardiola, Carmen Palladino, Hernan Pfluecker, Joost Polak, Roberto de Michele, and Jamil Sopher (consultants). Gilma Unda (IBRD) contributed production and logistic support. Inaddition to all key government agencies, the team interacted extensively with key representatives of the complete range of stakeholders that participate inthe reformeffort. One of the objectives of this joint report was to coordinate procurement and financial management analysis and recommendations by framing them into a broader public expenditure management context. This strategy i s consistent with a strengthened approach to conducting analytical and country work in the public financial management area. The approach (currently being developed by IBRD) integrates issues covered by the Public Expenditure Review (PER), Country Financial Accountability Assessment (CFAA) and Country Procurement Assessment Report (CPAR) to coordinate and prioritize country work programs ineconomic governance. This joint report also reflects close cooperation between IBRD and IDB on fiduciary work in the Dominican Republic. This cooperation is consistent with a memorandum of understanding between the two institutions to promote increased effectiveness of their programs for the benefit of their member countries inLatin America and the Caribbean. Thejoint report focuses onimpact and aims at providing a tool to further coordinate the policy dialogue on economic governance and state modernizationbetween the country, the two institutions and other donors. The report's main finding and recommendations are also reflected in policy notes that contribute to each institution's assistance strategy. Finally, the report discussed possible basis for improving coordination with the other main donors and discussing a harmonization strategy on public financial management. Volume Iof the report addresses basic public sector management issues that seriously hamper fiduciary reform efforts and, in general, pose significant obstacles to development effectiveness. Volume I1and I11 focus on core financial management and procurement issues. Volume IV presents several annexes and complete portfolio information for IBRDand IDB. While acknowledgments would require this preface to include a very long list of people, the team wishes to express its gratitude to all those from the Dominican Republic and the two institutions who contributed valuable ideas and information. A complete list of individuals who provided such contributions i s included as Annex 15. i FIDUCIARYASSESSMENTREPORT VOLUMEI - EXECUTIVESUMMARY 1. Background and Introduction. This report was prepared at a critical time for the Dominican Republic. All levels of society are deeply affected by growing economic, political and social difficulties which threaten years of achievements inpoverty reduction. 2. On the heels of sound macroeconomic management and economic growth during the 1990s, a series of internal and external shocks hit the country hard during the past two years and an unprecedentedcrisis unfolded. Following a major bankingcrisis, the pesobegan fluctuating as much as ten percent daily, losing much of its value', inflation grew sharply, and public confidence weakened along with macroeconomic indicators. Additional pressure came from shifts in the price of oil in international markets and the worsening of a long-standing energy crisis. Interest rates are as high as fifty percent making it very difficult for business owners and other borrowers to service loans. Gas prices quadrupled since last year, and widespread problems with electricity, water and transport contributed to deteriorating living conditions. The division between the richand poor has increasedwith aperception of exclusion. 3. The Dominican Republic has made significant strides indeepening democracy during the past decade including the implementation of an important electoral reform. Indeed, as a result of free and fair elections, a new administration was recently voted into office. However, the electoral climate exemplified the level of political uncertainty when a disruptive national political and legal debate ensuedfrom a conflict internal to the incumbent's party. 4. Political Economy. During the past decade, the rule of law has been progressively strengthened, the political system achieved legitimacy, and democracy grew quickly. Notwithstanding these achievements, the Dominican Republic faces challenges common to other countries which transitioned in relatively recent times from authoritarian regimes to democratic systems while implementing complex decentralization processes in institutionally weak environments. The political economy i s still affected by the legacy of past dictatorships which contributed to shaping current institutions and fostered a perception within civil society of government functions as favors or rewards rather than services. Notwithstanding some recent encouraging trends, allocation of public expenditures is still partly driven by political considerations. The executive's authority to award contracts on a sole source basis with limited checks and balances from other branches of government facilitates the practice of rewarding political sponsors and party loyalists. The persistent effects of this legacy on the quality of public sector management are also apparent in inefficient public services, civil service practices which are not basedon objective selection and promotion criteria, and a general lack of established rules and standards inthe public administration. 5. Key Features of Public Sector Management. In recent years, the budget process has become more efficient, significant progress has been made in implementing an integrated financial management system which improved budget execution, and the share of central government budget directly spent by the Office of the President has declined. Yet, the 'From a 14 to17 Peso-US dollar exchange rate before that crisis to approximately 52 Pesos to one dollar at the time of the fact finding mission inFebruary 2004 (with daily variations). FIDUCIARYASSESSMENTREPORT VOLUME I - effectiveness of both the formulation and implementation phases of the budget system remains limiteddue to institutionalweakness, low capacity and poor regulatory quality. 6. The effectiveness of public spending is severely constrained by the lack of many sound features in the current public expenditure system which would allow informed policy choices. These shortcomings include the lack of a well coordinated fiscal strategy and institutional arrangements for budget preparation and implementation, which vest significant powers in the Office of the President and lendthemselves to undue political influence. 7. There i s no continuity between successive governments' plans, and macroeconomic criteria used to support budget implementation are poor and not publicized. There are no appropriate budget reporting mechanisms or systems to evaluate the impact of government policies, and civil society has not been very effective in creating pressure for the government to modernize the State and inholding publicofficials accountable. 8. Other systemic issues that affect the governance framework include: (i)limited enforcement of rules; (ii) weak internal and external control; (iii) significant shortcomings within the current public sector procurement system2; and (iv) an ineffective anticorruption strategy.The combined effect of these problems creates serious obstacles to an efficient and transparent management of public funds and make it more difficult for the various good initiatives and reform efforts currently underway to take hold and allow the country to move forward with the State modernizationagenda. 