Report No. 35040-GT Guatemala Country Financial Accountability and Procurement Assessment Report (CFAA/CPAR) June 24, 2005 Central America Country Management Unit Regional Operations Department 2 Operations Services Department Modernization of the State Latin America and the Caribbean Region Division (RE2/SC2) The World Bank Inter-American Developmemt Bank Document of the World Bank and the Inter-American Development Bank Guafemala CFAAICPAR: Table of Confenfs i TABLE OF CONTENTS PREFACE ........................................................................................................................................... IV EXECUTIVE SUMMARY .............................................................................................................. vi1 ICOUNTRYBACKGROUND . .......................................................................................................... 1 Political and Economic Evolution .......................................................................................................... The Public Sector.................................................................................................................................... 1 2 Governance Environment....................................................................................................................... 3 The CFAA/CPAR inthe Country Context ............................................................................................. 5 I1 LEGAL AND INSTITUTIONAL FRAMEWORK . ...................................................................... 7 Budgetary Attributes of different Branches of Government................................................................... Formal Rulesfor Public Financial Management .................................................................................... 7 8 Public Procurement Regulatory Framework.,....................................................................................... The Integrated FinancialManagement System (SIAF) ........................................................................ 10 10 Analysis and Recommendations........................................................................................................... Civil Service ......................................................................................................................................... 14 16 I11 BUDGETFORMULATION . ....................................................................................................... 20 The ProcessofBudgetFormulation..................................................................................................... Content ofthe Budget........................................................................................................................... 21 20 24 Analysis and Recommendations........................................................................................................... Budget Outcomes as Indicators of BudgetReliability.,........................................................................ 26 IV TREASURYAND BUDGETEXECUTIONMANAGEMENT . .............................................. 29 Revenue Administration ...................................................................................................................... The BudgetExecutionProcess............................................................................................................. 29 30 Internal Control Framework ................................................................................................................. Analysis and Recommendations........................................................................................................... 34 34 V PROCUREMENTMANAGEMENT . ........................................................................................... 40 40 E-Procurement ...................................................................................................................................... Strategic Planning................................................................................................................................. 41 Procuring Units..................................................................................................................................... Analysis and Recommendations........................................................................................................... 43 45 VI FISCALREPORTINGAND EXTERNALOVERSIGHT . ...................................................... 50 Financial Reporting............................................................................................................................... The ExternalAudit Function............................................................................................................... -51 50 Monitoring by Civil Society ................................................................................................................. 53 Legislative Oversight............................................................................................................................ 53 Analysis and Recommendations........................................................................................................... 54 VI1 CONCLUSIONSAND MAINRECOMMENDATIONS . ........................................................ 58 LeveragingOpportunities to Move Forward ........................................................................................ SuggestedFundamental Actions........................................................................................................... 61 60 Other key reforms that affect PFM....................................................................................................... 65 Guatemala CFAAICPAR: Table of Contents ii ANNEXES ........................................................................................................................................... 66 Annex IPlan ofAction Recommended............................................................................................... 66 Annex I1BackgroundPapersandPersons Interviewed., .................................................... -72 References ............................................................................................................................................. 79 LIST OF TABLES. BOXESAND FIGURES: TABLE1:CENTRAL GOVERNMENT OPERATIONS ................................................................................... 3 TABLE2: PROPOSEDAMENDMENTS THESTATEPROCUREMENTLAW TO ............................................. 12 TABLE3: BUDGET FORMULATION PROCESS ........................................................................................... 21 TABLE4: EARMARKED REVENUESINTHEBUDGET ............................................................................... 22 TABLE5: AGGREGATE GENERALBUDGET ......................................................................... 25 TABLE6:DEVIATIONFROMBUDGETED DEFICIT................................................................................... EXECUTION 26 TABLE7: AVERAGEABSOLUTE TABLE8: VALUE-ADDEDTAXEFFICIENCY........................................................................................... DEVIATION GENERALBUDGET OF EXPENDITUREEXECUTION...........^^ TABLE9: SUMMARY OF 2003 AUDIT RESULTS...................................................................................... 29 52 Box 1:GUATEMALAAT A GLANCE.................................................................................................... 1 BOX 2: MAINLAWS REGULATIONSGOVERNINGPUBLICFINANCIALMANAGEMENT AND ................... 7 Box3: DR-CAFTAI~~PLICATIONS ON PUBLIC PROCUREMENT ........................................................... 13 BOX 4: WEAKNESSESOFTHE PROPOSEDCONCESSIONS LAW ............................................................... 14 BOX 5: SELECTEDOPTIONS TO REFORMTHE MUNICIPAL TRANSFERSYSTEM..................................... 17 BOX 6: MAINASPECTS THE PROCUREMENTREFORMPROGRAM OF .................................................... 18 Box7: EXPENDITURE BUDGET CLASSIFICATIONS............................................................................... 24 Box 8: EXPENDITURE BUDGET EXECUTION PROCESS ........................................................................... 31 BOX 9: RULESONMUNICIPAL DEBTAUTHORIZATION .......................................................................... 33 Box 10: SOME RECENTSOCIAL AUDIT INITIATIVES ............................................................................. 53 FIGURE1:GOVERNANCE INDICATORS:2004/2002/200/1998 AND REGIONALCOMPARISON2004 FIGURE2: CENTRALGOVERNMENT EMPLOYMENT WAGESIN2002.............................................. ....... 4 AND 15 FIGURE3: CURRENT STATUSOF GUATEMALA'S PROCUREMENTSTRATEGY ....................................... 41 FIGURE4: TRENDSINUSEOF GUATECOMPRAS .................................................................................... 42 FIGURE5: INTEGRATINGPROCUREMENTANDBUDGET .................................................... FIGURE6: SAVINGSPOTENTIALSOF STREAMLININGSTRATEGY.......................................................... PLANNING 47 FIGURE7:PHASESOF COSTREDUCTIONSTRATEGY............................................................................. 48 49 Guatemala CFANCPAR: Table of Contents iii This report was prepared in June 2005, by Enzo de Laurentiis (Sr. Procurement Specialist, WB) and Manuel Vargas (Sr. Financial Management Specialist, WB), with Roberto Camblor (State Modernization Specialist, IDB) and Stephen Doherty (Sr. Social Development Specialist, IDB). The task team included Patricia de Baquero (Sr. Procurement Specialist, WB), Henry Forero (Sr. Information Officer, WB), Luis Prada (Procurement Specialist, WB), Alfonso Shnchez (Procurement Consultant), and Joao Veiga Malta (E-Procurement Specialist, IDB). Other staff members and consultants contributed with background papers (Annex I). Erick Coyoy (Advisor, MFP) coordinated the PFM Assessment on behalf of the Government of Guatemala. Antonio L. Blasco (Financial Management Specialist, World Bank) and Keisgner D. Alfaro (Senior Procurement Specialist, World Bank) performedajoint assessment with high-levelgovernment officials in March 15-16, 2007 of the actions taken and progress made inthe implementation of the recommendations included in the Plan of Action proposed by the Banks inJune of 2005. The preparation team thanks the Ministers of Public Finance, Ms.Maria Antonieta de Bonilla and Mr Hugo Beteta, and other Government authorities and officials for their cooperation and support. The Team also appreciates the support of Gerald Johnson (Resident Representative, IDB), Neeta Sirur (Country Manager, WB), and Jamil Sopher (Consultant, WB), as well as the leadership of Bernard Becq, Roberto Tarallo (Sector Managers, WB) and Jorge Sapoznikow (Sector Chief, IDB). Guatemala CFAAICPAR: Preface iv PREFACE The Country Financial Accountability and Procurement Assessment Report (CFMCPAR) is a diagnostic tool that covers the Government's ability to fulfill its fiduciary responsibility to the citizenship, in managing public resources through sound public financial management (PFM).' As such, it seeks to support development objectives by facilitating a common understanding o f the state o f PFM systems, practices and accountability arrangements. On that basis, the assessment makes recommendations with the ultimate goal o f increasing the efficiency and transparency o f public expenditures. Information obtained in CFAMCPARs can also help development agencies to identify potential risks, posed by weaknesses in PFM arrangements, to the use of loanor grant proceeds.* The World Bank and the Inter-AmericanDevelopment Bank (IDB)have agreed to collaborate with each other in the overall coordination o f PFM diagnostic work. The two participating Banks expect that their collaboration in Guatemala will foster a common understanding of how the C F M C P A R should support the country's development agenda, and make good use o f their combined efficiencies o f scale. This report was prepared on the basis of: (i)the Memorandum o f Initiation (2004); (ii) interviews held with several government officials and stakeholders from the private sector, non-governmental organizations, civil society organizations (SCO) and development agencies; iii)the Country Assistance Strategy (CAS) agreed with the Government of Guatemala (2005); (iv) the analysis o f surveys, questionnaires, and other information and documents collected duringthe fact findings missions conducted on October 25-29, 2004 and January 17-28, 2005; and v) a workshop for the presentation by the Banks and discussion o f the CPAR report with the participation of government officials from the Ministry o f Public Finance andthe Office o f the Controller General o f Accounts conducted inGuatemala City on March9, 2006. The report reflects basically advances made and recommendations identified at that moment. A WE3 fiduciary mission conducted ajoint review with the Ministryo f Public Finance's officials inMarch 15-16, 2007 to assess the actions taken and progress made inthe implementation o f the Plan o f Action recommended by the Banks in June 2005; The findings and results o f this evaluation were included inthe relevant sections o f the report. 1 The CFAA/CPAR combines two exercises that have traditionally been carried out separately: the Country *FinancialAccountabilityAssessmentneither (CFAA) andthe Country ProcurementAssessment Report(CPAR). The CFAA/CPAR, however, i s an audit nor is prepared following audit procedures (World Bank, 2003). Guatemala CFANCPAR: Preface v TheParticipatingBanks'Assistance Strategies The World Bank's Country Assistance Strategy (CAS) for FY05-08 proposes a strategic program o f lending and non-lending services to support the main pillars o f Guatemala's "Vamos Guatemala" plan, which is aimed at promoting sustainable and equitable growth and poverty reduction through: (i)strengthening the "fundamentals" -i.e., macro stability, personal and legal security, and governance and public sector management; (ii) promoting social solidarity through investments in human development and rural infrastructure; (iii) accelerating sustainable growth through public-private partnerships; and (iv) improving the country's competiti~eness.~ The core o f the IDB's Country Strategy for 2005-07 i s to reduce poverty as a basic condition for establishing a solid and lasting peace, founded on the fullest participation o f the population in the twin processes o f economic and social development. The Strategy seeks to promote sustainable and widely based economic growth through support to economic diversification and inclusion o f all sectors o f the population. Key themes are creating a climate conducive to production, improving human capital with emphasis on promoting equity, and improving the operation o f the country's key institutions. In addition to its inherent value as a diagnostic tool, the assessment has special relevance through its relationship to the participating Banks' assistance strategies, lending programs, and policy dialogue. The linkages are particularly strong inthree areas: Public sector modernization and governance. Public financial management systems that contribute to operational and allocative efficiency are critical elements o f public sector effectiveness. These features, together with fiscal transparency, can positively influence the governance en~ironment.~Hence, in these areas the CFANCPAR constitutes a key non- lendingservice o fthe participating Banks. Design and implementation of the participatingBanks' lending program. The exercise can provide valuable information to help the Government with the designo f capacity-building programs under its ongoing modernization agenda, and will feed into the implementation o f ongoing operations (e.g., the Integrated Financial Management System Project) and the preparation o f new ones (e.g., the Governance and Public Sector Management Project). Additionally, a central component o f the Guatemala CAS i s a programmatic series o f annual Development Policy Loans (DPLs) focusing on four key areas, one o f which is the continued strengtheningo f public sector management and governance. The C F M C P A R is the major analyticaltool underpinningthe DPL-supported actions inthat area. The CFAAJCPAR is one of the non-lending services contained inthe CAS. The governance environment and certain PFM functions (e.g., procurement and revenue administration) are also important aspects of a country's enabling environment for business and investment. Guatemala CFANCPAR:Preface vi Management of the participatingBanks' lendingportfolio. The CFMCPAR can inform strategies to make more efficient use o f the Government's own institutional settings and systems for project-related financial management and procurement activities. Guatemala CFANCPAR: Executive Summary vii EXECUTIVESUMMARY 1. This Country Financial Accountability and Procurement Assessment Report ( C F M C P A R ) analyzes the Government's fiduciary responsibility to manage public resources through transparentinstitutions and efficient systems o f budgetingand procurement. Accordingly, the recommendations contained inthis report seek to identify areas where public financial management (PFM) can be improved with the goal o f strengthening fiscal discipline, enabling more efficient allocation o f resources, and increasingoperational efficiency. 2. PFM enhancements, in the context o f other key public sector reforms, can positively influence the country's governance environment, a key aspect considering that one o f the Government's critical challenges i s promote higher levels o f transparency and enhance the Governance framework to reduce corruption. At the same time, the Government's relatively low level o f revenues calls for an active pursuit o f opportunities for efficiency gains. Enhanced fiscal transparency, inturn, could help as validation to potentially increase those revenues. Summary of Findings 3. The financial management reform process, initiated in the mid-1990s under the umbrella o f public sector modernization, has produced improvements in the performance o f budget management institutions. The implementation of the integrated financial management system (SIAF), built upon a good normative framework and facilitated by a modern technological platform, has contributed to efficiency inexecuting financial transactions and to the production o f opportune information on most government finances. The underlying accounting system (SICON) operates in most government entities and a version tailored to municipalities (SIAFMUNI) i s rapidly being expanded. All in all, the formal norms are progressively generating a culture o f accountability and fiscal prudence in officials responsible for PFM. 4. The financial management methodologies and processes are well documented and normally followed. The Government is able to track revenues and expenditures on a timely basis and under a broad classification system. Effective controls o f its cash position, including an efficient common fund system and rather complete central government debt records, are in place. Both the annual budgets and financial reports provide considerable government financial data that i s publicly available. 5. The external auditors have independence and room to exercise their functions, including timely annual reporting to Congress on fiscal information. Furthermore, leading civil society organizations with good technical and convening capacity have been engaged constructively in social audit initiatives and integrity pacts. Still, important obstacles remain, as summarized inthe following paragraphs 6. Procurement. Efforts to modernize public procurement have not been so significant than other areas. The public procurement system has advanced to a certain degree but has not GuafemalaCFANCPAR:Execufive Summary viii achieved the desiredlevel o f transparency, competition and predictability. While transparency has benefited from the initial stage launch o f an electronic government procurement tool (Guatecompras), policy deficiencies complicate enforcement and negatively affect the efficiency o f budget execution and the government's ability to deliver public services. 7. Procurement planning, management and monitoring remain inadequate because o f various factors that could be addressed. The public procurement regulatory framework i s outdated and inefficient, includes some barriers to competition, and i s not conducive to transparency or economic results. Unduly onerous requirements, lack o f clarity, a preference for anachronistic approaches to control, and the absence o f procedural guidance or standard biddingdocuments have fostered a proliferation of arrangements which lead to fragmentation and further compounds the regulatory shortcomings. 8. Because there are not an effective public procurement policy nor the mechanisms for policy oversight, a clear, unifying vision o f the objectives o f public procurement and its role within the PFM system is missing. There is also limited capacity to monitor the system's performance and effectively utilize the feedback for policy development, procurement planning, and control. As a result, capacity building initiatives are not well coordinated, the development o f key implementing tools (e.g. bidding documents) is lagging, and there have been no in-depth assessments of the government's procurement strategy or the supplying markets to support the introduction o f new contracting approaches and cost reduction programs. 9. At the executing entity level, most procuring units have poor capacity and there is no strategic planning clearly linked to the entities' budget processes and institutional and developmental objectives. While the Commissioner for Public Sector Modernization (COPRE) i s undertaking a modernization o f the legal framework, there is no clear leadership for a sustained national dialogue and a focused effort to coordinate the procurement reform. 10. Financialmanagement. While a formal budget formulation process is inplace, and the Ministry o f Public Finance (MFP) i s strengthening it with clear plans for adoption o f a medium-tendperformance based expenditure framework, the high incidence o f constitutionally and legally mandated earmarked funds and fixed-type costs limits the room for resources allocation in the budget planning. Similarly, the incomplete information on municipal budgets and investment projects prevent comprehensive sectoral planning. On the other hand, the unrestricted capacity o f Congress to introduce unrestricted changes to budget plans (particularly the public investmentprogram), and o f the Executive to modify the budget duringthe fiscal year through transfers, can affect the credibility o fbudget formulation. 11. Regarding budget execution, on one hand the flexibility o f some entities i s restricted by the monthly periodicity o f the system of quotas; on the other, many entities andprograms operate out o f the single treasury account payment system, an exemption which can produce idle finds, increase transaction costs, and reduce transparency. And, whereas budget execution accounting practices have been standardized, there i s still certain degree of fragmentation in internal administrative systems and procedures. This i s evident at the time o f this analysis inpersonnel and payroll management, which are complicated by the variety o f disconnected regimes and practices used for hiring and compensation, and -as mentioned Guatemala CFAICF'AR: Execufive Summary ix above- in procurement and contracting practices as mentioned above. This has been addressed partially through the implementation in 2006 o f a internet based payroll system (Guatenomina). 12. In terms o f fiscal reporting, at the moment o f the analysis, the simultaneous (and sometimes late) recording o f expenditure commitments and accruals may generate incomplete information on total expenditures incurred and debt, carrying the risk o f generating payment arrears. However, since January 2006 MFP established since January 2006 implementing quarterly commitment limits and monthly cash flow and accrual limits, facilitating inthis way the timely recording o feach expenditure stage. 13, On the other hand, the lack of consolidated government financial statements restricts the capacity to undertake comprehensive analyses of budgetary performance, financial position, and fiscal risks -which are not performed in a systematic manner. It was clarified that at central level period exercises o f budgetary performance and fiscal risk are being performed weekly. 14. Finally, the independent assurance on the reasonableness o f fiscal data (e.g. on Public Accounts) i s constrained by capacity limitations o f the Office o f the Controller General o f Accounts (CGC), particularly its low numbers of qualified professionals. The problem is compounded by the weaknesses that makethe internal audit function largely irrelevant. Suggested Fundamental Actions 15. Moving forward, the Government should focus on implementing key actions that are relatively less complicated because they do not require legal changes, may be supported by current capacity building projects, and can produce improved outputs in the short-term. Pilot programs in line ministries that are responsible for the majority o f the budget (Le. Infrastructure, Health, and Education) should be accelerated with a focus on strengthening procurement and financial management processes, including internal controls. As the pilots produce measurable results, they could be expanded throughout the public sector. 16. At the same time, the Government should begin developing consensus on systemic changes aimed at ensuring that the reforms are sustainable, the procurement and financial management systems better integrated, and the regulatory framework consistent with international standards. 17. Each chapter o f this report provides recommendations to strengthen the country's PFM foundations, operational processes, and transparency. These suggested actions are largely consistent with the Government's own plans, and are supposed to be put into practice under proper sequencing arrangements. Selectedfundamental actions, driven primarily by operational efficiency implications, are identified throughout the report and included in the following paragraphs. 18. Budget planning. The Government has designed a good planto adopt a results-based andmulti-annual approach to budgeting.To validate and sustain what is by nature a long-term endeavour, a cautious and gradual approach i s encouraged. Guatemala CFAAICPAR: Executive Summary X 19. Inthe short to medium term, the approach inthe pilot ministries should be expanded, from the institutional level, to sectoral and programmatic levels. Costed sectoral strategic plans should be developed for reconciliation o f the top-down and bottom-up multi-year budget planning. The public investment program (PIP) should be based on those plans, with due consideration to recurrent cost implications. These actions could bring about more meaningfuldiscussions over operational efficiency inthe use o f resources, an orderly review o f budgetary implications o f existing and new policies, and better planning o f the recurrent costs o f investment decisions. 20. Revenue administration. The Superintendency of Tax Administration (SAT) is already heading inthe right direction with its comprehensive strategic plan. Accordingly, and with a view o f improving transparency of tax data and effectiveness o f registration, assessments and collections, some key actions to be implemented are to: (i)continue expanding the coverage and information content o f the taxpayer account, including accurate identification o f outstanding debt; (ii)aggregate that information so as to enable better reporting on declared and assessed taxes, including well-classified and reconciliated data on arrears; and (iii) clear up the registration databases, make penalties for non-compliance with tax obligations more effective (as pertinent, through modifications to the Tax Code), and strengthenthe risk-based focus o faudits. 21. Budget execution. In the short term, proper and timely recording of expenditure commitments and accruals should be both enforced and enabled (e.g., moving from monthly accrual quotas to quarterly commitment limits -always keeping emergency options to deal with unexpected cash flow problems). These actions could help prevent payment arrears, a form o f non-transparent financing that can affect fiscal discipline and increase cost o f works, goods and services. They could also improve predictability in resource flows to service delivery units, which could therefore plan and use those resources in a more timely and efficient manner -a matter o f particular importance in light o f the introduction o f results- based agreements for budget management. This recommendation was implemented since January 2006 implementing quarterly commitment limits and monthly cash flow limits. 22. Treasury management,Inthe medium term, the Treasury's common fund payment system should be significantly expanded to all central government noncommercial entities, taking into consideration the respective legal implications, so as to prevent idle funds, reduce transaction costs, and increase transparency. 