Report No. 31763 ­ PY Republic of Paraguay Institutional and Governance Review Breaking with Tradition: Overcoming Institutional Impediments To Improve Public Sector Performance June 2005 Poverty Reduction and Economic Management Unit Latin America and the Caribbean Document of the World Bank SCJ Suprema Corte de Justicia Supreme Court o f Justice SIAF SistemaIntegral deAdministracidn Integrated Financial Management System Financiera SIC0 SistemaIntegral de Contabilidad Integral Accounting System SICP SistemaIntegral de Contrataciones Integral Public Procurement System Publicas SIME Sistema deMesa de Entrada Reception System SIPP SistemaIntegral de Planijkacidn Integral Budget Planning System Presupuestaria SOFIA IntegratedSoftware System for Customs SSEAF Subsecretaria de Estado de Financial Management Undersecretariat Administracidn Financiera o f State SSEEI Subsecretaria de Estado de Economia e Economy and Integration Integracidn Undersecretariat of State SSET Subsecretaria de Estado de Tributacih Tax Undersecretariat o f State STP Secretaria Te'cnicadePlanificacidn Planning Technical Secretariat TC Tribunalde Cuentas Court o f Accounts UCIP Unidad Central deInversidn Publica Public Investment Central Unit UCNT Unidad Central Normativa y Tkcnica de Legal andTechnical Procurement Contrataciones Central Unit UNDP Programa de Desarrollo de las Naciones UnitedNations Development Program Unidas uoc Unidad Operativa de Contratacidn Procurement Operative Unit USAID UnitedStates Agency for International Development UT Unidad de Transparencia Transparency Unit WB Banco Mundial World Bank WBI Instituto del Banco Mundial World Bank Institute Vice President: Pamela Cox Country Director Axel van Trotsenburg Sector Director Ernest0 May Sector Leader James Parks Sector Manager RonaldMyers Task Manager LinnHammergren This report is based on a study caned out by a World Bank Team led by Linn Hammergren (LCSPS). Other team members included Marcel0 Barg (consultant), Gerard0 Ufia (consultant), Fernando Grafe (consultant), Benjamin Santa Maria (consultant) and Pablo Spinadel (consultant). Peer reviewers were Wolfgang Koehling (LCSPS), Yasuhiko Matsuda (LCSPS), James Anderson (ECSPE) and Roberto Panzardi (LCSPS). TableofContents EXECUTIVESUMMARY ........................................................................................................... i INTRODUCTION ........................................................................................................................ i MINISTRY FINANCE ............................................................................................................ .. THEJUDICIARY ..................................................................................................................... OF 11 .. vi1 THECONGRESS .................................................................................................................... viii ... CONCLUSIONS ........................................................................................................................ ix CHAPTER INTRODUCTION I: .................................................................................................. 1 BACKGROUND .......................................................................................................................... 1 RELATED WORKAND INTELLECTUAL FOUNDATIONS .............................................................. 2 RESEARCHFOCUS. DESIGN.ANDMETHODOLOGY ................................................................... 5 CONCLUDINGREMARKS .......................................................................................................... 7 CHAPTER11: MINISTRYFINANCE OF .................................................................................... 8 ORGANIZATIONAL OVERVIEW AND COMMONPROBLEMS LINEAGENCIESAND THEPERFORMANCEOFTHEMINISTRY'SSERVICEFUNCTIONS.............19 ........................................................ 8 CONCLUSIONS AND RECOMMENDATIONS............................................................................... 36 CHAPTER111:THEJUDICIARY .................................................................................... 40 JUDICIAL REFORMINTHE 1990s............................................................................................ 40 IMPACT OF CHANGES ............................................................................................................. 44 A CASE STUDY OFPERFORMANCEPROBLEMS: JuIcrosE~~C~~rvos .................................... 47 NEW SIGNIFICANCE OF A TRADITIONAL PROBLEM: JURIDICAL SECURITY ............................ 50 CONCLUSIONS AND RECOMMENDATIONS ............................................................................... 52 CHAPTERIV: THECONGRESS ............................................................................................ 56 STRUCTURAL. PROCEDURAL. OPERATIONAL CONTEXT.................................................. AND 56 BUDGETARY 63 THEVIEW FROMWITHIN ....................................................................................................... POLITICS ......................................................................................................... ANALYSISAND RECOMMENDATIONS..................................................................................... 67 68 CHAPTERV: CONCLUSIONS ................................................................................................ 71 SHORT.TERM. AGENCY-SPECIFICAGENDA .......................................................................... 72 MID.TERM. CROSSAGENCYAGENDA ............................................................ 74 REFERENCES .................................................................................................................... 78 ANNEXI:ADDITIONALTABLES ........................................................................................ 83 ANNEX11:A BRIEF REVIEWOFPARAGUAYANHISTORY THEIMPACT OF RECENT CHANGES ..................................................................................... AND ANNEX111: DEPARTMENTALGOVERNMENTSANDTHEBUDGETARYPROCESS ..............89 93 BACKGROUND ........................................................................................................................ 93 CONCLUSIONS ........................................................................................................................ 96 TABLES Table 1: PermanentPositions intheMinistryofFinance (Years 2000-2003) ................... 13 Table 2: 2004 Budget. Classified by Object of Expenditure andFunding Source .............20 Table 3: Monthly Salary Schedule for Caja Fiscal............................................................. 30 Table 4: Pending Cases as Identifiedinan August 2003 Audit ......................................... 31 Table 5: Comparison of Executive Proposal, Modifications, andModified Budget Law (2000 - 2004), inmillions of Guaranies............................................................... 62 Table 6: CongressionalModifications to the Executive Budget, Disaggregatedby Key Agencies inthe Central andDecentralized Administration - (2002-2004) ..........63 Table 7: Assessment by a Simpleof Legislators oftheir Relations with other 68 Table 8: Contributive andNon-contributive Pensions(2003) ............................................ Government Agencies........................................................................................... 86 Table 9: CongressionalModifications to the Executive Budget ........................................ 87 Table 11: Government Budgets, by Source andUse, 2003 ................................................. Table 10: CongressionalModificationsto Executive Budget, by Central Ministries .........88 94 Table 12: Staffing, Population, andBudgets for Six Departamental Governments, 2004............................................................................................... 95 FIGURES Figure 1:Tax contributions byType ofTaxpayer ............................................................... Figure 2: Budget Law. Budget with Modifications andBudget "Obligado" (Obligated) ...24 65 Figure3:Budget Law. Budget withModifications andBudget "Obligado" (Obligated) Figure4: Organization ofthe FinanceMinistry.January 2004........................................... Personal Services (2000-2004") -PYG............................................................... 65 83 Figure 5: Organization of the Undersecretariat Tax State General Administration andTax Sections Only................................................... 84 Figure 6: Organizational Chart for the FiscalBox............................................................... 85 BOXES: Box 1:Ministryo fFinance. More Recent Accomplishments ................................ Some 39 Box 2: Judicial Independence andthe Balance of Powers .................................................. 43 Box 3: The Judiciary . Box 4: Duration of Terms for Congressional MembersandCommissions......................... Recent Accomplishments inPromoting Internal Reform..............46 57 Box 5: Budgetary Powers of Selected South American Congresses................................... Box 6: Recent CongressionalPlans andActivities to ImproveInstitutionalPerformance 70 Box 7: Civil Service Reforms.............................................................................................. .61 74 Box 8: Change Management................................................................................................ 76 Acknowledgments This report could not have beenprepared without the support and cooperation o f a variety o f individuals inside and out side the World Bank. The project team first thanks the World Bank's Country Management Unit Director, Axel Van Trotsenburg; the Paraguay Country Representative, Peter M.Hansen; the Lead Economist andPREM Sector Leader, James Parks; and the LCSPS Sector Manager, Ronald E. Myers for their support in authorizing the study and providing guidance throughout its course. We also thank the numerous World Bank staff who contributed ideas and comments, including but hardly limited to the Paraguay Country Team and our peer reviewers, Wolfgang Koehling, Yasuhiko Matsuda, James Anderson, and Roberto Panzardi. Also critical to our work was support staff from the Paraguay Country Office, Gloria Dure andMercedes Ocampos andfrom Washington, Patricia Mendez and Karla Soledad Lopez Flores. Jesus Martinez who did final editing o f both the Spanish and English drafts earns a double vote of thanks. The individuals in Paraguay who contributed with interviews, documents, and discussions o f our initial drafts are simply too numerous to mention. We would however like to give special thanks to ex-Minister o f Finance, Dionisio Borda for acting as the government sponsor o f the study; to his three Vice Ministers, Miguel Gomez, Andreas Neufeld, and Jose Buttner; to Raul Sapena, Max Rejalaga, and Pedro Espinola, all o f whom facilitated the process o f interviewing their staff and organizing meetings to provide feedback on our initial results. Fernando Masi, Diego Abente, and Manuel Caballero, ex-Minister Borda's advisors were also extremely generous with their time and insights. To those in the Ministrywe cannot name separately, we also extend our profound gratitude. Although our meetings with members o f the Congress and Judiciary were less numerous, none o f them would have been possible without the support o f Oscar RubCnSalombn, President o fthe Houseo fDeputies, Miguel Carrizosa Galiano, President o f the Congress, Alicia Pucheta de Correa, First Vice President o f the Supreme Court o f Justice, Lina Matto de Ferreira, Director o f Planningand Development for the Court, and Oscar la Torre, Fiscal General. None o f these individuals is responsible for the contents o f the final report, which we only hope accurately reflects the situations o f their institutions, the advances they have made, andthe challenges they still face. Because the field work for the report was completed over six months before its publication, it does not capture some more recent accomplishments. In final meetings with the institutional leaders, the Bank thus agreed to add a box for each institution, attempting to recognize, but clearly not with sufficient detail, some o f these inevitably excluded events. EXECUTIVESUMMARY INTRODUCTION 1. Inan era ofnationaltransitions (to democratic governance; market based growth; sustainable, equitable development), Paraguay has been called the forgotten transition country. The oversight i s hardlyjustified. Since the end o f the Stroessner regime (1954- 1989) and despite a post-independence history with more than its share o f lengthy dictatorships and unstable elected governments, the nation has made important strides in introducing competitive, party based, electoral democracy; modifying its governmental structure; updating its constitutional and legal framework; advancing the rule o f law; improving economic and political ties with its neighbors; and broadening citizen participation. Nonetheless, observers argue that unresolved institutional weaknesses are impeding further progress and have exacerbated a series o f disturbing new trends - declining growth rates, a rising public sector deficit, and increased social unrest. On entering office inmid-2003, the Duarte Frutos administration placed state reform among its key priorities, but is finding a weak institutional framework can be a strong source o f resistance to change. 2. The present study, the fifth in a series o f Institutional and Governance Reviews (IGRs) conducted by the World Bank inthe L A C region, examines this phenomenon in the context o f a few key Paraguay organizations. It is not intended as a guide to the entire Paraguayan political system, nor does it explore the potential and/or need for macro- systemic reforms. Insteadit uses examples from all three branches o f Government -- the Ministry o f Finance, the ordinary courts, and the Congress in its budgetary role - to examine the institutional obstacles to their improved performance and the opportunities for effecting targeted changes In this it builds on recent analytic work done by Paraguayan academics and others, highlightingthe historical andpersisting impact o f the traditional political practices. Their arguments emphasize that the particularistic use o f public resources (patronage, clientelism, the capture o f the state) has been and remains key to obtaining and holding political power in Paraguay. Beginning with this now widely accepted interpretation, the Bank team posited a corollary hypothesis - that this traditional political logic has been structured into the organization, mandates, resource endowments, and practices o f state institutions, meaning that they operate in a fashion antithetical to the new emphasis on improved outputs and results. Thus, upgrading governance perfomance implies not only combating the vestiges o f the traditional system, but also reengineering institutions to conform to the new logic. It also means doing this with caution, as the traditional vices have proved quite resilient. Some recent reforms have in fact complicated the process, providing opponents o f change additional means for resisting it. 3. The study's goals were eminently practical - to provide Paraguay's reformers with insights as to how they can escape a series o f vicious circles. As they understand the basics quite well, the emphasis here was on their more detailed application at the organizational and sub-organizational levels. To do this, the IGR adopted a case study 1 methodology, guided by a common research fi-amework. In assessing each organization or its component part, team members reviewed the legal and structural base for its operations, the formal and informal practices for carrying out a few key functions, the adequacy o f human and other resources, and the overall quality o f output, identifying where it fell short and why this occurred. They also identified stakeholders or beneficiaries who might be expected to offer resistance and to make recommendations for targeted short and long tem changes, taking into account the relative impact and difficulty o f each. The Bank was looking for changes with a potential for leveraging more fhdamental alterations in agency operations, either though a demonstration effect, or by creating their own virtuous circles to counter the long standing vicious ones. However, in recognition that this incremental approach has its limits, the study also reviews, in the final chapter, some more global reforms that may eventually be required. Finally, it bears mentioning that the field work for this report was completed in July, 2004 (Ministry o f Finance) and December, 2004 (Judiciary and Congress). Especially in the case o f the Ministry, some problems noted may thus already be on their way to resolution, inpart because the initial recommendations were thoroughly discussed with the Minister and his staff, but largely because the Ministryis undertaking its own reforms. MINISTRY FINANCE OF 4. Macro-Analysis: Although the Ministry has a reputation for more technically proficient staff, and under the current Minister, a greater interest in improving its performance than many executive agencies, it otherwise faces a series o f common problems. One o f the most critical i s its human resource base, the product o f years o f patronage appointments, and now difficult to change because o f the guaranteed tenure awarded by the 1992 Constitution. Under current law, it is difficult to fire, redistribute, or even provide salary incentives to employees. Budgetary limitations preclude adding better prepared employees, a program o f voluntary retirements, and even doing much training. Like the rest of the public sector, the Ministryis currently forced to work with the staff it has, better than average, but still underpaid, under-motivated, poorly distributed, and in many cases, under-qualified. Despite the thirteen foreign loans and grants it now receives, shortages or poor distribution o f materials and equipment also impede efficiency. 5. Finance's legal mandate is unusually broad, including not only budgetary control and economic policy making, but also taxation and customs, public pensions, and more recently, oversight o f public procurement. There are also proposals that it absorb the Secretaria TCcnica de Planificaci6n and the Secretaria de la Funci6n P ~ b l i c (the recently a created human resource office). Despite this broad mandate, the Ministry shares some functions (public debt, economic analysis, budget preparation) with other entities. Extemal coordination i s thus a problem, but more critically, the Ministry was never organized to operate as a unified entity, and inthe post-Stroessner period, the tendency to create internal fiefdoms was further exacerbated. The resulting redundant functions, inadequate vertical and horizontal communication, and in-grained self sufficiency pose an enormous challenge for new the leadership. The IGR concludes that the problem is not "architectural," and thus will not be resolved by rearranging the boxes in the organization chart, but rather the lack o f adequate coordinating mechanisms. To relieve 11 the Minister o f an excessive span o f control and to help guide the Ministry o f Excellence program, the study recommends the creation o f a Managing Director and office, exclusively responsible for overseeing staff offices and coordinating support to line departments in their own reengineering programs. Existing central staff units (the legal department, administration, internal control, informatics) also require strengthening to counter the current practice o f their functions being carried out by a series o f independent offices scattered throughout the organization. 6. The IGR has uncovered a series o f formal and informal practices so prevalent throughout the organization as to require across-the-board attention. These include: Lack o f adequate manual or automated systems for registering document entry and tracking processing untiltermination Redundant clearances and checks duringthe course o f a single process Tendency for offices charged with intemal control to focus on compliance with legal details rather than results or possible corruption Existence o f superfluous managerial levels and o f staff paid as directors or coordinators, but doing ordinary work Unnecessary division o f labor among offices handling similar processes Generally poor record keeping, continuing reliance on paper documents, and disorganized archives Tendency to allow an excessive movement of paper files, even outside the Ministry Unclear, often overly complex and inconsistent instructions to internal and external clients, forcing them to rely on the services o f special agents (gestores), repeated personal visits, andpayment o f speed money A tendency, encouraged by recent attempts to stamp out corruption, for even the most trivial action to require higher level authorization Some o f these practices stem from or facilitate corruption, but many are now supported only by inertia and a failure to recognize more efficient alternatives.. Although much o f Finance's work revolves around processing paper or electronic documents, the goal of usingthe process to produce a result often seems forgotten. The non-results, non- managerial perspective also characterizes the traditional operations o f Finance's line agencies and thus its fundamental outputs or products. 8. Subsecretaria de Administracidn Financiera (SSEAF): Like the Minister, the Subsecretario's span o f control is extremely broad, and two offices (the Caja Fiscal and the UCNT) operate so independently that they are treated separately below. The recent elimination o f networks in the DGP and Treasury involved in selling budget approvals and disbursements has improved the situation there, but both face further impediments to efficient and effective operations. For the Direccidn General de Presupuesto P ~ b l i c o (DGP) problems are less its structure or human resources than the complexities o f the budgetprocess and the lack o f training o f or cooperation from officials inthe rest o f the public sector. The Secretaria Tbcnica de Planzfzcacidn`s (STP) role in investment planning, while now better coordinated, firther complicates matters, as do the Congress' substantial ability to modify the budgetary law; the traditional, overly optimistic ... 111 estimates o f tax and customs revenues; the rigidity o f expenditures financed through general revenues vuente 10); an accounting system which does not register commitments (and thus generates a large "floating debt"); and the greater independence (and political power) o f entities inthe decentralized sector that generate their own resources (recursus instituciunales or fuente 30). Despite the formal, and legal, adoption o f "zero-based, programmatic budgeting by results," budgets tend to be historically based and modified largely through uncoordinated political negotiations. Simplifying the paperwork, recording commitments, setting Executive priorities prior to congressional negotiations and maintaining them afterwards, and training budget officials throughout the public sector would help. On the disbursement side (Treasury), real staffing levels appear insufficient, procedures are unregulated, and in the face o f the inevitable cuts in disbursements, there is still too much room for negotiating payments with agencies and suppliers. Most affected i s the investment budget. While always underexecuted, the combined impact o f unpredictable hnding and the absence o f clear priorities leads to discontinuities, encourages irregular contracting, and generates waste. 9. The Subsecretaria de Tributacio'n (SSET): Although the SSET includes both taxation and customs,' the IGR only reviewed the former. A first observation is that it i s handled by three separate direcciones generales with no coordination o f their efforts below the Vice Ministerial level. This clearly needs to be changed, as does the overall tendency toward excessively broad spans o f control at the topmost level and within agency units. 10. Although tax revenues have increased under the current administration, the effect may not be sustainable. The improvement was achieved through a crackdown on intemal corruption rings and the Government's announced attack on tax evasion. The former had a one-time effect, and the latter will not retain its influence unless the heightened perception o f risk is backed by further changes in internal practices. Overall figures on tax collection suggest considerable room for improvement, with 97 percent o f tax payers contributing only 6 percent o f collections and 100 firms and individuals (0.04 percent o f those registered) contributing 53 percent. 11. The tax agencies face the usual constraints - an excess o f employees owing their jobs to political appointments, but fairly immovable under current law; low salaries (in fact reported as traditionally lower than the rest o f the public sector because o f the expectation employees would "supplement their incomes"); a highly compressed salary schedule; insufficient equipment and materials and low operating budgets; poorly designed structure; poor coordination among units; lack o f training; inadequate tracking mechanisms; ineffective internal controls; and the absence o f standards for evaluating employee performance. Additionally, there is the absence o f an overall strategy for maximizing collections, an overreliance on routine audits, and an inefficient performance o f the audit function itself. Despite an agency culture that emphasizes control o f the tax payer, and the belief that evasion is high,Jiscalizacidn (ex-post control through internal and external audits and inspections) accounts for only 0.5 percent o f collections, at the low end o f an intemational range that can reach 2 to 3 percent. Aside from better 1Following the 2004 passage of the Ley de Adecuacidn Fiscal, the Direccidn de Aduanas received semi- autarkic status, remaining attached to the Ministry, no longer under the SSET. iv coordination of the three direcciones, and some redistributiono f functions among them, improvements should work inthree areas: 0 Better collection, management, and use o f information to develop and implement a strategy to increase collections. Improvement o f fzscalizacidn practices including pro-active analysis o f tax payers' current accounts; crosses o f information; use o f hypothesis-based auditing, more strategic targeting (as opposed to integral audits); specialized training; and monitoring o f performance by less intrusive means (eliminating the tight control exercisedbythe directors). e Development o f preventive and pro-active methods short o f audits and investigations to encourage compliance andimproved attention to clients. 12. The Subsecretaria de Economia e Integracio'n (SSEEI): This office i s the exception to the general findings. It is neither understaffednor undermotivated, but ifit i s to fulfill its role as the Ministry's "think tank," it needs a way to upgrade skills through some mix o f training and (temporary) additions o f highly qualified, outside personnel. Over the longer run, salaries o f employees who increase their competencies will need to be raised. 13. Caja Fiscal: Pension funds managed by the Caja (Direccidn General de Jubilaciones y Pensiones) account for between 2.4 and 2.8 percent o f the GDP and contribute substantially to the public sector deficit. Overall pension reform may be needed to improve these figures, but internal operations generate considerable waste, fraud, and public dissatisfaction. The Caja's locationwithin the SSEAFprobably has not encouraged improvements. Both the Minister and Vice Minister are aware o f the problems, but have little time to devote to resolving them. While past directors have doubtless contributed to the situation, they have faced the usual constraints in addressing the problems - the legal framework, an inappropriate structure, poor human resource endowment, low salaries, and little budget for materials and equipment. With the entrance into effect of Law 2345, the Caja's control o f the highly problematic non- contributive pensions (largely veterans o f the Chaco War and their dependents) will end, and it will focus only on the 58.4 percent o f the beneficiaries (and 67.7 percent o f payments) on the contributive side. According to the 2004 Budget Law, it will also, however, oversee employee contributions, a task for which it seems unprepared and may be unsuited. 14. The current division of labor and traditional practices (many o f them not legally mandated) make processing o f pensions slow, put the onus on the beneficiary.to ensure the requests move ahead, have generated a large backlog, and encourage personal visits andirregular paymentsby clients. Beyond this, the system is very ineffectual incatching fraudulent claims, lacking established procedures for detecting and investigating fraud, resources, employee skills, and incentives. The two directors serving in 2004 have already adopted some o f the Bank's recommendations for targeted improvements in processes, but the Caja needs a longer term strategy to guarantee more lasting effects. V 15. Aside from design o f a new framework for overseeing all pension schemes, and attention to some o f the elements mentioned above, the strategy should incorporate: 0 Development and implementation o f a plan to control pension fraud, based on analytic studies, development o f support tools, and staff training intheir use. 0 Redesign o f intemal structure and basic procedures to introduce economies o f scale, decrease delays and improve service. Part o f the plan should include the introduction o f systems to track case movement, measure output, and evaluate employee performance against production quotas. 16. UCNT (Procurement): This is a new office, created inconjunctionwith the new contracting law, and assigned to the SSEAFwhere, like the Caja, it operates with relative independence. Its placement limits its powers within the Ministry and the entire public sector, and may produce some conflicts o f interest. However, the largest impedimentsto effective realization o f its mandate are its small staff and somewhat precarious budget. The office has made progress in developing standardized forms, initiating informational meetings and training for government contracting units (UOCs), and reviewing and publishingprocurementplans (PACs) on its website. Ingrained vices and low contracting skills throughout the public sector pose enormous obstacles to its own work and to any proposal to delegate responsibilities. UCNT will also have to identify any problems (of omission or commission) in the existing law and lobby for their reform. With a larger staff, more direct support from the highest levels (not only the Minister but possibly the President), and more resources, the UCNT will be better able to carry out its job, but it also will have to develop a plan for prioritizing its efforts. 