9. Opportunityfor Change. While the current crisis may pose a threat to political and social stability, it also presents an opportunity to support a more profound reform agenda. In particular, the crisis has clearly highlighted a serious misalignment between regulatory quality, public sector capacity and the demands of a modem economy operating in a global environment. State modernization i s already a top priority on the government agenda and it is recognized by donors as the most important development issue in the Dominican Republic. There is a general agreement that the weaknesses in the DR's financial accountability system and the overall low quality of public sector management are directly hindering economic development and competitiveness. Inaddition, the inefficient use of public funds poses a major obstacle to poverty reduction and a fair distribution of the economic dividends of development. There is an urgent need for a more comprehensive and well coordinated public sector reform strategy with clearly defined priorities and better donor coordination to support this revised, government-led reform agenda. 10. Confidence in government i s at an all time low. There i s a general sense across a wide range of civil society actors that the system has become dysfunctional. The scope of the crisis i s such, that many who benefited from the political economy discussed above now voice frustration with the current state of affairs. There i s growing support from civil society for deep changes that An effort to reformthe procurement system hasbeen underway for the past six years, but has produced no concrete results. There are still different perceptions of what the main features of the system should be as the government has not implemented a coordinated campaign to build support for the reform and civil society has, so far, not focused on procurement reform as much as on other areas, such as electoral and judicial reforms. FIDUCIARY ASSESSMENTREPORT VOLUME I - would modernize the State and increase efficiency, transparency and accountability in public spending. For example, think tanks have drafted modern legislation for consideration by the legislature. Some CSOs voice interest in supporting efforts to increase governmental transparency, enhance anticorruption initiatives, and reformprocurement. 11. An Agenda for Reform. Going forward, the structure, methods and capacity of the country's public sector need to be re-tooled to align them with the new role that a growing, modern and private sector-driven economy requires. One of the key challenges for the public sector i s to sharpen its capacity for sound economic governance, including putting in place the appropriate regulatory frameworks and institutional capacity for procurement and financial management. Key recommendations for overall public sector management reforms are set forth in the June 2003 IBRD Public Expenditure Review (PER). These recommendations include reforming the civil service to streamline it and make it more professional, strengthening the organs responsible for control and enforcement, and making public institutions and their managers accountable. 12. Implementing a consistent procurement reform which incorporates sound principles and practices into the financial management system of the DR i s also of paramount importance to improve budget execution. In addition to new internal pressures, the bilateral trade agreement recently negotiated with the United States, the transparency framework currently being discussed in the context of the FTAA, and the Inter-American Convention Against Corruption provide important extemal drivers for procurement reform. 13. This fiduciary assessment was prepared by the World Bank and the Inter-American Development Bank as a tool for their coordinated policy dialogue on governance with the country and as a key input for their respective assistance strategies. Consequently, the fiduciary assessment also provides important contributions to both institutions' analytical work on public sector management and State modernization which will be the basis for developing these strategiesjointly with the government. Recommendations already made by the PER to improve related aspects of public sector management (e.g., civil service) should be achieved together with the specific actions aimed at improving procurement and financial management. Since piecemeal solutions have proven to be ineffective, all these aspects will need to be addressed in a well coordinated manner and their complete implementation will necessarily require a multi-year effort. 14. The report was prepared as a composite document summarizing the main procurement and financial management issues identified by the two banks in the Dominican Republic within the broader public sector management context. Several short-term actions recommended in Volume I1 (CFAA) and Volume I11 (CPAR Update) address the problems linked to the Government's weak capacity to manage the fiduciary function. Volume Ipresents key public sector issues relevant for the financial management system including systemic strengths and weaknesses, the political economy surrounding the State modernizationeffort, and the obstacles to and incentives for public financial management reform. It provides a wider context which i s useful to assess fiduciary reforms that can be realistically implemented and expected to achieve sustainable results. Volume Ialso aims at integrating the main recommendations for broad systemic improvements relevant to the public financial management system. These include reducing discretion within the executive power, improving access to and quality of information, working more effectively with civil society by tapping into the leading Civil Society Organizations' technical ability and capacity to form strong coalitions, and building upon iv FIDUCIARY ASSESSMENT REPORT VOLUME I - ongoing reform efforts including, in particular, the Integrated Financial Management Project (SIGEF) supported by the IDB. These broad aspects are recommended as priority areas for reform because their successful implementation would contribute to lowering the systemic risks and establishing an enabling environment for regulatory and enforcement bodies to function effectively. Unless such conditions exist, the specific legal and institutional reforms required to strengthen the procurement and financial management systems, even if implemented, are not likely to have significant impact on the overall quality of public sector management. V x x X x h i Ql a f z 2 v1 Y 9E $>0 bo 2 2 X FIDUCIARYASSESSMENT REPORT VOLUMEI - 1. PUBLIC SECTORMANAGEMENT INTHE DOMINICANREPUBLIC: BASICISSUES Introduction 1.1 The Dominican Republic's 48,500 h2 the eastern two thirds of the occupy Caribbean island of Hispaniola, which it shares with Haiti. Its population i s about 9 million, with income per capita of US$2,070 (2003), and a poverty rate of 28.6 percent (1998).3 Its economy depends largely on tourism, free trade zone exports and worker remittances. The Dominican economy was one of the fastest growing in Latin America inthe 1990s at an average rate of 5.9 percent. However, following two years of slower performance in 2001 and 2002, major crises in the banking and electricity sectors contributed to a general macroeconomic deterioration which slashed real GDP growth to negative 1.3 percent in 2003. The 2003 crisis highlighted a serious misalignment between the structure and capacity of the public sector and the role it i s expected to fulfill to meet the demands of a modern economy. The Dominican Republic must address a number of basic underlying country issues if it i s to make significant progress in improving its governance and financial accountability system. 