23. Procurementpolicy and management.A planto clearly assign procurement policy formulation and oversight functions, separating them from operational tasks (e.g., management o f framework contracts), and ensuringproper leadership and resources for both, should be developed soon for a medium-term implementation for a successful implementation o f the procurement reform. Further development o f Guutecomprus should take place, in the short term, as part o f a comprehensive strategic plan for e-procurement, focusing inparticular on a better interfacewith SIAF modules, product classification and information standards, and use o f data for procurementplanning. 24. At a strategic level, the Government could benefit in the short term from in-depth market studies and a review of its supply processes for identification o f cost saving Guatemala CFANCPAR: Executive Summary xi opportunities. A conservative estimate of the overall savings that could be potentially achieved by streamlining the Government's supply strategy is approximately 500 million Quetzales per year (approximately US$65.5 million). 25. At the executing entity level, procurement planning and management should be institutionalized in the short to medium term, by overhauling the annual operating plan process and developing key implementationtools (e.g., documents and monitoring systems) - starting with pilot ministries, and eventually adopting them as policy. These efforts should be framed in well-targeted medium-term capacity building programs coordinated with prospective civil service reform advancements, and be properly linked to cost reduction strategies such as potential initiatives to take advantage o f economies of scale in volume consolidation (e.g. including enhanced use o f framework contracts under clear arrangements for awarding and management.) 26. Focusing on tools and strategies designed to improve the efficiency and transparency o f the system's outcomes would ease the pressure for significant regulatory action inthe short term and, at the same time, it i s likely to help buildmomentum for the reform. 27. Internal controls. The institutional assessments carried out under COPRE's leadership, together with the specific findings reported inaudit reports, should be the basis to develop inthe short term internal control strengthening plans inthe budget executing entities -again, starting with pilot ministries. On the other hand, recognizing that the internal audit institutional weaknesses cannot be solved in the short term, certain technical actions can be undertaken, e.g. preparing an internal audit manual, providing internal auditors with tools from the government audit information system (SAG), developing a system o f training and certification, and improving the coordination with the CGC. 28. By enhancing controls o f expenditure processes, the opportunities for corrupt practices, leakages andpatronages that affect operational efficiency can be reduced. 29. Financial management systems. The ongoing development o f SIAF modules for personnel registry and payroll, procurement, fixed assets and inventories, should be framed in a medium-term comprehensive strategy that takes into account the need to re-structure and streamline procedures within executing entities. With regards to payroll controls, the continued implementation o f decentralized payroll preparation in ministries should be complemented with efficient interfaces betweenthe humanresource management systems and SIAF's cited module, and with a system o f periodicalpayroll audits. 30. Ingeneral, operational efficiency can be improved ifthe control rules and procedures are relevant, widely understood, and cost effective. 31. Transparency of fiscal reporting. The expansion o f coverage o f SICOIN, complemented as needed with incentives and sanctions, should serve in the short term to disclose budgetary and financial information o f entities (including municipalities) that do not form part o f the General Budget. Similarly, an effort should be made to begin disclosing the composition o f certain large accounts (notably the groupings for "state obligations" and "secretariats and other dependencies"), identifying the arrears portion o f the known payables, disclosing the nature and fiscal significance of contingent liabilities and quasi-fiscal activities, Guatemala CFANCPAR: Executive Summary xii and disclosing local government indebtedness to the Municipal Development Institute (INFOM) and others. In2006 the Municipal Transparency webpage and Fiscal Transparency were established at www.minfin.rrob.at where is published information regarding municipal budgetandtransfer recipient entities. 32. In the short to medium term, the MFP should strengthen its capacity to assess and monitor fiscal risks associated with the financial performance o f decentralized and autonomous entities, and should develop consolidation methodologies and begin applying them to the central and general government. The actions summarized inthese two paragraphs would increase the availability o f evidence required for comprehensive and effective oversight o f the use o f funds, thus reducing the opportunity for breaches in fiscal discipline and operational efficiency. 33. External oversight. An effort should be made inthe short term by the CGC to utilize and validate available SAG modules, complemented with better use of risk assessment techniques to develop the annual audit work plan and to plan individual audits -so as to adhere to international standards and focus on significant and systemic issues. By enhancing external scrutiny, these actions could influence operational efficiency via increased accountability for efficient and rule-based management o fresources. 34. In the medium term, the CGC should address the overhaul o f its staff structure, shifting resources for a more efficient ratio o f administrative to technical operational staff, and ensuringthat the latter are increasingly composed o f qualified professionals. At the same time, the CGC should make more extensive use o f its legal power to use work of private auditors. 35. Municipalities. The ad hoc alliances that have been fostered between government entities and cooperation agencies to strengthen local government administrative capacities, should lay the ground work for the short-term preparation o f a uniform sector-wide strategy, under which the various sources o f finds available are efficiently allocated. Further implementation o f SIAFMUNI and access to Guatecompras should continue, but with due consideration to the mentioned strategy. The latter should also contemplate opportunities to simplify internal administrative procedures, to address ambiguities and contradictions in municipal debt legislation, to further facilitate associations o f municipalities to take advantage o f potential economies o f scale in shared administrative tasks, and to carry out market analyses to identify room for cost saving mechanisms. In2006 it was completed registry module and the municipal Financial Statements are currently generated through SIAFMUNI. Currently all municipalities have access to Guatecompras and i s usedby a 95 %. 36. Legal framework. The Government, mostly through COPRE, is sponsoring key reforms to civil service, public access to information, procurement, and concessions laws. In this regard, country circumstances (e.g., a highly divided Congress that makes it difficult to shepherdmajor legal reforms) demand -in the short term- a strategic approach to legislators and opinion makers, so as to ensure due technical and public debate, and achieve reasonable compromise to generate wide-based support. Guatemala CFANCPAR: Executive Summary xiii 37. Improvements to the procurement law should aim at ensuring a more streamlined and transparent process, consistency with DR-CAFTA, and coverage o f all entities managing public funds (e.g. social funds.) Consistency with established international practices may facilitate greater utilization o f local rules under operations financed by external donors. 38. Financial management legal enhancements (taking into account possible constitutionally restrictions) should contemplate making the PIP process mandatory, and putting certain limits on the executive and legislature's capacity to dictate budget allocations and composition ofthe PIP, as well as to the executive's capacity to modify the budgetduring the fiscal year through transfers. These actions could lead to increased credibility o f the budgetprocess, which inturncould help avoid shifts across expenditure categories that could affect operational efficiency o f service delivery. 39. Other key reforms that affect PFM. Efforts to modernize PFM should not take in place in isolation, but be complemented by other key public sector and governance reforms, such as modernizing civil service, establishing key legal precepts to help the fight against corruption and strengthen probity controls, and strengthening judicial systems that guarantee the rule o f law. Inthe short to mediumterm, the office o f the Commissioner for Transparency should be better focused, staffed and resourced to further develop and implementthe incipient anticorruption strategy. During a similar timeframe, legislation concerning public access to information, together with actions to further enable social audits, should be pursued. At the end o f 2005 the Government approved a governmental agreement (Acuerdo Gubernativo) regarding free information access, that establish among others, the obligation for public officers to present an annual accountability report o f the precedingperiod. Guatemala CFAICPAR: Country Background 1 I.COUNTRYBACKGROUND Political and Economic Evolution5 1.1 With approximately 12.2 million inhabitants and an average per capita income of about US$2,000, Guatemala i s the largest economy in Central America (Box 1). Poverty in the country i s high and deep: about 56 percent o f all Guatemalans lived in poverty in 2000 andabout 16percent inextreme poverty. Box 1: Guatemala at a Glance Population: 12.2 million Surface area: 108.9thousandsq. km Population per sq. km: 110.2 Population growth: 2.6 YO Population under 15 year old: over 50% Life expectancy: 65.5 years GNI per capita: US$ 1,760 GDP: US$23.3 billion Source: World Development Indicators2004 1.2 Political context. Long-standing social and economic tensions sparked a 36-year civil war that ended in 1996 with the signing o f the Peace Accords, which marked an important turning point in Guatemala's political and socio-economic development.The Peace Accords aimed to reverse the negative impact o f the conflict and foster a more inclusive socio- economic development, by setting targets infour mainareas: (i) resettlement, re-incorporation andreconciliation; (ii) development; (iii) human productive and sustainable development; and (iv) modernizationofthe state andimproved governance. 1.3 Progress toward achieving the targets established in the Peace Accords include, inter alia: (i)steps taken to implement mechanisms at sub-national and local levels to empower communities; (ii)important recent gains in education and health coverage and increased social sector spending; (iii)improved coverage of basic utility services; (iv) better management of public finances with the implementation of an Integrated Financial Management System (SIAF), and increases in public revenues (albeit below agreed targets). However, progress has been slower in other important areas, such as achievement o f higher growth rates. Deceleration in progress towards achievement o f the Peace Accord targets was especially apparent inthe last years o f the Portillo administration, 2002-2003, intandem with a noticeable weakening o f governance and public sector institutions. 1.4 The incoming Berger Administration, elected for the 2004-2008 presidential term on an anti-corruption, pro-growth platform, has reaffirmed its strong commitment to the Peace Accords, particularly through an economic reactivation plan, Vamos Guatemala! that is fully consistent with the framework established in the Accords. One o f the fundamentals o f Vamos Basedon World Bank(2005). Guatemala CFAAICPAR: Country Background 2 Guatemala! i s to improve governance and credibility o f public sector management and institutions. Central to this strategy i s the consolidation o f an efficient and transparent public financial management (PFM) system. These efforts have been deemed positive for the country's domestic and international image and investment climate. 1.5 Economic context. Guatemala's record o f macroeconomic management during the past decade has been characterized by low inflation, stable outputs per capita, and generally sound fiscal management. The country's ratio o f public debt to GDP (around 18 percent) remains one o f the lowest in the region, despite similarly low tax revenue to GDP ratio (around 10 percent). Its sovereign bondratings are below but close to investment grade.6 1.6 With respect to growth, however, Guatemala has long performed more poorly thanthe rest o f the region. Inthe period 2001-03 there was a deceleration o f the economy due to both internal and external factors. Internally, the investment climate was negatively affected by the aforementioned deterioration in governance and a weakening o f the rule o f law - which, in turn, gave rise to a conflict between Government and significant segments o f the private sector. On the external front, the terms o f trade were negatively affected by the collapse o f the world price o f coffee, and recession in the U.S. and other trading partners. Looking ahead, the ratification o f the free trade agreement with the U.S.(DR-CAFTA) and the deepening of regional integration efforts, offer significant opportunities for attracting new investment and fostering trade-led growth. 1.7 One o f the key economic and political challenges for Guatemala i s the need to increase public expenditure to reduce poverty and support economic growth, while maintaining fiscal discipline. Consequently, it is an important priority for the Government to enhance the efficiency of public resources management. As evidenced inthe fundamentals o f Vamos Guatemala!, it i s a stated objective o f the administration to improve public procurement and financial management because they offer major opportunities for gains in efficiency and reduction o f opportunities for waste and corruption. In addition, the Government is very interested in attracting private funds for large infrastructure projects, which are urgent but cannot be included in the public investment program without crowding out priority social investments. The Government's efforts to attract private investors can greatly benefit from overall improvements ingovernance andtransparency. ThePublic Sector 1.8 Composition and size. Titles IV and V o f the Constitution regulate the attributions and competencies of the Government, defined broadly as the legislature, the executive, the judiciary, the local governments, and other constitutional bodies such as the offices o f the controller general, the public prosecutor and the attorney general. The non-financial public sector (NFPS) consists o f the central administration entities, decentralized institutions that operate under the central government's authority, autonomous entities, social security, public enterprises, andm~nicipalities.~ 6 Two notches below investmentgrade accordingto Moody's, andthree notches below accordingto S&P. MFP(2005). GuatemalaCFAAICPAR: Country Background 3 1.9 With central government expenditure below 14 percent o f GDP (Table l), Guatemala's public sector i s small by international comparison.' levenue 10.5 10.4 11.1 11.6 11.3 Tax revenue 9.3 9.4 9.7 10.6 10.3 t Other 1.1 0.9 1.4 1.0 0.9 xpenditure 13.3 12.4 13.3 12.2 13.4 Current expenditure 8.1 8.6 9.2 8.6 9.3 Capital expenditure 5.2 3.7 4.1 3.6 4.1 verall balance et external financing et internal financin 0.9 Source: IMF (2005). GovernanceEnvironment 1.10 This section contains data on governance and corruption indexes as o f 2004, which help portray the state o f affairs as o f the end o f the Portillo administration. Therefore, any effects that actions by the current administration could have on those indexes are not yet reflected. The data should thus be read with caution. 1.11 Perceptions o f governance as o f 2004 remained unfavorable. The Worldwide Governance Research Indicators Dataset showed that in all six major governance categories, Guatemala fell below the 50th percentile, with the dimensions for rule o f law, government effectiveness, political stability, and control o f corruption below the 30' percentile (Figure l).' Moreover, no improvement was shown with respect to the 1998 results. The picture was not better when compared to the Latin America and the Caribbean average: all indicators for Guatemala presented much lower levels, with the exception o f regulatory quality. * Major progress in the privatization program was achieved during the late 199Os, reducing significantly the public enterprise activity. The port authorities and the National Electrification Institute (INDE) are the only non- financial public enterprises that carry sizable operations. The six governance indicators (voice and accountability, political stability, government effectiveness, regulatory quality, rule o f law, and control o f corruption), reflect the statistical compilation o f responses on the quality of governance given by a large number of enterprise, citizen and expert survey respondents in industrial and developing countries, as reported by a number o f survey institutes, think tanks, non-governmental organizations, and international organizations. (Kaufinan, 2005) Guatemala CFAAICPAR: Country Background 4 I I " " 7. I I- C o l l r l a btu."-.-,IW, llsltsp-hlta ordr) Cc.,pcira "lth r . . u . I I 1L.tl" rnm-1..Iulbb.n>(IoWP br) :ct to 1.12 Control of corruption. According to the Corruption Perceptions Index 2004 (Transparency International, 2004), Guatemala ranked 122 out o f 145 states worldwide, only ahead o f Paraguay and Haiti in Latin America and the Caribbean. This result possibly reflects the highly publicized cases -taking place during the previous administration- o f misuse o f public funds, reports o f influence peddling, intervention into mismanagement in banks, and failures to prosecute suspects o f corrupt activities. 1.13 As noted previously, the first year o f the Berger administration has seen important steps being taken to improve the overall governance framework (such as the creation o f the Office o f the Commissioner for Transparency), and law enforcement (including a series o f highprofile arrests and indictments). However, muchwork remainsinbothareas. 1.14 Inappearance, the regulatory fiamework for transparency and anticorruption is fairly comprehensive: there are seventeen laws which define the national integrity system. However, as discussed later inthis report, critical cornerstones o f this system -including the procurement and civil service laws- require substantial revisions. Furthermore, some key concepts -such as the offering and soliciting o f bribes, embezzlement, political interference, and conflict of interests- are not well defined in criminal law, and additional regulations - such as whistleblower protection- are needed to support investigation and prosecution o f corrupt practices. 1.15 Enforcement i s expected to improve as a result o f multiple initiatives which include the ongoing judicial reform, wider use o f the government procurement system (Guatecompras) -which also allows interested parties to submit allegations o f corruption directly to the system administrator-, and the obligation o f public officials to submit patrimonial declarations (though, as arguedinChapter VI the capacity for verification i s low). Another positive development has been the creation of a financial investigation unit and an anticorruption "hotline" inthe Public Ministry (office of the public prosecutor), which i s also the focal point for implementationofthe Inter-American Conventionagainst Corruption. Still, due to the lack o f a comprehensive mechanism to coordinate information and follow-up GuafemalaCFANCPAR: Counfry Background 5 actions among the many involved agencies, enforcement will continue to be a persistent challenge. 1.16 The presence o f multiple institutions charged with different roles in the fight against corruption has complicated coordination and lead to duplication o f efforts, limited enforcement, and insufficient emphasis on preventive measures. The creation o f the office o f the Commissioner for Transparency was an important, yet incipient, development introduced by the Berger administration to improve coordination and develop a comprehensive strategy. An early benefit ofthis instance has beenthe engagement o fprivate sector representatives and CSOs in a constructive dialogue and cooperation around integrity and social audit initiatives." It seems that, moving forward, the Commissioner for Transparency needs to focus more on policy and coordination, rather than investigation and enforcement. 1.17 PFMimplications. The perceptiono fgovernment effectiveness canbe affected bythe way the Government manages the inputs required to produce and implement good policies and deliver public goods. The perceptionof corruption can be affected by the degree of fiscal and public procurement transparency that the Government adopts. Thus, the quality o f PFM, analyzed in the following chapters, can be a factor in enhancing the country's governance environment. However, efforts to modernize PFM should not take inplace inisolation, but be complemented by other key governance reforms, such as establishing key legal precepts to help the fight against corruption and strengthening judicial systems that guarantee the rule of law. The C F M C P A R in the Country Context 1.18 Good budget institutions allow governments to balance the three interrelated objectives o f budgetary performance: aggregate fiscal discipline, efficient allocation o f resources according to the Government's policy priorities, and operational efficiency in the use o f resources (Schick, 1998). Institutions, understood as sets o f formal and informal rules, influence behavior o f public officials involved in the process o f planning, allocating and spendingpublic money aimed at implementinggovernment policies and programs. 1.19 Objectives. With the view o f strengthening the performance o f Guatemalan budget institutions at the three cited levels," the overall objectives o f the C F M C P A R are to: (i) update analytical knowledge on the legal and institutional framework and systems for budget planning and execution, procurement and contracting, fiscal reporting and external oversight; and (ii) accordingly propose a set o frecommendations, thereby helping the Government inthe design or implementation o f capacity-building programs under its ongoing public sector lo For example, the local chapter o f Transparency International has an agreement with the Government to monitor the utilization o f Guatecompras and give out monthly awards to the public entity that complies more closely with the applicable rules. Moreover, an award for transparency in municipal procurement was instituted inOctober 2004andis given out quarterly. l1The Public ExpenditureReview (World Bank, 2005a) analyzes other aspects (fiscal sustainability, quality of sectoral expenditure planning and allocation, and decentralization policy) that have a significant impact on the three levels o f budgetary performance. Guatemala CFAAICPAR: Country Background 6 modernization agenda.I2 Emphasis i s put on fundamental actions that could enhance operational efficiency.l3 1.20 To that effect, Chapter I1 describes the PFM legal and institutional framework, Chapter I11 looks into the process o f budget formulation and its reliability, Chapter IV examines treasury and budget execution management, Chapter V discusses procurement management, Chapter VI evaluates the arrangements for fiscal reporting and external oversight, and Chapter VI1presents the main conclusions and suggests priorities for action. 1.21 The ultimate goal is to contribute to key fundamentals o f Vamos Guatemala!: strengthening public sector management and institutions, enhancing fiscal management and expenditure efficiency, and positively influencing the governance environment. In the context of the CFAAICPAR, a number of additional "just in time" interventionswere made. These included: (i) performance budgetingworkshop; (ii) e-procurement readiness assessment; (iii)a high level a an study of the government's supply system and identification of potential cost savings strategies; and (iv) a workshop onprocurementaspects of concessionsandpublic-privatepartnershipsininfrastructure. l3The fundamental actions found throughout the report respond primarily to the results of a preliminary assessmentof public financial managementperformanceindicators (Annex 2). Guafernala CFANCPAR: Legal and lnsfifufional Framework 7 11.LEGALAND INSTITUTIONALFRAMEWORK FormalRulesfor Public Financial Management 2.1 The PFM legal instruments are contained invarious laws and regulations listed inBox 2. Under the general rules established in the Constitution, the Organic Budget Law of 1997 (LOP) governs the formulation, approval, execution, evaluation and closing of the national budget, as well as the systems for government accounting, treasury, and public credit. The State Contracting Law (1992), inturn, regulatespublic procurement. Box 2: Main Laws and RegulationsGoverningPublic Financial Management I Articles 237-243 of the 1985 Constitution regulate public fiances, particularly the general state budget. Articles 232-236 regulate the fiscal control function of the Office of the Controller General of Accounts (CGC). I The Organic Budget Law (Decree 101 of 1997, as modified by Decree 71 of 1998) and its Regulations (Accord 240-98, modified by Accrod 433-2004) norm the public sector financial management systems, i.e. budget, integratedaccounting, treasury and public credit. I The annual Law of the General State Revenue and Expenditure Budget lays out the revenue and expenditure budgets o f the central government, and provides for specific budget rules applicable to the fiscal year (although these have been similar from year to year). I The Ministry of Public Finance (MFP) has issued various manuals, e.g.: Budget Formulation, Programming of Budget Execution, Organization and Basic Functions of Financial Management Units (UDAFs), Budget Classifications, Budget Modifications; and user guides for the Integrated Financial ManagementSystem (SIAF). I The State Contracting Law (Decree 57 of 1992, as amendedby Decrees 29-97, 34-2001 and 73-2001) and its Regulations(Decree 1056of 1992) normpublic procurement. I The regime for external audit is establishedin the Organic Law of the CGC (Decree 3 1 of 2002) and its Regulations (Decree 318 of 2003). That same legislation governs public sector internal controls and internal audits. Accordingly, the CGC has issued norms for government (external) audits, internal controls, and government internal audits (last updatedin2003). I The Law of the Executive Body (Decree 114 of 1997) dictates the organizational framework of the executive branch. I The Civil Service Law (Decree 1748 of 1968) regulates public employment, albeit several specific regimesalso apply. I Municipal financial management is regulatedprincipally by the Municipal Code (Decree 12 of 2002, as amendedby Decree 56 of 2002), the GeneralDecentralization Law (Decree 14 of 2002), andthe Organic BudgetLaw I The Tax Code (Decree 6 of 1991) and other specific legislation provide the framework for tax and customs administration functions. 2.2 Institutional arrangements. The MFP is responsible for the direction and coordination of public finance, as well as the "control" of public sector budgets, excepting municipalities and the public university (Universidad de San Carlos). Each public sector entity must maintain a financial managementunit (UDAF) responsible for budget, accounting and treasury functions. UDAFs serve as the link with MFP's central normative directorates for these functions. Guatemala CFAICPAR: Legal and lnstitutional Framework a 2.3 The MFP, through its Normative Directorate o f State Contracting and Procurement (DNCAE), also has the mandate to develop procurement policy and implementation tools, coordinate capacity building programs, and carry out other functions that are typical o f a procurement policy office. In practice, however, the DNCAE is not adequately staffed to fulfill these responsibilitiesandfocuses almost exclusively on operationalfunctions.l4 2.4 The Constitution grants the Office o f the Controller General o f Accounts (CGC) the power to exercise fiscal control fiscalizacidn) o f finances throughout the public sector and other recipients o f public funds. Its Organic Law establishes, inter alia, the CGC's responsibility for the external audit o f financial statements and budget execution reports o fthe central government, decentralized and autonomous entities, and its authority to set governmental norms on internal controls and internal audits. Budgetary Attributes of different Branches of Government 2.5 Guatemala's Executive has powers o f proposing and executing the budget that seem similar to those in other Latin American countries, with the same tendency towards a strong role o f the Ministry o f Public Finance (MFP). There is, however, a significant exception in that neither the Constitution nor the LOP imposes any limits on the faculty o f Congress to modify the annual state budget.15 This has been particularly evident in the significant reprogramming -as much as 70% in 2003- o f the program o f works developed by regional development councils (Maul, 2005). The Congress also retains the power to authorize public debt and tax legislation, and approve budget execution reports. The presidentholds the right o f veto on laws passed by the legislature, which can be overturned by a two-thirds congressional majority. 