17. Unidad de Transparency (UT): This i s another new office, which reports directly to the Minister. Its first year has not beenpositive, inthat it still has minimal staff andits director and deputy were recently removed. Its apparent mandate involves a mix o fthree seemingly consistent functions: providing information on the Ministry's operations, managing a complaints office, and building links with civil society monitors. Donor interest and funding will give it a second lease on life, but ifit is to survive, UT will need a better defined mandate, more resources and political support, and a director who can buildconstituencies within the Ministry or outside. The unitwas the Minister's idea, and the functions are important, but their potential for generating resistance is too great to expect the unit to develop on its own. 18. Conclusions: Over the year and a half since assuming office (August 2003), the Ministry o f Finance's new leadership has made important strides in eradicating the organization's most dysfunctional practices and setting it on a different course. However, as even its members agree, the initial progress has been more in the nature o f fire fighting than profound institutional change. What i s now needed i s a more systematic approach to internal reengineering, which recognizes, but works around, the many internal and extemal constraints. The revised, short-term objective - ensuring the Ministry can perform its basic functions well - is realistic and lends itself to a multi- faceted, incremental strategy. Better management, greater coordination, and better use o f information will be critical at all levels. The Ministrymust also build internal support by communicating its message to the mass o f employees and finding ways to reward those who embrace it. Donors will be important for financing equipment, but their biggest vi contribution may be inproviding the appropriate technical assistance to help design and direct the reform and work out the many details. THEJUDICIARY 19. The reforms introduced in the 1992 Constitution and afterwards changed the shape o f the justice sector, the relations among its parts, and the powers o f each. They increased budgets and salaries (although both subsequently lost value); altered the appointment system; added judges, prosecutors, and defenders; financed equipment, and infrastructure; and revised procedural laws. Their impact on performance has been less clear. As regards the many traditional complaints about the sector - corruption, bias, politicization, the poor quality o fjudgments and investigations, and delays -the failure to resolve the first three has received most criticism. Arguably, the new appointment systems have aggravated the problems. They have also complicated another weakness, the Judiciary's inability to take charge o f improving performance from within. Although the Supreme Court remains the center o f judicial government, it, along with the Public Ministry, has lost effective control o f its professional staff, having ceded this to the new Judicial Council and Jurado de Enjuiciamiento (the external committee handling disciplinary investigations and actions against judges). 20. As further reforms appear not to be an executive or legislative priority, the Court should have time to reconsider the wisdom o f lesser dynamism. The Court's new development plan i s long on abstract principles but very short on the concrete improvements it intends to effect. The lack o f adequate basic statistics onjudicial output, despite sizable donor investments in automation, is both a symptom and a cause o f the situation. A court which does not know how many cases judges are handling, how they are deciding, andwith what kinds o f delays, andhas still less information on support staff performance, is poorly equipped to address problems o f the quantity and quality o f output. Even absent this critical tool, the Court might do well to focus on a few well known problems, those involving debt collection (reputedly up to 80 percent o f the civil caseload and visibly rift with irregular practices) and predictably inconsistent rulings, especially by appellate courts. It will also have to turn its attention to how it will handle the likely influx o f cases questioning the constitutionality o f Government programs and laws. Finally, with an ample ifnot excessive budget, the Court will need to ensure more efficient and effective investment o f its resources, even though, like the rest o f the public sector, it faces the normal constraints on removing or replacing underperforming administrative staff, and extra hurdles as regards judges, whose removal is under the Jurado 's control. Insummary, the IGRrecommendations are as follows: 0 Develop means to track judicial performance through collection o f statistics from the courtroom level anduse them to analyze problems andprogram remedies. 0 Create a Director o f Administration position to oversee and coordinate all administrative services. 0 Ensure that the Court's development plan includes concrete results inareas where problems are greatest. vii 0 Review performance o f the Council and Jurado to find ways to reduce their political interference and ensure the Court and the Fiscalia (Pubic Prosecution) have more effective control over employee behavior. 0 Recognize and find ways to deal with the problem o f inconsistent rulings by appellate courts and begin to develop a strategy for handling constitutional challenges. THECONGRESS 21. Following the changes introduced in the 1992 Constitution, and the evolving shape o f the political system, Paraguay's Congress i s potentially one o f the most powerful inthe region. By law, and through its own interpretations, it has an enormous impact on reshaping the budget, intrudes into minor details o f personnel appointments and salaries, and negotiates budgetary allocations directly with agencies and even suppliers. Its reputation for increasing budget spending levels i s well deserved, but its most important impact may be on redistributing intemal allocations. Unfortunately, this appears to follow the preferences o f individual members and blocs (and o f their own political supporters), rather than technical analysis or even party lines. Congress complains that its own budget, despite its usually hefty increases over the initial proposals, does not allow the hiring o f qualified staff or the purchase o f necessary equipment. This is, however, by choice - most funds go to pay for staff and representational allowances, andmost staff is hiredon a patronage basis. 22. According to its own leaders, Congress does not have excessive power, lacks adequate information to shape its decisions, and is thus most influenced by Executive preferences. This i s most apparent in issues where none o f its members or their external clients has a major stake. Where they do (and the budget law is a prime example), Congress is quite capable o f introducing substantial changes. Because so much o f the budgetis rigid, and what is not depends for its execution on available funding, Congress' major impact i s to dilute priorities and leave execution o f the investment budget in particular to the strategies and tactics o f individual agencies. The agencies get the license to spend by negotiating with Congress, but shape their actual decisions in accord with other kinds o f calculations. 23. Improving the situation toward a more technically based legislative role would require three types o f actions: 0 The Executive's coordination o f its own cross-sector priorities and measures to enforce them (thereby discouraging individual negotiationswith the Congress). 0 Certain intemal changes to eliminate factors (annual selections o f committees and chamber heads, completely political appointments o f staff) encouraging a less technical approach to reviewing legislation. 0 Donor assistance, contingent on these other changes, to finance equipment and technical assistance. ... V l l l CONCLUSIONS 24. While the IGR identified areas where each organization could implement targeted change to improve its operations, an incremental approach to reform will eventually reach its limits. There are clearly areas where sooner or later more radical steps may be required. 25. The overarching obstacle is the human resource system. The unfortunate decision to grant job security before reforming the patronage appointments or vetting existing staff i s water under the bridge. Combined with other legislation, this works against efforts to link individuals' performance to pay and job retention, or to put existing employees where they are most needed. The next reform attempt should arguably seek a more modest target - facilitating removal o f employees for poor performance, insufficient skills, or elimination o f their jobs; introducing merit pay systems and unifying salary schedules; and limiting Congress' ability to approve staffing patterns and pay. Tenured civil services do well in protecting public employees against political pressures and arbitrary removal. They also tend to encourage rule compliance for its own sake and thus, are less compatible with a focus on results. Current thinking recommends movement toward a mixedsystem, combining permanent tenure, fixed-term contracts and outsourcing, and ultimately reserving tenure only for a small portion o f core staff, specialized in procedures unique to the public sector. The Bank is not recommending this action for present adoption in Paraguay, but believes it should be kept in mind as a possible longer term target, and thus that changes effected now should not preclude eventual movement inthis direction. 26. The report's organizational focus diverted attention from several additional cross- cutting and medium term goals that deserve mention. The first o f these is the need for coordination at the inter-institutional level. Problems ranging from impunity in corruption cases to deficiencies inthe budgetary process cannot be adequately addressed except inthis fashion. A second is the need for a clearer definition of, andpossibly some readjustments, in the existing balance o f powers. While some legal or constitutional change may eventually be required, most o f the current examples are more a result o f agencies exceeding their constitutional mandates because they can and because o f the persisting influence o f traditional politics. A third area, where the Bank's lack o f expertise precludes any recommendations, involves possible changes to laws regulating the party system. A fourth and final area, which may also help advance inthe other three, i s the creation and greater involvement of citizen constituencies to create permanent support for the change process. 27. Since the importance of institutional reform was declared a decade ago, those attempting it and those analyzing their progress have come to realize that it is far more difficult to execute than macro-structural adjustments. It rarely can be achieved through what have been called "one-off' or "stroke-of-the-pen'' measures, requires far more attention to a mass of details, and implies more coordinated, longer term efforts. A recent emphasis on greater selectivity (as opposed to holistic "capacity building") does not undercutthese arguments, butrather reemphasizes the centrality o f strategic planning and i x management, and o f understanding the entire situation before deciding where to intervene. The Bank has shaped its analysis and recommendations in the IGR with this understanding; if everything i s not possible, then choosing well is a perquisite for success. SHORT-TERM RECOMMENDATIONS BY ENTITY ENTITY RECOMMENDED ACTIONS Ministry of Finance Macro Changes a) Improve internal coordination and oversight o f Ministry o f Excellence program by designation o f an office or official to monitor both. b) Give central staff offices (e.g. Abogacia, Internal Control) power to supervise decentralized units performing these functions. c) Develop Ministry-wide program to simplify procedures, eliminate redundant clearances, track document processing, reduce movement o f paper files, and simplify instructions for internal and external clients. d) To the extent possible eliminate superfluous managers, and combine offices handling similar processes. Add a Human Resource office within the Administrative Direction and develop training programs to raise staff skill levels. SSEAF a) Simplify and clarify budget formats, moving toward program budgets linkedto results. b) Register commitments and extend the integrated financial management system SIAF to all major entities. c) Regulate procedures for disbursements to eliminate room for staff discretion. a) Improve collection, management, and use o f information to develop and implement a strategy to increase tax collections. b) Rationalize fiscalizacidn practices to be more pro-active, encouraging use o f targeted as opposed to integral audits. c) Develop complementary mechanisms to facilitate and encourage compliance and improve attention to clients. SSEEI a) Develop and implement program to upgrade staff skills b) Findshort term means o f improving incentive systemto ensure staff morale remains high. Caja Fiscal a) Develop and implementa plan to controlpension fraud. b) Redesign internal structure and procedures to introduce economies o f scale, decrease delays, improve service, and monitor employee performance. UCNT a) Increase staffing to allow division of labor inpriority areas. b) Develop strategy for maximizing impact, possibly by attention to areas o f greatest procurement risk. c) Make reducing contracting irregularities a ministerial and nationalpriority. a) Clarify mandate and status as a ministerial priority. b) Add staffandbudget. c) Build intra- and extra-ministerial constituencies for the unit's work. X (con' t.) SHORT-TERMRECOMMENDATIONSBY ENTITY _____~ ~ ENTITY RECOMMENDEDACTIONS Judiciary a) Develop system o f management statistics to track performance, identify problems, and design solutions. b) Create a Director o f Administration position to oversee and coordinate all administrative services. c) Focus development plan on concrete problems and measurable results. d) Findways to reduce partisan intervention via Judicial Council andJurado. e) Develop means to reduce inconsistencies in appellate Court rulings. f ) Develop strategy for dealing with constitutional challenges as they affect political conflicts. Congress a) For the Executive, develop and enforce cross-sector priorities as foundation for budget proposal. b) If possible extend terms for committees, heads of chambers; rationalize system for appointing staff to prioritize merit and develop a permanent technical core. c) Develop a program to strengthen technical aspects o f Congress's work anduse donor finds to implement it. xi MEDIUMTO LONG-TERMRECOMMENDATIONS(GLOBAL) AREA RECOMMENDEDACTIONS Human Resources a) Amendnew civil service law to facilitate removalitransfer of redundant staff or those not performing well; tying o f pay to performance; andrationalization o f salary scale. b) Ifneedbe, amendConstitution to make the above feasible. c) Accelerate program to determine human resource endowments (a "live" registry), needs, and to begin to rationalize positions andpay scales. d) Consider incremental implementation o f new system, and the possibility o f movement toward a mix o f permanent employees, fixed-term contracts, and outsourcing. Balance of Powers a) Findways to limit legally-basedand ultra vires interventions injudicial appointments andoperations. b) Begin broad-based analysis and discussions o f current system of checks and balances as a means o f identifying and implementing any necessary corrections to legalframework. c) Encourage Congress and Judiciary to focus on improving the technical content o f their work. Political Reforms a) Foment broad discussion o f disadvantages o f clientelism and patronage. b) Consider, carefully, changes to laws regulating parties as a means o f improving their incentive systems. c) Strengthen skills o f departmental and municipal governments as a way o f training future political leadership in a results, service based approach to their work. (Addressed in Annex Change Management a) Encourage internal discussions and participation in agency reform programs b) Extend discussion and knowledge o f reforms to citizen groups c) Increase transparency o f all operations and develop programs o f citizen education. xii CHAPTER I:INTRODUCTION BACKGROUND 28. Inaneraofnationaltransitions (to democratic governance; marketbasedgrowth; sustainable, equitable development), Paraguay has been called the forgotten transition country. The oversight i s hardlyjustified. Since the end o f the Stroessner regime (1954- 1989) and despite a post-independence history with more than its share o f lengthy dictatorships and unstable elected governments, the nation has made important strides in introducing competitive, party based, electoral democracy; modifying its governmental structure; updating its constitutional and legal framework; advancing the rule o f law; improving economic and political ties with its neighbors; and broadening citizen participation. Nonetheless, observers argue that unresolved institutional weaknesses are impeding further progress and have exacerbated a series o f disturbing new trends - declining growth rates, a rising public sector deficit, and increased social unrest. On entering office inmid-2003, the Duarte Frutos administration placed state reform among its key priorities, but is finding a weak institutional framework can be a strong source o f resistance to change. 29. Currently, Paraguay holds one o f the lowest rankings in Transparency International's Corruption Perception Index and equivalently negative ratings on the WorldBank's six governance indicators2and a series o fpolls tapping citizen assessments o f public sector organization^.^ Latinobardmetro finds it has the least citizen support (40 percent) for democratic, as opposed to other forms of governance, o f countries in the regi~n.~Paraguay places near the bottom o f the World Economic Forum's Global Competitiveness Index and on its public institutions ~ i l l a rArguably, endemic corruption . ~ lies at the heart o f the mattery6but it i s hardly the only problem. Others usually mentioned include high levels o f informality (general failure to comply with legal norms for a variety o f reasons), inefficiency, poor service delivery, low juridical security, and ineffectual policy making and execution. The additional weaknesses are themselves entrenched inthe system, and would not disappear even should corruption be eliminated tomorrow. In fact, while corruption receives more attention, most analysts attribute the entire set o f performance problems to the underlying institutional framework and the historical path dependencies with which the country has yet to break. 30. The present study examines this phenomenon as it affects the operations and output o f a few key Paraguayanorganizations. It is not intended as a guide to the entire Paraguayan political system nor does it attempt to suggest how that system could be Kaufman et a1(1999 and 2001). Galindo (2003). Cited inUSAID (2004), p. 1, and inGalindo (2003). It ranks 100and 98 out o f 104, respectively. This part is amply documentedina series ofrecent publications. See Gobierno de la Republica de Paraguay, Instituto del Banco Mundial, Consejo Impulsor delPlanNacional Anticormpcih en el Paraguay (2000 a andb); Instituto Internacionalde Gobernabilidad (2002); Miranda (2003); Pangrazio (2001); Radrez Pefia (2000), UNDP (2002) and all World Bank documents listedinreferences. 1 reorganized to produce a more positive working environment. The questions addressed are more modest, and more practical: how the performance o f these, and by extrapolation, other agencies can be improved from within, despite the institutional and political obstacles. The analysis i s intended to help the Bank and the current Paraguayan administration identify ways to realize immediate, concrete improvements in public sector outputs and so build a constituency for more fundamental reform. This incremental, gradual approach clearly has its limits, and in a last chapter, the eventual need for higher order, and in some cases, more radical changes i s discussed. However, because such major changes take time and a highlevel o f consensus on their urgency and content, treating them as a necessary, prior condition could waste the present leadership's chance to make a substantial difference. The analysis and strategic recommendations o f the IGR combine institutional and political factors, but focus on the micro level first. They also are multi-dimensional, arguing that the current preference for focusing on corruption i s an insufficient remedy that can generate diminishing, even counterproductive returns absent attention to the additional sources o f poor performance. While all are interrelated and share common historical origins, some current practices are more susceptible to targeted reform and might subsequently serve to leverage more difficult changes. The assumption underlying this approach, which some of the present administration's achievements appear to support, is that even in a highly distorted environment, changes can be worked from within if one has the will and knows where to start. 31. This study is the fifth in a series o f Institutional and Governance Reviews (IGRs) the World Bank has conducted in the L A C region. It draws its examples from all three branches o f Government, but does so selectively. Inthe Executive it looks principally at the Ministry o fFinance, extendingthis vision only insofar as the Ministry's key hnctions require the cooperation o f other agencies. The Ministry thus figures as a representative case, but as a particularly important one given its role in the budgetary process, the additional functions it has attracted, the Minister's interest in improving its performance (e.g. creating a Ministryo f E~cellence),~and the considerable donor assistance (including that o f the Bank) aimed at supporting his efforts. Inthe Judiciary, only the ordinary courts are included, and as with the Congress, the focus is on a few basic functions, their interactions with the Ministry, and their impact on the broader state reform agenda. The rest o f the present chapter provides some additional background on Paraguay's governance system and explains the IGR's analytic framework and methodology. The next three chapters examine each o f the cases inturn. The final chapter summarizes and expands on the Bank's recommendations to the present administration and others interested inimproving Paraguay's governance performance. RELATEDWORK AND INTELLECTUAL FOUNDATIONS 32. While this IGR did not start from zero, Paraguay is admittedly one o f the least studied countries in South America. Until recently, academic literature on governance practices and problems was scant, limited in thematic coverage, and not very systematic 7Just as this report was going to press (May, 2004), Minister Borda resigned. As all research was done while he was inoffice, "the Minister" or "the Minister's policies" shouldbe understood to refer to him. 2 inits approach.' Inthe early 2000s, the UNDP' sponsored two large overview studies on Paraguay's public sector. Their principal virtue was consolidating arguments from local and intemational sources and attempting to provide some statistical support. Work done by other donors, including the World Bank, touched on the issues o f institutional quality indirectly and diplomatically, mentioning but not dwelling on problems." One notable exception is the WBI survey conducted in 1999," which provides perhaps the first quantitative measures of the dimensions o f corrupt practices, the areas where they occur, and the forms they most usually take. While still relying on subjective appreciations (views as to which organizations are more or less trustworthy) and insufficiently detailed (the "Ministry o f Finance" covers a lot o f ground, and consequently a number o f potentially very different problems)," it did tap respondents' actual exposure to bribes and irregular charges. The WBI Survey probably did not catch much grand corruption (which participants are unlikely to report), but did provide a good indication o f where many o f the problems are. The Bank's 2003 Policy Notes,I3 while not based on original research, consolidated observations from the earlier Bank studies and other sources in its section on governance, presenting a still general, but more pointed depiction o f actual conditions. 33. Recently, two things have changed. The Duarte Frutos administration has openly recognized the need to improve govemance performance, and in particular to attack corruption in all its forms. This has been taken by the donor community as a sign that they may speak more freely about their own concerns, and was a primary factor in the decision to conduct this IGR. Additionally, the small community o f national and international scholars working on Paraguay has produced a series o f articles and monographs on the country's institutional failings, doing this far more systematically than in the earlier works.14 Significantly, some o f the first of these more recent studies came out o f a local research institute headed by the Minister o f Finance." These scholars operate independently, but international donors have funded some o f the studies and are now promoting work (including their own) that examines the existing situation more critically.l6 'Examples include Rodriguez and Routi (2003), and Routi (2002) on taxation; Ramirez Peiia (2000) on control; Miranda (2003) andParigrazio (2001)on corruption. Intemational NGOs have also produced a 'series o f reports documenting human rights abuses and related weaknesses inthe country's judicial system. UNDP (2002) and Instituto Intemacional de Gobemabilidad (2002). loSee, for example, World Bank (1997,2003 d, e, f, and g). I'Gobiemo de la Repcblica de Paraguay, Instituto delBanco Mundial, Consejo Impulsor del PlanNacional Anticompci6n en el Paraguay (2000a andb). l2A hrther problemis that Tributacibn, part o fthe Ministry, i s handled separately, but customs is not. This raises questions as to what participants are addressing when they complain about corruption inthe Ministry. For most citizens, this would most logically be taxation and customs, suggesting that the Ministry's low scoremay include problems also recorded elsewhere. l3World Bank (2003d). 14See for example, Aguilera et a1(2004); Instituto de Desarrollo (2004), Nickson and Lambert (2002); PCrez-Lifihn (2003). l5See for example, Borda (2001) and Borda and Masi (1999). l6One important example from the Bank's work is GacitLia Marib et a1(2004) where readers interested in an overview o fParaguay's political systemwill find a more comprehensive summary. 34. As regards the new studies, their authors coincide on the centrality o f institutional weaknesses in explaining both the country's current condition and the challenges lying ahead. They also agree on the weight o f traditional vices, especially as developed under the Stroessner regime, in shaping current practices and on the complications added by certain political and economic tends emerging after, but also, in their earliest manifestations, contributing to Stroessner's fall. Their diverse characterizations of Paraguay's political system - described altematively as a partiocracy," a predatory,'* or a privatized stateIg -- do have different implications as to its intemal logic; the role, motivations, and expectations o f its external collaborators; and thus the most likely sources o f change." However, the new studies agree on the nature o f the benefits inplay (the currency o f exchange), the mechanisms through which they are distributed, and the identity o f those participating in the transactions. The currencies o f exchange are the obvious ones - jobs, contracts, favorable laws or decisions, and the occasional, strategically placed public work. The mechanisms include both classic clientelism (vertical exchanges in which the client incurs an opened-ended debt to the patron disbursing the benefits) and less asymmetric transactions (where parties trade favors on a more equal footing), and may occur among state agents or between them and outside actors. Most simply put, under the Stroessner regime, possibly before, and certainly afterwards, obtaining and holding political power in Paraguay has been about trading public resources for individual support, and the process does not end there. Those attaining one kindo f resource -- public employment -- for their allegiance have also been expected and expect to use their positions ina series o f further transactions, either to line their own pockets (possibly sharing with party higher ups), or to make additional allies for their party and strengthen their own positions within it. 35. Although the system had its origins in the Stroessner period or before, the disappearance o f the single dominant leader, the emergence o f a competitive party system, and the factionalization o f the still dominant Colorado Party have given this party-based patrimonialism a life o f its own, making it far more difficult to eradicate. Toward the end, even Stroessner probably couldn't have eliminated it. Today, any leader attempting a head-on attack would be indulging in a politically risky and probably impossible act. As the observers agree, while change is necessary, it will have to be staged gradually and strategically. It bears noting that Paraguay is not alone in this dilemma. Patronage politics has been a standard mechanism for countries making the transition from elite- to mass-based politicse2'For late developers, facing other, equally important transitions, the dependence of the new party system on the patronage logic has frequently posed conflicts with these simultaneous challenges. Paraguay is an extreme, buthardly unique case. USAID (2004). Aguilera-Alfred et a1(2004). l9Nickson and Lambert (2003). 2oFor example, the concept of the privatized state puts most emphasis on the benefits to external collaborators -the entrepreneurs and other economic actors who mightbe conceived as usingthe politicians to further their own ends. A partiocracy on the other hand, makes politicians the main movers *'andbeneficiaries,with the economic actors complying out of necessity. Della Porta (2000), p. 2. Two earlier IGRs, onBolivia and the DominicanRepublic, make muchthe same point. See World Bank (2001 and2003~). 