1.2 The rule of law began to take hold in the Dominican Republic only in the second half of the 1990s under mounting national and international pressure. The country is, in a sense, still struggling with the legacy of past authoritarian regimes which fosters poor management and lack of transparency. Many laws are incomplete, contradict existing statutes, or lack the regulations needed to put them into effect. In addition, the legislature exercises limited oversight over the executive branch. Oversight and control responsibilities assigned to different institutions are not well coordinated, and there i s limited enforcement and accountability. 1.3 Public servants are not selected on the basis of objective criteria and professional qualifications and are not rewarded for good performance. Many lack skills, and there is little provision for training to improve their performance. There i s very limited "service" culture in government. 1.4 Civil society, despite significant strides inrecent years, does not work effectively with the government. The country's 15,000 civil society organizations have undertaken campaigns supporting judicial and electoral reform, but have not yet focused their attention on basic public sector management. See World Bank DominicanRepublic Poverty Assessment, 2001. This report uses the cost of basic needs method. Using a multivariate analysis, the National Planning Office (ONAPLAN) derives poverty rates of 55 percent (20 percent for extreme poverty) in 1991 and 52 percent (15 percent for extreme poverty) in 1998. According to the Central Bank, the latest ENGIH(household) surveys conductedbetweenOctober 1997 and September 1998 show that 25.8 percentof Dominicanslive below the povertyline. 1 FIDUCIARY ASSESSMENT REPORT-VOLUME I 2. POLITICALECONOMYAND LEGALINSTITUTIONS OF THEMARKETECONOMY 2.1 Background. The Dominican political system i s based on vast presidential powers that have insufficient checks and balances from other branches of government. The system includes nearly no limits to the power of the executive to award public contracts on a sole source basis. This unbridled authority, compounded by limited oversight, may be used to reward political allies and financial contributors, as suggested by some stakeholders interviewedduringthe preparation of this fiduciary assessment. 2.2 Since many government positions are filled through personal contacts rather than competitive processes based on technical qualifications, the State lacks a professional civil service. This has resulted in weak capacity, inefficient administrative practices, limited accountability, acceptance of non-compliance, and diminished public confidence in government - including its capacity or desire to respond to citizens' concerns or to provide needed services. 2.3 While multiple initiatives are underway to reform all branches of government, many of the country's institutions are still affected by the legacy of its authoritarian past when subjectivity and personal influence predominated as there were no clear rules or administrative processes. This legacy continues to affect all aspects of governance and create vicious cycles that make it difficult for good practices to take hold and catalyze system improvements. The ensuing problems include: Little public access to quality information, and low accountability within government. Proliferation of administrative bodies that often have duplicative roles and rarely coordinate their efforts. Lack of established administrative processes and, consequently, discretionary approaches and lack of institutionalresponses. Limited technical resources to support the legislative function, resulting in weak regulatory policies and a general lack of clarity and quality in the regulatory framework. An independent Electoral Committee that has limitedcapacity to monitor campaign financing or regulate political party financing. Lax enforcement of laws. Limitedimpact of civil society on policy development and monitoring, despite some important success stories with respect to elections andjudicial reforms. Limited ability to prevent, investigate, and prosecute conuption, which is, in large part, aresult of the issues listed above. 2 FIDUCIARY ASSESSMENTREPORT-VOLUME I 2.4 Legislative Capacity. Congress has few legal advisors and most legislative committees do not have qualified technical support to help them discharge their responsibilities. Legal advisors are often subject to political pressures, which impedes them in advising on the technical quality of laws. The Inter-American Development Bank (IDB) i s financing an initiative to create a full-time technical unit to assist legislators. While this approach i s beginning to produce results, i t i s still in its early stages. The limited technical skills available to both houses of Congress often results in low legislative quality. 2.5 Weak Regulatory Framework. The Dominican Republic's weak regulatory control framework and failure to develop adequate fiscal and monetary strategies became apparent in 2003 when Baninter, one of the largest privately owned banks in the Dominican Republic, collapsed and serious irregularities and fraudulent practices were uncovered. According to the Central Bank, the fraudulent schemes had been in operation for over a decade and hadnot been detectedby oversight agencies. 2.6 The government's 2003 repurchase of private investments inthe two electrical companies responsible for distribution further exposedthe regulatory framework's poor quality. While the government and private sector have blamed each other for the energy problems, they both preferred informal negotiations to overcome problems with the 2001 General Law on Electricity rather than focusing on improving the regulatory framework for the electricity sector. 2.7 Weak legal institutions in the Dominican Republic have hindered economic governance and fostered negative incentives that have affected the quality of political institutions. As a result, political parties and government policy makers have not strongly pursued sound and transparent economic policies that aim at growth and a fair distribution of the economic dividends of development. Weakness in the rule of law may also contribute to perpetuatingcronyism which, inturn, further undermines the rule of law. 2.8 Some very positive developments have occurred in recent years with respect to strengthening the judiciary. These include enhancing the Supreme Court's independence, granting tenure to judges, and a 2003 law that reformed the office and functions of the Attorney General, although these institutions still remain subject to some political interference. A new Code of Criminal Procedure approved in 2002 will be applicable from 2004. However, thejudiciary i s still not regarded as very effective inenforcing the law. 2.9 Access to Information. The quality of information and transparent public expenditure management are of paramount importance in makingpolicy choices, increasing government effectiveness, reducing corruption, and, ultimately, strengthening democratic institutions and the rule of law. Important systemic weaknesses include a lack of civil society participation in budget formulation, monitoring implementation, and providing feedback. Macroeconomic data used for the expenditure planning process i s often of low quality and there have been instances in which the Executive made changes in Congressionally approved budgets without properly reportingthem. 