2.6 The Executive must present the annual General Budget proposal to Congress by September 2 o f the preceding fiscal year (which coincides with the calendar year), and Congress must approve, modify or disapprove it by November 30. If by the start o f the fiscal year the General Budget Law has not been approved, the budget in effect from the previous year i s put again into effect. The authority to modify the budget during the fiscal year can be summarized as follows: Budget modifications resulting in an increase or reduction in the overall budget totals must be approved by Congress (if the Executive makes an objection to a budget increase, a two-third majority vote from the Congress is required for the increase to become effective). However, the LOP allows the MFP to adjust the budget, within the amount l4The DNCAE administers the Public Sector Contracting and Procurement Information System (Guutecomprus) andthe framework contracts (discussed inChapter V). The latter activity absorbs approximately 90 percento f its resources. l5Congress usually modifies the budget proposed by the Executive, including a significant increase inbudgeted expenditures for 2003 -an electoralyear- that leadto a 75% increase inthe budgeted deficit. However, as argued later in the chapter, the Executive has sufficient powers to modify the budget during the fiscal year so as to control the actual fiscal balance. Guatemala CFANCPAR:Legal and lnstifutional Framework 9 authorized by Congress, if current revenues have a tendency to be significantly below the budgetestimates.16 rn Inter-institutional transfers can be approved by accord issuedby the affected entities, subject to prior positive opinion from the MFP -a power that has consistently been exercised.l7 MFP can authorize transfers within a central administration institution when The the modifications affect personnel, emergency or unforeseen costs, change the financing sources, or shift resources betweenprograms or investment projects. Other intra-institutional budget modifications can be approved by each entity's supreme authority. There are certain exceptions to the mentioned general rules: the Constitution stipulates that allocations for investments cannot be transferred to current expenses, and the annual General Budget laws can establish other transfer restrictions such as limits to the use o f budgetary savings from personnel expenditures and debt service. 2.7 Extra-budgetaryentities. The Congress, the judiciary, certain constitutional offices, the autonomous entities, and the central government decentralized entities, are excluded from the annual General Budget Law formulation and approval process (in this regard, the latter encompasses only the transfers from the General Budget). '*The budgets of decentralized entities are approved -through the MFP- by accord before December 15 o f each year. During the fiscal year, these entities can authorize modifications within their budgets, unless these affect the investment budget, the sources o f financing or personnel costs, in which cases authorization from the MFP i s required.The autonomous entities, excepting the Universidad de San Carlos and the National Central Agricultural School (ENCA), are required to submit their annual budgets to the Executive and the Congress only "for information". A marginal portion o f donor funds that do not require counterpart funding also escapes the budgetary system (see Chapter IV). 2.8 Local governments.The 331 municipalities represent around 15 percent o f the public sector and are heavily dependent upon central government transfers, which account for approximately 65 percent o f total municipal revenues (though the majority o f municipalities are much more dependent on transfers than this aggregate figure would ~uggest).'~ These transfers are funded from a mandated constitutional allocation (10 percent o f ordinary revenues), a share o f the value-added tax (1.5 percentage points o f the 12 percent VAT rate), and-less significant- other shares oftaxes. The transfers are distributedamong municipalities on the basis o f pre-established formulas that limit the use for operating expenditures (10 l6 The Executive exercised this power in 2004, by freezing certain expenditure allocations of the 2003 budget (which was in effect because the 2004 budget was not approved). This action, combined with a thorough modification of budgetary allocations (42 transfers representing 10 percent of the expenditures executedduring the year), allowed the actualimplementation ofan Executive-drivenbudget. l7 The opacity and alleged misuse of inter-institutional transfers (e.g. those benefiting the Presidency and Defense) from 1998to 2003, has beenflagged as atransparency issue (Coalici6n por la Transparencia, 2004). 18During 2003, the total expenditure execution of the General Budget (includingtransfers) was of 426,333 million. During that period, the expenditureexecution of entities excludedfrom the annual GeneralBudgetLaw formulation and approval process was of 47,637 million. This information was drawn from the 2003 annual audit report, which covered fmancial statements of 68 out of 79 NFPS central government entities, some with qualified or adverse opinions (Table 9). World Bank (2005a). Guatemala CFANCPAR: Legal and lnsfifutional framework 10 percent of the constitutional transfer and 25 percent of the VAT allocation).20There are also a number of social and infrastructure funds that implement projects at the municipal level, albeit not through the municipaltreasuries. 2.9 Municipalbudgets, as stipulated inthe MunicipalCode, are formulated by each mayor and presentedduring the first week of October to the municipal council, which can modify it and must approve it by December 15. Budget modifications during the fiscal year require approval by the council. For "purposes of consolidation and information", the LOP requires municipalities to report the approved and executedbudgetsto the MFP, Congressand CGC. TheIntegrated Financial Management System (SUF) 2.10 The SIAF system, born inthe mid-ninetiesas part of the public sector modernization program, integrates the budget, accounting, treasury, and public credit systems through a common set of rules and procedures. Its basic premise is normative centralization (by MFP) and operational decentralization (by executing entities, via legally mandated institutional financial management units -UDAFs). But, as explained in Chapter IVYthe MFP does maintain a critical operational role inthe budget execution cycle -a reflection of concern for aggregate spending controls. 2.11 At the center of the budget management process is SIAF's integrated accounting system (SICOIN), whose module for standardized budget formulation and execution is operating in42 central government entities, 20 decentralized and autonomous agencies, and 2 major municipalities.21 SICOIN is complemented by various operational tools, such as the Contracting and Procurement Information System (Guatecompras) and modules for payroll preparation, rotating funds and asset registry. A version tailored to municipal needs (SIAFMUNI) is under implementation in 44 municipalities. A previous lighter tool for recording budget execution (SIAFITOMUNI) is installed in321municipalities. Public ProcurementRegulatory Framework 2.12 The State Procurement Law and Regulations, while fairly complete, are outdated. The bases for awards are excessively vague, the use of contract bracketing could lead to disqualification of otherwise competitive bids, and appropriate provisions for consultant selection are not contemplated. In addition, there are no subsidiary instructions providing practical guidance to staff on procedurals details or standard bidding documents. All of this has fostered a proliferation of application practices whose results are neither transparent nor economical. 2oThe constitutional transfer and tax-sharing formula for distribution, as establishedinthe Municipal Code, is as follows: 25 percent based on equal parts; 25 percent based on population; 25 percent proportional to own revenues per capita; 10 percent proportional to the inverse of own revenues per capita; and 15 percent proportional to the number oftowns andvillages inthe municipality. 21Interms of its IT structure, since 2004 the system has been operatingunder a database management software with n-tier Internet architecture (SICOIN-WEB), which reduces costs associatedwith communication systems (dedicated links), processingcapacity (servers and other equipment), software upgrades andmaintenance.At the same time, the system is supportedby security safeguards-logical (e.g., user profiles and access protocols, audit trails, etc.) and physical (e.g., frewalls, encrypted data transmittal, etc.). Guatemala CFAICPAR: Legal and lnsfifufional Framework 11 2.13 Reforming the legal framework. The Commissioner for State Modernization (COPRE) intends to modernize the procurement legislation with the introduction of important amendments. It would be desirable that such amendments take into account the recommendations already made to address the main shortcomings of the current law, which are listed below. Guatemala CFANCPAR: Legal and lnsfitutional Framework 12 [ain issues previously identified 'roposed amendments Old New Article Article The thresholdsfor public bidding and for Increasedthresholds;procedurebased 9 5 delegation of authority are low and cannot on inflation to adjust thresholds.22 38 22 be updatedfor inflation. 43 24 The registry of "pre-qualified bidders" Obligation to register as acondition to 22 11 limits competition and may be abused. bidis eliminated. The bracketing inbid evaluationmay lead No change proposed. 29 N/A to disqualification of competitive proposals. Contractsare not necessarilyawardedto The new definition still provides for 1,28 2,28 the lowestevaluatedbid, butto the bid awardto the "most convenient" bid. which is "the most convenient to the interests of the state". The chapter on concessions is not I No amendment (however, the I95 IN/A comprehensive. Government is proposing anew law on concessions.) Bidscan be pricedand contractspaid in Requires specifying currencies of bid 19 10 quetzals only. andpayment. The price adjustmentmechanismfor No amendment is proposed. 7 N/A imported goods is ambiguousandmay be abused. Bank guaranteesare not inthe list of The new article 1 b provides abroad 64 2 acceptablebid andcontract securities definition of "garantia", which appears to include all types of securities. The mechanismfor contract award IIA new provision introduces a"best and 28 and 34 I I16 and20 decisionsis not effective. final offer" procedure amongthe three lowest bidderswhom are invitedto I / improve their offer.23 There is no mechanismfor correction of Establishesthat bids containing 28 16 arithmetic errors at bidevaluation or arithmetic errors shall be rejected.24 contract award. Automatic default to direct contracting if Automatic default to shoppingifno 32,43 32 no bids are received. bids are received25 Frameworkcontractsare not sufficiently Clarifies process and responsibilities.26 43 25 defined. 46 27 The contractualdisputeresolution Not addressed. 102, 103 mechanismis not effective. 2.14 Procurementrequirementsundertrade agreements. Consistency with Guatemala's commitments under the multilateral free trade agreements i s an important external driver for 22 However, there is no adjustmentmechanismfor shoppingthresholds. 23 Neither "best and final offer" nor competitive negotiations may not be appropriate in Guatemala, given the current control environment and capacity inGuatemala. Inaddition, this approach is not appropriate inall cases andrequires additional safeguards that should be specifiedinthe law. Inthe case of complex contractswhere it i s difficult to define requirementbefore bidding, atwo-stage approachwould be more appropriate. 24 Based on establishedpractice, arithmetical errors should not be cause for rejections, providedthat the bidder acceptsthe correctionsmade by the evaluating committee. 25 The procuring entity should assessthe reasons for the lack of response and re-bid after making the appropriate amendments. 26 However,these definitions should be expanded. Guatemala CFAAICPAR: Legal and lnsfifutional Framework 13 reforming the procurement law.27 While all the agreements to which Guatemala i s a party include specific chapters on government procurement, these provisions have not yet been implemented in practice. However, DR-CAFTA includes better enforcement mechanisms and is likely to have greater impact in the area o f public procurement. DR-CAFTA includes specific dispute settlement procedures for procurement which may result in compensation to the aggrieved bidder and commercial sanctions in case o f non-compliance. Given the generally proactive utilization o f available remedies that characterizes U.S. business practices, it is reasonable to anticipate that compliance with DR-CAFTA's procurement rules will become an important benchmark for Guatemala's procurement system.28 2.15 DR-CAFTA does not require its parties to adopt new procurement legislation, but prohibits them from developing procurement policies or apply rules inconsistent with the agreement with respect to contracts above the specified t h r e ~ h o l d sGuatemala's current . ~ ~ procurement law may require modifications in order to be congruent with CAFTA's provisions which set forth principles and procedures to foster open and transparent procurement practices (Box 3). Box 3: DR-CAFTA implications on public procurement Amongthe mainDR-CAFTAprovisionsthat mayhave a direct impact on current rules andpracticesin .. Guatemalaare the following: non-discriminatorytreatmentfor all participantsinpublic biddingfor BOTcontractsis specifically required. .... Partiescannotrequirethat foreign f m s participateinpublicbiddingthrough a localagent.30 Partiesmustapply fair andtransparentselectionprocedures. Domesticsystemsmust provide for timely andeffective bidreview proceduresfor aggrievedbidders. A minimumbidpreparationtime of forty days is prescribed. Build-operate-transfer contracts (BOTS)are included in the scope of application and the transparent and Partiesmust implementfair proceduresto debarbidderswho participatedincorrupt or fraudulentpractices. Partiesmust implementeffectivetransparencyandanticorruption measures. 2.16 Concessions Law. Public Private Infrastructure (PPIs) projects are an important component o f the Government's financing plans and, consequently, the Government i s very interested in moving fast with the implementation o f a new regulatory framework for concessions. However, in absence o f a comprehensive analysis o f the institutional, legal, and private sector environments required to support concessions and PPIs, there i s no clear regulatory strategy. The Executive's proposal for a new concession law should incorporate 27 Guatemalais a partyto the followingagreements:CentralAmerica-Chile (1999), CentralAmerica-Dominican Republic (1998), and Central America-Panama (2002). However, Guatemala is not a party to the WTO Agreement on GovernmentProcurement. 28 DR-CAFTAcovers all goods and most services, including construction, and applies to all agencies specified inthe agreement. This scope of application encompassesmost central governmententities, includingthe main s endingministries andstate-ownedenterprises,andthe majorityof departments andmunicipalities. 2rThresholds are the same for all DR-CAFTA countries (US$6,725,000 for works; US$58,550 for goods and services). However, for the fist three years following the entry into force of the agreement, the thresholds for procurement of goods and services will be US$8 million for works and US$117,100 for goods. A number of other transitionalprovisionswill apply during the first two years of application(e.g. with respectto time for bid preparation,time limitsto submitbidprotests,andpublicationof noticesof contractaward.) 30 Suchrequirementsexist with respectto certainitems, such as drugs. Guatemala CFANCPAR: Legal and lnstifutional Framework 14 established international practice in the area o f Public-Private Infrastructure Projects (PPIs). Box 4 lists some important aspects o fthis practices which are particularly relevant inthe local context. Box 4: Main RecommendationsBasedon Established InternationalPracticesin the Area of PPIs I In addition to concessions, the draft law should address other PPI modalities in which the Governmentis interested I Iisimportantthatthelawdefineclearlywhichpublicservicesareincluded(forexample,areassuchas forestry or themining sector) I It is critical to ensure full consistencybetweenthe concessions law and existing legislation governing the relevant sector (e.g. the GeneralElectricity andTelecommunicationsLaws.) m The various options for concessions covered by the law should be clearly defined (e.g. management contractsvs. BOTS.) I Turnkey contractsshould not be addressedinthe concessionlaw, but inthe procurement law or regulations. I The treatment ofunsolicitedproposalsshould be addressed inthe law. I International arbitration should be provided for and routinely included in contracts with foreign concessionaires. I It is very important to define clearly when international or national biddingwouldbeused. I Any request by the concessionaireto modify the contractshould be explicitly approvedby the public entity. I Any approvals which decentralizedentities would requireto initiate the process should be clearly specified. I Provisionson paymentto the concessionaire shouldbe clear andcomplete. I The law should include clear provisions on extensions of the concessionperiod. I Evaluation and award criteria shouldbe clearly definedinthe law. I The entity responsible for promoting and coordination opportunities for concessions and PPIs projects shouldbe clearly identifiedinthe law. Civil service3' 2.17 Guatemala's public sector employs comparatively few people. As shown in Figure 2, the central government work force in 2002 represented around 1.6 percent o f Guatemala's total population, which i s considerably lower thanthe averages for LatinAmerica and middle- income countries in general. The size of Guatemala's central government wage bill also i s relatively small, averaging only 3.5 percent o f GDP. The total wage bill in 2002 represented 24.3 percent o f total central government expenditures, significantly below the LatinAmerican average, but slightly higher than inmiddle-income countries.32 2.18 Legal and institutional framework. Guatemala's civil service is mainly governed by a Civil Service Law (1968)' which constitutes a National Civil Service Office (ONSEC) as the entity responsible to organize the public sector personnel administration system.33The Civil Service Commission (JNSC) has as its main objective to settle labor disputes between public employees and the state. Each ministry has a management administration unit in charge of - inter alia- humanresource management. COPRE has beengiven the responsibility of drafting 31Basedon World Bank(2005a). 32 While it seems that Guatemala is performing better than other countries, it is important to keep in mind that the expendituresclassified as part of the centralgovernmentwage billdiffer insome countries. 33Even though ONSEC is mandated by law to take the lead in civil service matters, it is perceived as a weak institution with limitedresources and political support. Guatemala CfAAICPAR: Legal and lnsfitutional framework 15 Figure2: CentralGovernment Employmentand Wages in 2002 I 40 1 ................................... ..................... ................................................... .................................................................. ............ ..,...........,.....,.. ,, .,...... . . ............... .... ,... .............................. 35 30 25 20 15 10 5 0 Guatemala LatinAmerica Middle-Income Countries /UTotalGovt. Empl.(% of population) DWage bill (% of GDP) 0Wage bill (% of govt exp.) 1 Source: World Bank (2005a). a new Civil Service Law. At the same time, the MFP has beenplaying a lead role in matters concerning the civil service remuneration. Certain overlaps infunctional assignments have led to a duplication and fiagmentation o f responsibilities that hamper progress in civil service reform. 2.19 Special employment regimes for a number o f sectors, e.g judiciary, military, education and legislative workers generate contradictions among different regulations and with the overall civil service framework.34 2.20 Personnelmanagement.The process of selecting and evaluating civil servants is time consuming and ineffective. According to the legislation, ONSEC i s responsible for keeping a register o f candidates, evaluating the different candidates for job openings, and presenting the recommended candidates to the executive entity. These procedures consist o f around sixteen steps that on average take 195 days, but are in any case often ignored. Civil servants can be hired under four categories: Regime 011 includes all civil servants in permanent positions. Regime 022 includes those hired under fixed-termcontracts for specific projects. Regime 041 refers to "temporary" employees hired on an hourly rate.3sRegime 029 was created to hire professionals and technicians for specific projects on a temporary basis, so as to avoid restrictions imposed by civil service regulations. In practice, many professionals have been hiredunderthis regime to performpermanentjobs. 34 Special regimes for different sectors are not always a problem as such. The issue in Guatemala is the increasing fragmentation and inefficiencies o f the different and contradictory systems. "Most temporary employees work inhospitals and construction work. Eventhough they are classifiedas "temporary", many have been working inthe same position for many years. Guatemala CFANCPAR:Legal and lnsfifufional Framework 16 2.21 The compensation o f Guatemala's civil servants includes both monetary and non- monetary benefits. The base salary i s determined according to the public salary scale, which includes many sub-classifications with differentpositions and salaries. This, together with the multiple regimes, has led to high fragmentation o f the wage bill. Job descriptions and career plans, let alone performance management systems in line with a merit-based public service entry and promotion, are yet to be effectively designed and implemented. Although the law foresees an annual evaluation o f public employees, these evaluations are not enforced. Given the dismissal process established by the law, once hired, it is very difficult to fire permanent public employees or even assign them to some other public branch.36O n the other hand, job stability for public employees at the professional and managerial levels is weak, as these professionals are often hiredon service contracts that depend highly on political factors. 2.22 Proposedreforms. New draft amendments to the Civil Service Law preparedunder COPRE's leadership propose important changes, such as: (i)creation o f a Personnel Management Unit (Secretaria de Gestidn Humana, SENASEC) that would partially absorb ONSEC; (ii)creation o f a civil service career plan; (iii)creation o f human resource management departments inthe executing entities; (iv) introduction o f annual salary reviews and competitive entrance and promotion policies; (v) change in the dispute settlement procedures by establishing conciliation settings; and (vi) limits to the number o f political appointments. The draft law also proposes to revise the system o f civil service categories, separating them into the following levels: (a) high level, elected or nominated by the President, (b) managerial level, (c) professional level, and (d) administrative or professional assistance level. In addition to the new categories, the wage scales are to be restructured in a manner that would provide better performance incentives. In parallel, a Municipal Civil Service Law also has beendrafted to accompany the on-going decentralization process. Analysis andRecommendations 2,23 Budget rules. There is a comprehensive legal and regulatory framework that covers each relevant area o f budget management. The distribution o f fiscal functions i s clear, yet not always adequate. Medium-term fundamental actions to enhance the budget process (taking into account possible constitutional restrictions) should include establishing certain limits to the legislature's capacity to dictate budget allocations and composition o f the public investmentprogram, as well as to the executive's capacity to modify the budget during the fiscal year through transfer^.^' These actions should lead to increased credibility o f the budget process, which inturn could help avoid shifts across expenditure categories that could affect operational efficiency o f service delivery. 2.24 To decrease the risk that government activities take place without reference to fiscal targets, and to allow comprehensive sectoral planning and well-targeted allocation o f ~ 36Only ajudge o f the Labor Court can order the ending o f a labor contract. These labor conflicts normally last over a year. 37 The MFP considers that the capacity to modify budgets from one entity to another is a valid mechanism o f budgetary flexibility. Hence, it is important that as part o f the budget execution responsibility o f each executing entity, more transparency be given to the use o f transferred resources, as well as those that were programmed since the beginning intheir respective budgets. Thus, MFP considers that the central point is one of transparency rather than flexibility, as the latter can bejustified or necessary incertain cases. Guafemala CFANCPAR: Legal and lnsfitufional Framework 17 resources, the Government should incorporate noncommercial decentralized and autonomous entities into the General Budget formulation, approval and control process. This effort should be accompanied by addressing the more fundamental question o f the nature and degree of autonomy needed by the agencies to effectively perform their tasks, matching autonomy with accountability mechanisms, and thus designing the appropriate links to the central government's financial management system.38 2.25 Any initiative to update the legal framework for budget management could contemplate the inclusion o f certain rules that are repeatedly included in the annual General Budget laws (which inturncould deal solely with specifics o fthe fiscal year), and address the operational issues to be dealt with when the budget is not approved and the previous budget comes into force (e.g., the procedures to updatethe public investment program). 2.26 Municipal transfers. The current system of constitutional and tax-sharing transfers is complex to administer (several sources of funds, with different rules and restrictions), and is based on a distribution formula that i s not necessarily conducive to efficiency and equity o f fiscal resource allocation. This situation calls for a reform o f the transfer system, which has legal implications, a subject analyzed in detail in the Public Expenditure Review (World Bank, 2005a). Box 5 summarizes some of its keyproposals. Box 5: Selected Options to Reformthe MunicipalTransfer System Use of constitutional and tax-sharing transfers. The current system has some legal restrictions on how the transfers are to be used. It i s not clear that these restrictions make sense, if the purpose of the transfers is to provide basic revenues for the municipalities, while various social and investment funds finance specific investmentprojects. These restrictions could be removed-or relaxed to a levelthat is more consistentwith the reality of expenditurepatternsinGuatemala. Consolidation of the transfers. In line with the view of simplifying operation of the system, the different sources could be convertedto apooloperatingunder a single set ofnorms. Distribution Formula, Any transition to a new formula should be approached gradually. Here are suggested financial management (Le., not equity-related)guidelines that couldbe consideredinrevisingthe formula: a) Equalparts only makes sense if it is calibrated carefully to some minimal fixed cost of running a municipal government.It i s not clear that this is the current objective of this component of the formula, and if it is, there is no quantitativerationale given for the large (25 percent)weight put on this component. b) Analyses have shown that for low revenue mobilization, inclusion of revenuesper capita along with its inverse is self-defeating. The inverse revenue component could thus be substitutedwith some poverty measure. On the other hand, for high revenuemobilization, there is an incentive for municipalities to misreport their own source revenues. Revenuesper capita itself is unlikely to provide an appropriate incentive for efforts at improved tax administration. Without complementing (or substituting) this indicator with some measure of the tax base rather than tax revenues, it is impossible to tell whether the system is rewarding tax effort or simply the good fortune of having a relatively large and growing tax base. An area for more in-depth analysis would be to estimate econometrically the potential revenue of the municipalities and construct a measure of fiscal effort on that basis. At minimum,the disincentive of the current formula could be corrected. Source: World Bank (2005a). 