4 RESEARCHFOCUS, DESIGN,AND METHODOLOGY 36. Because Paraguay's political economy has been amply documented elsewhere, its recounting i s not the purpose o f the IGR. Instead this now widely acknowledged interpretation became the initiation point for the work. The IGR's underlying argument i s simple: a political system based on patronage will over time modify govemance structures and practices (the institutional base) to facilitate particularistic exchanges, creating an organizational framework not well suited to other operational logics. Where government is widely regarded as a means to furthering private agendas, efforts to advance collective objectives are likely to be stymied even when they do not directly obstruct rent seeking behavior. Corruption i s only one aspect o f the system dynamics, and while it has a major direct impact on system outputs, its greater damage may be in preventing the development o f positive models o f public sector behavior, undercutting organizational capacity, and encouraging perspectives and incentive systems that have little to do with providing the best services at the least cost. 37. Ina system where corruption and related particularistic uses of public resources are as widespread as they have been in Paraguay, organizational mandates, personal agendas, and public and private understandings o f institutional purposes become so distorted that just altering the leadership, the putative motor behind the system, may produce little change. This in fact occurred with the end o f the Stroessner dictatorship, and many observers believe dysfunctionality is still worse now. Those who want to act differently face a legal framework never intended to be implemented, or when it was, designed to skew the results; organizational structures created to facilitate extraction o f rents and maintain personal fiefdoms; and a mass o f employees chosen for their personal and political affiliations and thus often lacking the basic skills to do their jobs. Employees can be replaced, but a more basic structural reengineering will be required if they are to behave differently." The "privatization o f public resources'' creates its own path dependencies, which not only resist reform (because o f the underlying political economy - the motives behind the structures) but also limit the abilities o f those trying to produce different outputs. Systems designed to facilitate rent seeking don't work well without it. 38. Reformers thus confront a vicious circle - an emphasis on rent seeking produces systemic biases to facilitate its practice which in turn make it difficult to accomplish anything without the wheel-greasing transactions, thereby encouraging a retum to former practices or dooming the innovators to programmatic paralysis. In breaking out of the structural trap the usual approach has been to combat corruption wherever and whenever it occurs. While the attack on corruption is important, improvements inperformance, the ultimate objective, are more effectively achieved through increasing attention to additional institutional weaknesses. For this reason, the rest o f this study devotes more 22 I t should be noted, however, that replacing themwith better candidates will not be easy because o f constitutionally guaranteed tenure for "public functionaries" and a dearth o f better qualifiedalternatives. The damage done by traditional practices has also affecteduniversityeducationto the point where individuals with local degrees inareas like management, accounting, law, or economics may have wholly inadequate educational backgrounds. It was reported, for example, that a localprogram, runby a former Comptroller, grants a degree inaccounting based on six months o f courses offered one day a week. 5 time to the latter and approaches corruption as a means o f understandingwhy institutions function as they do. The IGR's aim is to document how the patrimonial path dependencies limit new leaders' ability to improve outputs and to identify critical areas for direct attention, using better performance o f key functions, rather than an exclusive anti-corruption strategy, as the immediate goal. 39. A second line o f argument and investigation explores a less recognized phenomenon, the way in which post-1989 legal and constitutional reforms have further complicated the situation, by freezing certain institutional arrangements and thereby limiting the reformers' freedom o f action; by introducing intended or unintended overlapping or redundant mandates; or by making room for their own subversion to the rent-seeking logic. While presenting a less problematic setting for further govemance reform than several o f its neighbors, Paraguay's new constitutional and legal fiamework did introduce elements which in retrospect look, at the very least, ill-timed or insufficiently thought out. Some o f this is water under the bridge. However, as opposed to its neighbors with their highly organized, corporatist lobbies and interest groups, Paraguay has the potential for reversing some o f the damage, and in any case, can take the examples as a cautionary lesson for shaping additional changes. Structural reform is often a necessary part o f reorienting institutions, but poorly designed and implemented, or introduced absent consideration o f the potential for subversion, it can aggravate the very problems it was intended to resolve. 40. Inpursuing these two relatedlines of investigation, the IGRadopted a case study modality, using a common research design to guide the work. In assessing each organization or its component part, World Bank team members were asked to review the legal and structural base for its operations, the formal and informalpractices for carrying out a few key functions, the adequacy o f human and other resources, and the overall quality o f output, identifying where it fell short and why this occurred. Corruption, o f course, was counted as a part o f output failures, but was only one o f those tapped, as our primary interest was in evaluating institutional capacity to carry out basic functions and understanding how the various areas o f weakness interacted to impede adequate performance. Team members were also asked to explore the political economy o f the existing institutional arrangements and identify stakeholders or beneficiaries who might be expected to resist any change. Here the emphasis was less on the historical path dependencies than their current utilization and further manipulation to protect and advance particularistic interests, either withinthe government apparatus or outside. 41. On the basis ofthese findings, the IGRmakes recommendations for targeted short and long tem changes, taking into account the relative impact and difficulty o f each. The IGR looks for changes with a potential for leveraging more fundamental alterations in agency operations, either though a demonstration effect, or by creating their own virtuous circles to counter the long standing vicious ones. As some o f the problems and recommendations are similar for all agencies, and because some are affected by cross- agency interactions, the final chapter also explores the potential for more broadly focused reforms. 6 CONCLUDING REMARKS 42. For those interested in more background on Paraguay's historical development and the roots o f its system o f governance, a short summary is provided in Annex 11. Worth noting here is that the 1992 Constitution and a series o f secondary laws have effected some dramatic modifications in government structure, the definition o f organizations' mandates, and their relative powers. The driving force behind these reforms was the desire to reverse the concentration o f power in the presidency characterizing the Stroessner dictatorship. The changes have produced their own contradictions and conflicts, but they have not altered the central role o f patronage and other particularistic exchanges inthe attainment and use o fpolitical power. Paraguay has achieved levels o f political competition and mass participation unparalleled inits history. Its politics are still conducted in the traditional mode.23 There are visible demands for change, and now a Government officially dedicated to advancing it, but the system's complexity, the many entrenched interests, and the greater decentralization o f political power have produced a seeming excess o f veto points and veto players. The impact on governance is highly negative, which in tum has produced a growing disillusionment with the benefits o fthe new democratic style. Inregional surveys, Paraguay is one o fthe countries with citizens expressing most tolerance for a retum to strongman rule.24 Whether or not recognizedas such, the crux of the matter is the inability o f the politics o f patronage to advance programs inthe general interest or to produce common as opposed to particularistic goods. 23One decided improvement, reported inInstituto de Desarrollo (2004), is the legalprohibition o n the former practice o f deducting payments to parties from public employees' salaries. It is not known whether the practice has stopped entirely, but those interviewed didnot mention it despite a willingness to discuss numerous other forms o f abuses. 24Latinobardmetro, as cited inUSAID (2004). 7 CHAPTER11: MINISTRY OF FINANCE 43. The analysis in this section, like that in the following two chapters, i s based on research completed in2004 - more specifically inJuly and December, respectively. The Bank thus apologizes for noting problems which may already be on their way to resolution. Inthe case o f the Ministry this is more likely, not only because o f the greater time lag, but also because the background papers were thoroughly discussed with the Minister and his staff during meetings in mid-2004. Inrecognition o f this fact and to acknowledge additional advances outside the area o f institutional reform, Box 1.has been added as a brief post script. This chapter is divided into three parts: a discussion o f the Ministry's overall situation and the problems affecting its operations as a unified entity; an analysis o f the situation o f its line agencies, the three vice ministries and other offices producing its fundamental services; and a final section consolidating the IGR's findings andrecommendations. ORGANIZATIONAL OVERVIEW AND COMMONPROBLEMS 44. The Ministry o f Finance enjoys a reputation for a more technically proficient staff, and under the current Minister, a greater interest inimproving its performance, than many other executive agencies. It otherwise faces the usual constraints to achieving that goal. Thus, aside from providing insights into factors impeding the Ministry's proposed transformation into a Ministry o f Excellence, the analysis serves as a representative study o f public sector weaknesses in general. The causes o f these weaknesses are historical, but the consequences are now entrenched in the institutional and political environment. They will thus be difficult to overcome, not only because o f internal and extemal resistance, but because some o f the most problematic rules and practices find support in the new constitutional and legal framework. Here, four areas are reviewed --the legal framework, the organizational structure, human and other resources, and internal procedures -- as they affect the Ministry's current performance and the on-going efforts to improve it. 45. Legal Mandate and Functions: Like the rest o f the Executive, the Ministry's basic organization and functional mandate are defined by Decree No. 17,511 o f 1947. Later laws modify details for specific agencies, including Finance (Law 109 o f 199l), but the failure to update the general law, or to adequately coordinate agency-specific legislation, i s a persisting source o f conflicts and contradictions. A recent, constitutionally-based move to transfer fimctions from the Ministry's central legal department (Abogacia del Tesoro) to the Produradoria (Solicitor General) is one example. Another is the resistance to the new public contracting law's application to the municipalities, supported by municipal authorities and by the Contraloria, whose ex-ante control o f contracts it eliminated. Conflicts like these inevitably have vested interests behind them. Whether or not the laws were written to protect these interests, they now can be used to serve that end. 8 46. Historically, the Ministryhas been central to the functioning o f the Executive, and in effect, to the operations of the entire public sector. Its budgetary oversight formally extends to roughly 97 percent o fpublic expenditures with only those o f the municipalities entirely excluded.25 Given the subordinationo fthe Congress and the absence o f effective external control agencies, the Ministry had no competition for this role under the Stroessner Government. However, it, like all other public agencies, did not function independently, but rather inresponse to the President's orders. Duringthe Stronato, and the early transition period, observers infact suggest that the Minister's control ofhis own ministerial departments, and especially those handling budget formulation and disbursement, taxation, and customs, was more often than not circumvented by direct contacts between their respective heads and the presidency. This maybe one reason why the average duration of Ministers post 1989 has been so short - approximately 14.5 months.26 47. The Ministry also is responsible for generating revenues through taxation and customs. Its control o f public debt and funds generated directly by agencies within the Executive's purview has historically been more limited, in fact, and to some extent in theory. As regards their own revenues, those interviewed reported that agencies overestimate them, to facilitate obligations for contracts, and that they underestimate, in order to maintain more control over the funds. Conceivably, both are true, with the actual practice depending on each agency's specific circumstances. While internal debt generated in the course o f budget execution should be under Finance's control, as elaborated below, this remains a legal fiction. Responsibility for external debt is legally shared with other agencies, most notably the Secretaria Tkcnica de Planzficacidn (STP) and the Central Bank (Banca Central del Paraguay, BCP). Within Finance three departments participate in its management, with the division o f responsibilities and coordinating mechanisms largely undefined. 48. Finance's other primary function is the development o f economic policy, but this again is shared, here with the BCP. Infact, estimates o f the macro-economic variables on which the budget is based are done entirely by the Central Bank because o f its greater technical capacity. Within the Ministry, economic planning responsibilities are shared by the Minister and his highlevel advisors and the Subsecretaria de Economia e Integracidn (SSEEI). The Minister also heads an external cabinet-level committee on economic policy. 25 Other branches o f government (i.e. the Judiciary, Congress, and the Contraloria) and entities inthe decentralized sector (state enterprises, foundations, the departmental governments) must, like the municipalities, follow rules set by the Ministry inpreparing their budgets, and, except for the municipalities, beginwith budget ceilings set by the Ministry for expenditures to be financed from general revenues based o n Governmentpriorities and estimated tax and customs revenues. However, those with additional sources o f funding (the decentralized agencies, the Public Ministry, the Judicial Council and Jurado) use their own estimates o fthese amounts to augment the ceilings, thus enjoying considerably more flexibility inprogramming. 26Instability extended to lower levels. Duringthe last decade, there were twelve Subsecretarios de Tributacidn (IMF, 2003, p. 13). 9 49. Aside from these natural functions, the Ministry has accumulated a series of additional responsibilities. These include cadastre, management o f government pensions (except those assigned to special funds), and most recently, the central procurement office, a transparency unit, and units to oversee the business environment and decentralization (in particular the gobernaciones; see Annex 111). The current Minister had also proposedthat Finance absorb the STP and the Secretaria de la Funcibn Pziblica, the recently created central personnel office. Vested interests and groups opposing the concentration o f more powers in the Ministry successfully blocked both moves. The Bank's own sense i s that the incorporation o f Funcibn Pziblica in particular could have been counter productive. Given the controversial reforms being attempted in the human resource area, it would make the Ministry the target o f still more opposition and overtax the Minister's ability to runhis shop. Inany event, the present leaders o f both agencies are on good terms with the Minister and his staff, allowing coordination o f their actions when needed. Inpreparation for the STP's transfer, the Minister created another office, the UCIP, or Unit for the Coordination o f Public Investment. Although the UCIP first focused on the loans benefiting the Ministry directly, it is beginning to look at those in other sectors, including loans with local financing. Its perspective is slightly different from that o f the STP, but the two manage to complement each other's work. 50. As the above should make clear, Finance's legal mandate is quite extensive and enough to stretch the capabilities o f any single organization. Inthe past, when the parts functioned with greater independence from the Minister's effective control, this was less of a problem. Today, with a Minister determinedto create a demonstration o f excellence, it is no longer true. Moreover, the Minister's reform agenda has extended his responsibilities, first to procurement and potentially to planning and human resource management for the entire public sector. Conceivably, certain areas (e.g. cadastre and the Caja Fiscal), far removed from Finance's key functions, and also, apparently receiving less attention from the Minister and his principal advisors, might be sent elsewhere. However, even if not critical to Finance's central mandate, and although presently performing problematically, their transfer might bring further declines in output. Much the same argument might be advanced for the incorporation o f procurement and the proposed addition o f planning, although here the impact on the Ministry's core functions i s more evident. The risks o f overextending the Ministry so that its perfonnance in the extra or even core functions suffers must be weighed against the costs o f sending critical activities to other agencies or leaders who would perform them less well. 51. For the time being, the Bank assumes that Finance will retain the functions it currently has and thus sees the challenge as ensuring it i s organized, staffed, and equipped to do its present job well. Inthis task, the overarching legal framework already poses some constraints, althoughmore as it affects all Government organizations than the Ministry inparticular. These are not the only obstacles, however, as discussed inthe next sections. 52. Macro-Organization and Internal Management: The key factor here is that the Ministry was never organized to operate as a single, coordinated entity; its existing structure continues to work against that end. Under Stroessner, internal coordination was not a concern as the real top-down control operated outside the formal lines o f command. 10 When that control disappeared, the tendency to create organizational fiefdoms was exacerbated because it afforded their leaders, staff, and external allies and clients more opportunities to pursue their own projects. The resulting redundant functions, inadequate channels for vertical and horizontal communication, and in-grained self sufficiency pose an enormous challenge. The structural impediments have received less attention than corruption and the human resource base, but if not addressed, they will take their own toll. 53. At first glance (see Chart in Annex I) problems are not obvious. The three the Subsecretarias de Estado (or vice ministries), Financial Administration (SSEAF), Taxation (SSET), and Economy and Integration (SSEEI), represent a logical division o f Finance's key functions, although the first also incorporates two direcciones, the Caja Fiscal and now Procurement, which have little to do with its mandate and consequently receive less attention from the Vice Minister. These units might more logically report directlyto the Minister, but that simplyraises the problem to another level. The Minister already has more such offices than he can oversee effectively - the Abogacia del Tesoro (legal department), the Auditoria Interna (internal control), the Direccidn de Administracidn, the Secretaria General, the National Cadaster Service, his own cabinet, the UCIP, the Transparency Unit, the Centro Informcitico Coordinado, the Tax Council (eliminated in mid 2004), and the Unidades del Ambiente de Negocios and o f Descentralizacidn. Except for those inwhich he must participate directly, most operate fairly independently, depending on their own leadership to set their direction. In some cases (most notably, the Abogacia del Tesoro and the UCIP) this has worked well. In others, for a variety o f reasons it has been less successful. 54. The problem, it i s suggested, i s not the ministerial architecture and thus will not be resolved by rearranging the boxes in the organization chart. It instead is the insufficient coordination or articulation o f the parts, and the lack o f mechanisms to support this f~nction.~'As the Minister himself has recognized, his own office is poorly equipped to keep track o f the documents and other work to which he must attend. However, the larger issue is the absence o f instances charged with the systematic monitoring o f internal operations, setting general standards and guidelines, and identifyingproblems and proposing solutions. Currently these tasks are only addressed inthe periodic cabinet meetings or by the ad hoc efforts of members of the Minister's advisory team, with any issue identified requiring the subsequent personal attention o fthe Minister himself. Offices like the Abogacia del Tesoro,the Direccidn de Administracidn, or the Auditoria Interna, which should play a major part in enforcing discipline and uniform standards within their respective areas, have either limited their attention to their own confines (the Abogacia) or taken, or been forced to take, an extremely restricted interpretation o f their powers. Administracidn, when not entirely circumvented by offices seeking to hire or relocate staff, is too often a mere paper processor, while the Auditoria, understaffed and underequipped, still devotes much o f its efforts to ensuring ex-ante compliance with rules for contracting and purchases. In short, the units 27The problems o f articulation and coordination o f efforts extend to the entire Government, as they do universally, and notjust inParaguay. Obviously, structural compartmentalization is a contributing factor, butthe solution is not further reorganization, butrather the creation ofnew coordinating mechanisms. For a discussion, see Drago (2002). 11 responsible for ensuring the quality, rational distribution, coordination, and consistency of inputs to the line agencies have an extremely shallow and narrow penetration o f the organization. Instead the respective activities are performed by relatively independent units within each major department, which when they don't obstruct progress are often magnets for corruption. While this management style was appropriate for the former days o f personalistic control and particularistic agendas, it is insufficient for the new emphasis on results. A comparable set o f problems affects the service production functions o f the Ministry's line offices, but they are addressed inlater sections. 55. At issue here is the absence o f an effective instance o f overall ministerial management to enforce horizontal and vertical coordination o f standards and oversee the Ministry's internal reforms. In an organization not embarked on an effort to recreate itself (the Ministry o f Excellence), this role could be performed by a highly empowered Director o f Administration, but while the latter's status does need to be raised, a separate managing director, to whom he and the other support offices would report seems more appropriate to the Ministry's present aims. All support offices in turn will require additional strengthening (in some cases, only a broader mandate, in others, more qualified staff and resources) to ensure they exercise effective supervision o f the functions they oversee throughout the entire organization. For example, the Abogacia would then provide standards and guidelines for all the legal offices operating within the Ministry, just as would the central informatics office for the various informatics units. The Direccidn de Administracidn, equipped with a specialized human resource department, would be responsible for setting and supervising compliance with human resource policy, not just for signing o f f on personnel actions. By thus delegating managerial oversight to a separate managing director and direction with vice-ministerial rank, the Minister would be free to focus on policy and results, as would the other vice ministers. Whether and how the Ministry eventually reshuffles the boxes in its organization chart or reassigns and rationalizes functions among them is another question, but one requiringa management as well as a functional perspective to so ensure that the whole really is more thanthe sum o f its parts. 56. Human Resources: Here the fundamental problems are not entirely under the Ministry's control, their origins lying in a mix o f historical practice, the present legal structure, and their combined force in impeding change. The legal status, rights, and duties o f Finance's employees, like those throughout government, are still regulated by a series o f earlier laws, following the abortive attempt to produce a new single legal framework with the Ley de la Funcidn Ptiblica, 162612000. Individual employees and their associations entered 800 to 1,000 constitutional protests against the new law. The Supreme Court's response resulted in the successful plaintiffs being covered by one or another o f the pre-existing laws, further adding to the confusion. The reason for these rulingsandthe likelihood o f future changes is covered inmore detail inthe chapter on the Judiciary. 57. Interms ofoverall employment, Financeis only the fifthlargest ministry, with, as o f 2003, 3,554 permanent and 200 contracted employees, or roughly 2.5 percent o f all central Executive personnel. Since 2000, it has avoided adding to its workforce, but has made little reduction. 12 2000 2001 2002 2003 Permanent Positions 3,748 3,634 3,583 3,554 58. Whether the number i s adequate, excessive, or just right, human resources constitute one o f the major obstacles to the Ministry's performance, as they do inthe rest o f the public sector. The majority of the employees were placed under the traditional patronage system, meaningthat any match between their skills and their job requirements i s largely fortuitous. Many still view their public position as a part-time arrangement, and thus hold other jobs to make ends meet. However, the costs of a voluntary retirement program, the job security guaranteed under the 1992 Constitution, and the legal difficulties in firing employees for cause have meant the Ministry must work with the staff it has. Moreover, financial constraints, and the same labor legislation, make it difficult to increase wages to attract more qualified staff and reward good performers, or to provide other, non-monetary incentives. A recent cap on salaries, imposed by the Congress, adds its own difficulties. Employees currently receiving higher reimbursements are doing so through pre-existing contracts run through the UNDP. What constitutes an adequate salary inParaguay is still a matter o f dispute. Studies done by the World Bank and Inter-American Bank frequently claim public sector salaries are above the market While this may be true across the board, salaries quoted by Finance's midto highlevel employees do not seem excessive, as discussed below. 59. Aside from the problems o f skills and incentives, there is the issue o f workforce distribution. Despite the general belief, probably accurate, that overall public employment is excessive; there still are areas with insufficient staff. Two examples are the new central contracting office and the Transparency Unit. Moreover, under current law, employees cannot be reassigned against their will, and when reassigned, expect to keep the same rank and salary they enjoyed before. This leads to such anomalies as the number o f free-floating legal advisors, legally removed from their positions as heads o f the ministerial legal offices, but still enjoying tenure although unable to obtain another position of equal rank. For employees not simply redundant, but suspected o f criminal actions, the easiestpath has beento assign them to "the freezer," ineffect puttingthem on a sort o f paid leave inplace. This doesn't always work. In early 2004, several hundred Jiscalizadoves (tax inspectors) were removed from their jobs and left to put in their time simply sitting in the Ministry. Later that year, the Subsecretary o f Taxation announced the temporary suspension o f all on-site tax inspections when it developed some o f these inspectors were doing their own, free-lance work. 28According to ex Minister Borda, staffing numbers went down in2004 and 2005. 29See Instituto de Desarrollo (2002, p. 24)which cites earlier studies claiming that the wage premiumfor Paraguay's public sector i s about 17 percent above the market norm. 13 60. As staffing patterns are set in the annual budget and subject to congressional approval, the resulting rigidities have produced a second layer o f informal solutions. Various section chiefs within the SSET, for example, assigned to and paid at a lower level, as the approved staffing pattern does not include the positions they actually filled. Different remuneration schedules within the entire public sector add further complications. Finance's informatics staff has begun to seek transfers to other entities, and even to jobs not related to their primary skills. One preferred spot i s the job o f cashier (cajero) in the Instituto de Previsidn Social (Social Security) which pays better than a programmer in the Direccidn de Informdtica. Training, an alternative source o f incentives, i s limitedby budgetary restrictions and the absence o f any office charged with developing a program. The Subsecretaria de Economia e Integracibn claims to have partly resolved this problem by stressing on-the-job training, but this effort would be aided by more resources. Its staff also has a chance to travel, at least if they work on integration, another source o f incentives for those paid at what they contend is an insufficient level. 61. Further details are given inthe sections on the line offices, but as a general rule, Finance's staff, whether or not excessive in overall numbers, i s inefficiently distributed, inadequately motivated (because of low salaries or the simple inability to reward good work), and frequently lacks the skills to do its job or the access to training to improve its capabilities. The problems are not unique to Finance, and their ultimate resolution will depend on legal change and a lessening o f the influence o f the still active patronage system. As one o f those interviewed noted, in firing (or for that matter, resisting hiring) someone, one i s not only confronting the individual, but also the political powers responsible for his placement. Underthe new Constitution, one is also confronting a very demanding set o f guarantees and procedural rules. Transferring poor performers to the freezer or a position where they can do less harm is an insufficient solution, as, to the extent the functions they were supposed to perform are needed, there is limited opportunity to put someone else intheir place. At the very least, the affected office will have to get approval for another position, probably inthe next budget cycle, unless it has been able to remove the individual permanently from its While a voluntary retirement program might look attractive, this is usually costly. Moreover, experience suggests that such efforts often lose the most talented employees. 62. Other Resources: Although the Ministry manages nearly all o f the public sector budget, its own resource endowment is rather modest, in 2004, coming to G$162,887 million, sixty percent o f which was spent on personnel. It is worth noting that this percentage is higher than the average for the public sector. While the Ministry has not been overly ambitious in its own budget requests, its continuing battles with Congress make it one o fthe few central agencies to have its submissions routinely cut by the latter. 63. Even augmented by the thirteen or so foreign grants and loans it currently receives, Finance's budget for materials and equipment is either highly stretched or just insufficient. The endowment of computers averages one for each five employees, and 30Ineffect, the transfer is more like asecondment, asthe transferring office usually retainsresponsibility for the position and salary, unless the second unit has an emptyslot it is willing to fill. 14 there are offices (the Auditoria Interna)with an even lower ratio, or others (the Direccidn General de Fiscalizacidn Tributaria) where a higher ratio (13 computers for 34 staff members) still does not match the work requirements. It should be mentioned, however, that lack o f access to training means that those fortunate enough to have them often underutilize their computers. 