2.10. There i s no freedom of information legislation or system, and no process or independent authority to resolve disputes over access to information. There i s no clear 3 FIDUCIARY ASSESSMENTREPORT VOLUME I- legal basis for requiring government officials to provide information to the public, nor to respond to public requests for such information. Government agencies generally do not have or publish descriptions of their organizations, functions, and procedures, and the forms, substantive rules, policies and regulations that govern them. 2.11 While the Constitution gives the public the right to request information, it does not create an enforcement mechanism and i s commonly interpreted as not obligating public officials to provide information. The Ministry of Education and the regulatory body for the telecommunication sector (INDOTEL) are two positive models, as they publish a significant amount of information electronically, including public officials salaries. With these exceptions, government information i s not easily obtainable, or i s generic. 2.12 The Senate passed a Bill in July 2003 that would have obligated public servants to make information available within 15 days of receipt of a request and sanctioned non- compliance with fines or jail terms, but the legislation stalled in the lower chamber and will needto be reintroduced into both houses inthe new legislative session. PublicExpenditureManagement 2.13 The June 2003 IBRD Public Expenditure Review (PER) identifies several positive features of the budget formulation system which has become more efficient and comprehensive in recent years and recently introduced sound policies, such as a medium- term expenditure framework and capital budgeting. Another encouraging trend i s the declining share of central government budget directly spent by the Office of the President. The PER, however, also highlights serious shortcomings in both budget formulation and execution. Budget formulation and implementation i s led by the National Budget Office (ONAPRES) within the Office of the President's Technical Secretariat. 2.14 There i s little continuity between successive governments' plans or any long-term development plan that goes beyond each administration's tenure. Timely, and accurate financial and statistical information i s scarce. 2.15 Internal and external controls are weak and the procurement system is seriously flawed, as discussed in further detail in Volumes I1 and 111, respectively. The main problems with respect to the procurement system include an incomplete and inconsistent regulatory framework lacking many of the principles and procedures which are generally considered as minimum content of a sound procurement legal system, inappropriate practices of application, and very limited procurement capacity. One of the most serious issues i s the indiscriminate use of direct contracting. The complex political economy and overall systemic issues discussed above provide some insight into the obstacles encountered by successive governments intheir attempts to implement procurement reforms. Civil Service 2.16 After a declining trend in the early 199Os, the importance of the State in the labor market resumed the upward trend which had characterized the recent past (the number of government employees grew at a rate of 4.4 percent from 1994 to 2003). As highlighted 4 FIDUCIARYASSESSMENTREPORT VOLUME I - in the PER, there are no standards for hiring public employees, defining career objectives and incentives, measuring performance, or holding public officials accountable for their actions. Civil service pay i s low compared to the private sector and this has led to a culture of non-compliance and a tolerance of corrupt practices to supplement low incomes. As the civil service suffers from highturnover each time a new administration takes office, staff are primarilymotivatedby their loyalties to political parties insteadof to professional objectives and the public ~ e r v i c e . ~ 2.17 The Dominican civil service suffers from an unclear structure and a weak management and control system. The Office of Personnel Management (ONAP) does not exercise full management control over the employment profile or records of civil servants and i s unable to ensure that appointments (numbers, types, and distribution of positions) match national development needs. Transparency and Anti-corruption 2.18 The laws, institutions, and enforcement mechanisms that make up the Dominican Republic's anti-corruption framework are weak and have limited effectiveness. There i s a general perception of widespread impunity among public sector officials and private citizens. This perception creates further incentives to disobey the law. 2.19 Despite the 2004 law reforming the Chamber of Accounts5-which reports to Congress as the supreme audit institutioHhere remains significant overlap and conflict between its mandate and that of the Comptroller General (internal control). The agencies have limited capacity to carry out their mandates and, as a result, produce limited amounts of useful information for the legislature and civil society to exercise oversight. The roles and capacity of these institutions are discussed in Volume 11. 2.20 An additional control agency, the Department for Prevention of Corruption (DEPRECO) has the specific mandate to investigate corruption and promote public ethics. DEPRECOwas created in 1997 (Decree No. 322) and reports to the Procurador General de L a Repdblica (Attorney General). The office .has a small and dedicated staff, but i s limited by its lack of independencefrom the executive. DEPRECOhas insufficient capacity to carry out its functions adequately. It cannot refer corruption cases directly to the judiciary, but must submit them to the Attorney General, who makes the final decision. DEPRECO concentrates most of its efforts on investigating past administrations. Given the lack of clear procedures for DEPRECOto carry out its functions, and the fact that the Attorney General i s appointed by the President, there i s little confidence that case selection i s transparent and not politically motivated. InAugust 2000, theSupreme Court ruledthat it was unconstitutional to limitthe authority of the Presidentto appoint and remove public officials, even if the Statute regulating a specific agency protected its director with tenure. Establishedin 1942(Law No. 130). 5 FIDUCIARY ASSESSMENTREPORT VOLUME I - 2.21 National Anti-Corruption Plans were developed on a consultative basis by DEPRECO on two occasions (in2001 and 2003) to incorporate civil society concerns. Civil society has pressed for legislation to create an independent body to replace DEPRECO in investigating and prosecuting corruption, but Congressional approval for these efforts i s still pending. 2.22 Social Audit Commissions, an important aspect of the plan, were authorized in April 2003 (Decree 39-03). These community commissions are expected to monitor public works. Their effectiveness i s limited, however, by their lack of independence, and unclear appointment rules. One of the leading civil society organizations, Participacion Ciudadana, i s actively working with DEPRECO on this initiative. 