2.27 The integrated financial management system. The successful implementation o f SIAF, built upon a good regulatory framework and standardization o f procedures, and 38See treatment of the subject in SIGMA (2001). Guatemala CFANCPAR: Legal and lnstitufional Framework 18 facilitated by a modern technological platform, has contributed to the production of timely and reliable (though not yet complete) information on government spending supported by audit trails. At the same time, the formal norms are progressively generating an accountability and fiscal prudence culture in officials responsible for public expenditure. SIAF's contribution to the MFP's capacity to control aggregate spending has been significant. 2.28 SIAF, however, is still administeredas aproject. To ensure the system's sustainability, the MFP should pursue an institutional abso tion strategy for its regulatory and information technology administration and maintenan~e.~' Although systemperformance and security are strong, the MFP should make better use of the user logs and other tools to monitor system performance, and develop a business continuity contingency plan. The MFP plans to contract an external systemcertification inthe short term. 2.29 Procurementreform. With the exception of the introduction of the initial phase of Guatecompras, there has been no significant improvement in the quality of the procurement system since 1999.Box 6 summarizesthe reform actionsrecommended inthe 1999 CPAR. Box 6: Main Aspects of the Procurement Reform Program Not Implemented Improve regulatory framework Carry out evaluation o f framework contracts Adopt standard documents Develop a procurement data base Create an administrative career inthe area o fpublic procurement Develop options for aregional capacity building program in procurement Marginally Implemented Establish a policy oversight body Implementtraining programs inprocurement management (not only on the use o f GUATECOMPRAS) Establishprocurement units inthe main entities I 2.30 The Government, through COPRE, is sponsoring key needed reforms to the State Procurement Law. However, country circumstances (e.g., a highly divided Congress that makes it difficult to shepherdmajor legal reforms) demand a strategic approachto legislators and opinion makers, so as to ensure due technical and public debate, generate wide-based support, and achieve reasonable compromise. The Government could also take advantage of 39Normative administration could be approached by strengthening(and re-structuring, as needed) the roles o fthe Budget, Treasury and Accounting Directorates (the LOP assigns to the Accounting Directorate the responsibility to "administer the integrated financial information system"). Information Technology (IT) administration could be approachedby strengthening MFP's Informatics Directorate or through outsourcing o f IT services underthat Directorate's supervision. Guatemala CFANCPAR: Legal and lnsfifutional Framework 19 this opportunity to repeal conflicting and obsolete provisions, establish a clear legal hierarchy, introduce additional provisions consistent with established international practice, and develop a comprehensive strategy for concessions and PPIs. 2.3 1 On the institutional front, DNCAE's policy mandate in public procurement conflicts with its current operational functions (i.e. management of framework contracts) and is not exercised inpractice. Procurement policy formulation and oversight responsibilities, including leadership for implementing and monitoring the reform, should be clearly assigned by the Government to DNCAE or another appropriate entity and adequate resources allocated to enable their effective exercise. Both the legal and institutional aspects o f the reform are particularly important to facilitate implementation o f DR-CAFTA. Guatemala's capacity to monitor and enforce the procuring entities' application o f the trade agreement may be impaired unless regulatory quality improves, the institutional framework i s strengthened, and procurement capacity developed. 2.32 Low staff retention, lack o f professional standards, and limited availability o f training remain persistent systemic issues which hinder efforts to build the capacity o f staff carrying out procurement responsibilities and whose resolution will necessarily require close coordination with the civil service reform. Among other aspects, there i s a need to develop appropriate professional and accountability standards for procurement staff, including entry level requirements, career and merit-based promotions, tenure, and a pay scale commensurate with comparable civil service positions. 2.33 With respect to the framework for concessions, a cautious approach is encouraged. A number of fundamental aspects need to be addressed before adopting legislation which may fail to properly address the Government's expectations and maximize the benefits o f the private provision o f infrastructure. It i s also critical for the Government to incorporate appropriate safeguards to foster private sector confidence in the transparency o f the system. A recent study on concessions in the transport sector financed by the World Bank provided detailed recommendations to the Government on this subject. Guatemala CFANCPAR: Budget Formulation 20 111.BUDGETFORMULATION TheProcess of Budget Formulation 3.1 Medium-termframework.Inaccordance with the LOP, the Executive is responsible for formulating a multi-annual budget. Accordingly, the MFP prepares annually the aggregate budget projections and underlying major macroeconomic variables for a three-year forward period. While the information gathered provides certain details on the revenue side, the expenditures are only aggregated according to major economic classifications. 3.2 The MFP has concrete plans for developing the institutional-specific information in the context o f the 2006-2008 multi-annualbudget. The Public Finance Technical Commission contemplated inthe LOP was officially updated inJanuary o f 2005, and has since contributed to the multi-annualbudget formulation process. The Commission is conformed by the Vice- Minister o f Public Finance (who presides it); the Economics Manager o f the central bank (BANGUAT); the Collections Intendence of the Tax Administration Superintendence (SAT); the Under-Secretary o f the Presidency's Secretariat o f Programming and Planning (SEGEPLAN); and MINFIN Directors (Budget, Public Credit, Fiscal Analysis and Studies, State Accounting, and General Treasury). In comparison with similar countries, these are significant steps that would lead, inthe mediumterm, to sectoral and programmatic exercises that informthe annual budget formulation process.40 3.3 Revenues. Under the framework of the Technical Commission, MFP's Technical Budget Directorate (DTP) formulates the revenue budgetjointly with MFP's Directorate of Economic and Fiscal Analysis and Studies and the SAT, who in turn make use o f macroeconomic projections from BANGUATa41These early projections inform the annual fiscal policy and expenditure budgetplanningprocess. 3.4 Expenditures.The LOP and its regulations require that the MFP, incoordination with SEGEPLAN, propose the budget policies and general guidelines that underpin the budget formulation process. However, the minimumcontent o fthose documents i s not regulated. The stages inthe formulation cycle are summarized inTable 3. Based on the budget policy, norms and ceilings, executing entities formulate their draft institutional budgets, which are discussed with the MFP before their incorporation into the budget proposal. There is more room for maneuver in the discussion of options for capital than for recurrent spending, but the MFP ultimately commands the decision-making process;42 that is, to the extent that budget rigidities allow. 40Currently, the Budget Formulation Manual makes no reference to the multi-annual budget. 41For the estimates o f non-tax revenue, the DTP coordinates with the respective generating entities. 42Two normal complaints from executing entities is that the lateness in communication o f ceilings affects the due process o f budget planning, and that the process by which the DTP makes budgetary cuts is usually unilateral and opaque. The MFP has begun to address these concerns inthe 2006 formulation cycle, through the submittal to executing entities o f budgetary ceilings, once validated by the government authorities, so that the entities can program their expenditures in line with its priorities and those ceilings. This measure intends to reduce the involvement o f the DTP inthe budgetary programming o f the executing entities. GuatemalaCFAICPAR: Budaet Formulation 21 Source: MFP (2004). 3.5 Rigidities.The Constitutionrequires that at minimum 10percent o f ordinary revenues go to municipalities, 5 percent to the Universidad de San Carlos, 2 percent to the judiciary (although the norm has been to allocate 4 percent), 1.5 percent to federated sports, and 1.5 percent to non-federated sports and physical education.43 The Value-Added Tax (VAT) Law requires that, o f the 12 percent VAT rate, 1.5 percentage points go to municipalities, 1 point to regional development councils, 1 point to peace social finds, and 1.5 points to social spending (distributed equally between programs for citizen security, technical education and nutritional security). These and other earmarked revenues accounted for 40.7 percent o f the 2005 tax revenue budget (Table 4). With remunerations and debt service representing 29.2 and26.5 percent o f tax revenues, the space for flexibility informulating the budget is limited. 3.6 Public investment program. While the Law of the Executive Body assigns to SEGEPLAN the responsibility to design, coordinate, monitor and evaluate the national investment projects system, there is no specific legislation to regulate its operation and mandate its use. It should be noted, however, that enhanced coordination between SEGEPLAN and DTP has increased the coverage o f the national public investment system (SNIP), which i s currently based on a technical evaluation and prioritization process that SEGEPLAN uses to approve or reject project proposals.44 3.7 SNIP'Smain output i s the 4-year Public Investment Program (PIP) that i s supposed to guide investment budgetingin the public sector. Then again, the lack o f a legal requirement for feasibility studies allows the entities or Congress to incorporate projects into the budget that have not undergone the ex-ante assessmentprocess. Content of the Budget 43Ordinary revenues are defied, in simple terms, as non-earmarkednet tax revenues. The LOP regulations establishthe calculationformula. 44 Annual budget norms require that investment projects have SEGEPLAN's approval before DTP's incorporationinto the GeneralBudgetproposal. Guatemala CFAAICPAR: Budget Formulation 22 Share of other taxes Source: CFA calculationsusing 2005 GeneralBudget Law and other legislation. 3.8 As noted in Chapter 11, the coverage of the General State Revenue and Expenditure Budgetis limited it encompassesthe Executive, a couple o f constitutional offices (CGC and - the Office of the Attorney General -PGN-), as well as the transfers to other public sector entities. O f these entities, the LOP requires that budgets o f decentralized agencies be approved by the Executive through accord, with participation o f the MFP. On the other hand, the MFP should also receive the budgets of the Congress, the judiciary, autonomous entities, and municipalities for information. These budgets, however, are neither disclosed as annexes to the General Budget nor c~nsolidated.~~ 3.9 The LOP requires that the budget proposal submitted to Congress be composed o f a purpose statement (exposicidn de motivos), the draft General Budget Law, and annexes detailing certain classifications. The General Budget Law must contain the Revenue and Expendituresbudgets, andgeneral rules applicable to each fiscal year. ~~ 45The time overlaps (e.g., the General Budget is presented to Congress by September 2 while the budgets of autonomous entities are approved by the Executive by December 15) and the lack of sanctions for noncompliance with information requirements, are mostly responsible for the lack of consolidation. The expansion of SICOIN could eventually help inthe budgetconsolidationprocess. Guatemala CFAAICPAR: Budoef Formulafion 23 3.10 The purpose statement contains summarized information on the macroeconomic environment (including growth and inflation projections for the year), the fiscal situation (including for the budgeted, ongoing and two preceding years), and other information such as social spending. Both the budget proposal and the Law itself contain annexes with aggregated tables and charts comparing different aspects o f the budget with the two preceding years, and the forward-looking three-year aggregate projections (classified by major economic lines) and underlying macroeconomic assumptions. The budget documentation also contains a 2-page summary o ftax expenditures. 3.11 Box 7 lists the six expenditure classifications used in the General Budget Law, which inits body provides aggregate data by entity, major economic groups andprograms. Attached to the Law are summaries by sources o f funds, functions, and regions. The same information i s provided for each executing entity's budget, which additionally provides brief descriptions o f its budget policy and programs, quantified goals for some programs, and the number of personnel posts. The approved budgets for recent years and the latest budget proposal are posted on MFP's ~ e b p a g e . ~ ~ Guatemala CFANCPAR: Budget Formulation 24 Box 7: ExpenditureBudget Classifications Administrative classification 16 central government entities 22 grouped secretariats and other agencies o fthe Executive Grouped state obligations (transfers to other public sector entities) Public debt service Geographical classification . 8 regions "Multi-regional", foreign service, and public debt service Functional classification 1. Administration (7 functions) 2. Defense and internal security (2 functions) 3. Social services (9 functions) 4. Economic services (9 functions) 5. Public Debt Sources of funds 1. Treasury funds 2. Earmarked treasury funds 3. Institutional own funds 4. Internalcredit 5. Externalcredit 6. Internalgrants 7. External grants Classification by group of expenditure The detailed budget line items are classified as operational expenditures, investments or debt service, under the following groups: 0. Personnel services 1. Non-personnel services 2. Materials and supplies 3. Property, plant, equipment and intangibles 4. Current transfers 5. Capital transfers 6. Financial assets 7. Debt service 8. Other expenditures 9. Global assignments Programmatic classification Program I Sub-program I Project I Activity I Work Sources: 2005 General Budget Law and MFP (2005) Budget Outcomesas Indicators of BudgetReliability 3.12 A comparison of budgeted and actual revenue can provide an overall indication o f the quality o f revenue forecasting, a critical factor since budgeted expenditure allocations (and underlyingpolicy priorities) are based upon it. As shown inTable 5, tax revenue outturn over the last five years has beenincreasingly closer to the initial budget, which inprinciple reflects well on the MFP's capacity to planannual availability of resources. On the expenditure side, Guatemala CFAICPAR: Budget Formulation 25 while execution has been below both the initial and modified budgets, the degree to which these are accurate predictors o f aggregate spending has been uneven. Interestingly, the modifications introduced from 2001 to 2003 to raise expenditures did not lead to similar increases inaggregate execution, which actually came closer to the initially approved thanthe modifiedbudget. An exception can be found inthe level of current expenditures during2001- 02, whichexceeded the initial budget. Table 5: Aggregate General Budget Execution (inpercentof budgetedrevenue) 12000 2001 2002 2003 2004 Revenues Modified Budget aspercent of Initial Budget Tax revenue 96 101 101 101 NA Non-tax revenue 95 102 103 108 NA Total revenue 96 101 101 101 NA ExecutedBudget aspercent of ModifiedBudget Tax revenue 99 94 102 98 106 Non-tax revenue 99 99 100 96 96 Total revenue 99 95 102 98 105 ExecutedBudget aspercent of Initial Budget Tax revenue 96 95 103 99 NA Non-taxrevenue 93 101 102 104 NA Totalrevenue 95 96 103 99 NA Expenditures Modi$ed Budget aspercent of Initial Budget Current expenditure 99 108 105 102 NA Capitalexpenditure 92 120 112 111 NA Total expenditure 97 112 107 105 NA ExecutedBudget aspercent of ModiFed Budget Current expenditure 98 98 97 94 94 Capitalexpenditure 82 71 85 82 76 Totalexpenditure 93 89 93 90 87 ExecutedBudget aspercent of Initial Budget Current expenditure 97 106 101 96 NA Capitalexpenditure 75 86 95 91 NA Total expenditure 90 99 99 94 NA Note: The 2004 Budgetwas not approved. Source: OwncalculationsusingMFP data. 3.13 Interms of aggregate fiscal deficit, the Executive has shown a good recordofkeeping actual deficits below the budgeted figures (Table 6).47Then again, the predictability o f the budgeted deficit has declined, as shown by the deficit deviation in proportional terms over time (from 7 percent of the budget in2000 to 17percent in2004, inthe latter case influenced by the tardy approval o f the investment program and issuance o f bonds for deficit financing, which limitedcapital expenditure execution). 47Deficitdefinedhere as revenuesminus expendituresinthe GeneralBudget. Guatemala CFAAICPAR: Budget Formulation 26 Table 6: Deviationfrom BudgetedDeficit (inpercent ofbudgetedexpenditure) 12000 2001 2002 2003 2004 Deficit deviation from modifiedbudget -7.0 -7.3 -8.8 -8.5 -16.6 Deficit deviation from initial approvedbudget -6.7 2.9 -3.4 -5.0 N A Note: The 2004 Budgetwas not approved. Source: Own calculationsusingMFP data. 3.14 The credibility o f the budget can be roughly indicated by the extent to which budget entities receive the resources initially indicated: where the composition o f expenditurevaries regularly from the original budget, the latter will not be a useful ex-ante statement o f intent. Since 2000, the inter-institutional variation o f execution against the initial budget has consistently decreased, down to a 12 percent average variation across 18 budget entities in 2003 (Table 7). Two caveats, however, are worth noting. It i s evident that the increased credibility o f allocations is driven by current expenditures, while the volatility of capital budgetexecution remainsmarkedly variable. Similarly, certain entities have consistently been granted increased budgetary allocations during the fiscal iear, an issue that has been questioned by civil society organizations and some legislators. 8 Table 7: Average Absolute Deviationof GeneralBudget ExpenditureExecution (inpercent ofbudgetedexpenditure) 12000 2001 2002 2003 2004 Variancein Modified Budget aspercent of Initial Budget Current expenditure 43 16 19 9 N A Capitalexpenditure 201 170 149 283 N A Total expenditure 44 22 18 9 NA Variancein ExecutedBudget aspercent of Modified Budget Current expenditure 6 6 4 8 8 Capital expenditure 14 28 26 22 24 Total expenditure 9 12 7 11 11 Variancein ExecutedBudget aspercent of Initial Budget Current expenditure 31 17 18 11 N A Capitalexpenditure 202 158 159 278 N A ITotal expenditure 34 21 18 12 NA Notes: The 2004 Budgetwas not auuroved.The coverage is of 18 entities from 2002 to 20 4 and 17 entities from 2000 to 2001, iniluding ineach case a line encomiassing "state obligations" (transfers from the General Budget). Interest on debt is excluded. Source: Own calculationsusing MFP data. Analysis and Recommendations 3.15 Budget planning. The MFP exercises a strong role in a budget formulation process that follows an established procedural framework inan orderly andtimely manner. The sound methodologies used for analysis and monitoring o f budgeted revenues and expenditures, and the coordinated application of these methodologies, have increased the ability of the Government to maintain aggregate fiscal discipline. However, there i s still much room to 48From2000 to 2003, the Presidency executed expendituressignificantly over the initialbudget (within a range of 266 percent in 2000 to 22 percent in 2003). Over the same period, the Ministry of Defense executed expenditures over the initial budgetwithin arangeof 85 percentin2001 to 24 percentin2002. Guatemala CFANCPAR: Budget Formulation 27 increase the credibility o f the initial expenditure budget as an allocative instrument, which i s evidenced by the inter-institutional variations in execution (particularly in capital expenditures). 3.16 Funds for current spending are allocated on a largely incremental basis (the previous budget i s taken as the base for discussion). The PIP allows more room for prioritization and i s based on due ex-ante evaluation processes. However, the operation o f SNIP in its current form i s relatively new (2001) and as such, various features are pending -which could undermineits potential as atool for policy-based and cost-effective investments. 3.17 There are no legal restrictions on potential changes by the entities or Congress to the PIP composition, its coverage i s still incomplete (e.g., social funds have only recently started to register their project proposals and municipalities are not part o f the system), project formulation capacity and sectoral tools are limited, the link between the SNIP and SIAF information systems has not been established, and the monitoring and evaluation modules have not been designed. Furthermore, the requirement for normative body authorization (e.g., the Ministry of Education's approval o f school infrastructure projects carried out by social funds) is not always met. Neither is the requirement to calculate future recurrent expenditures performed and used for the preparationo fthe multi-annual budget. 3.18 The Government took a significant leap towards enhanced planningand accountability with the introduction in 2005 of agreements among MFP, SEGEPLAN and four major Ministries to adopt a results-based and multi-annual approach to budgeting. The process has been undertaken under a well-designed plan that i s likely to result soon in a formal medium- term expenditure framework that informs the annual budget formulation and approval process. To validate and sustain what i s by nature a long-term endeavour, a cautious and gradual approach is encouraged. 3.19 The already available multi-year fiscal targets and indicative ceilings for the pilot ministries are good bases for implementing certain fundamental actions: (i) the approach should be expanded to a sectoral level (e.g., incorporating social and other funds) and broken down to a programmatic level; (ii) costed sectoral strategic plans should be developed as the catalytic documents for policy assessment and reconciliation o f the top-down and bottom-up multi-year budget planning; and (iii)the PIP should be based on those plans, with due consideration to recurrent cost implications. These actions, for which some steps haven been taken already, could lead to more meaningful discussions over operational efficiency in the use o f resources, an orderly review o f budgetary implications o f existing and new policies, andbetter planningofthe recurrent costs of investmentdecisions. 3.20 The performance indicators should progressively reach an appropriate, yet manageable, mix o f dimensions (e effectiveness, efficiency, economy, quality) and ambits (e.g., process, outputs, outcomes).i?4t the same time, the sophistication o f cost accounting systems to measure the marginal cost o f changes in performance should be progressively built. Credibility of the new practices should rely on a formal program assessment process that informs budget ceilings and allocations for upcoming years, on higher degrees o f 49Guzmh (2005). Guatemala CFANCPAR: Budaet Formulation 28 certainty and flexibility to entities in the execution o f their budgets, and eventually on introduction o f other incentives linkedto performance. 3.21 As is expected from such a significant overhaul ofthe budgetarysystem, which should be gradually implemented over the medium and long term, there are capacity gaps in executing entities and in the DTP that need to be addressed, for which a significant effort o f training and updating i s required. In a system that will necessarily imply more devolution to executing entities, the DTP should shift its transactional focus, and thus develop capacity, to assess the fiscal and budgetary impact o f policy changes and programmatic trade-offs, and to maintain a system o f budgetary accountability (e.g., standardizing reporting formats, assisting executing entities to measure productivity and output, and evaluating res~lts).~' One important obstacle, with legal and other implications, must be recognized: any effort to modernize budget planning i s necessarily limited by the high level o f budget rigidities (earmarked revenues and fixed costs). 3.22 Budget transparency. In terms of content, the General Budget documentation provides a large set o f data on the planned uses o f budgetary funds -with the clear and important exception o f transfers to constitutional offices and decentralized entities- and shows some sophisticated advances, e.g. the disclosure of tax expenditures and aggregate three-year projections. However, attention shouldbe paidto some shortcomings. 3.23 Extra-budgetary funds are neither consolidated nor disclosed as attachments to the annual budget documentation; similarly, there is no consolidation o f the general government budget or any aggregated public information on municipal budgets. Fundamental actions to close these information gaps, for which the expansion o f SICOIN should help, could expand the scrutiny on operations, expenditures and procurement processes o f the service delivery units, which in turn could enhance operational efficiency by helping prevent waste of resources and enhance the provision o f services. 3.24 There is a robust classification system in terms o f administrative, functional and economic items, but the definition and dissection o f programs could be enhanced. Other disclosures recommended in the IMF's Fiscal Transparency Code (IMF, 2001) that could improve the budget documentation are: statements describing the nature and fiscal significance o f contingent liabilities and quasi-fiscal activities; improved and more comprehensive information on the quantitative macroeconomic framework, fiscal policy and sustainability; and identification o f major fiscal risks, including variations in economic assumptions. Details o f debt stock and financial assets could also be included. 50See treatment of the subject in Schick (2001). Guatemala CFAAICPAR: Budget Execution and Controls 29 IV. TREASURY AND BUDGETEXECUTIONMANAGEMENT RevenueAdministration 51 4.1 The Superintendence o f Tax Administration (SAT) i s a decentralized entity, created in 1998, granted with functional, financial, technical and administrative autonomy to exercise tax and customs administration. SAT administers the value-added tax (around 52 percent o f its collections in 2004), the income tax (24 percent), import duties (11 percent), excise taxes (11 percent), and other minor taxes. Altogether, SAT collects around 97 percent of central government tax revenues. 4.2 As shown by a basic measure o f VAT efficiency, the SAT quickly made an impact in the efficiency o f collections, moving from a 36.8 index in 1998 to 41.8 in2000 (Table 8), but deteriorating in 2001 and staying constant for the following two years -a reflection o f significant governance and managerial problems during that period. With the new government, the 2004 efficiency index showed an important increment. 1998 1999 2000 2001 2002 2003 2004 4.3 Registrationand filing controls.The procedures for taxpayer registration (RTU) and assignment o f identification numbers (NIT) are well documented, though the databases are under depuration. Interms o f monetary amounts, returns for around 86 percent o f internal tax and all customs collections are filed through electronic means -these levels exceed those found inmost LatinAmerican countries. However, the actual number o f returns filed through that media i s less than 13 percent, and the systems for control o f non-filers are still ineffective. Given the reliance on filers for every modern tax administration system to work, it i s o f the utmost importance to rigorously prosecute non filers and non compliers. 