64. There are still more examples o f insufficient material support. Interviews in the Direccidn de Recaudacidn o f the SSET found that employees often had to buy their own paper to print reports or purchase light bulbs when they burned out, and that the Director paid for employees' lunches as a way o f compensating them for working longer hours. The 16 Oficinas Regionales and 171Agencias Tributarias responsible for tax collection inthe interior reportedly faced still more severe shortages o f equipment and materials as well as often inadequate physical installations. Because external donors generally do not support operating costs, and because o f certain redundancies in their own focus, they have not aided and in some cases may have exacerbated problem resolution - as for example in not ensuring that the various software systems they have financed are fully coordinated and that Ministry staff i s both involved intheir development and adequately prepared to maintain them. There are frequent complaints about an overreliance on expensive foreign consultants and the latter's failure to build capacity within the Ministry. Since these complaints are standard in any foreign assistance program, they must be taken with the usual grain o f salt. In any event, reducing the number of consultants or their salaries will not resolve the resource problem. More effective management might do so. 65. Formal and Informal Procedures and Practices: This section does not focus on the procedures specific to certain functional areas (e.g. budgeting, contracting), but rather on general patterns o f workflow and transaction processing common to both line and support agencies. As with the factors discussed above, the problems, and there are many, are not immediately evident from a quick reading o f office functions, or even the rapidly accumulating collection o f procedural manuals, many o f them financed by donors. The findings o f this exercise can, however, be summarized fairly briefly, as the problems and their causes are similar throughout the organization. Once again, the devil is in the details, and identifying weaknesses, counter-productivities, and even instances o f corruption requires a much closer examination o f how processes operate inpractice. s Lack of adequatemanual or automated systemsfor registeringdocumententry and tracking processing until termination. This is partly a problem o f poor organization and a failure to use adequately the systems that have been introduced, but it also reflects employee resistance to having their work monitored, either to avoid evaluation or to retain the opportunity to charge users for special treatment. Although the responsibility for recording and tracking documents theoretically resides with the Secretaria General for each Subsecretaria, department, or lower level unit, it i s not handled adequately anywhere. The introduction o f an automated document reception system (SIME, Sistema de Mesa de Entrada), while not intended to track further progress, should have improved things, but it i s not fully used, entries are not systematic, and, as reported o f the Caja Fiscal, those receiving the initial papers often 15 don't check to ensure documentation is complete. At present, there i s little or no follow-up on processes once initiated, and apparently little sense that this i s needed. As an interviewee in the Caja Fiscal's Secretaria noted, "we never felt the need to know the status o f the process." This puts the onus on the concerned party and encourages a variety o f semi-legal andillegal actions. z Redundantclearancesandchecksduringthecourseof asingleprocess. Some o f these are legally based, but many have developed informally. Reasons range from a failure to define adequately each individual or office's role to the power and rent seeking opportunities that clearance authority gives. It appears that offices and individuals are designing their jobs as they go along, only occasionally supported by actual legal requirements. For example, many decentralized legal offices have assumed the role o f a compulsory rechecking o f documentation, re-doing what other offices presumably have already done. As with this example, where the redundant controls take precedence, the practice not only adds to delays, but often leaves other work unattended. Moreover, many o f the clearances and checks appear to be inefficient, as it i s not uncommon for documents to be returned at some latter stage in the processing because some detail has not beenprovided. Tendencyfor offices charged with auditing or controlling internal processes to focus on compliance with legal details rather than results or possible corruption. The central Auditoria Interna is heavily focused on compliance, but the same practices also appear in the decentralized control offices. Conceivably, the roots o f this practice lie largely in an outdated notion o f the role o f internal control, and one untilrecently sanctioned by law. Although internal auditors have now beenrelieved o f their ex-ante roles, most seem to ignore the change, as do those (the chiefs to whom they report) who might be expected to instruct them to do otherwise. Moreover, without training in new practices, it is doubtful most could comply effectively with orders to use them. a Existenceof superfluous managerial levels(coordinadores and directoreswho do little directing or coordinating, but are apparently just higher paid normal staff: This has been noted in both the Caja Fiscal and the Abogacia del Tesoro. There is every sign they are not unique examples. It is the other side o f the coin o f the practice, noted in Tributacidn, o f assigning directors' functions to staff paid and officially employed at a lower level. In both cases, staffing pattern rigidities are a principal explanation. Inthe case o f redundant managers, the additional problem is that iftheir position i s eliminated they have a legal right to be placed elsewhere at the same rank and salary. Hence, the path o f least resistance i s to leave them in place, paying them for work they don't actually do. In the examples studied, this did not seem to cause further problems (Le. the "director" or coordinators did not abuse their formal positions), but it i s wasteful and does little for office morale. z Existenceof offices handlingsimilarprocesses,differentiated only by thetype of client. Insome instances (Tributacidn's departments for different categories o f tax payers) this makes sense, because the clients do lend themselves to different 16 treatment. (Although as elaborated in the section on the SSET, the ways in which clients are assigned to each category could certainly be improved). In others, it unnecessarily splits up single procedures, which could easily be handled together. A clear example comes from the Caja Fiscal, where four departments - Jubilados, Haberes de Retiro, Herederos de Jubilados, and Veteranos y sus Herederos - perform the same work o f calculating benefits due, elaborating payment schedules, and verifying the identity and the rights o f the beneficiaries. Combining the work would allow economies of scale, and cut costs on additional managerial staff. z Generallypoor record keeping, continuing reliance onpaper documents,and disorganized archives. A clear example comes from the Caja Fiscal. Its two main databases, corresponding to the archive of processed cases (approximately 60,000 files) and records from the various public dependencies on employees salary history, are entirely paper based. Only the former is well organized, allowing a reasonably rapid retrieval on any specific file. However, both are extremely vulnerable to damage from natural causes or human manipulation. A new automated system, JUPE, is intendedto replace the paper archive, but it is poorly managed and suffers from insufficient control o f data entry. a Tendencytoallow an excessivemovementof paperfiles, evenat timesoutside of the Ministry itself: Part o f the problem i s insufficient automation, but even when automation is present, or when an official could do his work without handling the expediente (the paper file) itself, the practice persists. This complicates the process o f supervision, makes it difficult for internal or external users to know the status o f their request, may result in files being misplaced, and o f course lends itself to various intentional abuses, not the least o f which is the alterationo f file contents. Unclear, often overly complex and inconsistent instructions to internal and external clients, forcing many of them to rely on the services of special agents (gestores), repeated personal visits, and payment of fees for prompt attention. While there are many examples o f one or more o f these practices in Tributacidn and the CajaFiscal, the two offices with the most direct dealings with the public, it is also true in the SSEAF, in the dealings o f other government officials with the budget office and Treasury. In fact, during 2004, the Ministry uncovered a network of its own officials who were ineffect selling budget approvals and disbursements o f funds to other government agencies. The practice was apparently stopped with the replacement o f the ring leaders (some sent to the freezer, others transferred to areas where it was hoped they would do less harm). However, the rules guiding budget preparation remain overly complex, and the interested parties still rely on various forms o f personal contact, if no longer bribes, to ensure they meet all the requirements. This i s a particular problem for departmental governments, many o f which still use gestores to handle the necessary contacts with the budget office and Treasury. Except for the budget design, where complexity was partially intentional, the problems seem to arise from other causes - the general absence o f a client- oriented approach, employees' lack o f understanding o f the purposes o f many 17 requirements, a bureaucratic ethos that does not reward initiative, and possibly inadequately transmitted recommendations from some foreign consultants. a Atendency,encouragedbytherecentattemptstostampoutcorruption,for even the most trivial action to require higher level authorization. In former days, this may have been a way to ensure the office head received his share o f any irregular payments. There are suspicions that this practice continues, but the Ministry's recent crackdown on corruption has added a new motive, sometimes encouraging office chiefs to insist on personally clearing routine actions, in other cases as a self- protection measure adopted by the employees themselves. One o f the most extreme examples reported and in effect is an improvement over the prior practice o f having the Minister sign is the requirement that every resolution in the Caja Fiscal (authorization o f benefits, updating o f amounts, retum o f overpayments) be signed by the Vice Minister o f Financial Administration. It was also reported that the head o f the Direccidn General de Grandes Contribuyentes has to personally authorize every inspection. Also in Tributacidn, employees have reportedly adopted a practice o f consulting the most minimal decision with the Subsecretaria's legal department, apparently to protect themselves against charges o f corruption. This trend can be distinguished from redundant clearances which are largely a horizontal phenomenon, but it has the same effects, increasingdelays without enhancingthe quality o fcontrol. 66. In summary, if the Ministry of Finance is going to move toward a system of management byresults, it will have to pay far more attention to how its employees handle basic procedures, to the design o f the same, and to the employees' orientation toward their work. Like all bureaucracies, much o f Finance's work revolves around processing paper or electronic documents, but the point is not inthe processing and instead inits use to respond to a request or resolve a problem inthe most efficient and expedient fashion. Where processes are not designed with this in mind, they become little more than an obstacle course which the interested parties, the intemal or external clients, successfully navigate only through sheer persistence, combined with a heavy reliance on personal contacts, and the occasional application o f grease money. Controlling the bribes is not the ultimate solution, andmay make things worse ifthis i s all that is done. 67. It is tempting to attribute all these counter-productive practices, and others not mentioned here, to simple rent seeking, but formal regulations, organizational structure, human resource endowments, and the inadequacy o f other resources also play a part. In fact, some o f the irrationalities have beennotedby ordinary employees who recognize the inefficiencies o f what they were asked to do, but believe they had no choice except compliance. Ultimately, the responsibility lies with management, but as suggested above, the managerialperspective is the missing element inthe equation. This perspective is not automatically conferred with the position or title, and it is quite different from technical competence. 18 LINEAGENCIESANDTHEPEmORMANCEOFTHEMINISTRY'S SERVICEFUNCTIONS 68. Clearly making the Ministry run like a well oiled machine should improve its output, but this ultimately depends on the organization and practices of its line agencies. The situation, while influenced by the same common failings, has its own specific weaknesses and vices to overcome. The Bank stresses that improving overall management i s a part o f the solution, but acknowledges that each line agency faces special impediments to better output. There also is the challenge, addressed inthe final section of the IGR, o f coordinating their individual actions and encouraging the exchange of information among them. 69. Unlike most o f the rest o f the central government, the Ministry's principal outputs are intemal to the government itself. The two principal exceptions are the Caja Fiscal, and, at least in their contact with the public, the revenue collection agencies. Hence, Finance's poor showing on the WBI corruption survey i s undoubtedly skewed bythe latter two areas, as public knowledge ofthe rest o f its operations is quite limited. Corruption has been, and continues to be a problem, but there are other explanations for and causes o finadequate performance o f its intemal andexternal services. 70. Subsecretaria de Administracio'n Financiera (SSEAF): This Vice-Ministry also incorporates the Caja Fiscal (Direccibn General de Jubilaciones y Pensiones) and the new procurement office (Unidad Central Normativa y TCcnica de Contrataciones), but they are treated in their own sections. The SSEAF's primary responsibility is the preparation o f the national budget, its presentation to and defense in Congress, and the supervision o f its execution. Again the basic organization (Annex I) to carry out these functions is not illogical - composed o f the Direction General de Presupuesto, the Direccion General de Tesoro Publico, the Direccih General de Contabilidad Publica and the Direcci6n General de CrCdito y Deuda Phblica. There is also a Direcci6n General de Normas y Procedimientos (responsible for developing and overseeing compliance with the rules for budget preparation) and a Direccion General de Informhtica y Comunicaciones. 71. One initial problem, originating outside the Ministry, is that these directions share some functional responsibilities with external agencies. The situation o f public debt has already been mentioned. However, budget preparation itself is only not subject to the SSEAF's requirements, but also must comply with rules and formats laid out by the STP (planning). This duplication o f functions, which requires entities to prepare their budgets in two formats, underlies the Minister's proposal that Finance absorb the STP. Despite the recently improved relations between the two organizations, they retain different perspectives, with the STP heavily influencedby the macro-planning approaches popular in the 1960s (the era o f national planning offices, o f which it is an example) and the Ministry now having moved to an emphasis on matching inputs to results. Neither has yet developed a highly sophisticated approach, meaning that those preparing agency budgetssimplyput what they want to spend into a project format for the STP and a programmatic organization for Finance. The resulting "zero-based, programmatic, budgeting by results" in the end serves neither purpose 19 well, and both are further undermined once the agencies get to discuss their real interests with the Congress.31 72. Since the dismantlingin early 2004 o f the SSEAF's intemal corruption network, the agency morale and cross-unit coordination has improved ~onsiderably.~~Current problems arguably lie less in its structure or even its human resource endowment, than inthe complexities of the budgetary process, including disbursements, and the lack of training of, or cooperation from, officials in the rest o f the public sector. As will be discussed ina later chapter, there are the so-called "rich" entities which because o f their political importance or their independent sources o f revenue Cfondos institutionales) do not see much need to cooperate with Finance, but rather do their negotiations directly with the Congress. In the case o f others, the problems are more a question of insufficient capacity to design their budgets and thus their presentation o f formats not correspondingto reality or to their real needs. As under the recently disbanded system, this wasn't really necessary (only contacts counted), the problem is how to get those usedto operatingdifferently to take budgeting seriously. 73. The table below shows the overall structure o f the 2004 budget. Funding sources include fuente 10 (Treasury), fuente 20 (debt), and fuente 30 (recursos institutionales). It should be noted that the substantial contribution fromfuente 30 i s largely controlled by 13 public enterprises and related decentralized entities, with little going to central Government agencies. Table 2: 2004 Budget, Classifiedby Object of Expenditureand FundingSource * * Valuesas of 30/6/004 ** Valuesestimatedby diyerence Source: Calculations based on datafrom the Direccidn General de Presupuesto. 31 "Zero-based" budgetingwas first mentionedinLaw 1535 and intendedto be appliedonly once. However, it reappearedinanother lawinitiatedbythe Congress,puttingParaguayseveraldecades behindthe curveinpublic sector budgeting. It is bynow widelyrecognizedthat it doesn't work well anywhere, andespeciallynotinthe public sectorbecauseofthe hghcomponentof fixed expenditures. 32 For example, theDirector of Credit0Ptiblico has beencooperatingwith thebudgetoffice inimproving its own system. 20 74. The large proportion o fthe centralbudget(fuente 10) that is inflexible (the 79 to 88 percent,33absorbed by salaries, transfers, andpublic debt), and the 48 percent going to wages that is also not subject to much internal redistribution, meanthat the emphasis on programmatic, results, or zero-based budgeting is further constrained in practice. Under these conditions, elaborating a budget that is any more than a list o f what-1- propose-to-spend may be too much to ask. Inany event, examination o f central agency budgetrequests for 2003 and 2004 suggests that programs and results were added after the fact, and often had little relationship to inputs. It also bears mentioning that no one (Finance, the Contraloria, the STP) has any system in place for an ex-post evaluation o f results. As Finance directly disburses the non-discretionary components o f the budget (salaries, transfers, debt payments) and gives them priority, this does not leave much money inthe others' hands, however they propose to spend it. For the 12 to 21 percent o fthe budget left for discretionary spending, there are two challenges: ensuring it is programmed to a reasonably efficient pursuit o f Government priorities, and discouraging spending inexcess ofthe approved budget and cash plan. 75. Failures in the latter area are easier to explain than they are to resolve. There i s first the chronic tendency to overestimate revenues, meaning that budgetary levels start above where they will eventually have to lie. Second, there is Congress' power to increase the budget, most recently (2005) by providing its own revenue estimates, and to reassign allocations within it. This i s discussed further inChapter IV. Finally, there i s the fact that the automated financial management system (SIAF) does not record commitments (an oversight apparently originating inLaw 1535), and that agencies also manipulate their estimates o f independent revenue sources Vuente 30) all incurring accruals in excess o f the budget ceilings - the so-called "floating debt." As the causes o f the resulting deficit are well understood, the challenge is disciplining the three contributing factors. This i s a political not technical challenge although that may make it harder to resolve. The only technical element involves adding a unit recording commitments to SIAF and extending its coverage to the entire public 76. The overestimation o f revenues, combinedwith the changes added by Congress, have over the past years resulted in an investment budget (including supplementary credits) that is inevitably underexecuted by as much as 50 percent. While agencies are required to provide a financial plandetailing their monthly expenditure proposals at the beginning of each fiscal year, their actual allocations are set by the plan de caja elaborated on a quarterly basis by Treasury in accord with actual revenue generations Vuente lo). Since the arrival o f the Duarte administration, this has provoked complaints from other agencies, first because o f the obvious difficulties it poses for carrying out their action plans, and second because many believe that the approved budget and financial plan constitute a guaranteed floor as well as ceiling. While the resulting situation does not let them spend what they proposed, it does leave them the decisions as to what actually will be financed. When the SSEAF cuts allocations, it tends to do this across the board, as it lacks sufficient information to assess priorities and sufficient power to enforce them. Any deviations from this scheme usually ~ 33Estimates offered by various sources differ. 34An IDBproject is currently supporting these developments. 21 originate in pressures coming from more politically powerful ministries. Thus, aside from the problem o f controlling the deficit, the present system, for all the emphasis on results, tends to a hit or miss ability to achieve them. 77. Treasury disbursements are also problematic. Of the DGT's 130 employees, most are assigned to the workshop that prints payment orders. Of the rest, the Director himself estimates that only a handful are sufficiently versed in the basic procedures, most done manually and without benefit o f procedural manuals. Despite the elimination o f the corruption ring, the largely unautomated process still lends itself to manipulation, especially in response to special requests from government agencies or from suppliers awaiting payment. Although the room for discretionality i s limited (because o f the high proportion o f payments -e.g. salaries --processed directly), the absence o f any established criteria for prioritizing what i s left or o f staff trained to apply them both encourages corruption and removes any means of ensuring the important items are attended. 78. As elaborated inChapter IvyCongress's role insetting the final budgetreduces Finance's ability to rationalize the system. However, there is room for some improvements through the simplification o f the present rules and process for elaborating the budget, better training o fbudget staff inboth, and an initial emphasis on programs with results (and the elimination of the "zero based" concept which only confuses things, as well as the need to add results at lower and higher levels o f aggregation). Given the additional difficulties posed by the decentralized sector (their control o f their own funds, lack o f capacity inthe departmental governments), it would be best to begin with the central agencies, piloting the process with a few that seem most capable o f and most willing to respond. Greater coordination, at least within the central government, as regards the investment budget and the setting o f priorities within it would also help. As the STP deals only at the project level, overall coordination would logically fall Finance. More training, some redistribution o f staff, and better coordination among information systems would help the SSEAF carry out its role. 79. The Subsecretaria de Tributacidn: The SSET accounts for the majority o f the Ministry's employees (2,253 permanent employees and 107 contractors as o fthe end o f 2003). Untilthe its removal from the SSET inmid2004, forty percent (937) belong to the Direccidn General de Aduanas, (Customs) which along with the Direcciones Generales for Recaudacidn, Fiscalizacidn and Grandes Contribuyentes are the Subsecretaria 's line offices responsible for revenue collection. In addition there are 15 staff offices reporting directly to the Vice-Minister, including the Direccidn de Planzjkacidn y Te`cnica Tributaria, the Direccidn de Apoyo (actually supporting the three tax collection direcciones), the Secretaria General, the Departamento Administrativo, and the Legal Counsel's Office.35 Typically, most o f the line direcciones also have their own administrative, legal, and even informatics departments. 35According to the IMF(2003), bothPlanning andApoyo really serve the tax departments. They nonetheless report directly to the Minister. 22 80. The SSET's structure appears logical from the standpoint o f the functional units included, but more problematic as regards their placement and interconnection. It was often suggested that Aduanas's location on an equal footing with the three direcciones generales handling taxation, was inconsistent with its importance and undercut the Director's influence within the Ministryand within her own Diveccidn. Another way o f analyzing this i s to note the absence o f a Direccibn General overseeing and thus coordinating the operations of the other three. At present, any such coordination must be done spontaneously or by the Vice-Minister himself, arguably not the most efficient assignment o f labor, and clearly related to some o f the problems discussed below. Ina similar fashion, the 15 staff offices reporting to Vice-minister would benefit from further consolidation to increase coordination andreducehis span o f direct control. 81. Although the Direccidn de Aduanas was not covered in detail (and as o f mid 2004, left the SSET), it warrants noting that despite its importance (up to 55 percent o f revenue gene~ation),~~ it appears to be understaffed; lacks an adequate operatingbudget; suffers the usual surplus o f politically appointed employees, most o f whom lack both the skills and incentives to perform their jobs; and has an internal organization impeding adequate oversight - some thirty departments reporting to the Director. The current Director's recognized efforts to and progress inimproving performance are also impeded by considerable opposition from staff, many o f whom have traditionally seen their jobs as a vehicle for rent seeking. In contrast with other Ministry departments where opposition i s more passive, in Aduanas it has included strikes and attempted sabotage o f the automated tracking system (SOFIA). 82. A sense ofoperationalproblems on the taxation side is givenby a quick look at output and the composition o f its sources. The tax incidence (including customs) i s unusually low for the region, in the past six years averaging less than 10 percent o f GDP. An estimated increase in2004 to 12.6 percent still places Paraguay inthe lower range. While this increase, if achieved, i s a sign o f progress, observers are doubtful as to its sustainability, attributing it to two factors - the new Government's campaign against tax evasion, which at least temporarily raised the level o f perceived risk among chronic evaders and eluders, and the crackdown on networks o f corruption within the SSET itself. The crackdown means that money formerly going into the pockets o f tax inspectors i s now reaching the public coffers, supplemented by the "discounts" they formerly negotiated with their "clients." It is clearly a one-time increase, whereas the impact o f the anti-evasion campaign will only be maintained if the heightened perception o f risk i s backedby a demonstration, on the basis o f improved practices, that it is real. 83. A quick review o f the tax base indicates much room for improvement. Although 98.1 percent o f the target population is located inthe "red bancaria" category (small payers, presenting their declarations and payments via the banking network), handled by the DGR, its contribution to total collections i s only 13 percent. Moreover, 20 percent o f those inthis category account for 60 percent o f the collections, and over half contribute virtually nothing. A similar situation applies for the 0.7 percent (6 36IMF(2003). 23 percent of all income) included in the Principal MediumContributors category (PMC, all inAsuncion) also handledby the DGR. Twenty percent o f the PMC account for 70 percent of payments and one third show no payment. Finally, among the large contributors (81 percent of all income) 100 of the 3,335 individuals and entities included account for 60 percent o fpayments, and half do not pay taxes. Figure 1: Tax contributionsby Type of Taxpayer 13% 6% Red Bancaria PMC DGGC Source: World Bank based on,figures,from SSET. 84. The situation merits several additional comments. 0 As several of those interviewed pointed out, placement in any of the three categories is not entirely logical - there are, as one informant noted, "mds grandes en Red Bancariay mds chicos en Grandes Contribuyentes." 0 Although from the standpoint of overall contributions, the general categories make some sense, individual contributions within each vary considerably and many fall outside the presumedparameters oftheir respective class. 0 Taken as a whole, 97 percent of the tax payers account for only 6 percent of the collections, while 100 firms and individuals (0.04 percent o f the universe) contribute 53 percent. 85. Eventaking into accountthe highly unequal distribution of income inParaguay, the overall results suggest considerable room for increasing collections. Apart from explanations related to Paraguay's tax policies, much of the shortfall can be attributed to failings in the tax agencies' own performance. Most of these arise from the usual contributing factors - an excess o f employees owing their jobs to political appointments, but fairly immovable given the protection of labor laws; low salaries (in 24 fact reported as traditionally lower than in the rest o f the public sector because o f the expectation employees would find ways to supplement them);37 a very compressed salary schedule; insufficient equipment, materials and operating budgets; an organizational structure not designed with an eye to efficiency o f output; poor coordination among units and between them and other public agencies relevant to their work; lack o f training; inadequate tracking mechanisms; and the absence o f standards for evaluating employee performance and effective internal controls. These problems and their impact may be particularly serious in the tax departments, but as elsewhere they will only be resolved over time. Since the syndrome and its consequences are by now familiar, the remaining discussion focuses on a set o f specific internal practices where changes and improvements in output are possible, despite the limitations posed bythe overall organizational environment. 