2.23 DEPRECO only recently adopted a manual on conducting investigations and has not yet clearly defined its organizational structure and functions. DEPRECO also acts as the focal point within the Inter-American Convention against Corruption. One of DEPRECO's specific responsibilities i s to review the financial disclosure forms submitted by public officials. These forms are requiredfrom most public officials at the time of appointment and resignation, but it i s not entirely clear who must submit them. For example, it has not been clarified if customs and revenues agency staff must comply with the requirement. Spouses of public officials are not covered by the provision and annual updates are not required. In addition, there i s no requirement for public officials to declare foreign assets and liabilities. 2.24 The Chamber of Accounts, the Comptroller General, and DEPRECO are not functionally linked and do not coordinate effectively in implementing a consistent anti- corruption strategy. Indeed, there was no legislative provision for such cooperation. Some provisions of the new law on the Chamber of Accounts appear to limit the Comptroller's independence, which conflicts with the latter's statutory powers. 2.25 Public ethics are governed by the 2001 Public Ethics Code and a 1998 decree that created Public Ethics Commissions to serve as arms of DEPRECO within government agencies. Neither the commissions nor the code have produced significant result in preventing or prosecuting corruption. Conflict of interest i s neither clearly defined nor enforced, and public officials are not generally heldaccountable for their actions. 2.26 Criminal law includes adequate provisions to define and punish corruption. When the Dominican Republic ratified the Inter-American Convention against Corruption it incorporated some modem criminal provisions into its existing framework. However, neither before nor after the ratification of the Convention have there been any significant number of cases investigated, referred to prosecution, or used to identify public officials or private parties engagedincorrupt activities. 2.27 Even if DEPRECO were effective in uncovering instances of corruption and referring them to prosecution, the judiciary would have limited capacity to investigate and prosecute such cases. The National School for Judges, which trains members of the judiciary, has only recently begun designing criminal law courses that cover corruption, money laundering, and other white collar crimes. 6 FIDUCIARY ASSESSMENT REPORT VOLUME I - Civil Society Organizations 2.28 The Dominican Republic's approximately 5,000 registered civil society I organizations (CSOS)~have potential to become an important force in the reform process. Leading groups include the Foro Ciudadano, a coalition of 400 CSOs, founded in 1999, and two business associations, ANJE and CONEP. The groups have focused on priorities on which there was relatively wide consensus, including electoral reform, passage of the new criminal procedure code, and judicial reforms. Even so, it took leading elements of civil society six years to develop, lobby for, and facilitate adoption of electoral reform and five to achieve passageof anew criminal procedure code. 2.29 For more than two years, the CSOs have promoted a new budget law, a more controversial. subject, but the effort has not yet yielded results. Other proposed legislation in which civil society was involved and which i s critical to increasing transparency in public administration include a new procurement law, freedom of information, the law establishing a national anti-cormption office, and a law that mandates financial disclosure for public sector employees. These had long tormented histories, were not approved, but could be re- introduced in the next legislature. Table1.1Leading Civil Society Organizations 2.30 The CSOs, which promoted electoral and judicial reforms, have relevant technical capacity and exercise effective advocacy. However, there i s no CSO with a primary focus CSOs include nongovernmental advocacy organizations, business and professional groups, think tanks, human rights and religious organizations, and the media. There are some 15,000 registered and unregistered CSOs inthe Dominican Republic, although many are captive groups established by the government or political parties. FIDUCIARY ASSESSMENTREPORT VOLUME I - on, or strong technical resources in procurement, transparency, and anti-corruption issues. Serious limitations to civil society effectiveness include the absence of key legislation related to access to information, anti-corruption, and the legal status of NGOs. More insidious barriers include slander and economic intimidation and frequent dismissals of NGO initiatives to advocate reforms or participate in overseeing public policy implementation as inappropriate interference, rather than legitimate forms of engagement in democratic governance. The Private Sector 2.31 The Dominican Republic has a dynamic private sector engaged in a broad range of economic activities, including a relatively strong construction industry. Other main activities include local transportation, finance (notwithstanding the recent crisis)-which also controls a large portion of the media--agro-industry (sugar, canned fruit, and coffee), manufacturing (tobacco, chemical products, a small cement production, animal feed, leather, and some textiles). Tourism and telecommunications are also strong sectors, but mostly represent foreign investment. 2.32 With the exception of a few very large firms, the construction industry has been severely affected by payment delays that can stretch to several years, no provision for price adjustment in long-term contracts, and lack of competitive contracting practices. Inthe past, many companies benefited from the status quo, but lower recent investment in public works has resulted in tougher "competition" for political favors (not only to win contracts, but also to be paid), and greater concentration of the "benefits" of the system. 2.33 While there are many qualified professionals, the consulting industry i s underdeveloped. Civil works design i s often provided by contractors themselves, as procuringentities do not have sufficient capacity, resources, or interest in design. 