4.4 Tax audits and controls. The audit information system (FISAT), currently under partial implementation, allows better targeting o f taxpayer audits -thus helping prevent the discretional approach under manual systems. A special unit dedicated to the 1,500 largest taxpayers i s in operation, and a purchasehale information system (Asiste Libros) has recently been made mandatory for the 300 largest taxpayers. It is expected that these tools will enhance data cross-checks and make the audit function more efficient. Inthis regard, special efforts are required in customs: about 50 percent o f merchandise, well above international standards, i s physically inspected -yet bearing little results. Value assessment mechanisms are undeveloped, security in ports i s generally weak, and inventory control o f special regimes (maquizas,zonasfiancas) is practically inexistent. 51 The scope of this CFAA/CPAR does not contemplatean in-depthanalysis of tax andcustoms administration. Nor does it covermattersoftax andcustoms policy. Guatemala CFANCPAR: Budget Execution and Controls 30 4.5 Collections. Actual collections are made via contractual arrangements with the banking system, with the internet-based tax and payment declaration system (BancaSAT) making up 86 percent of internal tax collections and all customs collections. A unified taxpayer account (cuenta corriente) is partially in operation: its coverage i s limited to the large taxpayers and it misses certain data (e.g., customs duties) to easily assess the accurate outstanding debt. On the other hand, since current regulations do not allow filing returns without their simultaneous ayment, there i s no formal outstanding tax debt, excepting that based on audit assessments. 52 4.6 Taxpayer services. With the operation o f BancaSAT and the simplification o f declaration forms, the filing and payment process has been significantly facilitated. BancaSAT i s part o f an electronic service portal (e-SAT)53 that has been complemented with enhanced dissemination o f legal and regulatory tax and customs data, and better facilities for telephone and walk-in queries. Important issues, however, remain in customs: procedures are burdensome, and there i s little coordination with other control entities at entry points. Corruption incustoms officials has been a historical concern. TheBudget Execution Process 4.7 In accordance with the LOP, budgetary credits approved by Congress constitute maximum limits to budget allocations, and expenditures cannot be committed or accrued in absence o f available credit balances. The different stages o f budget execution, summarized in Box 8, are well defined. The use of budget allocations by executing entities are restricted by quarterlycommitment quotas andmonthly accrual/payment quotas established by the MFP (in line with the level o f current revenue collections). While these quotas put the MFP ina strong position to control aggregate expenditures, the executing entities suffer from limited flexibility inexecuting their budgets. The extensively usedpractice o f simultaneous recording o f commitments and accruals (only the commitments for which there is available payment quota are recorded) prevents full information on actual commitments. 4.8 Treasury operations. The Constitution establishes that all public revenues constitute a common fund, which in accordance with the LOP i s administered by MFP's National Treasury. In line with the budget structure, however, revenues generated by entities that do not form part o f the General Budget are not channeled through the Treasury. The treasury single account is thus constituted by a limited number o f bank accounts maintained by the Treasury in the Central Bank (BANGUAT), which are funded largely by taxes administered by the SAT and, to a much lesser extent, by ministries and other agencies with collection facilities vondosprivativos).54 '*Asopposedto other tax administration systems, inGuatemalaatax filer cannot declare its impossibility to pay dueto frnancialreasonswhile at the same time recognizingthe debt by filing areturn. 53www.sat.gob.gt 54 The CGC identified, in its audit report on the 2003 General Budget Execution, only one instance of noncompliancewith the requirementto depositfindis privativos into the common find. The questionedamount was of 46.4 million (0.03 percentofrevenues). Guatemala CFANCPAR: Buduet Execution and Confrols 31 Box 8: Expenditure Budget ExecutionProcess Budget execution program. This document, prepared by the institutional fmancial management units (UDAFs) at each budget entity and approved by the Technical Budget Directorate (DTP) o f the Ministry o f Finance (MFP), distributes the approved budget at the levels o f commitment and accrual. Budget programming takes place on an annual and quarterly basis. Expenditure quotas. The Budget Execution Programming Committee (COPEP), headed by the Viceminister o f Finance and integrated by various MFP Directors, approves quarterly commitment quotas andmonthly accrual and payment quotas. Budget commitment.Commitments, provided there is availability o f resources inthe quotas, are triggered by the issuance o fpurchase orders (goods or services), payrolls (salaries), bills (utilities), or by the existence o f legal requirements (transfers). UDAFs are responsible for crediting expenses committed but not accrued by the end o fthe fiscal year to the following year's budget. Expenditure accrual. Provided there is an open commitment, accruals are recorded by UDAFs in the integrated accounting system (SICOIN), against the legal documentation (invoices, payrolls) that sets the financial obligation to pay for goods and services received. Payment request. The UDAFsrequest payments by MFP's National Treasury against accruals recorded in SICOIN. There is an intermediate step by which MFP's State Accounting Directorate (DCE) screens entries for consistency before submitting the payment requests to the Treasury. Payment. Accrued expenses are paid by the National Treasury, from the common fund held in the Central Bank (BANGUAT), to recipients via electronic deposits to their bank accounts. Record keeping. All steps in the budget execution cycle are recorded in SICOIN using "single journal entries" (CURs). Supporting documentation is maintained by each UDAF. Other procedures. Alternative procedures apply to payments to be made directly by UDAFs usingrotating funds and for execution o f externally-funded projects with the use o f special advance accounts. Nevertheless, the basic principle o f recording all accrued expenditures through CURs in SICOIN applies equally. Sources: LOP and its regulations, MFP (2005a), interviews) 4.9 The bulk o f expenditures are paid directly from the common fund (treasury payment account) to providers o f goods and services, using a system o f electronic deposits into bank accounts. Other expenditurescan be paid by the executing entities using a restricted system o f rotating funds controlled through SICOIN.55Bank reconciliations are performed on a daily basis by MFP's State Accounting Directorate (DCE). The process i s done to a large extent via automatic matching o f entries against the electronic statements provided by BANGUAT. 4.10 Overall control o f the cash position i s based on the MFP's authority to establish monthly payment quotas and release payment requests made by the executing entities, combined with daily monitoring o f the common fund balance. In case o f temporary cash shortfalls, the LOP allows the MFP to issue short-term treasury debt for up to 20 percent of budgeted current revenues. 4.11 Accumulation of arrears. The MFP has established a policy of inhibiting floating debt and equaling the monthly accrual and payment quotas. It is well known, however, that entities circumvent this policy by delaying accrual recording until funding becomes available (notably but not solely in connection with contracts o f works by the Ministry o f Communications, Infrastructure and Housing). Hence, even though the accounting system 55Each rotating fund is capped at 5 percent o f the executing entity's non-personnel expenditure budget. The balances are transferred at the end o f the year to the common fund. Guatemala CFANCPAR: Budget Execution and Controls 32 allows recording o f expenditures on an accrual basis, there i s in essence a simultaneous recording o f accruals and payments, thus preventing the identification o f accounts payable (andthe share ofthose that may be inarrears). 4.12 Donor funds. When required by international agreements, the MFP opens separate special accounts for the receipt o f external funds for projects. These accounts (cuentus mudre) normally fund separate subsidiary accounts (cuentus hiju) managed directly by implementing unitswith project-specificprocedures. Enforcemento fthe requirement that execution ofthese funds be recorded in SICOIN has been significantly enhanced, thus allowing donor funding to be effectively captured by the budget management system.56However, the process is done ex- post and not always ina timely manner.57Interms o f administration, it is normal the set up o f project-specific implementingunits, with the UDAFs playing solely a recording role. 4.13 Other procedures. A significant portion o f the budget i s executed through special1 created funds, most of which operate under trust funds opened in commercial banks. 4 Similarly, there are a number o f constitutional bodies (e.g., the legislature and the judiciary) and decentralized entities that are funded through transfers from the common fund to their institutional bank accounts. Inthese cases, the central treasury payment system captures the transfers, but the subsequent transactions are manageddirectly by the executing entities. 4.14 Municipalities. The Municipal Code requires that all municipalities implement before 2006 an integrated municipal financial management system (AFIM), which creates AFIM units to substitute the figure of "municipal treasurer" -currently in charge of revenue and expenditure financial management. As noted inChapter I,most municipalities depend heavily on constitutional transfers, which are disbursed by the MFP every two months, potentially leadingto short-term borrowing. 4.15 Budget execution procedures are consistent with those o f the central government, and their standardized implementation has beenfacilitated by the information systems mentioned earlier (SIAFITOMUNI and SIAFMUNI).59In practice, budget execution mirrors similar central government issues, particularly the simultaneous recording o f the three expenditure stages (commitment, accrual, and payment) that prevents identification o f floating debt. 4.16 Debt records. 6o The LOP stipulates that the MFP i s responsible for the formulation o f public credit policy and the authorization of all public sector credit operations. Debt management responsibilities, including maintenance o f public credit records, are assigned to MFP's Public Credit Directorate (DCP). Inpractice, the DCP manages directly the external debt database using UNCTAD's Debt Management and Financial Analysis System (DMFASISIGADE), while BANGUAT manages the internal debt database and transfers the files to the DCP on a daily basis. 56 The CGC identified, in its audit report on the 2003 General Budget Execution, grants amounting to 496 million(0.4 percentofrevenues) that were notrecordedinthe budget. 51The 2005 GeneralBudgetLaw includesvarious allocations to regularizeexecutionfrom previous fiscal years. 58The 2005 GeneralBudgetLaw identifies 12 funds (e.g., social and infrastructure funds) that account for about 8.5%ofthe totalexpenditurebudget. 59A municipalfmancialmanagementmanual(MAFIM) was issuedby the MFP, but itsuse i s notmandatory. 6oThis documentdoesnot covermatters o f debt management. Guatemala CFANCPAR:Budoet Execufion and Controls 33 4.17 Debtdatabases are the basis for debt service data incorporated into the annual General Budget, for execution o f payments by the National Treasury, and for reconciliation with accounting balances. There is an automatic link between SIGADE and SICOIN for the execution and recording of external debt service. BANGUAT, in turn, reports internal debt paymentsto the DCE for entry into SICOIN. 4.18 Municipalities are required by the Municipal Code to provide the DCP with a monthly detail o f internal and external loans in effect and contracted loan balances, but compliance i s very low. DCP's municipal debt database is conformed almost exclusively o f information provided by the Municipal Development Institute (INFOM) on loans to this institution. Municipal debt policy and management, including INFOM's role, is analyzed in the Public Expenditure Review (World Bank, 2005a). For the purposes o f this report, it should be noted that the lack o f completeness and accuracy o f municipal debt records i s in large part due to a number of ambiguities and contradictions with regards to the legal basis for municipal borrowing (Box 9). Box 9: Rules on MunicipalDebtAuthorization The Constitution states that Congress has the power to contract, convert, consolidate or undertake borrowing domestically or externally, taking into considerationthe views of the Executive and the Monetary Board. It goes on to say that for any "state entity" to conclude negotiations of loans or other forms of debt, it must have prior consent of the Congress. The Organic Budget Law stipulatesthat the MFP i s responsible for the formulation of publiccredit policy andthe authorization of all public sector credit operations. The Municipal Code, inturn, establishes that all loans should be approvedby a two-thirds super-majority of the members of the Municipal Council. It states that foreign loans and domestic and foreign bond issues shouldbe "channeled" through the MFP and be "subject to the borrowing policy established by the State for the public sector." This implies an approval process by the MFP, albeit infairly vague terms. Inaddition, noticeably absent i s any reference to other types of domestic borrowing, e.g. from the domestic banking system or INFOM. The Organic Law of INFOM further states that its loans to municipalities do not require authorization from the Executive or opinion from the Monetary Board. Fromthe creditor side, there are no rules that apply specifically to municipal debt (other thancertain information requirementsestablishedin the Regulations for Administration of Credit Risk). The Superintendenceof Banks upholds confidentiality requirements with regards to details on the loan portfolios of domestic banks. (World Bank. 2005a) 4.19 Contingent liabilities. Other than records o f guaranteed debt, no information is consistently compiled and reported on contingent liabilities. 4.20 Safeguard of assets. MFP's Directorate o f State Assets (DBE) is the normative body for asset management and i s responsible for collecting and consolidating registries o f property, plant and equipment. This information, however, is not yet complete, reconciled against physical inventories, properly valued or used for accounting purposes (e.g., depreciation recording). As part o f the SIAF Project, work is ongoing for the development o f modules for asset and inventory management that -if coupled with adequate procedures for asset management- should help executing entities indeveloping control o f assets and stocks. Guatemala CFANCPAR: Budget Execution and Controls 34 Internal Control Framework 4.21 The Organic Law o f the Office o f the Controller General o f Accounts (CGC) establishes the concept o f "governmental control", and provides the CGC with the power to regulate institutional internal control norms and the functioning o f internal audit units. The current set o f internal control norms (2003) i s largely consistent with international standards, though there are gaps in their implementation, as evidenced by recent institutional assessments carried out by private firms hired by the Commissioner for State Modernization (COPRE) with USAID support. Specific instances o f noncompliance, with different degrees o f relevance, are identified inCGC's annual audit reports (see Table 9 inChapter VI). 4.22 Internal audit. The internal audit function has its legal basis in the Organic Law o f the CGC, which has issued a set of internal audit norms (2003) setting the basic guides for design, implementation and functioning of internal audit units. Moreover, the CGC receives internal audit plans andreports, and has the responsibility to evaluate internal auditors. 4.23 The Regulations to the Organic Law o f the CGC establish the requirement for all public entities to "create, support and strengthen" internal audit units (UDAIS).~~ Internal auditors are named by, and report to, the authorities o f each entity -but are prevented from undertaking any administrative or prior control function. In practice, though, internal audit units suffer from limitations in human, technical and technological resources, and some perform ex-ante control tasks. Most internal audit work i s related to certain financial reviews (not financial statement audits) and unplanned special reviews. In general, quality o f he procurement processes i s not contemplated. Analysis and Recommendations 4.24 Tax administration. While tax administration has been substantially modernized since 1998, the SAT was not exempt from the governance deterioration witnessed at the end o f the Portillo administration. Allegations o f corruption and money laundering affected its image, and instability at the board and management levels affected its strategic direction and performance. Moreover, various rulings from the Constitutional Court have made the legal framework unstable, affecting both tax policy and administration. 4.25 At the operational level, the information systems have allowed orderly, systematic, and massive data processing that facilitates taxpayer compliance, but SAT's capacity to effectively use the wealth o f information compiled i s still incipient. Most notably, coordinationbetween internal revenues and customs areas for information exchange andjoint work i s not yet effective. Finally, SAT's capacity for enforcement is constrained by its overburdened legal department and by deficiencies in the jurisdictional process for the legal prosecution o ftax and customs related cases (e.g., lack o f specialized courts). 4.26 Given the still-substantial resistance in Guatemala to higher taxation, the Government i s renewing its effort to strengthen tax administration as a means o f raising revenues. A strategic plan, focusing on implementation o f 106 points developed with technical assistance 61 UDAIshave been established in 88 percent of central government entities and 8 percent ofmunicipalities. Guatemala CFANCPAR:Budgef Execution and Confrols 35 from the IMF and supported by the Tax Administration Project, is under implementation. The process i s being facilitated by a new project portfolio system with clear assignments, inputs, outputs, timetables, and monitoring arrangements. 4.27 Early concrete actions taken include: (i)a complete personnel evaluation and cleansing o f an important number o f questioned customs officials; (ii) strengthening of the internal audit and legal directorates; (iii) development o f a workflow tool to monitor judicial cases; (iv) forming o f a special group to audit special regimes (rnaquilas, zonasfrancas); (v) creation o f an anti-smuggling committee; and (vi) introduction o f an electronic customs manifest for air cargo. Other contemplated measures are summarized inthe next paragraphs. 4.28 Looking forward, fundamental actions to improve transparency o f tax data and effectiveness o f registration, assessment and collection functions, will be to: (i) continue expandingthe coverage and information content o f the taxpayer account, including accurate identification o f outstanding debt;62 (ii) aggregate that information so as to enable better reporting on declared and assessed taxes, including well-classified and reconciliated data on arrears (e.g., age profile, amounts in dispute, bad debts); and (iii) up the N I T and RUT clear databases (assisted by data cross-checks), make penalties for non-compliance more effective, and strengthen the risk-basedfocus o f audits. 4.29 More specifically, key actions to help control evasion will be to: (i) make electronic filing mandatoryabove certainthresholds; (ii) prepare specific programs for data cross-checks (e.g., with customs and large/mediumtaxpayer data providedby Asiste Libros); (iii) establish well-focused regimes for VAT retention and advance payments; (iv) create a special unit for the differentiatedcontrol o fmedium-size taxpayers; (v) pursue legal reforms to expand SAT'S access to third-party information; (vi) consolidate integrated (customs and internal tax) audit teams; (vii) establish specific programs for control of stop-filers, and allow tax filers to declare debt even if payment i s not immediate due to liquidity reasons; (viii) compensate automatically tax arrears against tax reimbursements; (ix) toughen the business closing sanctions; and (x) suspend certain faculties o ftaxpayers innon-compliance status. 4.30 Incustoms, the SAT shouldaim at raisingcollectionswhile reducingprocessingtimes and costs, with actions to: (i)develop a comprehensive anti-smuggling strategy; (ii) reduce the number o f physical inspections but perform them under a risk profile system; (iii) extend the electronic customs manifest to all ports and airports; (iv) harmonize customs declarations with neighbouring countries; (v) streamline processes for large importers with good compliance record; (vi) maintain a reference price database to help detect sub-valuations; and (vii) execute audits tailored to special regimes. 4.31 In terms of its internal operation, the SAT should: (i)enhance its performance monitoring system; (ii) create a special unit to investigate allegations and presumptions o f corruption; and (iii)consider transferring the vehicle license plate administration, which disproportionately consumes SAT resources, to another government agency. Thejudiciary, in 62 Among others, the taxpayer account should differentiate between the non-filing status (not showing any amount inthis case, but indicating lack o f compliance), the debt that is not in arrears status (a debt that has been declared or assessed for which payment is not yet due), andthe arrears status (an overdue debt). Guafemala CFANCPAR: Budaef Execution and Confrols 36 turn, should consider the development of specialized courts (andthus prosecutors andjudges) for tax and customs matters. 4.32 Budget execution. One particular issue in the operation o f the budget execution system at the moment of the review was the simultaneous (and sometimes late) recording o f commitments and accounts payable incertain entities, thus generating incomplete information of total expenditures incurred, debt and payment arrears. This issue, which can constitute a form of non-transparentfinancing, and can affect fiscal discipline and increase cost o f works, goods and services, could be addressed with twofundamental actions: 4.33 Proper recording o f commitments and accruals should be enforced, e.g. by issuance o f certifications to providers o f goods and services linked to the entry in SICOIN. At the same time, executing entities shouldbe provided with higher degrees o f certainty and flexibility in executing their budgets, e.g. by eliminating monthly accrual quotas and concentrating the fiscal control on the quarterly commitments (always keeping emergency options to deal with unexpected cash flow problems).63 The latter action could also improve predictability in resource flows to service delivery units, which could therefore plananduse those resources in a more timely and efficient manner -a matter o f particular importance in light o f the recent introduction o f results-based agreements for budget management. The MFP has noted that actions o f this kind should be made consistently and preceded by serious training efforts. It is necessary to upgrade, for example, the technical level o f UDAF officers in charge o f preparing financial quota requirements, so that their financial programs be more reliable. In parallel, it i s necessary to strengthen the capacity o f DTP analysts to undertake deeper financial analyses. Finally, training on the linkages between financial requirements and physical programming i s needed. 4.34 While SICOIN has been successful in standardizing budget execution accounting practices, there i s still certain degree o f fragmentation and complication in internal administrative systems and procedures within executing entities that can ultimately affect efficiency in the use o f public funds. Most notable are the diverse modalities for personnel contracting, each with specific procedures for administration and payment, which in part reflects the deficient and fragmented civil service framework (see Chapter II)64. But similar issues are true for the administration o f assets and inventories, procurement management and monitoring, and other administrative tasks. In this sense, the ongoing development o f SIAF modules for payroll, procurement, and management o f fixed assets and inventories, is a fundamental action that should nevertheless be framed ina comprehensive strategy that takes into account the needto re-structure and streamline procedures withinexecuting entities6' 63The MFP since January established since January 2006 implementing quarterly commitment limits and monthly cash flow and accrual limits, facilitating inthis way the timely recording of each expenditure. On the other hand, as part of SIAF's procurementmanagement module, commitmentrecordingwill be facilitatedby an automaticentry when apurchase order is prepared. 64 Partially has been addressed through the implementation in 2006 of a internet based payroll system (Guatenbmina). 65For successfulconsolidation ofthe new payrolladministrationsystem (Guatenbmina), with a view of creating a comprehensive public sector database based on adequate information standards, it is imperative that duplication o f efforts be avoided with entities that have developed, or are in the process of developing, human Guatemala CFAAICPAR: Budoef Execution and Confrols 37 4.35 With the development of the public investment program monitoring system still inthe works, key attention should be paid to the pendinglink between SICOIN and SNIP for project financial monitoring, to ensure that executing entities are not required to enter financial information into different systems. In general, the Government should pursue the development o f IT policies that discourage the proliferation o f different or incompatible applications anddatabasesacross andwithin executing entities. 4.36 The municipal level. Even though SIAFMUNI is rapidly being expanded, that does not necessarily signify that the system is in use on a comprehensive and timely basis. The objectives o f efficiency and transparency that the system pursues could be jeopardized if the effort i s concentrated solely on its installation. This shouldbe part of a comprehensive process that naturally requires an intensive technical assistance and training support. Thus, the ad hoc alliances that have been fostered between government entities and cooperation agencies to ensure complementary strengthening o f individual municipalities, should lay the ground work for a uniform sector-wide strategy under which the various sources o f funds to enhance the administrative capacities o f municipalities are efficiently allocated. 4.37 The categorization attempts initiated under the SIAF Project and the Presidency's Coordination and Strategy Secretariat (SCEP) should be made compatible and serve as the basis to adopt the most effective implementation approach.66 As with SIAF, system installation should continue together with analysis and simplification of internal administrative procedures. At the central level, the Government could consider moving gradually (e.g., as part o f an incentive system and taking into consideration the legal implications) to more periodical releases o f transfer funds (from the current two-month practice). This could help avoid, though not guarantee, costly and risky short-term borrowing on the part o f the municipalities. 4.38 In all these efforts, a clear line should be drawn between responsibilities for the normative administration o f the municipal financial management system (which should be led by the MFP as the normative body o f public finances), and the technical assistanceleadership (which could be exercised by INFOM).67 4.39 Treasury. The MFP exercises good management and control o f the Government's cash position, an achievement based on three main features: a single treasury account system (common fund) that captures, with some exceptions, all government revenues; a reliable revenue forecasting and monitoring capacity; and the use o f effective legal instruments to deal with temporary cash shortages. However, in large part as a reflection o f the insufficient budget comprehensiveness mentioned earlier, many entities and programs are exempt from the common funddirect payment systemto providers o f goods and services. resource management systems (e.g., Ministry o f Education), and concentrate efforts on the set up of efficient interfaces -taking into consideration compatibility o f database structures- between the two systems. Other key aspects are the timely inventory and organization o f posts and personnel data for easier incorporation into the system and, looking forward, the implementationof payroll audit systems. 