86. The situation can be summed up as the absence o f an overall strategy, over- reliance on routine audits to the detriment o f other mechanisms to encourage compliance, and the inefficient performance o f the routine audit function. Indicative o f the latter is the fact that Jiscalizacidn (ex-post control, internal and external audits and on-site inspections) accounts for only 0.5 percent o f total collections, far short o f an international norm which ranges from 2 to 3 percent. This means that nearly all collections depend on voluntary payments in a country where the rates o f evasion and elusion are estimated as quite high. Moreover, measures that might be taken to encourage voluntary payments (including, but not limited to more effective Jiscalizacidn) have not been implemented. The sections below highlight three areas where improvements are critical: better use o f information, more effective fiscalizacibn, and additional measures, including improved user services, to augment voluntary and induced payments. A. Use ofirzformatiorz: Many o f the problems start with fiscal intelligence, critical both to developing a strategy and its effective implementation. Significantly, there i s no single unit responsible for coordinating the collection, handling, and further utilization o f available data to guide other actions. The agencies make limited use o f the information they receive from tax payer declarations and related sources, and have essentially no system for collecting exogenous data. Analysis and crossing o f data are virtually nonexistent. The use o f the RUC (Registro Unico de Contribuyentes, managed by an office within the Direccidn de Apoyo) is itselfproblematic because o f lack o f connection to other documentation on taxpayers (e.g. civil registry, registration systems used by other entities, including municipalities and Social Security), the failure to update its contents, and the many errors inthe system itself.38 The reliance on the banking system to collect declarations and payments from small contributors is another source o f 37The IMF(2003) figures support the first part o fthis hypothesis, showing thatjscalizadores earned G$200 a month and office chiefs G$300. It also holds that this is about one-fourth the market rate for comparable private sector professionals. Salaries are certainly lower than those surveyed inthe rest o f the Ministry. 38IMF(2003) has a lengthy discussion onthe problems ofthe RUC, notinginter alia, data presentedby those requesting a RUC are entered with no attempt to check their accuracy, and that as cards are delivered inthe office where the request i s made, there i s no automatic means o f validating even the domicile listed. 25 errors (estimated as occurring in 60 percent o f the cases)39- those made by tax payers and those made by the banks when entering the data. Other technological obstacles - equipment shortages and the different systems in place for the three taxpayer data bases- constitute contributing factors, but the real problem, affecting both underutilization and the inattention to upgrading systems and databases, appears to be a failure to recognize their centrality to improving results. B. Fiscalizacio'n: Despite the emphasis on Jiscalizacidn and its importance to creating and maintaining a perception o f risk among potential evaders, little i s done andwhat occurs is inefficiently conducted. The Bank team found a monthly average o f 22 extemal audits by the entire organization (and for the universe o f 275,338 RUC holders). The number had dropped from 2003, as a result o f the removal o f the suspected tax inspectors, but it is kept low because o f the tight control exercised by higher-level authorities. The current quantity only covers the necessary: requests from the Public Ministry in relation to on-going investigations, specific denunciations, and business closures (the latter because an audit i s a prerequisite for the closure going forward). Intemal audits increase the total number, currently reaching 100 monthly, but employees estimated they could do 600, held back only because each required the prior approval o f the Director General de Fiscalizacidn. In Grandes Contribuyentes, currently doing 10 o f the 22 monthly extemal audits; all contact with or investigation o f an enterprise also now requires prior authorization. Here the emphasis on controlling internal corruption means that some employees are detailed to monitoring their colleagues rather than investigating taxpayers. Aside from insufficient quantity there is also a problem o f quality, starting with a tendency to emphasize integrated audits rather than more targeted investigations. For each o f the 1,300JiscaZizaciones done between January and June, 2003, figures provided by the DGFT indicated an average o f 120,000 Guaranies recuperated. Most probably, the average retums have since increased, owing to the emphasis on larger cases and the removal o f the suspectfiscalizadores, but it is also clear that inadequate training, poor information use, and the lack o f more sophisticated approaches (proactive analysis o f tax payers' current accounts, crosses o f information, use o f hypothesis-based auditing and more strategic targeting) continue to affect the results. Although the organizational culture emphasizes control o f the tax payer, and thus the preeminent role o f the inspector/auditor, this role remains underdeveloped, and is now impeded by the new focus on controlling the controllers. At this rate, the increased perception o f risk (and any increases in retums), generated by the Government's announced attack on evasion, will soon dissipate as taxpayers recognize that their chances o f being audited are less than before and that those o f audits detecting evasion have not improved at all. 39IMF(2003). According to the same source, errors are only detected whentaxpayers consult the agency for some other purpose. 26 C. Underutilization of Complementary Mechanisms and Inadequate Attention to Clients: The underlying organizational cultural bias has also meant a reduced attention to both these areas. The complementary mechanisms are those used to give a nudge to taxpayers, who intentionally or not, are potential candidates for elusion or evasion. It includes the use o f "pre-active" and pro-active methods short o f audits and investigations (calls and letters to tax payers, warnings, targeting o f high risk sectors or clients based on statistical analysis o f payments and other types o f studies). As no system audits more than a small portion o f clients, these methods are essential to enhance "voluntary" payment. Infact, the Unidudde Cobrunzu Persuusivu has itself produced good results, but is utilized only to handle cases referred by other offices. While its employees estimated they could deal with 100 cases a month, they had only received 302 in the 10 months following their creation (May 2003). If alternative mechanisms are underutilized, attention to the client is completely lacking. Those charged with this f i c t i o n have received no formal training and their compensation scheme reflects no incentives for good perfonnance. Given the complexity o f the legal procedures and the low level o f information on the part of many clients, employees' inability or unwillingness to provide guidance may discourage even willing payers from compliance. Although the SSET is creating an office for client services in Asuncibn, it has the hrther problem o f the 162 offices and 16 regional departments outside the capital, whose functions, following the adoption o f payment via the bank network, should now emphasize provision o f information. However, their 289 employees, selected and traditionally operating on the basis o f relationships ("reluciones") are considered by manyto be unsuited for that function. 87. With the exception o f these decentralized employees and the sidelined fzscalizadores, the SSET's human resource base is hardly unsalvageable and with proper guidance and better practices could produce much more. Equipment and other technological obstacles can be resolved through donor programs. However, none o f this will help absent a strategy for improving performance, and that depends on management. In developing that strategy, either the three direcciones will have to operate with a muchhigher level o f cooperation and coordination, or, the most practical route, their activities should be subsumed under a single division or super-dire~cidn.~~ However effected the coordination will require considerable further changes ininternal structures, division of labor, level and type o f oversight, and operational practices. The multi-part objective can be summarized as increasing the perception o f risk for noncompliance andthe incidence of voluntary payment, through: 0 Development o f improved fiscal intelligence (data bases, studies, analysis) and its use to guide all operations 0 A more selective and targeted use o f audits, and the adoption o f more sophisticated auditingandinvestigativetechniques 40 Logically, the other direcciones should drop a level, and a single Direccidn General should oversee all their activities; however, givenpossible reactions from employees, some intermediate step, and another title, might be adopted. 27 a An improved categorization o f types o f tax payers and the development of appropriate mechanisms for dealing with each a Better customer service to facilitate payments by those choosing to comply a Improvement o f management's ability to develop and track the new strategy, monitor employee performance (but in a less intrusive fashion), and encourage coordination o f efforts across divisions, and with outside agencies a Promotion of cultural change within the organization and among the citizenry in general 88. The Subsecretaria de Economia e Integracibn: The SSEEI has been described by the current Minister as the organization's think tank. (What it did before i s not clear, in part because much o f the staff i s new.) It has four principal directions: Fiscal Policy, Integration, Debt Policy, and Economic Studies. Both the Direccidn of Integration and of Public Debt also have line responsibilities in that they participate, respectively, innegotiation o f tariffs and other, predominantly MERCOSUR issues, and inthe negotiation of foreign loans, inboth cases acting as the technical secretariat for the Ministry's economic team, and in the former acting in conjunction with the Ministry o fForeignRelations andthe Direccidn General deAduanas (of the SSET). 89. The SSEEI has a small staff, 71 employees, and most (90 percent) are professionals, with at least one university degree. Because its staff does not handle funds, and is not involved in approving expenditures, it tends not to attract political appointees. According to the staff, the occasional political appointee who does enter usually quickly requests a transfer, becoming someone else's problem. There is, as this suggests, considerable esprit de corps within the group, which is also aided by an emphasis on "learning by doing." However, there are limits to what can be achieved with enthusiasm and camaraderie, and as even the group's members admit (and the Minister clearly recognizes), the pool o f talent needs further training, or an infusion o f individuals with more experience and more advanced degrees. It is significant, as noted above, that it i s the BCP, and not the SSEEI, that produces the official macro- economic estimates on which the budget i s based. Ideally the SSEEI should be involved inthe process, but at present its opinion i s not even solicited on the results. 90. Another potential problem arising in duplicate functions affects the Direccidn de Politica de Endeudamiento, which i s only one o f several agencies (including, inthe Ministry itself both the UCP and the SSEAF's office o f Cre`dito Pziblico). If the Ministry does absorb the STP, or if the UCIP further expands its own functions, this leaves the question of what the SSEEI's Direccidn will be left to do. This i s a policy andtechnical issue, but it is also one o f overall management, and another indication of the need to coordinate the Ministry's own reform agenda so as not to leave valuable staff wondering whether they have a future intheir current positions. 91. Inshort, the performance problems faced bythe SSEEI are unique owing to the nature o f its functions. Clearly, the SSEEI could have become a repository for those 28 interested only ina place to sit and a salary, but not bent on collecting additional rents. Further improvements, and realization o f the Minister's goal o f creating a viable think tank, will mean finding ways to upgrade staff skills. Doing this quickly implies adding staff, possibly on a temporary basis, and finding ways to pay them higher salaries, and eventually to increase the salaries o f existing staff who develop their own capabilities. 92. Caja Fiscal: The pension funds managed by the Caja Fiscal (Direccibn General de Jubiliciones y Pensiones) account for between 2.4 and 2.8 percent o f GDP andcontribute substantially to the public sector deficit. The Caja's location within the Ministry o f Finance is an anomaly and not necessarily an asset from the standpoint o f efficient performance. As one o f several directions within the SSEAF, it operates with relative autonomy. It i s known for its inefficiency, outmoded practices, and corruption. The ability o f the Caja's directors implement changes is limited by the usual factors: the legal framework, an inappropriate structure, poor human resource endowment, and little budget for materials and equipment. Added to this is the likely resistance o f both clients and employees, and insufficient attention from higher management. The Minister i s clearly aware o f the problems and would like to see them resolved. However, among the many items requiringhis attention, the Caja i s naturally not a high priority. 93. Until the passage of Law 2,345 (December 2003) and pending its full implementation, the Caja's services were divided among contributory and non- contributory pension programs. The former are those o f ordinary public servants and their dependants, comprising 58.4 percent o f the beneficiaries and 67.7 percent o f total payments. The latter are the veterans o f the Chaco War and their dependants. (Annex Icontainsamoredetailedtableandorganizationchart). Underthenewlaw,aseparate entity, the Direccibn General dePensionesno Contributivas, will assume responsibility for the veterans and a small number o f honorary pensions. This won't resolve the problems, but it will relieve the Caja o f handling them. As the non-contributory pensions will eventually fade away, the new Direction, it may be assumed, is a temporary creation, andprobably a good way o f letting the Caja focus on improving its permanentwork. Other changes to Paraguay's pensionprograms now under discussion may further alter the Caja's mandate, but they are not considered here. 94. Under current law, the Caja's legal responsibilities are fairly straightforward. Its actions, always initiated by the potentialbeneficiary, are as follows: Determination of the applicant's right to a pension and the amount due, on the basis ofthe years worked and the contributions made Determination o f the rights o f and amounts due to dependents (spouse or minor children) including verification o f the death o f the primary beneficiary and the relationship o f the secondary claimant(s) Handlingofrequests for back payments or return o fexcess contributions. Payment o fbenefits and control o f authorization o f representatives Updating o f information on deaths and conditions allowing secondary benefits (e.g. attainment o f majority, marital status) 29 95. The Caja is divided into four major areas: two (Jubiliaciones and Pensiones) handling the verification and calculation o f contributive and non contributive pensions, and two, Treasury and Accounting, handling payments. In addition, it has the usual support offices - a Secretaria General and units responsible for legal advice, internal control, and informatics support. Decree 1,585, regulating the 2004 Budget Law also gives the Caja responsibility for registering and supervising the employee contributions (salary retentions) deposited by each public sector entity, a task presumably to be performed by the Accounting department. It i s not clear why this task was given to the Caja, the other functions o f which revolve around calculating and paying pensions. It mightmore logically fall with the SSET (taxation) or perhaps with another office inthe SSEAF.41 96. The Caja 's 162 member staff is probably excessive in numbers and clearly in need o f quality enhancement. Significantly, 69 (42 percent) are located inthe General Director's office and the 4 support units, with 19 alone inthe legal department. Skills in short supply include those related to control of fkaud, monitoring and evaluation, management, and informatics. Salaries are low (Table 3), as is morale: Table 3: Monthly Salary Schedule for Caja Fiscal Department Chief 2,754,9000 459 3.0 Staff head 2,080,467 347 2.3 Professional I 1,696,539 283 1.9 Professional I1 1,279,005 213 1.4 Administrative 903,989 151 1.o Administrative Assistant 893,100 149 1.o Source: Data providedby Caja Fiscal. 97. Previous sections described some o f the shortcomings ininternal operations: (i) the unnecessary division o f similar tasks among several different offices; (ii)the overabundance o f clearances and redundant, but apparently not very efficient checking o f documents; (iii) the redundant ex-ante controls performed by both the internal auditing office and the legal department; (iv) the lack o f a system for tracking documents; (v) the inadequate filing system, and (vi) the tendency for case files to travel excessively, sometimes out of the Cuja and back to the ministries o f origin. To this might be added the time (estimated at 40 percent) employees say they devote to consultations with individualapplicants, something they arguably shouldn't be doing at 41One suggestion i s its placement with the new Direccidn General de Pensiones No-Contributivas. This makes little sense from the standpoint o f its primary functions, but giventhat these are not long term, mighthave apracticaljustification. 30 all; the minimal value added by many clearances which simply revalidate information already vetted by another office; andthe fact that although documents pass through two intake offices (the mesas de recepcidn of the SSEAF and o f the Caja's Secretario General) neither checks to ensure they are complete. As a consequence, when missing documentation i s discovered at a later stage, the process must start over. The Caja has a large backlog of cases to process and that the only way to document it was to do an audit. The results are as follows: Table 4: PendingCases asIdentifiedin anAugust 2003 Audit Office Number Secretary General 1,414 Envista, awaiting more documentation. 18,000 Envista, relating to Law 186193 ontemporarypersonel. With Secretario. With private secretary o f Secretario. Legal Office 3,089 Awaiting legal opinion. Retirees Area 3,411 S u m o f three departments below. a) Department o f Service 2,164 Calculating years o f service and contributions made. History b) DepartmentofRetirees 1,03 1 1 I Calculating benefits due, payment plan, andregistry in JUPE. c) Department o fBenefits 216 Same as above, but for police and military. Department o fDependents o f 615 Determining right o f dependent beneficiary, verifying Retirees identityo fthose collecting pension. I Department o fVeterans and n.a Not surveyed as this function will be moved out o f the Caja. Dependents Dep.ofAccounting and 584 Being entered into the annualbudgetfor pension payments. Budget Dept of the Treasury 1,806 Awaiting payment Office o f Control 80 For the most part, being recheckedfor compliance with legal norms. Source: Caja Fiscal. 31 98. Processing o f applications takes an average o f six to eight months, depending on the pressures exercised by the beneficiary. Absent these pressures, which often involve personal visits to whoever holdsthe file at the time, and quite probably, payment o f speed money, the delays would bemuchlonger, as the system itselfprovides no impetus. There is evidence that things could move faster, even under present rules and organization, and thus that part o fthe problem lies inincentives andmanagerial inattention. For example, the priority treatment now being given to the "automatic retirements," made possible under Law 2345 has allowed them to be processed ina maximum o f a month. 99. The system i s also not doing well in controlling fraud. This is not speed money, but rather the receipt o f pension funds under false premises. This ranges from primary beneficiaries with fraudulent claims, probably accompanied by falsified documents (perhaps with the complicity o f someone in the agency where they were presumed to have worked) to the many dodges worked by those claiming benefits as relatives, collecting benefits o f deceased retirees, or claiming to be representatives for individuals to whom they never transfer the funds. The Caja has no established procedures for detecting and investigating fraud and generally initiates an investigation only when someone reports a problem. Scarce resources and limited employee skills mean it only i s successful in catching the most egregious cases. The office which should be most involved inthis, Internal Control, devotes its time to other activities. 100. Both Directors serving over the year in which the field work was conducted showed an interest inthe Bank's findings and recommendations, and infact implemented some o f the latter. Given the absence o f means to measure performance, it is hard to say how much impact they had. There are a series of additional short term measures that mightbe adopted to improve attention to users and discourage some o f the most blatant irregularities. Some o f them are urgent, and especially those aimed at avoiding potential negative effects o f Law 2345. Still, if performance is to improve substantially and permanently, a longer term strategy will be required, composed o f three parts: 0 Development and implementation o f a plan to control pension fraud based on analytic studies, development o f support tools, andtraining o f staff intheir use. Redesign of organization and basic procedures to introduce economies o f scale, decrease delays, and improve service to users. A part o f this plan should involve introduction o f systems to track case movement, measure output, and evaluate employee performance against production quotas. 0 Designo f a new institutional framework for overseeing all pension schemes. This goes beyond the scope o f the IGR, but the Caja obviously doesn't work in a vacuum and its performance i s tied to the output o f other pension schemes and to overall pensionpolicy. 101. As with the bulk o f the Bank's recommendations, the emphasis is on reengineering the division o f labor, workflow and procedures to increase efficiency; better use o f information for tracking, monitoring and increasing effectiveness, and 32 education o f both employees and clients - in short, the more strategic management o f existing resources targeting defined output goals. 102. Procurement: Until the passage of the new law on public contracting (Law 2051./2003) and its regulatory decree (21909) public procurement was guided in theory by a . body o f inconsistent legislation, and infact, by the customary practices o f individual agencies.42It was a source o f corruption, benefiting public employees and private actors, and the source o f many private fortunes. To ensure compliance, the new law created the Unidad Central Normativa y Te`cnica de Contrataciones (UCNT), charged with supervising its application, analysis and approval o f the procurement plans now required o f nearly 400 separate governmental units, the oversight o f individual contracting actions, and the training o f contracting personnel throughout the public sector. Originally, Congress had proposed the UCNT be placed within the Secretaria para la Reforma del Estado. With the latter's disappearance, it was given to Finance's SSEAF. The placement does not interfere with its autonomy, as the Subsecretario lacks the time to direct its actions. It does lessen its authority, even within the Ministry. This accounts, for example, for the delays in coordinating with the DGPP a connection between the Sistema de Informacidn de Contrataciones Piblicas (SICP) and the CDP (Certzjlcacidn de Disponabilidad Prepuestaria), issued by the DGPP as a prerequisite for any procurement. 103. The example is more important than the specific issue, as it demonstrates a fundamental problem confronting the UCNT, the gap between its formal mandate and its enforcement powers. Like many o f Finance's offices, it does what it can with its internal resources, but must fight its bureaucratic battles on its own. Its only other recourse is an appeal for the Minister's direct intervention, but aside from the heavy competition for his attention, this is a resource that any seasonedbureaucrat understands he cannot use often. 104. The UCNT's location inFinance creates a potential conflict o f interest among the many roles the Ministry holds inthe contracting process (approving annual procurement plans, contracting procedures, obligation o f funds, and the disbursement o f payments). Owingto the law's inconsistencywith that governing the Contraloria's operations, it also creates conflicts with the latter entity. While the CGR retains its ability to investigate and intervene in any part o f a PAC's execution, the conflict seems to center on the concurso de cotizaciones (comparison o f financial offers) and its suspected manipulation to justify sole source contracts. 105. There i s also the enormous disparity between the UCNT's mandate and its minimal staffing, currently only 16 professional and support personnel, and budget, which i s dependent on Finance's transfer of the 0.05 percent o f all contracts. It has, nonetheless, made considerable progress, beginning to develop models o f standard forms, initiating informational meetings with and training for contracting officials, and publishingthe PACs on its website. It also has begun to investigate the causes of, and take actions against, specific problems, like that o f the use o f fractionalized contracts. The fact that the bulk o f contracting (by value) i s concentrated in a few large ministries 42World Bank(20030. 33 and public enterprises is another mixed blessing. Those heading their contracting units have years of experience, know what documents and timeframes are required, and have developedbiddingforms they can use inthe absence o f standardized models. While they thus can get by without further training, they also are very much part o f the old system, well protected from their agencies' internal control units, and both skeptical about and critical o f the UCNT. Even in these agencies, lower level contracting staff is often insufficient in number, lacking in skills, and without access to additional training, whether within their own agency or from the UCNT.43 106. Aside from the evident problems o f promoting a government-wide organizational infrastructure to comply with the new law, developing the specific instruments it requires, and carrying out its role o f analysis, approval, and oversight o f on-going procedures, the UCNT will also have to address the numerous questions arising from the law's insufficient clarity, identifyproblematic provisions, and eventually suggest and campaign for legal or other changes. Several problems have emerged already. For example, personnel interviewed outside Finance raised questions as to the ultimate responsibility for the contract -whether it lay with the initiating organizational unit, with the contracting office, or with both. This seemingly minor detail is highly important in shaping the incentives for compliance. A similar source o f confusion relates to the intended decentralization or centralization o f purchases o f food, materials, and services used by agencies which also generate their own funds. There were also suggestions that the new practices and especially the suppliers' registry and the publication o f tenders on the intemet would unnecessarily restrict competition, that the times allowed for various stages were insufficient, that there was insufficient public knowledge and understanding o f the new rules and the objectives behind them, and that the traditional delays in Treasury disbursements would both continue to reduce the number o f respondents to bid invitations and encourage collusion and fraudulent offers. Many o f these criticisms, like the overall skepticism as to the target o f a 20 percent reduction inpayments for good and services, must be taken as normal, reactions to a change in the traditional rules o f the game. However, some o f them may be justified, and thus, another task for the U C N T will be to evaluate the results o f the 2004 exercise to determine where adjustments may be required. 107. The danger is that the UCNT, clearly understaffed and probably underbudgeted, will not be able to handle the massive challenge it has received. It is not going to get much more help from the Minister or Subsecretario de Administacion Financiera who have other concerns on their minds, and unfortunately, a possible natural ally, the Contraloria, regards it as a competitor. IfFinance could give it more budget and staff, its chances o f success would increase. Ifsetting up a national contracting system, and thus the full and full-hearted participation o f the rest o f the public sector, became a still higher level (Le. presidential) priority, it could count on greater cooperation. However, even if these conditions could be met, what U C N T evidently needs i s a strategy for incremental progress. Doubling its staff, with a commensurate increase in funding, would allow a measure o f intemal specialization - teams to review PACs, to oversee contracts, manage 43Interviews and collection o f data fromthe Ministryo f Education, the Ministry o fHealth, the Ministryof Public Works, PETROPAR, and COPACO indicated the shortage of specialized personnelintheir UOCs (contracting units), and the lack of stafftraining programs. 34 the information system and website, handle legal issues, implement or contract studies, and conduct training and public outreach. Even then, the challenges cannot be faced all at once, and the specialized teams will have to target their efforts. The first year's experience should provide the staff with a better understanding o f the problems and the base for requesting and utilizing new resources. Unless these are forthcoming, UCNT i s unlikelyto makemucho fa dent inresolvingthe challenge they havebeenhanded. 