2.34 Political interests and economic activity in the Dominican Republic have long been closely related. During his three decades (1930-61) in power, President Rafael Trujillo exerted close control over most economic activity. Indeed, Trujillo himself was the most prominent businessman in the Dominican Republic with direct or indirect interests in agricultural and agri-business activities, construction, and light industries such as glass, nails, and cigar factories. Trujillo's regime was followed by a major struggle to redefine the private sector (including the resolution of complicated legal issues with respect to ownership of some assets confiscated during the Trujillo regime); the private sector emerged as a distinct player, but continued to maintain close ties with the political system. The new role of the private sector was shaped by protectionist policies, and successful efforts to compete externally while relying on political favors to obtain public contracts. For example, the "Asociaci6n de Industrias de la ReptiblicaDominicana" (Dominican Industrial Association) originated from an umbrella organization of business activities previously protected by Trujillo and successfully lobbied with every successive government until the mid-1980s sufficient protection and incentives to maintain an import substitution system. Import subsidies and protection of large landowner economic interests were used b y presidents to gain political support from the private sector through the 1980s. 8 FIDUCIARY ASSESSMENT REPORT VOLUME I - 2.35 During the early 1990s, the economy began to open to allow much needed foreign investment, largely directed at the booming tourist industry. Two other organizations emerged and began to take the lead in representing private sector interests: the National Council of Private Enterprises (CONEP) and the National Association of Young Entrepreneurs (ANJE). CONEP represents the often competing interests of its large and diverse membership, which includes large and small business and associations. Among its priorities are clean elections, judicial sector reform, civil service reform, and resolving the current crisis inthe financial and banking sectors. 2.36 ANJE has a younger membership (25-45 years old) and its membership includes individuals as well as registered businesses. It has over 600 members, and its objectives are strengthening institutions, enhancing transparency, and modernization of the state. Among its chief concerns are public expenditures (waste, fraud and abuse) and a judiciary with the necessary independence and capacity to enforce the law. The leaders of business organizations came to recognize that poor regulatory policies and weak government institutions could significantly affect economic performance. These private sector organizations also began concentrating on corporate governance and the need to regulate their activity through codes of conduct and other internal controls. 2.37 The aggressive export promotion policies pursued by the government during the 1980s facilitated the creation of free trade zones and were complemented b y preferential trade agreements, particularly with the United States. Trade represented a major engine of growth throughout the 1980s and 1990s, and the number of manufacturingfirms quadrupled duringthe 1 9 9 0 ~ ~ 2.38 Several concurrent trade-related events, in particular, the 2004 free trade agreement with the United States, have significantly changed the environment in which the Dominican Republic operated during the past two decades and will pose new challenges for the country.8 Trade liberalization will generate new pressures for Dominican companies to be competitive and for the government to be more efficient in its public expenditure management to compensate for the loss of revenue as tariffs are phased out. While civil works are included in the scope of the agreement, Puerto Rico, potentially a strong competitor for Dominican construction firms, was excluded from the sub-national U S entities covered by the agreement. Trade liberalization will require strengthening several related areas that directly impact trade capacity, in particular customs' capacity to investigate compliance with rules of origin and conduct valuations, and procurement (discussed in Volume 111). 2.39 There i s general agreement among business leaders that the urgent systemic issues affecting the private sector's competitiveness are too broadto be addressed by trade and 'The Dominican Republic i s a member of the WTO and a signatory to various trade agreements, and is an observer inCARICOM. * These aspects are discussed in detail in a policy note on "Future Competitiveness of Trade and Labor in the Dominican Republic" which was under preparation at the time of this report. 9 FIDUCIARY ASSESSMENTREPORT VOLUME I- investment policies alone, as they encompass fundamental aspects of governance and public sector management. Key private sector organization now believe that far-reaching public sector reforms are required to improve the business climate and prospects for economic growth. FIDUCIARY ASSESSMENTREPORT-VOLUME I 3. DONOR-SUPPORTEDREFORMINITIATIVES 3.1 Financial Management Reform. The Dominican Republic began implementing a comprehensive financial management reform with support from the IDB in 2000 (PAFI). The objective of the program is to modernize public finance management by establishing a modem legal basis for reform, implementing an integrated and automated financial management system (SIGEF) and promoting policies and procedures for more transparent and efficient public expenditure. The program also includes a small procurement component with the objective to integrate procurement information and processes into public financial management. Design of this sub-component i s still in its preliminary stages, and IDB funding i s limitedto pilot exercises. 3.2 Donor-supported State Modernization Initiatives. IDB i s financing projects to reform the executive and legislative branches. The former funds various activities aimed at improving public administration. The latter includes reform of the Chamber of Accounts and technical assistance to legislative committees. Ongoing efforts include drafting a Code of Administrative Procedures and promoting a civil service structure based on professionalism, merit, and objective criteria. None of these initiatives have significantly advanced or produced concrete results, with the exception of a new law regulating external audits. 3.3 The European Union (EU) i s supporting a program to reform and modernize the State, focused primarily on decentralization, includingdevelopment of a financial system for municipalities. IDB has provided additional grant financing to integrate SIGEF with the EUprogram. 3.4 The Spanish Cooperation Fund for Technical Assistance i s supporting the Supreme Court in reforming career streams in the judiciary, increasing participation of civil society and consolidation of democracy, and strengthening local administrations, as a complement to the EU's program. Germany's GTZ i s also working on these and complementary aspects both as a bilateral donor and as part of the EU Development Fund. 3.5 USAID's strategy to support democracy and governance in the Dominican Republic focuses on the rule of law, effective participation of civil society, and transparency through grants to major local NGOs. 3.6 While these reform initiatives are very important steps toward modernizing the Dominican State and already resulted in significant improvements in all branches and levels of government, there has been limited coordination in their implementation at the donor, government policy, and project levels. Their respective scope and objectives are sound, but the different programs have not fully benefited from and built upon their synergies in the context of a comprehensive public sector reform strategy. Nonetheless, the donors have maintained an active dialogue on key issues such as governance, anti- 11 FIDUCIARY ASSESSMENT REPORT VOLUME I - corruption, decentralization, and justice also engaging representatives of the private sector, CSOs, and representatives of the three political parties, and are meeting monthly to discuss coordination and assistance strategies (Annex 3 ). FIDUCIARY ASSESSMENTREPORT-VOLUME I 4. CREATING AN ENABLING ENVIRONMENT FOR FIDUCIARY REFORMS 4.1 Strengthen the Public Financial Management System (PFM). Much i s still required to put in place conditions that guarantee sound PFM at the central, and eventually the municipal, levels of government to improve the effectiveness and efficiency of public expenditure. Among other measures, it i s critical to focus the budget function away from control and toward performance-based budget preparation b y incorporating physical program outputs and performance indicators. This will need to go hand in hand with strengthening financial and performance management in spending agencies to reduce heavy reliance on ineffective ex-ante controls. In addition, the control environment will need strengthening through the full application of the external control functions and modernization of the internal control functions, both of which will need substantial human resources capacity building. Public procurement reform i s also critical, as discussed inVolume 111. 