66For example, the MFP is realizing that some municipalities may benefitbetter from SICOINWEB, others from SIAFMUNI, and others should remain solely with SIAFITOMUNI. 67Inaccordancewith the Municipal Code, the MFP is the normative body of the municipal integrated financial management (AFIM) systems. Guatemala CFANCPAR: Budget Execution and Controls 38 4.40 The exemptions include the transfers to -and own revenues generated by- decentralized and autonomous entities (which are mostly o f a noncommercial nature), to social and other fund administrators (e.g., trust funds, NGOs), and to projects funded by external loans and grants. Such a system can produce idle funds, increase transaction costs, and reduce transparency. Inparallel with the proposal made earlier to expand the coverage of the General Budget, a fundamental action should be to significantly expand the common fund payment system (which is efficient and transparent) to all central government noncommercial entities (with due considerationto legal implications). 4.41 Donor funds. External financing is comprehensively incorporated into the budget execution system, but not always on a timely basis and usually under parallel administration arrangements. The Government and donors should pursue opportunities to benefit from potential economies o f scale in planning sectoral (as opposed to project-specific) external assistance, andfrom makinglarger use o f UDAFsand SICOIN (as opposed to project-specific implementation units and systems) inthe financial management o fthat assistance. 4.42 Debt records. MFP's central government debt databases seem complete (with the exception o f non-guaranteed debt o f decentralized and autonomous entities) and well used to introduce data into the budget formulation, execution and accounting systems.68The MFP, with the help of INFOM, is also developing a database ofmunicipal debt -but the information i s incomplete and thus cannot be yet relied upon. While the implementation o f SIAFMUNIis expected to help with this issue, there are a number o f inconsistencies in municipal debt legislation that need to be addressed. INFOM could contribute to strengthened fiscal transparency by publishinginformation o f municipal indebtedness to the institute. 4.43 Although debt management capacity was not assessedby this report, and noting that - at around 21 percent o f GDP- public sector debt i s among the lowest in the region, the MFP could still introduce continuing programs for skills development in this highly specialized area, so as to turn the DCP into an active debt manager that undertakes systematic debt sustainability and risk analyses to minimize borrowing risks and costs. This would be a medium-termeffort requiring strong coordinationwith BANGUAT. 4.44 Other areas for improvement are the control o f non-guaranteed public sector debt and the collection andanalysis ofdata on contingent liabilities. 4.45 Internal controls. The internal control norms are generally sound, but their introduction in the absence o f a formal implementation plan, has probably made little difference -by itself- in the quality of government controls. There is, however, a fair amount o f information to build upon. The institutional assessments carried out under COPRE's leadership, together with the specific findings reported in internal and external audit reports, should be the basis for thefundamental action o f developing internal control strengthening plans in the budget executing entities. By enhancing controls o f expenditure processes, the 68 The CGC identified, in its 2003 audit report on General Budget Execution and Financial Statements, a difference between SIGADE and SICOIN balances originated in the exchange rate used by SICOIN. The deficiencywas subsequentlysolved. Guatemala CFANCPAR: Budget Execution and Controls 39 opportunities for corrupt practices, leakages and patronages that affect operational efficiency can be reduced. 4.46 The mentioned internal control plans should consider the adoption o f risk-based approaches (particularly in light o f further decentralization o f financial management tasks to "third-level" executing entities), and be accompanied by monitoring systems to assess progress. Internal controls should also include a strong focus on procurement processes and value for money. 4.47 Internal audits. The legal mandate of the internal audit function provides a sound foundation to build its legitimacy and empowerment. However, UDAIs have in general been constituted without technical studies or objective criteria to justify their size or budget. They usually lack sufficient numbers o f professional and experienced staff, do not conduct their work under a risk-based approach, and do not produce statements on their overall assessment o f the entities' internal control system. It seems that coordination with the CGC to prevent duplication o f efforts is weak, and there i s no effective quality control system: while the CGC i s responsible for internal audit evaluations, these evaluations are not formally and systematically reported back to the internal auditors. 4.48 Recognizing that the institutional weaknesses cannot be solved in the short term, certainfundamental actions at the technical level, such as preparing an internal audit manual, providing UDAIs with tools from the government audit information system (SAG-discussed in Chapter VI), developing a system o f training and certification o f internal auditors, and improving the coordination with the CGC, could serve to gradually strengthen the internal audit function. Guatemala CFANCPAR: Procurement Management 40 V. PROCUREMENT MANAGEMENT StrategicPlanning 5.1 The Government i s implementing framework contracts for certain items and i s very interested inimproving procurement efficiency and economies o f scale. 69 However, there has not been any review o f the current supply strategy and market structure to identify inefficiencies and opportunities for cost reduction by better packaging and more effective purchasing approaches. These market reviews are particularly important in the absence o f a strong governance environment, because procurement arrangements such as framework contracts and reverse auctions have a potential for producing savings, but may also result in further market concentration7'. Inorder to avoid perverse consequences, these arrangements andthe conditions for their use should be clearly defined inthe law or the regulations. 5.2 The CFAA/CPAR team carried out a high level assessment o f the procurement strategy o f the Government o f Guatemala and made a first estimation o f the potential savings which could be achieved inthe short-term by better streamlining it. This study i s based on an analysis o f selected examples o f recent acquisitions in different categories across governmental entities7'. 5.3 The government o f Guatemala currently procures goods, services, and civil work through over 628 governmental entities (including municipalities). The total amount spent in 2004 was about 8,629 million Quetzales (approximately US$1,112 million), including procurement by the Central Government and all major decentralized entities. Procurement expenditures are expected to increase in 2005 by over 40%, according to the current budget, which might still change during the remainder o f the year. Figure 3 visualizes an overall assessment o f the procurement strategy in Guatemala, as compared to international best practices. 5.4 The major conclusions o f this preliminary analysis, based on the concrete examples reviewed and experiences inother similar environments, suggests: 0 A lack of consolidation indemand acrossprocuring entities; 0 A highly fragmentedsupplier base, including only local suppliers; A lack of standards and benchmarks leading to over-specifications and additional costs; and 0 Lack o f control in consumer patterns leading this to over-consumption and a higher spent. 69Frameworkcontracts are currently utilizedfor procurementof drugs for the Ministry of Health and medical equipment, but could potentiallyinclude any kind if global purchases such as stationery and spare parts. These contracts cover an 18-monthperiod, and can be usedwhen two or more governmentunits requestthem. 70Unbalanced bids (i.e. prices which the suppliers cannot afford to offer and are not sustainable) is another possiblenegativeoutcomedueto the cost-drivennature ofthese methods. 71See Annex IV. Guatemala CFAICPAR: Procurement Management 41 Figure3: Current Statusof Guatemala's ProcurementStrategy Degree of development Little progress in pro-active consolidation * No control o f descentralized buying units Medium * GuateCompras a development in , the right direction LEh * A t this point in time only a portal, not Low a management tool * Little progress in new electronic methods (e.g. Reverse auction) Low Medium No legal regulationyet * Buying methodswell developed * Clear definitions Mediu * "Contrato abierto", open - contract in little use Lack o f commuuication Lo Medium about the existence of those contracts No systematic control of prices and commercial terms of contracts Low Medium High E-Procurement 5.5 The current administration considers electronic government procurement as one o f its most important tools to increase efficiency and combat corruption. While the Contracting and Procurement Information System (Guatecompras) i s at the initial stage o f implementation, the Government's efforts have been well directed and are already having an important impact, particularly interms o f improved perceptiono ftransparency. These efforts have the potentials for further important progress, with the caveats discussed below. Guatecompras consists o f a single website for the publication o f procurement information, including a simple format for procurement notices.72The responsibility for the system, including further development and implementation o f operating rules and functionalities, were appropriately assignedto the MFP (through the DNCAE), underscoring the importance o f the tool for public resources management andthe highlevel o f political support for this initiative. 5.6 Inaddition to rules and regulations, information published in Guatecompras includes all procurement plans and notices for locally and externally financed procurement. As o f 31 August 2005, Guatecompras is being utilized by 122 public sector agencies and around 251 municipalities ( 76% o f the existing 331). Intotal, 693 procuring units were using the system 31 August 2005 (Figure 4). Among the reasons hampering a fuller implementation are the lack o f comprehensive standards and procedures and, in some cases, capacity and clear understanding o f its benefits. 72http:llguatecomuras.gob.gt GuatemalaCFAAICPAR: Procurement Management 42 Figure4: Trendsinuseof Guatecompras(SourceMFP) Accumulated Monthly Use of Guatecompras between2093to2005 Oct.INov.- Den. Jan. Feb. Mar. Apr. May. Jun. Jul. Ago. Sep. D&. Nau. Dee.Jan. Feb. 2 m 3 ~ ~ 2 D w ~ p 3 4 1 o w p 3 4 2 o w ~ a 3 w 2 m 4 a o w 2 1 3 w 2 o o 4 . p # ; 3 o 3 5 +Entities using the System 6Units using the system 5.7 While the e-transparency phase o f Guatecompras can be generally considered a success and the Government i s fully committed to continue the implementation o f the subsequent transactional phases, the latter involves greater risks and complexity -thus requiringa more rigorousplanningprocess. The following risks have been identified: . Consistency with current procurementpractices. There has been a proliferation o f practices in various institutions due to little clarity and obsolescence o f the regulatory framework. The low level o f coherence i s partly a consequence o f the lack o f coordination between the present regulatory environment and the electronic procurement system. Guatecompras should be an important tool to standardize and improve the applid procedures if it continues to be developed and applied in a consistent manner in all public entities. Clearly, a reform to the procurement law i s . important to introduce modern procedures and integrate better all those aspects related to electronic procurement. Leadership and utilization of the system. While responsible in MFP for policy making and supervision of the consistent application o f the legal procurement framework by public entities, the DNCAE is merely a system operator and has no capacity to generate consistent policies and standards to further regulate its continuous development. In addition, the DNCAE has not developed the capacity nor the tools to make a proper use o f the wealthy o f procurement information generated by Guatecompras for market analysis, monitoring implementation o f management o f procurement by public entities and incorporating lessons learned into policy making. Guatemala CFAAICPAR: Procurement Management . 43 Due process. Module 6 o f Guatecompras, Inconformities, was launched in June 2005. As o f 27 September 2005, 82 inconformities were received. All inconformities are signed electronically by the people who present them.. Bidders have so far used the module correctly. However, there is a risk o f unfounded allegations were due process may not be followed. Moreover, the procedure to follow up i s not clear. m Overreaching. Module 7 in Guatecompras which was launched in June 2005, allows the private sector to utilize Guatecompras for its own procurement. As o f 27 September 2005, a total o f 29 not for profit private entities have used the system. Out o fthe 82 non-conformities received, 3 were against private sector entities and in all cases none were o f a serious nature. While there are potential benefits with respect to corporate governance and further developing the electronic market place, it is important to avoid potential misuse over which the Government would have . little control, but may underminethe credibility o f the system. Strategic planning. The lack o f strategic planning may lead to incomplete and insufficient design o f the system, leaving many important unresolved issues, such as . the lack o f catalogues codifying buyer and supplier products, which in turn could compromise the sustainability o fthe system. Introductionof new procurementprocedures. The Government is very interested in increasing its utilization o f reverse auctioning, but has limited experience inthis procedure. There have been no detailed studies o f the implications o f an unrestricted use o f this method which, in absence o f proper market conditions, may impact negatively both the government and the private sector. Guatecompras has a module on reverse auctioning foreseen in its road map. Eventually, it will be important to consider the peculiarities o f the market in Guatemala and build on the experience o f countries that are already using this method as the case o f Brazil and o f those that have recently incorporated it in their procurement legislation as the case o f Peru, Costa Rica and Paraguay. System demand. Entities are still utilizing different procedural requirements (e.g. some entities even request payment in kind, such as computer diskettes, for participation in the bidding process), and many are not fully convinced of the system's benefits. Guatecompras may remain just a parallel system unless the requirement that all public entities utilize its single portal i s enforced and the transparency and transactional phases implemented in a consistent manner, because its growth may slow down and demand for it may dwindle, particularly among municipalities. The module on electronic bids i s planned to be launched during 2007. The General Budget Law o f Fiscal Year 2006 has incorporated a norm so that all entities that receive resources from the State have to use Guatecompras in all purchases exceeding Q30,OOO. Procuring Units 5.8 Central government. Most procurement processes are undertaken directly by the executing entities, some o f which have established specialized procurement units to that Guatemala CFANCPAR: Procurement Management 44 effect. 73 Inother agencies, procurement is carried out by user departments. Overall, there i s no significant procurement-specific capacity in executing units. For example, lack o f formal procurement planningi s reflected by very limited spendingat the beginning o f the fiscal year, followed by a rushto use the budgettowards the end, sometimes by fractioning contracts and utilizing other shortcuts. In general, there are no clear links between annual operating plans (POAs) and procurement planning, which i s generally ad-hoc and not built around the synergies o f the entities' objectives and targets. Thus, procurement plans do not provide the budget process with time related information on financial resources required throughout the year to meet institutional objectives. 5.9 However, some good initiatives are being launched to streamline processes and strengthened procurement units. O n the heels o f COPRE'S institutional assessments, some line ministries initiated programs to improve procurement processes and are very committed to continue with their internal reforms. These include the Ministries o f Education, Health, and Communications ,which together implement over 30 percent o fthe General Budget. 5.10 Case studies in the Ministries of Education and Health. An assessment of these two ministries showed that internal controls related to procurement management are generally weak. There i s no procurement monitoring system and record management i s poor. Other issues generally mirror systemic shortcomings with respect to procurement planning and management. Problems with evaluation and award practices as well as concerns expressed by the private sector about transparency largely reflect the low quality o f the regulatory framework, which i s generally complied with by the two ministries. 5.11 While the Ministry o f Health has a central procurement unit whose capacity i s over~tretched~~,the Ministry o f Education has no specialized unit and only one experienced procurement staff. Some priority actions would be to: (i)develop and implement a procurement monitoring system (physical and financial); (ii) complete the procedural manual for the ministry and its decentralized units, including standard bidding documents for all methods o f procurement; (iii) add capable procurement staff; (iv) develop and implement a training program; (v) strengthen internal control systems; and (vi) strengthen procurement planning and link it better to financial management processes. 5.12 Other ImplementingEntities. Decentralized and autonomous entities are subject to the law and many are utilizing Guatecompras. However, the current scope o f application of the procurement law does not include social funds, such as FIS and FONAPAZ, trust funds (Fidecomisos), and NGOs contracted by municipalities to procure goods and works, which cumulatively represent a significant amount o f the total procurement volume (estimated at between US$42 and 2 billion per year.) There are no significant differences between these procuring entities and the average central government agency with respect to procurement capacity. However, some social funds, trust funds, and NGOs are currently being investigated for alleged mismanagement and appropriation o f public finds and control organs expressed concerns about the Government's ability to monitor effectively that public resources channeled through these entities are utilized transparency and effectively. 73In 2003, 48 percent of procurement procedures followed public bidding, 24 percent direct contracting, 15 percentframework contracts, and 13 percent shopping. 74Eachof its 6 staff overseesprocurementof 14 executingunits. Guatemala CFAAICPAR: Procurement Management 45 5.13 UNDP i s the main procurement agent o f the Government and i s currently implementing 7 of 12 active World Bank Projects and various IDB projects, in addition to procurement financed by other sources for a total o f approximately US$300 million. 5.14 Municipalities. Guatemala's 331 municipalities are currently subject to the procurement law with respect to transfers from the central Government. Typically, procurement is the responsibility o f the treasury department which only inthe case o f some o f the larger municipalities includes a procurement unit. The Integrated Municipal Financial Management System (AFIM) includes detailed procurement and supply management procedures. The vast majority o f contracts for goods and works awarded by municipalities i s below Q. 900,000 (around US$116,000) and i s procured following shopping procedures. 5.15 A sample asse~sment'~confirmed the consistent feedback received from various Government agencies involved in implementing the decentralization process that local procurement capacity i s generally very weak. Typical problems are similar to those affecting central government agencies and include lack o f objective contract award criteria, low capacity o f staff due to frequent rotation, incomplete records, and fractioning of contracts to avoid open bidding. DNCAE launched a training program in 2004 in collaboration with INFOM which focuses primarily on legal aspects and the utilization o f Guatecompras (more from a system user than a procurement practitioner point o f view.) However, training resources are scarce, the impact o f this approach generally limited, and the usefulness o f attempting to conduct a massive training effort inall municipalities dubious. 5.16 While 278 municipalities have at least one computer with the capacity to connect to the Internet, only 185 currently utilize Guatecompras. A public debate ensued from statements made by some mayors to the press during a meeting o f the National Municipal Association (ANAM), to the effect that Guatecompras infringes upon local autonomy and, because of the large digital divided between companies based in Guatemala City and local suppliers, may negatively affect the economic development o f local communities. However, many mayors, leading representatives o f social society, and part o f the press responded vigorously by pointing out that while e-procurement has significantly enhanced transparency and has the potential for large savings, it has not eliminated the possibility o f participating in the procurement process through traditional means. N o clear disadvantages in adopting Guatecompras at all level o f government are evident, provided that next phases o f its implementationare based on an appropriate strategy, as discussed above. Analysis andRecommendations 5.17 E-procurement. The successful launch o f Guatecompras can be considered a good step towards public expenditure transparency. As afundamental action, further development o f the system should take place in the context o f a comprehensive strategic plan for e- procurement, focusing in particular on a better interface with SIAF modules, product classification and information standards, and use o f data for procurement planning. The government i s working inthat direction. The integration with SICOIN i s plannedto be carried out in4 stages. The first two stages have beenimplemented. At present, Guatecompras counts with a catalog with 14 categories that may be changed or modified whenever needed. 7515 municipalities o f different sizes, in5 of the 22 departments of the country. Guatemala CFANCPAR: Procurement Management 46 5.18 Procurement planning. As part of the overall budget reform, anotherfundamental action will be the institutionalization o f procurement planning and monitoring. The lack o f procurement planningand integration with financial management processes (particularly, with budgetplanning) remains a particularly serious problem which may require further additional training efforts. This deficiency i s due mainly to the lack o f a more strategic linkage o f these two planning areas with the institutional objectives o f each public entity. Without procurement plans, POAs and budgets cannot adequately reflects operational needs. As a result, the transparency and economy o f procurement processes and often the quality o f the goods, works or services procured i s negatively impacted, and the institutions' capacity to implementtheir programs efficiently is seriously impaired. 5.19 POAs should clearly define strategies for achieving performance standards against outputs, which, inturn, should reflect priority policy outcomes. They should include details o f the costs o f the activities that will be carried out throughout the year, linkedto the underlying procurement and contracting processes, so as to assess the time and cost efficiency implications. Previous years' procurement statistics and more risk and value for money- oriented internal audit would undoubtedly enhance the quality o f procurement plans and their usefulness and consistency with POAs. Figure 5 proposes a framework that would facilitate integration o fprocurement planninginto strategic and budget planning. Guatemala CFANCPAR: Procurement Management 47 Figure5: IntegratingProcurementand BudgetPlanning lncorooratina ProcurementPlannina in Annual ODerationalPlan Process Additional Processes Required to link Procurement with Budgeting To Achieve Objectives of Plan PreviousYear Procurement ' Statisticsfor ' Procurement Performance Plan Justification 1 InternalAudit Procurement Performance Review I I 5.20 Cost reduction strategies. In carrying out institutional procurement planning, due consideration should be paid to potential economies o f scale in volume consolidation, e.g. through enhanced use o f framework contracts.76At a strategic level, thisfundamental action could be facilitated by in-depth market studies and a review o f the Government supply processes for identification o f cost saving opportunities. Such studies should include analysis o f the market structure, expenditure profile and current purchasing arrangement, and selection ofthe procurement item groups which present the greatest prospect for savings. 5.21 A conservative estimate of the overall savings which could be achieved by addressing the problems withthe Government's procurement strategy highlightedabove is approximately 500 million Quetzales per year (approximately US$64.5 million.) A more aggressive cost reduction program could lead to potential savings in the order o f 800 million Quetzales per 76Currently, most goods and services are acquired independently by each executing entity. The problem is compounded by over-specification in goods, lack o f service contracting standards, and lack o f consumption controls. Guatemala CFANCPAR: Procuremenf Management 48 year (approximately US$103 million.) Furthermore, this estimate does not include savings that might potentially result from decentralized procuring units. In order to be able to achieve these savings, a cost reduction program needs to be launched at a very high level of Government. The current legal framework is adequate to execute a program o f this magnitude and capture these savings. However, additional executive acts in the form o f governmental agreements ("acuerdos gubernativos") are likely to be needed in order to generate more reliable volumes for the procurement processes. It i s recommended to initiate pilots through implementation phases, as shown in Figure 6, starting with commonly used items with low technical complexity and standard specifications. Figure 6: Savings Potentials of Streamlining Strategy 5.22 An implementation o f this strategy by phases would facilitate more systematic feedback and allow the introduction of progressive improvements, while delivering a solid platform o f continuous savings, as exemplified inFigure7. Guatemala CFANCPAR: Procurement Management 49 Figure 7: Phases of Cost Reduction Strategy Saving potential t Printed Materials Buildin PC's and Maintenanc printers Offtce equipment and paper Textiles and Uniforms 20-25% - .--- -- - Gasolineand Diesel Contracted administrative labour Low Comnplexity of implementation High 0 Volume 5.23 Other Procuring Entities. The Government should reassess its procurement outsourcing strategy and consider reducing it use o f international financial agents as more resources are invested in buildingthe capacity o f procuring entities and these demonstrate to be able to manage procurement efficiently an transparently. Current providers o f administration services and technical assistance could gradually begin shifting their focus to buildingprocuring entities' capacity to operate independently and successfully. Guafemala CFANCPAR:Fiscal Repoding and External Oversight 50 VI. FISCAL REPORTINGAND EXTERNAL OVERSIGHT Financia1Reporting 6.1 The MFP is required by the Constitution to submit to the CGC, within three months after the end o f the fiscal year, the annual budget execution report. The CGC is required, in turn, to submitto Congress its report andopinionwithintwo months o freceipt from the MFP. The Congress has the responsibility to approve or disapprove the budget executionreport. The entities that do not form part o f the General Budget are required to subject their budget execution reports to the same process. 