108. The Unidad de Tranparencia (UT): As a new office, which at the time o f this writing (December 2004) was againwithout a director, the unit deserves mentionbecause o f its potentially critical role inthe Ministry's reform program. The unit arose out o f the Minister's discussions with CISN144and several associated civil society organizations interested in promoting greater transparency o f government actions and a larger role for groups like themselves inmonitoring them. It also drew on an earlier effort to develop a citizen complaint mechanism in the Ministry and on the Minister's own efforts in introduce citizen outreach. Despite their disparate origins and backing, these three functions had a logical connection, filled an important gap inthe Ministry o f Excellency program, and lacked an existing organizational home. The complaints service, already initiated before the UT'S creation, operated in a truncated fashion - an intake center in Finance's mainbuilding, but no one incharge o f follow-up. Relations with CISNI and its civil society associates had been managed by one o f the Minister's advisors, and to the extent any outreach was performed, it was contracted out to these same groups. Hence, creating a single office to assume these tasks, to develop a program for disseminating basic information, and to otherwise strengthen contacts between the Ministry and the citizenry appeared to be a reasonable step. Moreover, the emphasis on transparency and civil society involvement was immediately popular with donors, bringing offers o f financing to help advance it. 109. Had the donor assistance come earlier, the first year's experience might have been more positive. As it was, the office while officially created functioned without a director until April, 2004, and operated with a minimal staff after that. The director and his deputy resigned in December 2004. The office's future remains unclear. Since it has almost no other staff and only a few ongoing programs - a website, the complaints office, and some publications on the Ministry's activities -there is little impetus to keep it alive. While the funding now available from a World Bank grant and the offers fi-om other donors, may give it another lease on life, certain changes will be essential. 110. The UT is one of several entities appended to the Ministry, given a license to develop its program, but unfortunately, and unlike others inthis situation (the Abogaciiu, the Cuju, the UCIP, and the UCNT) lacking the resources to move ahead on its own. The comparison with the others is instructive. The first two have necessary functions backed by a longstandinglegal mandate, thereby guaranteeing that however well they perform, they will survive. Their directors may change, and indeed over the course of this study that o f the Caja was replaced, but the office will persist. The UCIP and the U C N T couldn't manage on their functional mandates alone. Their roles are new, and while 44 The hybrid,part governmental, part civil society organization, created to overseethe country's national integrity plan. 35 critical to improving ministry and government output, the bureaucracy could, and might well like to make do without them. However, their heads (like that o f the Abogacia) have a close relationship with the Minister. The first head o f the UT was an outsider -- neither a long standing Ministry employee nor a member o f the Minister's group o f trusted advisors. Finally, all five entities could use more funding, but the UT's situation was most precarious. 111. With all this working against it, it is hardly surprising that the office's actions are so limited. The small staff i s doing what they can do alone, or with the help o f their civil society allies, but receive minimal cooperation from the rest o f the Ministry, most o f whose staff claim not to know what it is doing. Lacking major achievements in any o f the three areas, and with an unclear mandate from the Minister himself, the first director eventually left. The lesson i s that the introduction o f this type o f novel function in any bureaucracy requires considerably more impetus if it is to succeed. Resources, leadership, and a clear mandate and pushfrom the top are all essential, as is the ability to produce results o f interest to some significant constituency (the higher ups, concerned citizens, or the donors) early on. Leaders who don't enter with a plan and an energetic approach to executing it are likely to reduce their own chances o f survival as well as that o f the entity they head. Either they or their external constituencies must cultivate contacts with their higher ups. Start-up agencies like start-up businesses face a high attrition rate in their early years. In the public sector, death can come a little more slowly, because o f how funding is provided, but it will come nonetheless if this fact o f life is not kept inmind. 112. The three functions performed by UT are important, but some conflicts exist among them, intrinsically and originating in their source o f support. The demand for transparency andpart o f the demand for citizen outreach are closely connected to the civil society groups' own interests in enhancing their roles. This is not necessarily an advantage from the standpoint o f the UT's ideal functions, but to the extent it uses them as a constituency, it will have to recognize and incorporate their interests over the short run. The complaints office may have no natural constituency, but if it could build one, this is another potential source o f support. Inthe meantime, it is a thorn inthe rest o fthe bureaucracy's side. The citizen outreach function, especially inthe eyes o f the Ministry, i s easily conflated with public relations. Again, this is not an ideal role for a transparency office, but some immediate actions in this direction might buy time. With a few more resources, more direction and support from the higher levels, and a leader who can work either through channels or outside them, the office could make a go o f its second chance. CONCLUSIONSAND RECOMMENDATIONS 113. Over the year and a half since assuming office (August 2003), the Ministry o f Finance's new leadership made important strides in eradicating the organization's most dysfunctional practices and setting it on a different the course. However, as even its members agree, the initial progress has been more in the nature o f fire fighting than profound institutional change. Two internal corruption networks - inFiscalizacidn and Budgeting/Treasury -- have been disbanded, but many o f the external and internal conditions encouraging their emergence remain in place. The Ministry can't do much 36 about the external constraints, except to try to limit their further influence on its operations. Despite that major obstacle, it will have to focus on altering a broader range o f internal behaviors, shifiing from an exclusive emphasis on curbing corruption to stress the production o f improvements in the Ministry's outputs, specifically its core products. This is a far more difficult challenge because o f the multiple ways in which the old system has shaped structures, laws, the quality and distribution o f resources, and employees' own understandings o f their jobs. It i s also difficult because its success will be less easily understoodby outsiders, will require a greater range o f coordinated actions conducted over a longer time frame, andwill continue to be obstructed, not only by those attached to the traditional system, but also by elements o f the new constitutional and legal framework. 114. Now understanding the problems more fully, those backing the Ministry of Excellence have come to define their immediate aims more specifically - as ensuring the Ministry can perform its basic functions well and moving toward this goal in an incremental, but systematic fashion. This probably implies abandoning some initial more ambitious goals for the short run, and instead focusing on using the resources at hand, working on improvements in their quality and distribution, and setting realistic output targets to guide the process. For individual areas, and for the whole, a strategy for the next few years is essential and it would also be desirable to give its oversight a specific organizational location and thus a continuity currently absent. 115. To avoid further proliferation of organizational units, and because many of the problems have a managerial component, the office and individual charged with overseeing management (the proposed Managing Director) could also play the oversight role. This would leave the Minister and Subsecretarios free to focus on overall policy and the functional performance o f their respective units, but could provide them assistance in effecting the internal organizational, procedural, and administrative changes required to improve their output. Although there are elements o f the Ministry's macro structure that might eventually be reengineered, the Bank has not recommended doing much with this now, or in fact taking on more functions (e.g. Funcidn Pziblica). The most urgent needs at the macro-level are better coordination "among the boxes," and some reorganization withinthem. Here, the creation o f a mechanism, ideally an office, to coordinate the three Direcciones Generaleshandling taxation seems key, as does that o f a human resources department within the Direccidn de Administracidn. Several staff offices, most notably the Abogacia, internal control, informatics, and all the administrative departments also need to deepen their penetration o f the organization, working toward ending the current practice whereby their functions are actually carried out by highly independent decentralized units. In an organization more capable o f managing by results, this mightbe less necessary. Under current conditions letting every major division and the occasional smaller one have its own, independent support offices has only guaranteed that these functions are performed inadequately and occasionally, abusively. 116. As regards the Ministry's "product line," and the line units (the three Subsecretarias, the Caja Fiscal, and the UCNT), apart from some internal reorganization, and inthe case o f the last, more resources and personnel, the emphasis should clearly be 37 on the strategic development o f improved operations, focusing on the division o f labor, coordination among the units, and the streamlining o f procedures to produce better results. Given the externally imposed limitations on dismissing personnel, raising salaries, or hiring new staff, these plans will have to be tailored to current human resource capacities, and include a training element and a greater emphasis on tracking performance and setting performance goals. Better collection, analysis, and use o f information, as well as its sharing across the Ministry are key both to performance tracking and to strategic design and implementation. While donor funds and programs can be used to augment still inadequate equipment, their major use may be in supplying, ina more coordinatedfashion, the technical assistance needed to carry out these parts of the reform. 117. The Ministry does not lack for recommendations, many o f them far more ambitious and detailed than those offered here. The Bank has tried to keep its contribution simple for two reasons: to preserve the strategic vision and to respect the inherent limitations on what can be done. Creating a separate ministerial career staff, effecting a major redistribution o f personnel, giving greater administrative independence to Customs4*or a new Tax Agency, or removing the Cuja from the Ministry's control are ideas meriting consideration, but over the longer term. Measures aimed at producing defined improvements in output with existing resources are probably as more politically feasible and less likely to rally external opposition. Another reason for incrementalism i s the need to build internal support, as it may be the best defense against a plethora o f external opponents. A small core o f dedicated personnel can't run the operation alone, and as they now realize, expanding their internal alliances i s a critical part o f their jobs. A final reason, linked to the Unidud de Trunspurencia, is the need for better communication o f the Ministry's programs to outside groups. Perhaps the unit was not the logical center for an external communications effort, but it does have a vital fimction inmakinginternal operations more intelligible to outsiders, within the generalpublic and inother Government agencies. This is the transparency function. Inaddition there is a second outreach function as regards publicizing the Ministry's accomplishments. Conceivably a separate communications office, which could also manage liaisons with other Government agencies, might do this better and reduce the conflict o f interest between transparency and publicity. In any event, both functions will be necessary as a means of bolsteringpublic understandingo f and support for the Ministry's efforts. 45 Customs was infact recently given autarkic status within the SSET. Itremains to be seenhow this will affect its operations. 38 Box 1: Ministryof Finance- Some More Recent Accomplishments As a reflection of Paraguayan reality, thls report faces two practical problems: parts o f it were inevitably outdated by the time o f its release and its selective focus on institutional reform precluded coverage o f other significant accomplishments. As regards the first problem, the Bank acknowledges resulting oversights, but believes the underlying institutional and political obstacles faced by the Ministry o f Excellence program have not disappeared. There have been advances since the fieldwork officially ended inAugust 2004, and while some have been included, others have gone unmentioned inthe principaltext: for example, the creation o f a semi-autonomous status for the Direccidn de Aduanas, thereby giving its director higher rank and power; further advances in the implementation o f the new procurement law and early results like the estimated 37 and 18 percent savings inpurchases made by the ministries o f Healthand Finance, respectively; the strides taken by the UCIP in reviewing investment projects within and outside the Ministry, exploratory advances in introducing results budgeting; and the publication of a series of reports explaining the ministry's work andprograms to the broader public. As regards the second set of oversights, it must be recognized that although the report focused on its institutional reform program, some o f the Ministry's most important accomplishments were inthe area of macro-economic management, coinciding with the Duarte Administration's emphasis on economic stabilization and reactivation o f the economy. During2004 for example, the GDP grew 3 percent; inflation fell to 2.8 percent, the lowest level in two decades; the primary surplus reached 1.4 percent o f GDP, after ten years o f deficits; and international reserves increased by 19 percent, another record level,. This meant, inter alia, that Paraguay was able to comply with the goals set in its 2003 agreement with the IMF and improve its country risk rating for the first time since 1995. The Ministry's contributions to these accomplishments cannot be understated. Aside from the direct negotiations with the Fund and other foreign creditors, they include a dramatic 34 percent increase intax revenues, a 57 percent increase incustoms revenues, and controls on the expansion o f public expenditures, principally through reforms inpublic sector pensions and a reduction inthe number o f amendments to the budget. The Minister and his team were also instrumental inthe drafiing o f a series o f critical laws, including those for customs, taxation, and public sector pensions. The fiscal discipline imposed during the first 21 months o f the new Administration has increased the faith o f foreign and domestic investors, and provided concrete benefits for all Paraguayans. However, greater challenges l i e ahead, both in sustaining and building on these accomplishments and in furthering reforms to the Ministry's structure andoperations. 39 CHAPTER111:THE JUDICIARY46 118. A section on the Judiciary was essential to this work as an example of how Paraguay's patrimonial path dependencies continue to impede performance o f another branch o f government. Because this is a potentially enormous topic, the analysis has been directed toward the impacts o f prior measures that were designed to improve judicial operations and potential conflicts with the Executive branch program to reform public sector institutions. Paraguay was never known for an impartial, apolitical, and professional Judiciary. Under Stroessner, judges were selected by the Executive and toed the line he seta4' They were few in number (only 150 as late as 199548)as under these conditions, there wasn't a large demand for their services. Paraguay's relative isolation and late transition meant that its courts and other judicial institutions passed through the 1980s unaffected by the regional judicial reform movement beginning early in that decade. Steps taken inthe early 1990s and afterwards to alter that situation changed the Judiciary's structure and operations, as well as that o f the entire justice sector. Their impact on performance remains debatable. JUDICIALREFORMINTHE 1990s 119. With the 1992 Constitution, Paraguay realigned its balance o f powers, moving away from the presidential centralism o f the Stroessner regime. Changes to the internal organization and external powers o f judicial institutions were critical and include the following: 0 Efforts to enhance judicial autonomy through a constitutionally guaranteed earmark o f at least 3 percent o f the central administration's Elaboration and execution o f the budget lies with the Supreme Court, subject to initial approval by Congress and ex-post control by the Contraloria. 0 Movement toward a merit-based, judicial career through the creation o f a Judicial Council responsible for selecting candidates to all judgeships and prosecutorial offices (for the Supreme Court's final selection o f all but its own membersandthe Attorney GeneralSo),a Judicial School run by the Council to prepare candidates, 46The focus is onthe ordinary courts and their typical functions. This excludes the Tribunalde Cuentas which handles administrative law and the Tribunal Electoral, both formally parts o f the Judiciary, as well as the registries managed by the Court. While a few other judiciaries inthe region also control registries, their experience has been problematic as it appears to be inParaguay. 47Rivas (2002). 48Aguilera-Alfred et a1(2004), p. 40. 49The allocation rose from 1.1percent o fcentralexpenditures in1988 to 5.4 percent in2002 (Instituto de Desarrollo, p.37), which compares favorably to the regional average o f 2 to 3 percent. While the Court complains this mustbe shared with the Public Ministry, Judicial Council andJurado, it gets the largest portion, still placing it above the regional average. The Court, however notes (private communication) that the level o f execution has typically beenlower. 50Prosecutors are also selected by the SCJ, an apparent oversight on the part o f the drafters, as logically they should be selected by the Attorney General. 40 introduction o f a ratification process for judges and prosecutors (fiscales), leading after two ratifications to permanent tenure.51 Selection o f the Supreme Court fi-om lists prepared by the Judicial Council, election by the Senate, and presidential approval. The Attorney General, who serves a five-year term, i s selected through a similar mechanism except that the President designates and the Senate approves the appointment. Creation o f a separate Jurado de Enjuiciamiento, composed o f two Justices, two members o f the Judicial Council, two senators, two deputies, all of whom should be lawyers by training, to review and ifnecessary remove judges and prosecutors charged with abuse o f office. 0 Creation o f a Constitutional Chamber inthe Supreme e Creation o f an independent Public Ministry (prosecution), Ombudsman, Procuradoria (to oversee Government litigation and other legal matters affecting the Exec~tive),'~ Public Defense office (within the Judiciary), and a Contraloria, a which until 2003 shared external control functions with the Judiciary's Tribunal de Cuentas (now seeing only administrative disputes). 120. The process did not stop here. On their own, and with donor funding (from the IDB,USAID, the World Bank, the Swedish assistance agency, and GTZ, with the UNDP administering the IDB and World Bank funds) the Judiciary, has undertaken several further reforms. The followingmeritparticular attention: 0 Addition of judges, fiscales and defenders: The number o f personnel in the sector has grown substantially. As o f mid 2004, there were 541 judges, 256 prosecutors, and 180 defenders. The ratio o f 10judges per 100,000 inhabitants is above the regional average and exceeds that of much o f Westem Europe and North America. Workload, however, is unevenly distributed, with many judges receiving fewer than 200 annual filings, and others, almost 100 times that amount. Workload for prosecutors and defenders is more unifoi, but this is easier as they are not located inmore isolated areas.54 e Improved distribution of judicial service units throughout the national territory: Especially with the addition o f 271 justices of the peace, the former pattern o f 51 Ratifications, however, involve recompeting for a position. Judges wishing to remain in their posts or move to a higher level must compete against outside candidates. Inother countries with ratifications (Peru, Costa Rica untilthe mid 199Os), the judge i s evaluated alone and either ratified or dismissed. 52 Since 1969, the Supreme Court has formal powers o f constitutional review, but didnot exercise them. 53 The Procuradoria was only created recently, still lacks anorganic law, and thus its relationship to the legal offices attached to ministries and other government dependencies remains unclear. 54 This o fcourse creates additionalproblems as regards access to services and contributes to the underutilization o f the justices o f the peace. 41 concentration only in the major urban areas was and most population centers o f any size now have a judge in residence, if not a fiscal and a defender. The change i s positive, but the justices o f the peace are for the most part extremely underutilized. The evident contradiction between the wish to make services available and to use them efficiently will not be resolved easily. 0 Automation: With financing from an IDB loan, the Judiciary has provided computers and case tracking software to individual judges and courts. As this started inthe interior o f the country, the most congested courts (inAsuncion) have not yet beenaffected. They are scheduled to be covered inthe next loan project. Infrastructure: Also with the IDB and other funds, the Judiciary has been constructing courthouses, especially in the interior o f the country. This was deemed necessary to house the new judgeships and to modernize the judicial working environment. 0 Criminal Procedures Reform: Again with donor assistance, largely from USAID and GTZ, Paraguay adopted a new criminal procedures code in 1998, which emphasized oral hearings, alternative proceedings and penalties, the right to defense, and an investigationoverseen by a prosecutor (instead o f an investigating judge). The code also required the creation o fjueces de garantias, jueces de la etapa intermedia, jueces de sentencia, andjueces de ejecucidn to oversee the four stages inany first instance criminal trial. 0 Other Activities: Steps are now underway to update the General Procedural Code, with donor (IDB-UNDP) assistance, to introduce a Judicial Ethics Code (assisted by the WB, IDB-UNDP, and USAID), and improve the judicial career system (WB and IDB-UNDP). 121. One o f the most radical recent changes was the Duarte administration's removal of six o f the nine Supreme Court members, and the new Court's retraction o f its predecessor's decision that Justices had permanent The move was extremely popular given the numerous scandals emerging over the ministerial and outside activities o f several Justices. The selection o f the new members was open to public scrutiny and comment, although various NGOs complained that public participation was insufficient anddidnot influencethe final selections. ~ ~~~ 55The capital district has a lower share ofjudges (42 percent) than of population (45.4 percent). Its larger caseload might argue for a redistribution inits favor, except that not all of its judges are overburdened and moving more judges to Asuncion might take justice less accessible to residents of rural areas. 56Although the new members were namedby the Senate, the Executivepromoted the removal of the six and advanced the implicit understanding o n the reversal o n tenure. 42 Box2: JudicialIndependenceandthe Balanceof Powers Judicial independence has become a worldwide concern. Even countries o f the Civil Law tradition or with parliamentary governments, which traditionally accorded it less importance, are moving to insulate the Judiciary (and Public Prosecution) from Executive, Legislative, and party interference. Ths agenda i s normally advanced through three mechanisms: higher, judicially controlled budgets; judicial tenure; and appointment systems. The mix and emphasis vary, as do the effects. The United States federal Judiciary, long considered a model, i s still appointed by the President with Senate approval. However, its judges are constitutionally protected from removal, and the Court took direct control o f the judicial budget from the Executive in 1939. InEurope, Executive management o f the budget remains (and usually is not considered problematic), but in the post-war period, judicial councils (with representation o f other branches, but dominated by the Judiciary) have wrested appointments and career management from the Executive. The issue in Europe, and untilrecently inthe US, was less partisan than Executive interference. An emerging concern, best seen in Italy, is that that balance has shifted too far, reducing accountability and augmenting judicial corporativism. Although many early LatinAmerican constitutions proclaimedjudicial independence, the impact was more cosmetic than real. Recently, the region has seen an effort to realign the balance o f powers and eliminate partisan intervention. Virtually all courts have received higher budgets, insome cases with a constitutional earmark, and the minority o f countries with Executive control o f the judicial budget transferred it to the Supreme Court or ajudicial council. A majority o f countries (notable exceptions aside from Paraguay, are Bolivia, Guatemala, and Nicaragua) has adopted permanent tenure either on appointment or after a short probationary period. Selection o f lower level judges either lies with the Supreme Court or a judicial council. The Colombian Supreme Court also chooses its own members from lists provided by a council. InPeru and the Dominican Republic, the council chooses the justices. Elsewhere, the Executive usually selects the Supreme Court, with congressional approval, often based on lists provided by a council. A similar arrangement commonly applies to the Attomey General, but council intervention i s less frequent. A minority of countries (Bolivia, Costa Rica, Mexico, El Salvador, Guatemala, Nicaragua, Paraguay, and Venezuela post-2000), give Congress the final word on Supreme Court selection. However, in Costa Rica an active legal community monitors the selections (as it does inthe U.S. Executive appointments), and ir El Salvador, the Congress is bound by lists based on bar association elections and vetted by a Counci where it has only one representative. In Mexico, Congress must choose from lists provided by the Executive which also makes the final selectionincase o f congressional deadlock. While no systemavoids all politicization, those most effective inprotecting independence and privileging merit tend to involve multiple entities, each representing a different set ofpartisan and functional interests (including those o f the judges). Transparent procedures and objective selection criteria are also important However, the presence o f an active private bar, concerned citizenry, informed media, and the level anc nature o f partisan conflicts, on their own and as they affect Executive-Legislative relations, may be mos important. N o legal structure i s impervious to undermining, and where political factions are all bent OI controlling the courts, or just the jobs they provide, they will find a way to do so. It i s also interesting tha three countries, Chile, Colombia, and Costa Rica, considered to have among the least politicize( judiciaries, achieved this through formal or informal political pacts (in the 1920s, 195Os, and 1940s respectively). Finally, although not covered in detail here, it bears noting that Paraguay is unique in it heavy congressionalrepresentation on the body charged withjudicial discipline. Source: Hammergren(2002). 43 IMPACT OF CHANGES 122. The reforms left many unsatisfied with their impact on the sector's traditional problems - corruption, bias, politicization, the poor quality o f judgments and investigations, and delays in completing them. The failure to resolve the first three, interrelated problems produced most criticisms. The reforms created a more organizationally complex sector composed o f a variety o f independent and semi- independent agencies. While this removed the excessive centralization o f the past, it has not diminished the sectors' penetrability by political and other interests. Selection of organizational leaders remains highly politicized, although now subject to pressures from various parties and factors. Moreover, many observers claim that the presence o f political representatives (the deputies and senators) on the Council andJurado gives them and the legislature direct influence on professionals further down in each organizational hierar~hy.'~Many o f those interviewed complained o f judges and prosecutors being pressured by members o f the Jurado, and a visit to the Council revealed the candidates liningup for private meetings with individual members." 123. The problem extends beyond vulnerability to political pressure. It is also suggested that merit has been increasingly ignored, and that judges andfzscales are now selected only on the basis of political and other ties. Certainly, the selection process and criteria could use improvement, but a new law being drafted with the participation o f the Council gives an enormous weight to the "personal interview," in an initial version intended to count for over half o f the final score. Politicization o f appointments is a universal concern. Regional experience suggests that a Council does not necessarily lessen it.'' However, in Paraguay efforts to contain the effects on the Council seem limited andthere are signs, and claims from interviewees, that politicization has increased rather than decreased over time. 124. Independently o f judicial selections, the reforms have had a minor or even negative impact on other factors determining the quality and quantity o f sector output, and thus on user satisfaction with performance. With the appearance o f the Council and the Jurado, the Supreme Court and the Public Ministry's ability to manage their own human resources has been affectednegatively. Judges andfzscales are now controlled by not by one, but three politicized bodies, often working at cross purposes or respondingto different pressures. Currently, the Justices and Attorney General have less influence than the Jurado in removing poor performers, less than the Council in deciding on promotions, and very little as regards providing material incentives to those who do well. Salaries for both groups have fallen in real and nominal terms over the past 10 years. Whereas a first instance judge (orpscal) was eaming the equivalent o f US$2,700 in the 57As the two congressional and one Executiverepresentative onthe council still compose a minority of its members, their influence is not explained by their numbers, as it might be inthe Jurado where congressionalrepresentatives comprise half o f the membership and possibly more, depending on the identity o f the two members from the Judicial Council. 