4.2 The revised strategy for procurement reform should be realistic and incorporate lessons learned from the unsuccessful attempts over the past several years to improve the procurement system. The strategy should include short-term measures which are relatively easier to achieve (e.g., a procurement decree as an initial step toward the adoption of a sound legal framework), ensure consistency in policy development and the capacity building strategy (e.g., enable the Ministry of Finance to exercise adequate procurement policy development and oversight functions), and establish an enabling environment b y beginning to implement the recommended public sector reform strategy while buildingpolitical support for the procurement reform. 4.3 Most importantly, as also recommended in the PER, financial management responsibility needs to be shifted from the Office of the President to a separate ministry, such as the Ministry of Finance, where systems for accurate reporting, expenditure programming, expenditure execution and personnel management should be developed. This will require strengthening the treasury, accounting, and debt management functions within the Ministry of Finance. 4.4 Build on ongoing reforms. Continuity in the reform program staff and other public officials, who have received training and have institutional knowledge, i s critical to consolidating and sustaining the achievements of the reforms already implemented. 4.5 For example, for SIGEF to succeed and provide the government with the maximum benefit, it will be important to allocate resources to ensure that it can continue to meet its objectives after IDB funding runs out in 2004. The government also needs to give priority to extending SIGEF to all central and decentralized government agencies and providing the training needed by government staff to ensure proper application and utilization of the system's features. It can also usefully continue to strengthen its fiscal control environment so that ex-ante controls can be removed and the efficiencies of the 13 FIDUCIARY ASSESSMENTREPORT VOLUME I - system can be realized. 4.6 In terms of the control environment, the government has made significant progress by establishing the scope and independence of the Chamber of Accounts as the Dominican Republic's supreme audit institution under the January 2004 law, a product of the IDB-financed project to reform the executive and legislative branches. To help the Chamber carry out its mandate, the government has to provide support for training Chamber staff. 4.7 As part of the agenda for State modernization currently supported by the European Union and other donors, the efforts to develop and adopt a code of administrative procedures should be further pursued. 4.8 Professionalize the civil service. The PER makes a number of recommendations for developing and adopting a comprehensive personnel policy, including salary and incentive systems, recruiting and retaining a professional civil service and retraining the current civil servants to perform under the new environment. The government needs to develop a professional cadre of budget, treasury, procurement, accounting, and auditing staff. The functions and responsibilities of ONAP can be redefined to reinforce its role in establishing a career civil service. 4.9 As discussed in the PER, rather than initiating a system-wide reform, the government could implement civil service reform sequentially, starting with agencies with direct responsibility for public financial resources management and those with significant responsibilities in managing social programs. This would avoid a drastic immediate reduction in civil service numbers that i s unlikely to be feasible. Civil service reform would need to be matched with a political economy transformation that clearly dedicates public institutions to the pursuit of the common good. 4.10 Human resource programs should be implemented in close coordination with other reforms to overcome the direct conflict between career or other merit-based systems and the culture of patronage and party control of public sector jobs. It i s recommended that all political parties and their leaders formally express their commitment not to use public jobs as rewards for political support. 4.11 Accelerate decentralization. Since the mid-1990s decentralization, an indispensable step toward the efficient delivery of public services and poverty reduction has involved the active participation of CSOs and political institutions. However, there i s no legal framework for the devolution of functions and the institutional setup for decentralization i s weak. Government has, nonetheless, granted some autonomy to municipalities and i s malung an effort to increase resource transfers to sub-national governments4hough care must be taken to ensure that increased transfer are matched with capacity buildingfor adequate financial management at the local government level. 4.12 An important additional recommendation to move forward with the State modernization effort included in the PER i s the development of the National 14 FIDUCIARY ASSESSMENT REPORT-VOLUME I Commission on the Reform of the State into a more technically competent and independent entity that can monitor andevaluate information on sub-national government practices. 4.13 Adopt a comprehensive anti-corruption policy. It i s recommended that a comprehensive anti-corruption strategy be developed and implemented consistent with the Inter-American Convention Against Corruption. Efforts to reform the main oversight bodies now underway should be continued and better coordinated. In particular, it i s critical to clearly define the functions of DEPRECO or a successor anti-corruption office, enhance its capacity and independence, and better coordinate the functions of the Chamber of Accounts and the anti-corruption office with those of the Comptroller General. Many of the measures recommended above to improve budget processes, procurement, financial management, civil service reform and decentralization can help reduce corruption. Additional important corruption prevention measures could include: e A law regulating financing of political parties and campaigns. e Improving the law requiring public employees to disclose their assets (Law 82 of 1979) and the capacity to monitor and follow-up on this information. Such improvements may include broadening the scope of the law to include a wider range of public employees, and, possibly, spouses and close relatives, and establish a mechanism to monitor the assets on an ongoing basis during and following tenure in public office. Ideally, this information would be widely publishedor otherwise readily available to the public. e Freedom of information legislation with appropriate institutional arrangements and enforcement capacity. e Closer cooperation among CSOs to coordinate and expand their anti-conuption efforts. 