6.2 The LOP and its Regulations establish an integrated government accounting system, and assign to MFP's State Accounting Directorate (DCE) the responsibility to set accounting norms for the NFPS, record public sector transactions, and issue budgetexecution reports and financial statements. While the entities that do not form part o f the General Budget, including municipalities, are required to submit their data to the DCE for consolidation purposes, an actual consolidation has never been done. This i s in large part because the cut-off date for submittal to the DCE coincides with that in which the DCE must issue the financial statements (March 31). 6.3 In-year reporting. The integrated accounting system (SICOIN) allows the MFP and executing entities to monitor General Budget execution on real time. Given the parametrical matrix that i s at the core o f SICOIN, single journal entries (CURS) affect simultaneously the budget execution and accounting records. Budget execution information aggregated under various classifications is uploaded on a monthly basis to MFP's Fiscal Transparency Portal webpage, where customized reports can be ~repared.'~The Portal also contains detailed information on debt balances and debt service. 6.4 The Constitution requires that the MFP presents to Congress analytical budget execution reports covering four-month periods. Inlarge part because o f SICOIN capabilities, the MFP is able to comply with the 30-day time limit for presentation o f these reports to Congress (the reports are also posted on MFP's website). The central government entities that do not form part o f the General Budget are requiredby the Regulations to the LOP to submit their budgetexecutions, for the same time period, to the MFP - but, again, this information is not usedfor consolidationpurposes. 6.5 Annual reporting. Inorder to fulfill its constitutional mandate, the MFP prepares an annual report on General Budget execution and government financial statements within the timeframestipulated inlegi~lationThe~report, which is also made available on MFP's web- . ~ site, presents the revenue and expenditure execution against the budget in effect, under 77 As of 2006, the Municipal Transparency and Fiscal Transparency Portals started operations and make information available on municipal budget and transfers to recipient entities by accessing the web site http://www,minfm.gob.gt. 78The financial statements are prepared on an accrual basis, in accordance with the Accounting Manual. The manual explains the chart of accounts, but cannot be considered a set of accounting standards. Guatemala CFANCPAR: Fiscal Reporting and External Oversight 51 different classifications. Additional disclosures include some aggregate data presented on a comparative basis with the previous fiscal year, the constitutional and social fund transfers, public debt service by loan, and the aggregate financial situation (determination o f the deficit and its financing). The individual annual budget execution and financial statements of decentralized and autonomous entities can be found inCGC's annual audit report. 6.6 Municipalities. As noted previously, a basic budget execution recording system (SIAFITOMUNI) i s installed in almost all (321 o f 331) municipalities, which have been provided with means to make that information public through a Municipal Transparency Portal.79 The extent of reporting is, however, limited and untimely.'' The annual budget execution reports are required to be submitted by March 31 o f the succeeding year to: Congress and CGC, per the Constitution; MFP and SEGEPLAN, per the LOP and the . Municipal Code; and INFOM per the Municipal Code. Compliance i s generally low, with the clear exception o f reporting to INFOM, since the information in this case is used as input to the calculationofnextyear's constitutionaltransfer andtax shares. 6.7 Central Bank. BANGUAT has not subscribed to the IMF's Special Data Dissemination Standard(SDDS), but it does make monthly and annual aggregate fiscal sector information available on a timely basis. The published figures are based strictly on data provided by the MFP -Le., no attempts are made to quantify data for entities that do not form part ofthe General Budget." TheExternalAudit Function 6.8 The Constitution grants the Office o f the Controller General o f Accounts (CGC) the power to exercise fiscal control (fiscalizacidn) o f revenues, expenditures and other financial matters o f state bodies, municipalities, decentralized and autonomous entities, and other recipients o f public funds (including public work contractors). Its Organic Law (2002) establishes its functional, administrative and technical independence, and confers it a minimum annual budget allocation of 0.7 percent of ordinary revenues, as well as rights to revenues from its imposition o f sanctions Vondosprivativos). 6.9 With a two-third majority, the Congress elects the Controller General for a four-year term, from a short list proposed by a committee integrated by representatives from the universities and the association o f professionals o f the economics field. The Controller General cannot be re-elected, can only be removed by Congress in case o f negligence, crime or ineptitude, and has to report to Congress as required-but at least twice a year. However, the CGC is not abranch o f Congress. 6.10 Inline withits Organic law, the CGC is organized intwo areas, eachheadedbya Sub- Controller. The Public Expenditure Quality department i s in charge o f the audit function ht@:Ilsiafmuni.minfm.gob.gt As of January 2005, 60 percent of municipalities had reported their budget execution for the first quarter of fiscal year 2004,49 percent for the second quarter, and 26 percent for the third quarter. "Financialoperations ofcertain large entities (e.g., the social security institute, theport authorities andtwo major municipalities), are integrated below the line in the context o f consultations with the IMF (hence the (( )) statistical discrepancy inTable l), but not for BANGUATpublications. Guatemala CFANCPAR: Fiscal Reporting and External Oversight 52 (organized by "state institutions", municipalities, "special entities", and public infrastructure), and the Probity department is in charge o f handling patrimonial declarations, as required under the Law of Probity and Responsibilities of Public Employees. Without prejudiceto the judicial prosecution o f criminal acts, the CGC has authority to impose pecuniary sanctions to public employees and others who incur infractions, in accordance with ranges o f fixed amounts established inits Organic Law. 6.11 Audits. Reform ofthe CGC's audit function has beenbased on the development ofthe Government Auditing System (SAG). The SAG has comprised the modernization o f CGC's law and regulations, and correlated activities: issuance of manuals and standards (including Government Auditing Norms consistent with standards by the International Organization o f Supreme Audit Institutions-INTOSAI), execution o f training activities, development o f humanresource management and other administrative tools, provision of technical assistance to UDAIs, and implementation o f management information systems. The latter include modules for planning, execution, and communication o f audit results, as well as a tool tailored to municipal audits (SAGITO). As opposed to SIAF, however, the implementationand impact o f SAG has been slower. This i s in part due to questionable leadership (corruption charges have been presented against the two previous Controllers), and an insufficient base of professionals.82 6.12 Inaccordance with its constitutional and legal mandate, the CGC issues annual audit reports on the budgetexecution and financial statements o fNFPS central government entities, within five months after the end o f the fiscal year.83 The report covers departmental development councils, but not municipalitie~.~~The audit opinion, internal control and compliance observations are reported on a consolidated and individual basis for General Budget entities, and separately for each one o f the other NFPS entities. As summarized in Table 9, a significant number o f qualified (as opposed to "clean") audit opinions were issued for 2003; however, the inclusion o f many qualifications seems questionable in terms o f their relative materiality. O n the other hand, there is not a consistent approach to valuing the internal control and compliance observations (Le., in many cases the total amount o f the correlated account, operation or contract i s reported, rather than the actual specific problem), makingit difficult to assess the actual damageto state resources. Entity Audit opinion No. internal controland compliance observations GeneralBudget entities Consolidated - Qualified: 60 qualifications 190 Per entity I 6 clean opinions I 7 qualiJiedopinions I disclaimer of opinion Non-GeneralBudget Entities 76 qualifications 204 Per entity I 6 clean opinions I6 qualiJiedopinions 4 adverse opinions '''* The CGC has around 1,000 employees, only half of whom are assigned to operational work. Of these, 40 ercent do not bear a professionaltitle. The 2003 audit report did not cover 11of the 78 NFPS entities (excluding the CGC itself). 84During2004, the CGC performedaudits to 65 percent ofmunicipalities. Guatemala CFANCPAR: Fiscal Reporting and External Oversighf 53 IDepartmentalDevelopmentCouncils I Qualified: 93 qualifications I 138 Source: Own calculationsusing CGC (2004) 6.13 Probity. The CGC has the responsibility to collect, record, and verify the veracity o f sworn patrimonial declarations of public employees. The declarations are in line with international practice and a database management information system has been developed to keep records up-to-date. In general, however, the CGC lacks human and technical resources to undertake effective verifications and investigate cases o f suspected embezzlement. Legislative Oversight 6.14 The Congress has the responsibility to approve or disapprove the budget execution report, and does so based on CGC's audit reports.85In general, however, the congressional scrutiny o f public finances is incipient and limitedto a handful o f legislators and themes (in line with specific interests o f certain legislators). The legislature's Public Finance Committee does have a supporting Budget Analysis Unit (UAP), but it is staffed by only three individuals, it does not have legal basis or operational techniques and procedures. Monitoring by Civil Society 6.15 While there are constitutional provisions that guarantee the citizens' right to request information and provide for public accessibility to administrative acts, the absence o f specific legislation and regulations on how to exercise this constitutional right affects its enforceability. There are no rules on what information should be considered confidential, no conflict resolution mechanisms (including no independent authority responsible for enforcement), and unclear accountability for public officials. 6.16 In spite of the mentioned limitations, the country has witnessed a growing participation o f civil society organizations (CSOs) in initiatives to monitor public expenditure matters, including social audits (Box 10) and budget analyses.86These tend to focus much more on public investment, particularly at the local level, and to a lesser extent in other budgetary analyses. Box 10: Some RecentSocial Audit Initiatives 1 Acci6n Ciudadana: Obsewatorio Ciudadano(monitoring of accessto information); municipal socialaudit project; congressionaltraining andmonitoringproject; audit of the Anti-Corruption ProsecutorOffice; monitoring use of Guatecompras. 1 Centro de Investigaciones Econ6micasNacionales(CIEN): Project of budgetmonitoringduring the government's last year inpower. . 1 Acci6n Ciudadana, Chmara de Comercio,CIEN: Coalicidnpor la Transparencia(projects for strengtheningof control bodies, strategictransparency commitments, analysis of budgetarytransfers) Gran CamDaila Dor la Educaci6n: Audit of deliverv of schoolmeals. sumlies andtexts. "Incaseofdisapproval,CongressisrequiredtoinstructtheCGCtoimposethepertinentsanctionsand,when applicable, put the case forward to the Public Ministry.Since the CGC is requiredto do so inthe first place, the disapprovalis inpracticejust a moral sanction. 86CSOs that have undertaken budget analyses include the Asociacion de Investigacibn y Estudios Sociales (ASIES), Centro de InvestigacionesEcon6micas Sociales (CIEN), Coordinadora iSi, Vamos por la Paz!, Grupo de Apoyo Mutuo, andOrganism0Naleb. Guatemala CfAAICPAR: fiscal Reporfing and External Oversighf 54 1 Redde Mujeres por la ConstruccMnde la Paz: Monitoring ofhealthexpenditure. Source: Maul(2005), using information by Ricardo Puerta. Analysis and Recommendations 6.17 Financial reporting. The accounting function has been institutionalized and shows sophisticated advances, most notably the accrual base o f recording, the single journal entries that affect simultaneously budget and accounting records, the timely issuance o f monthly, four-monthly and annual fiscal reports, and the availability o f information through the internet. 6.18 However, a significant shortcoming can be found in the lack o f consolidated NFPS and general government financial statements, a problem that the MFP could seem likely to solve by the expansion of SICOIN's coverage to decentralized and autonomous entities, and o f SIAFMUNI/SIAFITOMUNI to m~nicipalities.~~Nevertheless, for all the significant advances in financial transparency, certain non-General Budget accounts are not properly disseminated, reflecting that expansion o f the cited systems have contributed to internal management and standardization, but not yet to consolidation and publication o f fiscal information. These circumstances reduce the availability o f evidence that is required for comprehensive and effective oversight o f the use of funds, and could provide the opportunity for operational efficiency breaches and increased fiscal risks. 6.19 At this point, the issue seems to be one o f enforcement and oversight rather than information system capacity, and thus fundamental actions should encompass: (i)a combination o f actions to comply with the legally-required consolidation o f public sector budget execution and (eventually) financial statements;** and (ii)strengthening MFP's capacity to assess and monitor fiscal risks associated with the financial performance o f decentralized and autonomous entities. 6.20 The mentioned efforts should be coupled with a program to modernize the DCE inthe current context o f decentralized accounting entries. Certain transactional activities that the DCE still executes should be phased out and substituted by strengthened capacities for financial and budgetary analyses, consolidation and customization o f financial data, and administration o f SICOIN. An analysis o f gaps with respect to the InternationalPublic Sector Accounting Standards (IPSAS) should serve as basis for a gradual adoption. Ina shorter term, 87The DCE does publish "consolidated central administrationbalancesheets" by recording, a year after the fact, the annual net asset variation of decentralized and autonomous entities. The process, however, is far from compliant with international standards for financial statement consolidation and adds little value to the information available. The MFP expects that, once SICOIN-WEB is implemented in all decentralized entities, budgetaryand accountingconsolidation will be made at the levelof individualaccounts. The CGC issuedrecently a directive mandatingthat the 2004 municipal budget execution reportsbe generated by one of the systems developed by the MFP (SICOIN, SIAFMUNI or SIAFITOMUNI). This requirement is likely to increase the capacity to aggregate municipal budgetary data, and should be complemented with a requirementto unify budget reporting to MFP, CGC andINFOM. Guafemala CFANCPAR: Fiscal Reporting and Exfernal Oversighf 55 both DCE and DBE should complement the development o f SIAF's asset management modulewith the preparationand issuance o f a property, plant andequipment manual.89 6.21 With respect to fiscal reports already beingpublished, the Government is inpositionto enhance their presentation and substance with additional fundamental actions: (i)the composition o f large accounts (notably the groupings for "state obligations" and "secretariats and other dependencies"), as well as of execution at the program level, should be disclosed; (ii)the detailedbudget executionreports couldincludecomparative datafor theprevious fiscal year and correlated explanations o f variances; (iii)timely reconciliation o f suspense accounts and advances should leadto a reduction inthe amount o f uncleared balances brought forward; and (iv) the arrears portion (if applicable) o f the known payables could be clearly identified, and an effort could be made to disclose known contingent liabilities. 6.22 There is also room for improvement inthe notes that provide narrative descriptions or more detailed schedules o f figures in the financial statements, as well as in additional information to assist users in assessing the Government's performance (correlated to the process of use o f result indicators to inform budgeting), its stewardship o f assets (financial, fixed andothers), and the allocation o f resources. 6.23 The DTP and SEGEPLAN could also contribute to strengthened transparency and accountability by making public summaries o f their evaluations o f budget and PIP execution, for which technical training to the pertinentpersonnel is necessary. 6.24 External audits. Based on legislationthat provides it with adequate independence and room to exercise its external audit function, the CGC has made commendable efforts to increase its coverage o f financial audits and issue its reports on a comprehensive and timely basis. Granted, those reports should be improved by making better use of judgment when assessing the materiality of qualifications to financial statements, and o f accuracy when costing the extent to which internal control and compliance deficiencies have affected public finances. 6.25 The major challenge that the CGC faces is the overhaul o f its staff structure, shifting resources for a more efficient ratio of administrative to technical staff, and ensuring the latter are increasingly composed o f qualified professionals. A merit-based selection, employment and promotion system, including aptitude tests and standards for certification o f government auditors, periodic staff evaluations, and career prospects disconnected to political cycles needs to be developed. At the same time, the CGC should make more extensive use o f its legal power to use work o fprivate auditors, under an efficient quality control framework. 6.26 The SAG information system is well designed, yet its implementation has been tardy and incomplete, thus limiting its potential to enhance efficiency in audit exec~tion.'~ the In 89 A manual is needed to set uniform procedures to control and record costs, revaluations, depreciation, movements, sales and disposals, custodial responsibilities, registries, physical inventories and reconciliations o f the Government's assets (property, plant andequipment). 90The administrative support tools o f SAG are in use, as well as the audit reporting module. The execution module is incomplete (e.g., tools for statistical sampling based on risk assessments have not been acquired), and only usedpartially. The planningmodule, though complete, was not in use as of 2004. Guatemala CFANCPAR:Fiscal Reporting and External Oversighf 56 short run, fundamental actions should be taken to utilize and validate available SAG modules, complemented with better use o f risk assessment techniques to develop the annual audit work plan and to plan individual audits, so as to adhere to international standards and focus on significant and systemic issues (this may require international technical assistance). By enhancing external scrutiny, these actions could influence operational efficiency through increased accountability for efficient and rule-based management o f resources and enforcement. withinCGC's institutional structures shouldbeplanned.9P 6.27 Similarly to SIAF, the SAG is still managed as a roject and thus a gradual absorption 6.28 As normative body of the internal control framework, the CGC should monitor the extent o f implementation and performance o f the internal control norms. The ongoing initiatives to enhance coordination with the Public Ministry (state prosecutor) should be reinforced. Finally, the CGC should enhance the quality andtimeliness o f its statistics and the monitoring o f its own performance indicators, and be subject to regular external audits. 6.29 Probity. The capacity o f CGC to analyze and verify patrimonial declarations, and accordingly carry out investigations, should be built on the basis o f qualified technical assistance and an adequate code of conduct. This effort, however, would be limited in the absence o f certain basic concepts in criminal law (e.g., offering and soliciting o f bribes, political interference, and conflict o f interesthllicit enrichment). 6.30 Legislative oversight. Despite its responsibility to approve or disapprove budget execution, the ability of Congress to scrutinize budget execution and audit reports, and public finances in general, is generally constrained. The Budget Analysis Unit (UAP) should be strengthened, e.g. through external cooperation, and fiscal oversight themes and tools should be better disseminated among the legislators. 6.31 Civil society oversight. Interms of fiscal transparency, the ability o f all stakeholders, including CSOs andthe private sector, to interpret information and monitor the PFM system's outputs is as important as the public institutions' capacity to generate reliable data andmakeit widely available. In that regard, a particular concern in Guatemala is the absence of legislation and regulations on public access to information, which makes the interpretation o f the constitutionalright subjective andits compliance largely arbitrary. 6.32 The emergent participation o f CSOs in budget analyses and social audits is a good basis to buildcertain foundations to facilitate and sustainthe process. Inaddition to regulating the right of access to information, the Government (e.g., through the MFP) could organize events with CSOs to gather main informational needs. On that basis, outputs at different level o f complexity depending on the prospective user could be designed. Both the CGC and the Congress (e.g., through the UAP) could open channels to process information received from CSOs in connection to social audit initiatives. Similarly, a feedback mechanism could be established to communicate actions taken by the Executive and others in relation to social audit findings. 91 A particular IT concern is the insufficient system design documentation, which may complicate future maintenance andadjustments. Guatemala CFANCPAR: Fiscal Reporting and Exfernal Oversight 57 6.33 A couple o f specific areas where there is room to enhance transparency are: (i)the availability o f key documentation prior to budget approval (e.g., budget policy, ceilings, investment project approval); and (ii)the implementation o f an effective bid protest mechanism, which could generate data on the type and frequency o f problems affecting the procurement process and the response from procuring entities. Guatemala CFICPAR: Conclusions 58 VII. CONCLUSIONSAND MAINRECOMMENDATIONS 7.1 The financial management reform process, initiated in the mid-1990s under the umbrella o f public sector modernization, has produced improvements in the performance o f budget management institutions. The implementation o f the integrated financial management system (SIAF), built upon a good normative framework and facilitated by a modern technological platform, has contributed to efficiency inexecuting financial transactions and to the production o f opportune information on most government finances. The underlying accounting system (SICOIN) operates in most government entities and a version tailored to municipalities (SIAFMUNI) i s rapidly being expanded92. All in all, the formal norms are progressively generating a culture o f accountability and fiscal prudence in officials responsible for PFM. 7.2 The financial management methodologies and processes are well documented and normally followed. The Government is able to track revenues and expenditures on a timely basis and under a broad classification system. Effective controls o f its cash position, including an efficient common fund system and rather complete central government debt records, are in place. Both the annual budgets and financial reports provide considerable government financial data that i s publicly available. Similarly, transparency of procurement operations has benefited from the initial stage launch o f the electronic government procurement system (Guatecompras), which i s already showing impact by its extensive use. 7.3 The external auditors have independence and room to exercise their functions, including timely annual reporting to Congress on fiscal information. Furthermore, leading civil society organizations with good technical and convening capacity have been engaged constructively in social audit initiatives and integrity pacts. Still, important obstacles remain, as summarized inthe following paragraphs. 7.4 Procurement.Efforts to modernize public procurement have not been as significant as inother areas. The public procurement system has advanced to a certain degree but has not achieved the desired level of transparency, competition and predictability While transparency has benefited from the initial stage launch o f an electronic government procurement tool (Guatecompras), systemic deficiencies restraint enforcement and reduce the efficiency o f budgetexecutionand the government's ability to deliver public services. 7.5 Procurement planning, management and monitoring are not quite adequate because o f various factors that can be improved. The public procurement regulatory framework is outdated and inefficient, includes some barriers to competition that limit transparency and economic results. Unduly onerous requirements and the lack o f procedural guidance and standard bidding documents have fostered a proliferation o f arrangements which lead to systemfragmentationand further compoundthe regulatory shortcomings. '*Theaccounting registry system was completed in2006 and the financial statements of the municipalities are generatedthrough SIAFMUNI Guafemala CFAICPAR: Conclusions 59 7.6 Because there is not a effective public procurement policy nor the mechanisms for policy oversight, a clear, unifying vision o f the objectives o f public procurement and its role within the PFM system is missing. There is also limited capacity to monitor the system's performance and effectively utilize the feedback for policy development, procurement planning, and control. As a result, capacity buildinginitiatives are not well coordinated, the development o f key implementing tools (e.g. bidding documents) is lagging, and there have been no in-depth assessments o f the government's procurement strategy or the supplying marketsthat foster the introduction o f new contracting approaches and the implementation of cost reduction programs. 7.7 At the executing entity level, most procuring units have a limitedcapacity andthere is no strategic planning clearly linked to the entities' budget processes and institutional and developmental objectives. The Commission for Public Sector Modernization (COPRE) i s undertaking a modernization o f the legal framework and is expected that this initiative may provide ,there i s no clear leadership for a sustained national dialogue and a focused effort to coordinate the procurement reforms. 7.8 Financialmanagement. While a formal budget formulation process is in place, and the Ministry o f Public Finance (MFP) i s strengthening it with clear plans for adoption o f a medium-tendperformance based expenditure framework, the high incidence of constitutionally and legally mandated earmarked funds and fixed-type costs limits the room for the re-allocation o f funds in the budget planning process. Similarly, the incomplete information on municipal budgets and investmentprojects prevent a comprehensive sectoral planning. On the other hand, the unrestricted legal capacity o f Congress to introduce changes to budget plans (particularly the public investment program), and o f the Executive to modify the budget during the fiscal year through transfers, can affect the credibility of budget formulation and its results. 7.9 Regarding budget execution, on one hand the flexibility o f some entities i s restricted by the monthly periodicity o f the system o f quotas; on the other, many entities and programs operate out o f single treasury account payment system, an exemption which can produce idle finds, increase transaction costs, and reduce transparency. And, whereas budget execution accounting practices have been standardized, there i s still certain degree o f fragmentation in internal administrative systems and procedures. At the time o f preparing this report, this was evident in personnel and payroll management, which got complicated by the variety o f disconnected regimes and practices used for hiring and compensation, in a way similar to what happened with procurement and contracting practices, as mentioned above. Inpart this was resolved with the implementation as o f 2006 o f a payroll system operated in the Internet (Guatecompras). 