58Rivas (2002), p 32 seconds this observation. 59See Hammergren(2002) for a discussion o f experience with councils inLatin American and Europe. 44 mid 1990~~mid 2004, they were earning Guaranies 3,100,000 or roughly US$600.60 in Salaries are not out o f line with those in the rest o f the public sector, but as with other public employees the effect has been to lower morale, increase susceptibility to corruption, andmost probably make the profession less attractive to qualified candidates. 125. Despite its incomplete control over human resources, the Supreme Court remains the center o fjudicial governance. As i s common throughout the region, the magistrates have experienced enormous difficulties inrising, organizationally and attitudinally, to the role. Ina not unusual pattern, they have divided oversight o f the territorial jurisdictions among themselves, with eachjustice retaining responsibility for a single circonscripci6n ('judicial district). They also divide responsibilities for administrative duties, either individually or through small committees. For example the President and two Vice Presidents o f the Court comprise the Superintendencia, responsible for overseeing Court staff, escribanos (notaries), and the private bar. A single justice handles the judicial development program working with the Direction o f Planning, and another general administration. The system does not lend itself to coordinated strategy-making or planning, and is further complicated by en banc attention to various administrative minutiae. There is, it should be noted, no Chief Administrative Officer. Instead the heads o f the various departments deal directly with the Court as a whole or with single ministers. Experts injudicial administration regard this as a dysfunctional arrangement, discouraging coordination and encouraging private lobbying by individual office heads. Administrative salaries are low, provoking periodic strikes and perpetually poor morale. The ratio o f support staff per judge may be excessive, and nonsystematic observation indicated that many support staff were not fully occupied and inadequate trained in their jobs. However, as throughout the public sector, job stability precludes a reduction in force, and legal salary caps and budgetary limitations work against paying the good performers more. 126. Ina public sector not noted for proactive management, the Judiciary, as is usual, i s even less oriented to this role. The situation has been complicated by the annual changes inleadership, and especially by the recent purge o f the Court. Eventaking these problems into account, the Court seems to have a somewhat static vision o f its role, limited to the administration o f the available budget with periodic efforts to claim more from the Congress. While its new development plan mentions reducing delays and improving the quality of perfonnance, there i s no indication o f its basis in analysis o f conditions on the ground. The proposed activities are those typically financed by donors -training, computers, buildings, and new laws -with a lack of clarity as to what is expected to be achieved. Despite the large amounts invested inautomation, the Judiciary still lacks a reliable set o f basic statistics on output, and what numbers it does manage, it seems to have difficulty interpreting. Ininterviews throughout the sector, only the head o f Public Defense andthe Attomey Generalwere able to discuss their institutional output and needs inquantitative terms. 127. The more complex sector structure also impedes coordinated planning. There is a certain lip service given to the need for cross-institutional coordination, but ultimately, 6oInSeptember, the Congress authorized raises ofabout Guaranies 1,200,000 for alljudges. 45 each organization works on its own. As all believe they are underfinanced, the premium i s on increasing individual budgets, not on resolving problems common to all. Especially as the sector moves into code reform this is a highly inadequate approach, as most codes require changes from, and different relationships among a variety o f judicial organizations. 128. The remainder o f this section looks in further detail at two aspects o f inadequate performance, one well established, the other only emerging, which seem to receive little attention from those responsible for judicial governance. The first, judicial debt collection covers a proceeding occupying up to 80 percent o f the civil caseload. It is a good demonstration o f weaknesses common to all judicial operations and arguably, if targeted, would not only reduce the congestion it directly causes, but possibly provide a means for resolving problems across the board. The complex factors contributing to unsatisfactory output would be difficult to treat, but their resolution does not runcounter to any basic doctrinal principles. The real question is why the Court, with its concern over delays and congestion, has not focused on these cases. The second, juridical security, i s less concentrated in any single kind of case, and i s influenced by more fundamental attitudes and principles. The problems it represents, while o f long standing, have a potential for growing inimportance in a system dedicated to the rule o f law. The debt collection cases (juicios ejecutivos) are economically very significant, but have little impact on the Government's efforts to reform the public sector. The issue o f juridical security could be a greater concern here, and for this reason i s examined, although inless detail. Box 3: The Judiciary -Recent AccomplishmentsinPromotingInternalReform 1 During the period o f fieldwork ( the last semester of 2004), the Court had begun to elaborate its own modernization program, inspired in part by the progress made through operations financed by various foreign donors. With the assumption of a new Supreme Court President and governing council inFebruary, 2005, progress inthis regard accelerated. What was only a Power Point when f i s t reviewed by the World Bank team, has evolved into a SO-page plan (backed by a still longer budget), for which the Court i s currently seeking financing from various sources. It i s the World Bank's view that the plan could be still more precise as to benefits to the wider public and indicators of success, but it certainly i s extremely specific as to the actions the Court wishes to take, their timing, and the estimated costs. Additionally, the newly installed internal council has introduced a series of measures intended to bring the Court closer to the public and its ownjudges. Once a month the entire Supreme Court now holds sessions in one o f the departments outside Asuncion to allow the public to observe them in action. It has also begun to publicize its development plan more broadly, and has accelerated its efforts to collect and evaluate statistics on judges' performance, introduce automation and improved courtroom management to Asuncih, and present proposals for improvingthe handling of the judicial career and discipline. 46 A CASESTUDYOF PERFORMANCEPROBLEMS: JUICIOSEJECUTIVOS 129. Explanation of the proceedings and its importance: Thejuicio ejecutivo is a simple proceeding usedto enforce payment of debts. Its purpose andstructure are similar throughout the Latin American region and in civil law countries in Europe. It is one o f the most common proceedings and as a basic form o f contract enforcement is seen as economically critical. In Paraguay, it is estimated to represent 80 percent of civil workload. Giventhe poor state o fParaguayan statistics, it i s impossible to verify whether this is true. It is known that justice o f the peace and civil trial courts in Asunci6n and larger cities are filled with these cases, which contribute substantially to their congestion (over 15,000 annual filings for eachjudge).61 130. The proceeding begins with the presentation o f a document (the titulo ejecutivo) establishing the existence o f an amount due for payment. Once the judge reviews the document, to ensure its face validity, the debtor i s summoned to make payment or offer assets equal to the value inquestion. The debtor has the opportunity to protest the action for one o f a series o f predetermined reasons (exceptions), usually questioning the existence o f the obligation to pay. Should he do so, or offer other defenses, there i s a second stage inwhich the judge reviews the additional evidence provided by the parties. This stage produces a ruling, either accepting the debtor's protests (and so invalidating the demand) or rejecting them and ordering payment, if need be through the auction o f seized assets. Although the process should be fast and straightforward, there are often obstacles to its completion, many o f them used by defendants attempting to delay if not entirely avoid makinggood on their obligations. These commonly involvethe following: 0 Contracts not recognized as titulos ejecutivos: While civil and civil procedural codes commonly list documents counting as titulos ejecutivos, this does not exhaust the possibilities. In addition, where contracts are poorly written, or defense counsel i s very innovative, they may not meet the legal requirements. Some countries (including Paraguay) use a preliminary proceeding to review nonstandard documents and convert them to titulos ejecutivos. Where this fails, debt collection goes through the longer ordinary proceedings. 0 Notification: The process server may fail to locate the debtor. While sometimes proceedings advance anyway, debtors not notifiedcan request their nullification. 0 Defendant in rebeldia: The defendant is notified but does not reply. In this case, the judge may make the equivalent o f a default judgment in favor o f the creditor. However, this still leaves the question o fpayment. 0 Identification of assets: Although the defendant is required to offer assets in lieu o f payment ifhe cannot provide the cash amount, there is no sanction for not doing so. Generally, Latin American laws require the creditor to identify assets An amount only handledadequately incourts (like some inBrazil) which"batch process" essentially redundant filings. See World Bank (2004). 47 in this situation and to make arrangements with the Court officer (bailiff, actuario, or inParaguay, ujier) to seize or attach them. 0 Assets not subject to attachment: Most Latin American codes exempt some assets, most commonly the family home (except in foreclosure proceedings), items essential to the debtor's profession, and so on. Provisions for attachment o f salaries vary. InParaguay up to 50 percent o f the salary maybe attached. 0 Inefficiency of the auction proceedings: For a variety o f reasons, these may not result inan adequate returnon the sale o f assets. 0 Delays occasioned by the exceptions and requirements for additional witnesses, documentation, etc: Defendants looking to buy time or simply wear out the plaintiff may make exaggerated requests or protests. While laws often allow judges to refuse these obvious dilatory tactics, they often do not do so, out o f inertia, fear that a complaint with be lodged, or because o f corruption. 0 Appeals: Juicios ejecutivos usually enjoy the same, generous opportunity for appeals as do other cases. Those attempting to delay payments often take ample advantage o f them, and again, judges, while having some ability to refuse, frequently don't do so, for all the reasons listed above. 131. Some Oddities of the Paraguayan Proceedings: As indicated by other Bank researchY6'the debt collection process is both common and commonly abused throughout the region. Many cases disappear without satisfactory resolution, and others go through first instance judgment and various appeals, but do not result inpayment. Abuses do not lie only with the defendant; those originating with the plaintiffs range from forging documents and avoiding notification to demanding unserious interest rates and fines to turn a minimal debt into a fortune. However, the treatment o f these cases in Paraguay demonstrate abuses, on both sides, well outside the normal range. Even the sheer numbers are exceptional. Ifjuicios ejecutivos really represent 80 o f all civil filings, this i s a regional record. The minimal value of the majority o f the demands i s also noteworthy - with Asuncion's justice o f the peace courts getting over 15,000 cases annually for amounts under 2,500,000 Guaranies (US $416). Interviews with judges, lawyers, and others in Asuncion turned up information suggestive o f the variety o f problems faced: 0 Lack of data on filings, their handling, and outcomes: The numbers provided are the judges' estimates, and only include annual filings. Even rough estimates as to how many cases were resolved, average times, likely outcomes, or whether payments were made do not appear to be available. Pressed for more specificity, answers were often incon~istent.~~ It appears no one is keeping track, or sees a 62 World Bank (2002b, 2003a andb). 63 For example thejudge who saidshe also had"lots of family cases," following onthe statement that 90 percent ofher filings werejuicios ejecutivos. Also, when onejudge, who hadher own computer to record filings, was askedto use it to produce some numbers, they were highly inconsistent with her own estimates. 48 need to do so, at the courtroom or higher levels. While typical o f all o f Latin America's less developed judiciaries, Paraguay is at the extreme end. Logistical problems: Asuncibn's justice o f the peace courts have two secretaries and two process servers to handle this workload. As the first notification mustbe done personally (to the debtor's domicile or office) an initial impression i s that this is humanly impossible. Because these courts are not automated, tracking proceedings is difficult. Case files (expedientes) are identified by name o f the plaintiff or defendant, not bynumber, raising the risks o f their being misplaced. Legalfirms specializing in debt collection: Although creditors are largely banks or commercial firms, most cases (12,000 o f the 15,000 inthe juzgados visited) are litigated by one o f a few large law firms specializing in debt collection. As contrasted with the courts, these firms are very well organized, highly automated, anduse statistical studies to determine where to place their efforts. They also, by their own admission, put their own staff in the courts "to help with the processing." Other interviewees suggested they also topped o f f salaries. Whether the latter i s true or not, a general criticism is that these firms receive special treatment, something the Bank has not encountered in its other studies in the region. Pro-active defense: Lacking statistics on the number o f defendants with legal representation (and thus able to participate actively) there is no way o f verifying the judges' and lawyers' impression that the defendants generally present exceptions and contest attachments, thereby slowing the proceedings. The low amounts at stake and the Public Defender's Office claim that it does not normally provide legal counsel in these cases, cast some doubt on the reputed frequency o f dilatory maneuvers. However, in light o f the following points, it is clear why it might occur insome cases. Lack ofjudicial control over dilatorypractices: As noted, this i s not uncommon, but seems especially undisciplined inParaguay. Judges reported that exceptions (intended to question the merits o f the initial demand) could be entered any time up to final judgment. Elsewhere they can only be presented at an early stage. This may be the idiosyncratic experience and interpretation o f the few judges interviewed, but it indicates another problem -judges' insufficient command o f the law andthus their vulnerability to unreasonable actions by attomeys. Principal and interest: Interest charged on debts i s high (commonly 48 percent annually). Thus a small debt may quickly assume larger proportions. Although family homes cannot be attached, they are only protected if registered as such. Many citizens do not know this, and those who do (including attomeys) volunteered that they had not bothered. Interviewees told various stories about homes being lost as the result o f a small debt (including those resulting from municipal fees). This is probably not common, but it does suggest the opportunities for abusive practices on the part of predatory creditors and/or their legal representatives, especially against a defendant without legal counsel. 49 0 Judicial auctions: As everywhere in the region, there are complaints about the conduct o f these auctions. In Paraguay, the activities of auctioneers are not regulated. Many auctioneers are said to lack relevant experience and to owe their appointments to patronage. Elsewhere inthe region, the Bankhas found evidence that some auctioneers can connive either with defendants (by ensuring there are no bids) or with plaintiffs (by ensuring a higher value asset is sold for an amount equal only to the specific debt). There were suggestions that both practices occur inParaguay, butthat the incidence, owingto lack ofcontrol, isfar higher. 0 Lack of information on incidence or amounts of any eventual payment: This also i s not uncommon, even in far more developed countries. However, its absence seems especially critical and noteworthy in Paraguay, given the enormous weight o f these cases. Most countries record some payments, if only because the debtor insists on this as self-protection. 132. What the example illustrates: This review o f the handling o f debt collection cases i s suggestive o f the various performance problems confronting Paraguay's courts. Most an attributable to vices and weaknesses inherited from the traditional system and left untouched, when not actually compounded by, the post-1992 reforms. As with executive agencies, the courts and other sector institutions (the Public Ministry, Public Defense) operate with: (i)large numbers o f inadequately trained, under motivated, inefficiently distributed employees, many o f whom got their jobs as patronage appointees; (ii) limited salaries and low operating budgets; (iii) inadequate organizational structures; and (iv) unsatisfactory legal frameworks. The addition o f the Council and Juvado, however well intended, has exposed them to further politicization and complicated the task o f directing their own professional staff. Some further legal changes, like the new criminal procedures code, have added challenges they have yet been unable to address adequately. The specific example o f debt collection cases, aside from providing concrete demonstrations o f the interaction o f these elements, also displays a further, complicating factor -the inability o f the Supreme Court, as judicial governance body, to assume that role in its full sense. Within the last year, the Court has issued its own development plan. However, its emphasis on training, computers, and buildings, while over the longrunpossibly providing the means for addressing these weaknesses, is indirect at best, and indicative o f a trust in technology to take care o f the essentials. If Paraguay's courts are to reverse their image o f slow and low quality outputs, they will have to focus on specific problems like those outlined above, and do so in a fashion that addresses the vested interests and bureaucratic attitudes shaping current practices. For an institution that i s still politically weak, this will not be easy, but the clock may be running as regards public andpolitical tolerance for the status quo. NEWSIGNIFICANCEOFA TRADITIONAL PROBLEM: JURIDICALSECURITY 133. According to neo-institutional theorists, courts are supposed to improve the business and societal environment by making decisions in a predictable fashion and so sending a message as to the rules that will be followed.64 Where they fail to do this, 64North(1990). 50 justice becomes a sort o f lottery and rule violation a reasonable strategy. The many problems identified inthe handlingo f debt collection produce just this kindo f situation. However, here the focus i s on the role o f upper level, appellate and Supreme courts in unifyingjurisprudence and providing (the Supreme Court) constitutional interpretations. InParaguay, as inother civil law countries, the use ofbindingprecedent is restricted, but second and last instance courts can still introduce a measure o f uniformity through their appellate functions, directly and by providing what has been called "persuasive precedent" to lower level courts.65How andwhether they do this is the question treated. 134. One common complaint inParaguay is that not only first instancejudges, but also appellate courts are inconsistent in their legal interpretations and decisions. This i s widely recognized, and i s more than a question o f random deviations from their own past rulings, or from those o f other appellate panels. There are visible disagreements among appellate panels as to the interpretation o f certain issues, so much so that lawyers attempt to place their case with the panel most likely to decide in the direction they prefer. One example cited by many informants i s relevant to debt collection cases and concerns the status o f a bill from a municipal agency for street repairs as a titulo ejecutivo. Among Asuncih's three civil appellate panels, there is open disagreement on this point, with one panel holding one position and the other two another. Again, lacking statistics, there i s no way o f determining how many cases are thus affected, but the point was made so consistently in interviews that it surely must be known to the appellate and Supreme Court justices. Such irregularities, and there were others mentioned, can be addressed through Supreme Court rulings, also not binding, but presumably with some broader influence; through instructivas;66and by less formal discussions within the Court and between it and its judges. Inconsistent rulings at all levels, some with more problematic explanations, are a common occurrence in Paraguay and one clearly requiring more attention from the high Court. However, the entire phenomenon i s absent from the Court's discussion o f its reform goals, and i s at best implicit inits suggestion o f the need for more training. 135. The problem will become still more important as the Court begins to exercise its constitutional powers and i s pulled into conflicts over the constitutionality o f Government actions and laws, including those relating to the Executive's reform programs. This pattern is evident elsewhere in the region, as a consequence o f similar factors: (i) measures to increase judicial independence and thus to allow Courts to use judicial review powers formerly honored largely in the breach; (ii)greater citizen mobilization and awareness o f new constitutional rights; and (iii)a transition to constitutional forms o f governance inwhich political conflicts can no longer be decided by Executive fiat. Because Paraguay's transition came later, the process is only beginning. The most famous example o f this so far has been the Court's rulings on the Ley de la Funcibn Publica and its upholding o f the nearly 1,000 protests made by 65Just as it sounds, persuasive precedent is intended to guide lowerjudges, but its use i s not obligatory. In countries like Argentina, it is commonly followed by first instance judges, despite the fact, that as in Paraguay, they no longer have the incentive o fknowingthe higher courts also controltheir careers. 66According to Rivas (2002), Paraguay's courts also provide "instructions" (instructivas) to lower level judges on how laws will be interpreted. While this practice is boundto encounter constitutional protests, for the moment i t may offer a way out o f some problems. 51 individual public employees and associations. In this case, there have been no suggestions that the Court (and those members recently removed) was responding to anything but its own reading o f the Constitution. It i s also believed that the new body may more closely follow the Executive's preferences on any future protests. That o f course will produce hrther inconsistencies, as the prior cases cannot be reopened. The Court's rulings are final. On the basis o f regional experience, the incidence o f constitutional protests on a variety o f other issues is only likely to increase. This implies that the Court as a whole and its Constitutional Chamber in particular will have to develop a strategy for dealing with this new burden, defining how far they will enter into policy decisions, striving for consistency, andtakinginto account the likely consequences o f their rulings. The recent replacement o f the Court's members will undoubtedly be a cause for caution. The Court cannot afford to be seen as a creature o f the Executive but as more experienced constitutional bodies have learned everywhere, their powers are too great to be wielded carelessly, and they can always delay or avoid a decision where the further consequences are unclear. Constitutional review is never simply about the application o f principles. For one thing, those principles require their own interpretation, and for another, factors like real consequences, the balance of powers, and the institution's own image also must be considered. It is none too early for Paraguay to think about resisting the regional tendency to constitutionalization o f many normal judicial conflicts (and in turn the judicialization o f many political battles). Elsewhere it has gluttedthe highcourts, complicated policy making, and arguably reduced rather than enhancedjuridical security. CONCLUSIONSAND RECOMMENDATIONS 136. O f the three entities studied, the Judiciary may face the most challenges in tackling its problems. The post-1989 reforms were aimed at increasing its independence; they also diminished its control over its own resources, and as in the case o f the other entities, added further legal constraints. From 1995 (when the first Court was appointed under the new rules) to 2004, the courts were largely left on their own to work their way through the new system, aided by a substantially higher budget and donor finding. That they have not done more is partly attributable to their inadequate management style, a function both o f their legal structure and o f the universal judicial culture. Courts everywhere have had to grapple with this challenge, andinLatin America, few have risen to meet it. Thus, Paraguay is just an extreme example o f a common syndrome. It i s significant that the two other agencies reviewed - Public Defense (located within the Judicial Branch) and the Public Ministry - both with a more hierarchical structure and single head, showed indications o f a more executive approach to managing their resources, despite facing the other common constraints. For the Judiciary, things came to a head in late 2003, when President Duarte took steps to remove most o f the Court's members. While this was extremely popular and possibly necessary, it set a dangerous precedent andi s unlikelyto encourage the new Justices to be more proactive. 137. Given the many other problems facing the country, it is doubtfbl that further interest injudicial reform, on the part o f the Executive or the Congress, will take a more strategic and consistent approach. Thus, unless the high judges repeat some o f their predecessors' errors, they may well be left alone to again try to make the new system 52 work. To do this more effectively, they will have to make several changes intheir own approach to the task: (i) recognizing the extent o f the current performance problems; (ii) identifying and targeting its sources; and (iii)creating a more dynamic intemal organization to deal with both. This will not be easy, psychologically or politically - the former because most justices are not natural managers, the latter because they will face considerable internal and external resistance to altering business as usual. While inthis context, it might seem easier to continue focusing their development plan on grand, but relatively abstract themes - delay reduction, increased independence, and better service, mentioned with no reference to specific amounts or indicators o f progress - they would be better advised to target their efforts so that concrete results will be visible and their significance understood by outside This may also be their best defense against further interventions by the other branches o f government. The Bank suggests that specific problems, like those related to the juicio ejecutivo or the inconsistency in appellate court rulings be highlighted as areas where the Court proposes defined improvements over the coming years. 138. Another possibility, but one requiring closer coordination with other entities, and especially with the Public Ministry and Contraloria (whose audit findings initiate some corruption cases), might be to improve handling o f criminal cases. This has not been discussed here, but it bears mentioning that there have been many recent complaints about questionable rulings in some notorious cases, especially those permitting dilatory practices to run until the procedural deadlines expire. Conceivably the problem starts with the new procedural code. The fact that by law a criminal proceedingnot concluded inthree years6'automatically terminates, andthat the clock does not stop for interlocutory appeals and other party-induced delays, offers an enormous opportunity for skillful lawyers to avoid justice for their clients. However, judicial interpretations also play a part in how the rules are applied, and there are o f course suspicions that some judges accept bribes to influence their rulings. Given the negative impact on the institutional image, the Court needs to pay more attention to these problems. What steps they have taken, suggested by local NGOs, have not been very e f f e ~ t i v e .Criminal and especially ~ ~ corruption cases face a multitude o f problems that will not be resolved by the Court alone. All three branches o f government, the larger legal community, and the various sector entities will have to be mobilized to address the challenges collectively. Any o f 67 To do so, the Judiciary will needa better handle onuser complaints and better statistics. For example, rather than "delay reduction," it would be advisable to target specific areas o f delay, mentioning current times and establishing a goal for cutting them. Likewise, for "better service" or "greater access" specific output goals are preferable. "Judicial independence" should be translated into something o f more direct interest to clients - possibly, speedier resolution o f complaints registered, or a more transparent evaluation process including opportunities for citizen input. Recently expanded to four. Also, as inmost o f Latin America, the statute o f limitations on crimes o f corruption tends to be very short. InArgentina, a recent (February 2005) and very controversial amendment to the criminal code has attempted to specify which actions stop the clock inthese proceedings. Judges complain that the new rules are too narrow and that, as a consequence, many o f the cases they are now hearing will prescribe immediately. 69For example, the extension o fthe deadline to four years and the additiono f thejuez de la etapa intermedia. The latter was intended to resolve the bottleneck inthe indictment stage, but it also provides still another judge who may be convinced to accept dilatory maneuvers and further dilutes the responsibility for moving a case ahead. 