4.14 Consolidate and deepen judicial reforms. Further Judicial reform was consistently indicated as a priority in the comprehensive effort to modernize the state by leading civil society opinion makers interviewed during fact-finding missions. Government officials and donors also spoke of a persisting crisis of the justice system, notwithstanding recent improvements. Current donor initiatives supporting the ongoing reform should be sustained and focus on the independence and competence of the judiciary. In particular, the independence of the Supreme Court should be further consolidated and judges and prosecutors better trained, including on techniques to investigate corruption. Strengthening the rule of law will be an important contribution to political stability and economic development in the Dominican Republic, including the country's ability to adapt to technological innovation and external drivers such as regional and bilateral agreements. Most importantly, it will respond to growing internal pressure to hold government accountable for its actions. 15 FIDUCIARYASSESSMENTREPORT VOLUME I - 4.15 Engage civil society in the reform process. The well articulated concerns of civil society contrast with the absence of in-depth policy debate or the definition of comprehensive development agendas by the government or any of the political parties. Given civil society's capacity to mobilize it should be engaged in a more constructive and coordinated way in the comprehensive effort to enhance government accountability. It would be very useful for the Dominican Republic to review the recent experiences of other countries which have been engaged for years in successful democratization and decentralization processes in institutionally weak environments. For example, the Philippines i s a country where civil society has been a major driving force for the implementation of a comprehensive procurement reform and continues to cooperate actively with the government on monitoring the procurement system and training public officials. 4.16 Given the demonstrated analytical and organizational capabilities of some CSOs, the reform strategy should be based on a two-pronged approach that taps into their technical abilities while supporting programs to strengthen the analytical and technical capacity of key government institutions. The leading CSOs are capable to convene a wide range o f stakeholders. These include think tanks (e.g. FINJUS), academic institutions (e.g. PUCMMA), grass roots organizations (e.g. Participacion Ciudadana, Foro Ciudadano), and private sector advocacy groups (CONEP and ANJE). The think tanks, for example, can provide non-partisan, or multi-partisan venues for debate and discussion with policy makers. They can hire specialists, commission papers, research and analyze data, and formulate proposals and provided inputs into draft legislation. Grassroots organizations can mobilize large numbers of groups to put pressure on policy makers for reform, including the support of coalitions that come together to promote common interests. These groups also can provide training to the media on policy issues and courses for elected officials and public servants. Finally, they can promote awareness among taxpayers and local communities on the waste of public funds, and the benefits of introducing sound public sector management practices. By promoting a collaborative approach, the donor community could help deepen citizen participation in policy design, advocacy, and implementation, while creating n e w - o r strengthening existing-key technical government units, within the Congress, the Technical Unit of the Presidency, or selected ministries. A proposed plan of action for full CSO engagement in the public sector reform process i s includedin Annex 8. 4.17 Pursue donor harmonization. As follow-up to the 2003 Rome Declaration on Harmonization, the joint IDB/IBRD fiduciary assessment team used the opportunity offered by the joint CPAWCFAA mission to explore mechanisms for improved donor coordination, alignment, and harmonization in the Dominican Republic. T o facilitate this work, the mission met with local representatives of IDB, USAID, the EC, AECI (Spain), GTZ, UNDP, and IBRD to discuss key developments on the harmonization agenda, including global commitments, experiences in other Countries, and explored opportunities for harmonization in the Dominican Republic. From these meetings, a draft matrix of harmonization activities was developed and presented to local donor representatives for consideration and future action, including discussion with the government following FIDUCIARY ASSESSMENTREPORT VOLUME I - the May 2004 presidential elections. The draft harmonization matrix i s described in Annex 3. 4.18 Harmonization activities already undertaken include joint IDB/IBRD fiduciary diagnostics (CPAR, CFAA, Review of Standard and Codes (ROSC) and a Quality Control Review of independent audit firms). The two banks have coordinated conditionality for their support to the social sector response operations, and undertaken joint reviews o f systematic portfolio performance review issues. 4.19 Donors' current and planned activities offer further opportunities for harmonization in the following ways: 0 Strategy, IDB and IBRD will begin work on new country assistance strategies timed to coincide with the establishment of the new government. Both institutions are interested in exploring the possibility of joint country strategies that build on the current joint analytic work, joint country economic policies notes, and other joint diagnostics. The EU i s conducting a mid-term review of programming strategy. 0 Sector-wideapproaches.The Ministry of Education has requested donor support for the articulation of an education sector strategy. Depending on the interests of the new government, this could form the basis for coordinated donor support, possibly including pooled donor funding and more explicit use of government systems and procedures. Donors may also wish to consider possible use of a sector-wide approach (with traditional project, budget support and technical assistance/capacity building) to provide coordinated support for public sector modernization. 0 Fiduciary management. The two current IBRD/IDB fiduciary diagnostic products include development of ajoint action plan for strengthening government procurement and financial management capacity. Given broader donor interest and support in these areas, the joint CPAR and CFAA teams could invite other donors to discuss and participate in follow-up activities. The donor community could also explicitly look to develop common procurement and financial management tools, including common bidding documents, common national and international competitive bidding thresholds, common review processes and biddingprocedures, and common financial reports andformats. 0 Sector adjustment loans. IDB and IBRD have recently disbursed adjustment loans in the social and financial sectors. Both banks intend to exercise the loan provision allowing them to request audits of the funds, and will suggest the use of a single set of terms of reference for auditing adjustment loans. This would require the harmonization of audit requirements by both banks but provide a significant cost savings inmeeting these requirements. 17 MAP SECTION