7.10 Interms of fiscal reporting, at the time of conductingthe assessment the simultaneous (and sometimes late) recording o f expenditure commitments and accruals generated incomplete information on total expenditures incurred and floating debt, carrying the potential risk of generating payment arrears. However, as o f January o f 2006, MFP implemented a system by which 4-month commitment quotas and monthly payments are approved all o f which enable their registry in a timely and separate manner. On the other hand, the lack o f consolidated government financial statements restricts the capacity to undertake Guatemala CFNCPAR: Conclusions 60 comprehensive analyses o f budgetary performance, financial position, and fiscal risks -which are not performed ina systematic manner. 7.11 Finally, the independentassurance on the reasonableness o f fiscal data (i.e., financial statements) i s constrained by capacity limitations of the Office o f the Controller General o f Accounts (CGC), particularly those related to its low numbers of qualified professionals. The problem i s compounded by the weaknesses that make the internal audit function ineffective. 7.12 Other aspects. The Office of the Commissioner for Transparency has a good vision, but insufficient resources to carry out its mandate effectively; similarly, the capacity of Congress to scrutinize budget execution and audit reports, and public finances in general, is limited.The civil service outdated and fragmented institutional framework is the most visible transversal institutional weakness that could restraincontinuing PFMmodernization. LeveragingOpportunitiestoMoveForward 7.13 Several converging elements suggest that, after a dim recent governance environment, there i s a renewed window of opportunity to accelerate P F M and transparency reform. The Government's strategy is fundamentally sound and its implementation teams capable and committed. Moreover, there is remarkable consensus between civil society, the private sector, andthe executive onthe need for and objectives o fthe reform. 7.14 The expansion o f SIAF, SIAFMUNIand Guatecompras shows the strong Government commitment to increased transparency. The MFP and four major ministries are undertakinga credible plan to renovate the budget planning process. COPRE i s carrying out a comprehensive plan of institutional assessments. Some key procuring units are inthe process o f developing strategies to streamline procurement processes and improve procurement management capacity. The Government has also shown strong interest in identifying ways to reduce costs through better economies of scale, and i s already utilizing contractual instruments that -provided appropriate information i s available- can facilitate achievement o f these objectives. 7.15 Notwithstanding the political division, there is general consensus that an improved communication strategy could enhance the prospects o f passage o f key pending legal reforms.93 While legislative reform to support modern and efficient PFM institutions and systems remains an important objective inthe medium term, the overall strategy should also be designed to demonstrate rapid progress and help build momentum and support for the reform. There are several actions that do not require legal changes, may be supported by current capacity buildingprojects, and can produce improved outputs inthe short-term. These could help shift focus from process to outcomes and makeit harder for the Government to fail to make further progress ifthe innovations are functioning. 7.16 Pilot programs inline ministriesthat are responsible for the majority of the budget (i.e. Infrastructure, Health, and Education) provide opportunities to accelerate strengthening o f 93Inthe particular case of procurement legislation, an additional external driver is to ensure consistency with CAFTA public procurement provisions. Guafemala CFNCPAR: Conclusions 61 procurement and financial management processes, including internal controls. As the pilots produce measurable results, they could be expanded throughout the public sector. SuggestedFundamentalActions 7.17 The analyses in the preceding chapters lead to the conclusion that, building on the achievements o f the last decade, the budget management institutions can envision further enhancement o f their performance to increase efficiency and effectiveness in the administration o f public funds, and to positively influence the governance environment through improvements in transparency. This i s o f particular importance given the currently limited level o f revenues -and as validation to increase those revenues-, and the need to expand public investmentsinkey sectors. 7.18 The suggested actions found in this report are largely consistent with the Government's own plans, and are supposed to be put into practice under proper sequencing arrangements. Available external cooperation could support their implementation when technical assistance or physical investments are needed. Selectedfundamental actions, driven primarily by operational efficiency implications, are recapitulated in the following paragraphs. 7.19 Budget planning.The Government has designed a good planto adopt a results-based andmulti-annualapproach to budgeting.To validate and sustain what is by nature a long-term endeavour, a cautious and gradual approach i s encouraged. 7.20 Inthe short to mediumterm, the approach shouldbe expanded to a sectoral level (e.g., incorporating social and other funds) and broken down to a programmatic level. Cost sectoral strategic plans should be developed as the catalytic documents for policy assessment and reconciliation o f the top-down and bottom-up multi-year budget planning. The public investmentprogram (PIP) should be based on those plans, with due consideration to recurrent cost implications. These actions, for which institutional strengthening and definition o f methodologies are required, could bring about more meaningful discussions over operational efficiency inthe use o f resources, an orderly review o f budgetaryimplications o f existing and newpolicies, andbetter planningo fthe recurrent costs o finvestmentdecisions. 7.21 Revenue administration. The Superintendence of Tax Administration (SAT) is already heading inthe right direction with its comprehensive strategic plan. Accordingly, and with a view of improving transparency of tax data and effectiveness o f registration, assessments and collections, some key actions to be implemented are to: (i)continue expanding the coverage and information content o f the taxpayer account, including accurate identification o f outstanding debt; (ii)aggregate that information so as to enable better reporting on declared and assessed taxes, including well-classified and reconciliated data on arrears; and (iii) clear up the registration databases, make penalties for non-compliance with tax obligations more effective (as pertinent, through modifications to the Tax Code), and strengthen the risk-based focus of audits. 7.22 Budget execution. In the short term, proper and timely recording o f expenditure commitments and accruals should be both enforced and enabled (e.g., moving fiom monthly accrual quotas to quarterly commitment limits -always keeping emergency options to deal GuatemalaCFNCPAR: Conclusions 62 with unexpected cash flow problems). These actions could help prevent payment arrears, a form o f non-transparent financing that can affect fiscal discipline and increase cost o f works, goods and services. They could also improve predictability in resource flows to service delivery units, which could therefore plan and use those resources in a more timely and efficient manner -a matter o f particular importance in light o f the introduction o f results- based agreements for budget management. This recommendation was implemented upon effectiveness o f the authorization o f four-month commitment quotas and monthly payment quotas 7.23 Treasury management.Inthe mediumterm, the Treasury's common fund payment system should be significantly expanded to all central government noncommercial entities, taking into consideration the respective legal implications, so as to prevent idle funds, reduce transaction costs, and increase transparency. 7.24 Procurement policy and management.In the short-term, a plan to clearly assign procurement policy formulation and oversight functions, separating them from operational tasks (e.g., management o f framework contracts) and ensuring proper leadership and resources for a successful implementation o f the public procurement system reforms should be developed soon for a medium-term implernentati~n.~~a strategic level, the Government At could benefit in the short term from in-depth market studies and a review o f its supply processes for identification o f cost saving opportunities. Further development of Guatecompras should take place, inthe short term, as part o f a comprehensive strategic plan for e-procurement, focusing in particular on a better interface with SIAF modules, product classificationand information standards, and use o f data relevant for procurementplanning. 7.25 At the executing entity level, startingwithpilot ministries, intensive support should be provided in the short term to implement modern procurement processes (including planning methodologies linked to budget and annual operational plans, manuals, documents, monitoring and evaluation, internal controls based on comprehensive risk prevention strategies and management processes, contract administration, and capacity building programs.) This action could be undertaken immediately with the support o f existing operations o f the participating Banks and could provide models to be later replicated in all line ministries-and eventually throughout the system and adopted as Government policy. As these ministries' operations are already substantially decentralized, they would also represent excellent vehicles to strengthen capacity and controls at the local level and pilot approaches which are likely to be more effective thanmassive capacity buildingefforts. 7.26 Inthe mediumterm, the efforts at the executing entity level should be properly linked to cost reduction strategies such as potential initiatives to take advantage o f economies o f scale in volume consolidation. These could include enhanced use o f fiamework contracts under clear arrangements for awarding and management. 94 The policy unit should coordinate ongoing efforts, monitor implementation o f the entity-level reforms, develop key tools building on these experiences, and facilitate replication o f success stories and consistent applications o f tools and policies throughout the public sector. The policy office should also develop and implement comprehensive capacity building programs and coordinate closely with COPREto ensure that civil service reform incorporate effective measuresto professionalize the procurement hnction. Guafemala CFNCPAR: Conclusions 63 7.27 Internal controls. The institutional assessments carried out under COPRE's leadership, together with the specific findings reported in audit reports, should be the basis to develop inthe short term internal control strengthening plans in the budget executing entities -again, starting with pilot ministries. On the other hand, recognizing that the internal audit institutional weaknesses cannot be solved in the short term, certain technical actions can be undertaken, e.g. preparing an internal audit manual, providing internal auditors with tools from the government audit information system (SAG), developing a system o f training and certification, and improving the coordination with the CGC. 7.28 By enhancing controls o f expenditure processes, the opportunities for corrupt practices, leakages and patronages that affect operational efficiency can be reduced. 7.29 Financial management systems. The ongoing development o f SIAF modules for personnel registry and payroll, procurement, fixed assets and inventories, should be framed in a medium-term comprehensive strategy that takes into account the need to re-structure and streamline procedures within public entities. With regards to payroll controls, the continued implementation o f decentralized payroll preparation in ministries should be complemented with efficient interfaces betweenthe human resource management systems and SIAF's cited module, and with a system o f periodicalpayroll audits. 7.30 Ingeneral, operational efficiency can be improved ifthe control rules andprocedures are relevant, widely understood, and cost effective. 7.31 Transparency of fiscal reporting. The expansion o f SICOIN's coverage, complemented as needed with other actions to enforce compliance and the pertinent support o f the CGC, should serve inthe short term to disclose budgetary and financial information o f entities (including municipalities) that do not form part o f the General Budget. Similarly, an effort should be made to begin disclosing with greater detail the composition o f certain large accounts (notably the groupings for "state obligations" and "secretariats and other dependencies"), identifying the arrears portion o f the known payables, disclosing the nature and fiscal significance o f known contingent liabilities and quasi-fiscal activities (an area which requires previous work, particularly to create technical capacity in the normative entities), and disclosing local government indebtedness to the Municipal Development Institute (INFOM) and others. In 2006, both the Municipal Transparency and Fiscal Transparency Portals became operational and information on municipal budget and fund transfers to recipient entities i s publishedinthe web site www.minfin,g;ob.at. 7.32 In the short to medium term, the MFP should strengthen its capacity to assess and monitor fiscal risks associated with the financial performance o f decentralized and autonomous entities, and should develop consolidation methodologies and begin applying themto the central and general government. The actions summarized inthese two paragraphs would increase the availability o f evidence required for comprehensive and effective oversight of the use o f finds, thus reducing the opportunity for breaches in fiscal discipline andoperational efficiency. 7.33 External oversight. In the short term, the CGC should make an effort to utilize and validate available SAG modules, complemented with better use o f risk assessment techniques Guatemala CFNCPAR: Conclusions 64 to develop the annual audit work plan and to plan individual audits -so as to adhere to international standards and focus on significant and systemic issues. By enhancing external scrutiny, these actions could influence operational efficiency via increased accountability for an efficient rule-based management of resources; andnorms enforcement. 7.34 In the medium term, the CGC should address the overhaul o f its staff structure, shifting resources for a more efficient ratio o f administrative to technical staff, and ensuring that the latter are increasingly composed o f qualified professionals. At the same time, the CGC should make more extensive use o f its legal power to use work o fprivate auditors. 7.35 Municipalities. The ad hoc alliances that have been fostered between government entities and cooperation agencies to strengthen local government administrative capacities, should lay the ground work for the short-term preparation o f a uniform sector-wide strategy, under which the various sources of finds available are efficiently allocated. Further implementation o f SIAFMUNI and access to Guatecompras should continue, but with due consideration to the mentioned strategy. The latter should also continue to contemplate opportunities to simplifl internal administrative procedures, to address ambiguities and contradictions inmunicipal debt legislation, to further facilitate associations o f municipalities to take advantage of potential economies o f scale, andto carry out market analyses to identify room for cost saving mechanisms. The module o f municipal accounting registry was completed and implemented in 2006 and the financial statements by municipalities are generated via SIAFMUNI. Currently, all municipal governments have access to Guatecompras and 95% o f them use it. 7.36 Legal framework. The Government, mostly through COPRE, is sponsoring key reforms to civil service, public access to information, procurement, and concessions laws. In this regard, country circumstances (e.g., a highly divided Congress that makes it difficult to shepherd major legal reforms) demand -in the short term- a strategic approach to legislators and opinion makers, so as to ensure due technical and public debate, and achieve reasonable compromise to generate wide-based support.95 Passage o f the mentioned legislation should thenbe soughtinthe short to mediumterm. 7.37 Improvements to the procurement law should aim at ensuring a more streamlined and transparent process and consistency with DR-CAFTA. Other important objectives are to ensure consistent application of the procurement law to all entities utilizing public funds and provide firmer legal basis for Guatecompras. Finally, consistency with established international practices may facilitate greater utilization o f local rules under operations financed by external donors. In terms o f concessions and PPI initiatives, a clear strategy should be developed. 7.38 Financial management legal enhancements (taking into account possible constitutionally restrictions) should contemplate makingthe Public Investment Program (PIP) assessment process mandatory, and putting certain limits on the legislature's capacity to 95COPRE could facilitate topical workshops to explain objectives and practical implications of the proposed reformsto legislatorsand develop ajoint strategy with CSOsto generate support form politicians, the media, and civil society. The CFAA/CPAR participating Banks could support the workshops by contributing lessons learnedfrom establishedpracticesincomparableenvironments. Guatemala CFNCPAR: Conclusions 65 dictate budgetallocations and composition o fthe PIP, as well as to the executive's capacity to modify the budget during the fiscal year through transfers. These actions could lead to increased credibility o f the budget process, which in turn would help avoid shifts across expenditurecategories that could affect operational efficiency o f service delivery. 7.39 Monitoring PFM reform. An element that the Government could use to monitor performance o f PFM systems i s the periodical assessment o f certain performance indicators, developed by the Public Expenditure and Financial Accountability (PEFA)program. Once the indicators are validated with Government officials, these may need refinement, customization and additions (e.g., establishing links with the indicators developed under the SIAF Project). Other key reforms that affect PFM 7.40 Efforts to modernize PFM should not take in place in isolation, but be complemented by other key public sector and governance reforms, such as modernizing civil service, establishing key legal precepts to help the fight against corruption and strengthen probity controls, and strengtheningjudicial systems that guaranteethe rule o f law. 7.41 In the short term, COPRE should continue its plans to modernize civil service legislation aiming at, among others, consolidating the institutional framework, creating a civil service career plan, merit-based selection and promotion, introducing annual evaluations and salary reviews, and revisingthe system o f civil service categories. 7.42 Inthe short to medium term, the Office ofthe Commissioner for Transparency should introduce changes in its reform approach, be better staffed and resourced to further develop and implement more effectively the anticorruption strategy. That office should focus on policy and coordination rather than investigation and enforcement. During a similar timeframe, legislation concerning public access to information, together with actions to further enable social audits, shouldbepursued. At the end o f2005, the Governmentapproved a Governmental Decree with regulations on free access to public information that mandates central government public officials, amongst other aspects, to submit an annual accountability report on the precedent fiscal year . hB & Q i t=; 5 Q El .I 30 Y W a3 P 3 J 2 a a3 ? .z4 -0 0 .3 ."W VI VI 8X W Y 8l -0 D a c 8 22 Y VI 3 n E : E 2 9 E E Z E 2 5 : E 4 4 4 4 n n n n 9E $ 2 2 9 - &5 s v) $ .I u & L 2 2 M .-% e .s .I 3 Y cd 0 1 P .C W s8 E'c 0 .I .-2 e .I -3 .Ie bl b 9 => M .I c 0 1 .I .Ic3 0 Px 9 P0 %2 eQb B Yv) E 0 .I Y 0 M cd e .I ! Y E .Iscd 3 a 0 8a V 2 e e e e e e 0 0 o z zc E E n n 8 E 4 4 9 9E 9 9El 9 9E 2E 9 e e a e a a v) W b Y>1 E 2 E 2 E 2 u u u 8 8 8 & G .-E v) E F .C Y W 5 0 .I . .-E1 E 1 z$ Yv) m .I Y 3 a z Y cd 8 2 .I -0 v) 0 M 42 sE 0 4 cr& s 0 P a c,v) S Q El a 3 v1 2i2 0 El Y 3 -3 .CI v) 4 c) cr 3 0 6 0 E 0 e cd .I Y $a e 2 i% .?2 4= 3 s8 e x a &LI su E 2 v) 4 8 .z8 > $1 a L 3 0 0 m m m w w w 0 0 > 1 > 1 * z z E E E ? ? ? E E ? ? E ? E ? u u 8 8 8" gv . 0 Guatemala CFAACPAR: Annex /I Background Papers and Persons lnferviewed 72 Annex 11 Background Papers and Persons Interviewed ListofBackgroundPapers Acci6n Ciudadana (February, 2005). Guatemala: Notes on the state o f Public Procurement Systems. Arias, Luis(February, 2005). Guatemala: Notes on Municipal Financial Management. Bermejo y Asociados (February, 2005). Guatemala: Notes on the State Procurement Law. De Baquero, Patricia(February, 2005). Guatemala: Notes on PPI. Fanta, Enrique (February, 2005). Guatemala: Notes on Tax Administration. Forero, Henry (February, 2005). Guatemala: Notes on SIAF/SAGinformation technology. Guardiola, Ulises (February, 2005). Guatemala: Notes on Internaland External Auditing. Guzman, Marcela (February, 2005). Sistema de Control de Gestidny Presupuestopor Resultados: La ExperienciaChilena.Presentation givento officials ofthe Government of Guatemala. MaulRivas, Hugo (April, 2005). Guatemala: Notes on the Functions o f Congressv i s - h i s Government Budgetingandthe Participationof Civil Society Organizations inBudget Analysis. Palladino, Carmen (February, 2005). Guatemala: Notes on Government Accounting. Pflucker, H e r n h (February, 2005). Guatemala:Notes on Management Information Systems (SIAF, MinistryofEducation, MinistryofHealth, andMinistryofCommunications). Plangemann, Kathrin (March, 2005). Guatemala: Note on Public Employment and Civil Service Administration. Background paper for the Public Expenditure Review. Prada, Luis(February, 2005). Guatemala: Assessment of the Ministryo f EducationCapacity to ImplementProcurement Applying Country Systems. Prada, Luis(February, 2005). Guatemala: Assessment of the Ministryo f HealthCapacity to ImplementProcurement Applying Country Systems. The Guatemalan Consulting Group (May, 2005). Guatemala:Evaluacidn de alto nivel de las Compras Gubernarnentales. Veiga Malta, Joao (February, 2005). Guatemala:Notes on e-Government Procurement. Guatemala CFAACPAR: Annex /I Background Papers and Persons Interviewed 73 List ofPersonsInterviewed Carranza, Victor Telecommunications SAG Project CastaAeda Arana, Miriam Vice-Minister of Education MinistryofEducation Castillo, Manuel Eduardo Minister of Communications MinistryofCommunication Chac6n de Pernillo, Aura M. Sub Director ofAccounting Dep..-State Accounting Department Ministry of Public Finance Chavac. Alfred0 Accountant Manager State Accounting Department Guatemala CFAACPAR: Annex I/ Background Papers and Persons Interviewed 74 EspaiiaPinzdn, Jorge Roland0 Chief of Cashier Operations MinistryofPublic Finance Estrada, Luis Head of Internal Audit Ministry of Education FarfhnAlvarez, Oty Aixa HumanResourcesConsultant SIAF-SAG, Ministry of Public Finance FigueroaDuarte,Noelia Director of HumanResources CGC Figueroa, Werner Head of Management Information Ministry of Public Health System(SIGSA) Fidn, RamdnAntonio AGIP FloresEspaiia, Joaquin Comptroller CGC Florido, Juan Luis FiscalGeneral Public Ministry Fonseca, Red Consultant MINFIN Forkel, Hugo Head of IT Ministry of Communications FunYaxon, Santa Isabel Receiver Municipality of Sololii Funes, LuisArturo Treasurer Municipality of Sololii Garcia, Alfred0 Director of Financial Administration Ministry of Education Garcia, Lazaro Responsiblefor preparationof Ministry of Education budget, UDAF Garrido, Eduardo Intendente BanksSuperintendence Girdn Sapdn, Edilzar Robert Headof Budget Municipality of Sololh Girdn, Carlos Enrique Director Public Goods Department- MinistrvofPublic Finance Guatemala CFAACPAR: Annex I/ Background Papers and Persons interviewed 75 G6mez Cal, Angel Francisco Bank Conciliation State Accounting Department -MinistryofPublicFinance G6mez, Carlos Sub Comissioner COPRE Gonzales Castillo, Eduardo Secretary Secretariat o fthe Presidency Gonzales Mdrida, Noemi Chief o f the Public DebtDepartment MINFIN Granados, Carlos Director o f Municipal Strengthens INFOM Granja, Richard ITAnalyst SAG Project Guerrero R., Myriam Consultant, USAIDSupport Unit CGC IG u n a n C., LuisA. National Audits Consultant, SIAF- Ministy ofFinance, CGC, World Bank, PNUD Hernhdez Figueroa, Raul Agricultural Chamber Herrera Flores, ElsinNoel Bankconciliation State Accounting Department -MinistryofPublicFinance Herrera, Lusbi Head o f Internal Audit Ministry o f Public Health Herrera, Roland0 Head and Accountant, UDAFUE Ministry ofCommunications Superior Directorate Huargax, Cruz Head o f Accountings Municipality of Solola Lavarreda, Jorge Coalitionpor la Transparencia (NGO) Layton, Richard W. Comptroller, Finance and Business USAID Management Lechuga Chicas, Cdsar Fundemop Lee, David Comptroller, UDAF MinistryofEducation ILemus, Josd Francisco Director of Sub-Controllership of CGC Probity Lemus, Ruben Budget Director Ministry ofPublic Finance Leyton, Richard Comptroller USAID Lima Mejia, Ana Lucrecia Sub Coord. o fMunicipalities MinistryofPublic Finance Lopez Armas, Jorge Luis Bank Conciliation -StateAccounting Department MinistryofPublic Finance L6pez Molina, Juan Manuel Treasurer Treasury Directorate Lopez Velasquez, Cdsar Roberto President Guatemalan Institute o fPublic Accountants andAuditors Lopez, Ana Maria Director, UDAF MinistryofPublic Health IState I I Lopez, Ovidio IChiefof Income Section I- Accounting Department MinistryofPublic Finance *... IVice-Minister o f Communications \MinistryofCommunication -- I. 1 " IAgricultural Chamhpr ._-__I Martinez Figueroa, Julio Roberto ISpanish Cooperation Martinez, Alejandro IGeneral Manager ICharnber of Industry Martinez. Luis IBudget Deoart. IMINFIN Mazariegos, Violeta ]Executive Director Commission M6ndez Jerez, Josd Raul ]Director IITransparency SEGEPLAN Guatemala CFAACPAR: Annex /I Background Papers and Persons lnferviewed 76 Mendez, Anabella Sub Director o f Financial INFOM Administration Mendez, Jorge Deputy Guatemalan Congress Mendez, Rahl Director SEGEPLAN Mendoza Cob6n, Delfmo Coordinator o f External Financing Roads Department Molina, Edgar Treasurer, UDAF MinistryofPublic Health Monroy, Roberto Consultant on Decentralization SIAF-SAG, MINFIN Montavh. Marco Antonio National Coord. for Municinalities MINFIN Montenegro de Rodas, Celia HumanResourcesConsultant SIAF-SAG, MINFIN Monterroso, Jorge Planning Director Ministry o f Public Health Morales M.,Jose P. Director o f Audits for Central CGC Government Morales, Lorena Treasurer, UDAF Ministry ofEducation Myangos, Sergio LegalAdvisor Transparency Commission Najarro, Sabas Heado f Budget, UDAF MinistryofPublic Health Oliva Alfonzo, Rolando Sub-Comptroller CGC Oliva Alonzo, Rolando Deputy Auditor General Public Expenditure Quality OrdoAezNayera, Gustavo Antonio Secretary General Office o f the Public Prosecutor Orellana Flores, Armando IIT Advisor ISIAF-SAG, Min.o f Finance Paiz G6mez, Victor Hugo IGeneral Manager IMunicipal Development Institute Palencia Prado, Mayra CCG Panjoj Bulux, Ramiro IUS1Administrator Municipality o f Solola Paz, Carmen Financial Programming Department Treasury Directorate Pennant, Selvin Chief Accounts MINFIN Peralta, Carlos Manager, Sectors and Branches Chamber o f Industry Perez, Ver6nica Consultant Office o f Public Goods System PesceMonteiro, Barbara Senior DeputyRepresentative UNDP Piedrasanta, Danilo Director o f Financial Administration Ministryo f Communications Pinzdn D., Manuel F. Heado fUnit, Projects for CGC International Cooperation Ponce, Felipe ILegal Advisor MinistryofCommunications Ponciano, Eddie Internal Sub-Auditor MinistryofCommunications Pontaza, Alejandro ChiefAccountant USAID Privado M.,Alfiedo A. Consultant for the Program o f Ministry ofPublic Health and Improvement o f Health Services Welfare Privado Medrano, Alfiedo Commissioner for Transparency Transparency Commission Guatemala CFAACPAR: Annex /I Background Papers and Persons lnterviewed 77 Puigmarti Borrell, Charles International Spanish Cooperation Ramirez Paiz, Jose Luis Chief of Banks Conciliation State Accounting Department- Procurement Officer World Bank, PNUD Guatemala CFAACPAR: Annex /I Background Papers and Persons Inferviewed IWhitbeck P.. 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