53 them could initiate the process, although the Court may have the largest stake in the results as rightly or wrongly, the judges absorb a good share o f the blame. 139. As part o f its more managerial outlook, the Judiciary will have to improve its ability to track its overall performance, that o f individual judges, and o f types o f cases. The unfortunate decision to concentrate automation first in the less congested courts o f the interior has not helped the situation, andmeans that after investing USSlO million and seven years o f work, the courts still do not have a good handle on caseloads. Any further investments in automation should address this problem, as well as improve the Court's ability to analyze and use the results. Management starts with knowledge, and an organization that does not know what it i s producing, how quickly, and with what inputs is inpoor shape to identify, let alone resolve problems. Ina related area, the Court might consider improving coordination o f its support services and the addition o f a Director o f Administration to help carry out this task. Regional and worldwide experience suggests that courts benefit enormously when they create a strong technical office to oversee the quality o f day-to-day administration and assist in the design o f reform programs. Whether the overarching governance body is a council (like the relatively successful Colombian example, or the less well rated cases o f Argentina, Bolivia, and pre-2000 Venezuela) or the Supreme Court itself (as in Paraguay and at least half o f the region's countries), its members should not be involved in day-to-day details but rather evaluate the results producedbytechnical staff inresponse to its policy g~idance.~' 140. Following the recent purge o f the old Court and given the Congress's reputedly large, but not entirely explicable influence over individual judges, the present Court may be understandably reluctant to take these steps. However, as inthe case o f the Ministry o f Finance, the recommended course lies not in promoting further grand changes, but rather in effecting modifications to internal practices and procedures to make visible improvements in outputs. Good technical assistance will be still more important here given the novelty o f the entire concept o f consistent use o f pro-active judicial management. Donors can help both by providing expertise and by supporting reforms that target real problems, and notjust abstract "capacity building." While the Judiciary's budget may be stretched by its wage bill, it is not an unreasonable amount, even when shared with other institutional actors. Inlight o f this last remark, and the centrality o f the entire issue to all public sector reform, this may well be the moment for the Executive to find a way o f cutting the Gordian knot o f employee tenure and various acquired rights. The new Court has shown a lesser inclination to regard even the current law as violating employee rights and has its own labor relations problems. The final chapter returns to this theme. As with most of the rest o f the public sector, one enormous impediment to 70 See Hammergren (2002) and DiFederico (2004) for comparative discussions. Both works suggest problems encountered withjudicial councils inthe rest of Latin American and Western Europe, respectively, also noting the many variations intheir composition andpower. DiFederico is especially critical o fjudicially controlled councils (as inItaly) arguing that they reduce external accountability. His comparison does not extend to council versus Court governance, nor givenhisparticular concerns does he address the alternative problemof excessive external and highly partisan interventionby councils dominatedby other branches o f government. Hammergren argues that the choice between Court or council Government is not the deciding factor and that either can work, but only ifthere is a broader consensus on the ends pursued. 54 the Judiciary's matching inputs to results is the current limitation on matching employee performance to remuneration, or even to holding a position. 55 CHAPTERIV: THE CONGRESS 141. The focus here is predominantly on the Congress' role in the budgetary process and its significance for public sector reform programs. The analysis also covers, in less detail, its impact on the broader policy making process. As background for both, the discussion begins with the institutional andpolitical foundations o f the Congress' current operations andthe forces motivating the actions of its members. STRUCTURAL, PROCEDURAL,AND OPERATIONALCONTEXT 142. Like the Judiciary, Paraguay's Congress was given more responsibilities and greater independence under the 1992 Constitution. It has been more successful, or just faced fewer obstacles, in capitalizing on both. Once regarded as a rubber stamp for Executive preferences, Congress has become a center o f power in its own right, a consequence o f an unusually broad legal mandate'l and of the political environment in which it operates. The impact o f this environment maymake it more accurate to speak o f the heightened power o f congressional parties or members acting through, rather than representing, the institution per se, except o f course as regards a common interest in maintaining shared prerogatives. Like all legislatures, Paraguay's Congress i s highly political and politicized, its actions driven by the partisan, factional, and individual agendas o f its members and the expectations o f their constituents. In a system where patronage i s still the key to support, Congress i s no exception, as demonstrated by its use o f its own resources and the impact it exercises on resources going to other agencies. This has negatively affected its ability to develop more technical approaches to its role, as regards the public budget, additional legislation, and its other functions. 143. Legalframework: Once again, the devil is inthe details, especially as influenced by the Constituent Assembly's desire to reverse the presidential cast o f the 1967 Constitution.'' Overall organization i s a bicameral body composed o f an 80-member Chamber of Deputies, elected from 17 departmental districts, and a 45-member Senate, elected nationally (Box 4). Elections are every five years, coinciding with those for the President. There are no limits on reelection, but the combined effect o f internal primaries, increasing factionalism, and the new parties has augmented turnover inrecent years. In 1998, 54 percent o f the deputies were reelected. In 2003, this dropped to 21 ~ercent.'~Although elections are by closed party list, the legally mandated primaries and the small size of many districts make more personalized campaigns feasible and reduce the influence o f party leadership both on list composition and actions once inCongress. The Constitutionprohibits "mandatos imperativos," or party-ordered votes. This i s most 7'Opinionsdo differ especiallyas regards Congress' exerciseof its powers. Aguilera-Alfred et a1(2003. p. 34) claimthat "despite the presidential character ofthe Constitution, the Presidenthas a weak mandatein comparisonwith the legislature." USAID (2004, p. 28) comments on Congress's tendency to underutilize its oversight and investigative functions. 72Caballero and Vial (1994). 73Instituto de Desarrollo (2004), p. 7. 56 I Box 4: Durationof Terms for CongressionalMembers and Commissions Term Length Commissions Term Length Commissions Argentina 4 years 2 years 6 years 2 years (literally, until next Senate is seated) Bolivia 5 years 1 year 5 years 1 year Chile 4 years 4 years 8 years 4 years Colombia 4 years 2 years 4 years NA 4 years (permanent I Costa Rica 4 years commissions) 1 year No Senate I Republica Dominicana 4 years 1year 4 years 1year Uruguay 5 years 5 years 5 years 5 years USA 2 years 2 years 6 years 2 years The table reveals that only 8 LatinAmerican countries limit terms for commissions to one year. The justification for the practice i s to allow a greater turnover in membership, thus avoiding concentrations o f power and encouraging negotiations and consensus over the short run. However, t h ~ sclearly works against the developmen1 o f members' expertise, and also requires a considerable amount o f time being spent each year in reforming the commissions. Although U S congressional commissions (committees) are elected with every new Congress -that is to say every two years -internal rules promote greater stability incomposition and less conflict over formation. First, all committees are chairedby a majority party member with the second (ranking) member coming from the minority party and remaining assignments determined by the proportiono f seats heldby parties ineachhouse. Second, since the mid-nineteenthcentury, selection by vote o f the full body o f each house was replaced by slates chosen by eachparty conference or caucus. Third, despitethe abandonment o fthe seniority systemin1974, chamber caucusesor committees tend to select more experienced leaders as chairs or ranking members and likewise privilege experience inmaking other assignments. Infact, continuity is so great that limits have beenplaced on the terms o fcommittee chairman. Over time these changeshave augmented the powersboth o fthe committees and o f the congressional parties. I Source: Elaboratedby World Bank staff onbasis o fnational laws and constitutions. important in the lower house, many o f whose members, despite a formal tie to one or another party, are more directly linked to local power structures and influences. 144. The Constitution's definition o f the Congress's powers and responsibilities i s for the most part not unusual, including the normal law-making functions, approval o f the annual budget and any modifications, legislating on taxes, approval o f international agreements and treaties, making the appointments o f key officials listed in the Constitution, initiating impeachment proceedings against highofficials, and approving or 57 rejecting, in whole or in part, the Contraloria's annual report on the public accounts. However, there are additional details meriting attention: e Congress's ability to interpret the Constitution (in clear contradiction with other articles which reserve that function to the Supreme Court) and its understanding o f this to include interpretation o f any law. e Congress's role not only in the appointment o f Justices and the Attorney General (withthe Senate playing the major part), but its placement o f two representatives (one deputy andone senator) on the Judicial Council and four on the Jurado. e Its ability to override the Executive's veto o f any bill with a majority vote and to use a partial veto as a second chance to review, and refuse to approve, even portions o f the bill that had remained unaffected by Congress's initial e~amination.'~ e Its ability to reject by two-thirds vote the Executive's call for "emergency treatment," signaling that bills should be voted within four months. e In the handling of the Executive budget proposal, which the Congress can only reject in toto through a two-thirds majority o f each house, its ability to increase the estimates o f revenues, increase amounts through supplementary credits, shift allocations within and among categories (intheory, butnot infact, respecting only the difference between operating and investment expenditures), and rule on details down to the salaries o f individual public employees. e Despite its inability to approve appointments o f cabinet members, either Chamber's ability to interpellate them or other "high level public officials," and in the case o f their refusal to appear or unsatisfactory responses, recommend, by two-thirds vote o fboth Chambers, their dismissal. e While not a power o f Congress, it i s worth noting that the 1992 Constitution eliminated the President's former ability to dissolve the body and call for new elections. 145. While none o f these powers, with the exception o f the first, i s unique to Paraguay, the combination i s unusual as i s the frequency o f their use. The Constitution, secondary law, and its own by-laws provide further details as to internal organization and procedures. These include a committee or commission system inwhich commissions and their leaders are elected every year, a process whereby the budget law is first seen by a l4The possibility o fthis second full review mustbe considered bythe Executive when it contemplates a partialveto. The risk i s not only theoretical. For example, in2002, when Congress accepted the Executive's veto o f a few articles o f the Ley de TransicidnEcondmica, it simultaneously decided to retract its initial approval of the rest of the bill, whereby the law died. Intwelve years, the Executive has not been able to impose a single full veto, andhas only succeeded with partial vetoes when the Congress has agreed to treat the text as "in error." 58 bilateral commission, then by the House and Senate inthat order, returning to the House for final votes on any discrepancies with the Senate proposal, and the ability of either chamber to form special investigative commissions, the findings o f which may be forwarded to judicial authorities, but are not bindingon them. Congress i s in session for ten months of each year, and during its recesses, its duties are held by a Permanent Commission, also elected annually. 146. Practices: As is normally the case, real practices represent a mix o f legal mandates, informal incentive systems, and actual capabilities. The House's 24 commissions and the Senate's 15 vary intheir influence and technical capacity. Because Senate members are generally more seasoned politicians, who may in fact have prior experience in the House, their commissions tend to take a more technical approach to their business with two - the commission for Legislacidn, Codzfzcacidn, Justicia y Trabajo, and the Comisidn de Hacienda - having the most weight. The first, although in theory limited to laws o f general interest, has extended its ambit to all but the most innocuous legislation, and its interest to the substantive content as well as the legal aspects o f each bill. Hacienda 's importance i s self evident, and its effects will be treated inlater sections. Annual elections of commissionheads, members, and of the presiding authorities for each chamber tend to reduce any continuity in their approaches, not to mention expertise o f their members. The mid-year elections are hotly contested and paralyze all other legislative activity untilthey are completed. 147. Both Chambers have ample budgets, thanks to the fact that they decide the levels themselves - and have made a habit o f increasing their initial requests. Much o f their funding goes for salaries and representational allowances for legislators and their staff. Permanent staff assigned to each Chamber as administrators or assistants to commissions has a reasonable educational background - 64 percent with university studies, 27 percent with secondary studies, and 5 percent with only primary education. Salaries are high. The 303 employees assigned to the House and the 171 assigned to the Senate average salaries and benefits o f 4 million Guaranies each. (As a point o f comparison, the average salary in the Executive branch i s 1.2 million Guaranies, excluding representational allowances). Each chamber also has contracted employees, 446 for the House and 330 for the Senate. Salaries here are lower, averaging 1.5 million Guaranies, although many serve as advisors to the commissions. Given the overall impression that the quality o f commission advisors i s low, both the European Union and the IDB financed projects (in 1995-96 and 1996-98, respectively) to provide assistance in legal drafting and promote the creation o f a more qualified core o f technical staff. Although the IDB's project hada positive impact on key legislation (the Law on Financial Administration, the Law on National Security, the Law on National Health), the broader purpose was not met by either. 148. A principal problem here, and in other more specific actions (e.g. the budget as discussed below) is that legislators need to reward and attract supporters. Use o f their own resources, largely internal appointments, is dedicated to this end. Technical value added is consequently a priority than clientelism, and the result is the limited quality o f advisory services provided to the commissions, not to mention the lack o f continuity, as over half the appointments are for a year or less. Congressional jobs are, however, 59 constrained in number, and thus Congress must pursue its aims through other means as well. One o f these i s the initiation and passage of particularistic laws (targeting individuals or communities). Between 1992 and 2003, one study" identified 1,710 o f such laws, 60 percent o f which involved honorary pensions. While the study does not include the financial implications, one assumes it is not major. The other means i s o f more concem and financially far more significant. This is the shaping o f legislation, often initiated in the Executive, to favor special clients, whether a business group, a ministry, or individual public employee. Legislators also regularly intervene less formally inthe selection o f public employees, and o f course have an enormous influence onjudicial appointments and discipline through their role on the Council and Jurado. It i s hard to say whether the results would be more positive with higher levels o f party discipline, less tumover and fewer intemal factions, but the absence o f strong institutional or partisan positions is evidently not a benefit. This may help an Executive lacking a congressional majority, but unfortunately, also dictates an equally particularistic approach to gamering legislative support. 149. On issues where individual members' and their clients' interest are not strongly affected, particularistic politics can work inthe Executive's favor. For example, the law reforming the Caja Fiscal was approved in three months (December 2003), contrary to expectations, because the arguments in its favor (the need to close the deficit) had been adequately explained inthe press, andbecause the Executive negotiated directly with the only strong opposition group, the teachers' unions. It possibly conceded more than was necessary, but also eliminated the one major obstacle to passage. On the other hand, the Ley de Adecuacidn Fiscal, eliminating 42 special exemptions and expanding the IVA's coverage, was presented as a matter of urgency, but was approved (June 2004) only after ten months o f discussion. As business sectors opposing the changes had strong allies in Congress, the Executive withdrew the initial proposal and undertook negotiations with the 10 most important economic groups. Even then it only succeeded by eliminating the extension o f the IVA to the agricultural sector whose members are an important source o f funding for congressional parties and candidates. Such logrolling is characteristic o f any legislative body. The only difference inParaguay is that it is rarely counterbalanced by overarching party positions. Congress may, as one source reports,76be overly focused on its law-making function, but the driving force is more often particularistic interests than any broader ideology. This i s even more clearly demonstrated in the treatment o f the budget, to which the discussionnow tums. 75 Instituto de Desarrollo (2004), p. 13. 76 USAID(2004), p.28. 60 Box 5: BudgetaryPowers of SelectedSouth American Congresses An initial analysis of Figure below shows considerable uniformity in the region as regards the Executive's initial formulation o f the budget, its ability to veto Congress' modified proposal, and the potential for Congress to insist on its version. The greatest differences lie inCongress' further ability to alter the approved Budget Law or specific details o f the initial Executive proposal, and the consequences if Congress does not approve a budget within the legal deadlines. From a comparative perspective, Paraguay lies in the higher range as regards Congress's powers in the budgetary process. Its Congress can modify the proposed Executive Budget, even increasing expenditures, andmust approve any further modification to the approved budget involving expenditure increases. InBrazil or Peru, for example, the Executive i s less dependent on Congress for subsequent modifications, and there, as in Uruguay, Congress cannot increase overall expenditures or the deficit beyond the Executive proposal. When Paraguay's Congress does not approve a budget within the legal time limits, that of the former year goes into effect. This puts more pressure on the Executive than in systems where its own budget is adopted by default or a new proposal must be presented. The form o f presentation of the budget (Le. level o f detail and use o f line items or programs) does not appear to have much impact on the types or extent o f changes made by the legislative bodies inthe countries surveyed. Except for Chile, the level o f detail and format are not that different from Paraguay. Legal powers and incentive systems (based on party organization and internal dynamics) appear more important inaccounting for the results. Although Law 1,535199 (Financial Administration) allows Congress to increase expenditures, but only for the investment budget,the fact that the Constitution does not include this limitation has been used by Congress to justify increases onthe operational side. Itis worth notingthat Congress's impact onthe budget is focused on the approval stage, i s much weaker during execution, and virtually non existent interms o f control. Legally, any modifications approved by Congress during execution must begin with an Executive request. Although they are usually enacted, the level o f real execution averages roughly 80 percent of the initial Budget Law. As regards evaluation andcontrol, Congress hasnot usedits prerogatives inany systematic fashion. Powers of the Executiveand Congresson BudgetaryMatters- Selected Countries in Latin America ' Power ofBudget the Executiveto Modifythe Legally Defined Altematives bythe Constitution or post-sanction Congress Congress powersto Mod,fy Execut,ve Budget Budgehry LegisiatlonifCongress does not approve the Can Executive Budget Country Initiative - Override Executive Executive Executlve Executive if deficit or Approve Cannot with Without Congress Veto R ~ ~ ~ c ~ ~ n s p~~~~~ Executive Presents Modify Congress Congress Budget New Budget Budget Argentina PE X X X X X Boliwa PE X X X X X X 61 BudgetaryPolitics 150. There i s a common belief that the Congress's major impact on the budget is in inflating its overall amount, largely through its ability, partly self-defined, to change revenue estimates. Analysis for the period 2000-2005 found this impact somewhat less than believed, and occurring in two parts: the initial modifications made in the budget law, which inthree of the last six years (2000-2005) actually resulted in a decrease or a marginal increase, and the effect o f the supplementary budgets, which for the five relevant years (2005 obviously cannot be included) did in fact increase all budgets, from a minimal 0.1 percent (2001 and 2002) to a hefty 15.8 percent in 2003. Significantly, 2003 was an election year and thus a magnet for pork barrel. Table 5: Comparisonof ExecutiveProposal,Modifications, andModifiedBudgetLaw (2000 -2004),inmillionsof Guaranies % YO YO Year A. Executive Proposal B.Budget C. With Law Modifications Variation B,A Variation Variation C/B CIA 2000 14.47 15.52 15.64 7.2 0.8 8.1 2001 15.24 13.79 15.35 -9.5 11.4 0.1 2002 15.11 14.79 15.30 -2.1 3.5 0.1 2003 15.75 15.55 18.24 -1.9 17.4 15.8 2004 16.84 17.11 18.90 10.6 110.5 112.2 2005 I19.62 I21.30 I8.6 62 Table 6: CongressionalModificationsto the Executive Budget, Disaggregatedby Key Agenciesinthe Centraland DecentralizedAdministration - (2002-2004) Judiciary ComptrollerGeneral 300,726,020,237~22,089,162,992 402,136,468,579120,946,122,724 101,410,448,3421-1,143,040,268 33.7%/-5.2% PublicTreasury 2,582,102,971,852 2,537,145,678,230 -44,957,293,622 -1.7% DecentralizedAdminisration I 7,966,406,984,101 1 7,452.080.723,9631 -504,326,280,1381 -6.3% \Central Bank 249,220,693,1891 227,846,883,6701 -21,373,809,5191 -8 6% DepartmentalGovernments 190,191,717,442 170,383,148,600 -19,808,568.842 -10.4% PublicEnterprises 4,734,215,579,032 4,342,417,101,985 -391,798,477,047 -8.3% Autonomous Entitiesand Autarkies 263,507,240,849 233,782,176,717 -29,725,064,132 -11.3% NationalUniversities 273,994,962,637 273,003,508,155 -991,454,482 -0.4% SocialSecurity 1,125,646,708,754 1.117.130,979,454 -8.515.729.300 -0.8% IFinancialEntities 1,129,630,082,1981 1,097,516,925,3821 -32,113,156,8161 -2 8% Executive 4,415,982,276,916 4,940,445,481,452 524,463,204,536 119% Judiciary 507,148,228,624 426,828,950,462 40,319,278,162 -15 8% ComptrollerGeneral 24,277,457,241 27,690,204,341 3,412,747,100 14.1% PublicTreasury 2,996,429,828,507 2,547,583,591.991 -448,846,236,516 -15.0% DepartmentalGovernments 166,924,053,075 170,828,148,600 3,904,095,525 2 3% PublicEnterprises 4,463,094,214,244 4,292,688,030,725 -170,406,183,519 -3 8% Autonomous Entitiesand Autarkies 241,212,433,582 227,356,715,201 -13.855,718,381 -5 7% Nationaluniversities 288,741,310.926 278,562,829,601 -10,178,481,325 -3 5% ISocialSecurity 1,275,310,165,281 1,127,130,979,454 -148,179,185,827 -11 6% FinancialEntitles 1,018,978,527,8561 1,097,516,925,3821 78,538,397,5261 7 7% Executive 4,591,743,778.649 4,811,902,994,179 220,159,215,530 4.8% Judiciary 422,446,049,922 437,578,035,863 15,131,985,941 3.6% ComptrollerGeneral 25,129,037,372 29,479,675,584 4,350,638,212 17.3% PublicTreasury 3,568,086,430,586 3,352,577,143,783 -215,509,286.803 -6.0% I I I I I DecentralizedAdministration I 8,344,984.350,489( 8,395,567,228,641 I 50,582,868,1521 0.6% ICentralBank 315.447.112,4591 315.447.112.4591 01 0 0% DepartmentalGovernments 172,981,259,885 193,684,772,049 20,703,512,164 12.0% PublicEnterprises 4,950,245,262,176 4,908,116,043.685 -42,129,218,491 -0.9% AutonomousEntitiesand Autarkies 312,107,868,061 299,432,573,133 -12,675,294,928 -4.1% NationalUniversities 295,787,757,529 300,443,970,737 4,656,213,208 1.6% SocialSecurity 1,226,654,819,703 1,226,667,143,703 12,324,000 0.0% Source: Elaboration based on SSEAFandbudget laws. 63 151. Congress had a still greater effect on the reallocations among budgetary categories. In these the Congress did commonly violate the apparent Constitutional prohibition on shifting funds between operating and capital expenditures, but short o f a constitutional protest, there i s no means to alter that practice. This phenomenon, as it affected the budget law (prior to later modifications) is demonstrated in three tables, illustrating, respectively, reallocations i)betweenthe centralized and decentralized sector and within each, among major actors; ii)among types o f expenditures; and iii)among central agencies. The first o f these tables is shown above (Table 6). The other two are included in Annex I.Significantly, the three years covered (2002, 2003, and 2004) are those inwhich the changes to overall budget levels were minimal. 152. Patterns are hard to distinguish over only three years. However, Congress consistently increased the Executive budget, and in two o f the three years, did this by reducing the budget for the decentralized sector. While the agency benefiting from the changes varied (and an increase inone year was frequently followed by a reduction inthe next), self reward was always powerful, andthe increments for the Congress itself ranged from 7 to 50 percent. Cuts withinthe decentralized sector tended to be levied across the board, with only departmental governments or gobernaciones, and financial entities receiving increases in two o f the three years. Interestingly, although 2003 was an election year, the gobernaciones experienced their largest gain (12 percent) in 2004. In the central administration, the Public Treasury was a consistent loser, with losses ranging from 1.7 (2002) to 15 percent (2003). The two tables included in the Annex add hrther detail to these observations, suggesting for example that Treasury's losses were due to the consistent cuts in allocations for public debt (which along with salaries and pensions are among the major items its handles directly). Also visible in the additional tables in the Annex is the consistent tendency to increase allocations for the Ministry of Public Works and for physical investments, especially in 2003, an election year. Within the central administration, Hacienda andIndustriay Comercio were perennially short-changed. The absence o f more uniform pattems and the often dramatic shifts inwinners and losers from one year to the next are themselves telling, suggestinga relatively ad hoc approach to the readjustments rather than the play o f a longer terms set o f policy preferences. 64 Figure 2: BudgetLaw, Budgetwith Modificationsand Budget "Obligado" (Obligated) (2000-2004) PYG E0 2000 2001 2002 2003 2004 ~ Budget w t h Modlfications +Budget "Obligado" I Source: WorldBank Staff based on SSEAFstatisticselaborationand budget laws. 153. Global trends are one thing, but execution is not uniform across the expenditure categories. The gap between approvals and executions is least in the area o f personal services (wages), where the budget law, the final budget, and the level of execution tend to coincide. Here Congress has tended to slightly cut the amounts in the Executive budget and raise them in the amendments, but execution falls only slightly below the authorized amounts (Figure3). Figure3: Budget Law, Budgetwith Modificationsand Budget"Obligado" (Obligated) PersonalServices (2000-2004*) -PYG l 4,500 -`e C 4,250 u- 4,000 m 23 3,750 c 3,500 3,250 3,000 2,750 2,500 2000 2001 2002 2003 2004 1- Budget Law +Budget wth Modifications -A- Budget "Obligado" i *Information on expendituresfor 2004 is not available. Tource: WorldBank staff based on fimres fiom SSEAF and budget laws. 65 154. In contrast, "inversibn fisica" (investment in infrastructure) shows the highest level o f under-execution. Although enjoying increments via supplementary budgets, ranging from 6 percent in 2003 to 36 percent in 2000, the level o f execution in this category averages 50 percent. Other areas showing high variation in execution, but in inconsistent directions are transfers, falling 14 percent below the budgeted amount in 2000 and showing a 9 percent excess in2003. Debt payment demonstrates even greater and less systematic oscillations. As regards the central agencies and the decentralized sector as a whole, the level o f under-execution is similar - averaging 20 and 25 percent respectivelybetween2000 and 2004. 155. The explanation lies equally with Congress, the Finance Ministry and the line agencies. As noted in the section on the SSEAF, Finance i s supposed to be the official interlocutor for the Executive budget, but in fact, individual ministries and decentralized agencies commonly take their proposals straight to the legislature, depending on contacts, partisan loyalties, and whatever other sources of influence they can muster to convince legislators to adjust the budget to their requirements. Individuals also campaign, taking advantage o f the congressional ability to fix even single salaries. While this is an important source o f patronage, its overall financial effect is not great. Its impact on performance i s another story. While Congress can and does increase salaries for categories or specific positions, it too i s limited in its ability to make cuts in this area - hence the general consistency between Executive requests and what is approved. Moreover, as salaries, like pensions, and debt payments, are controlled directly by Treasury and accorded priority, they, unlike the other areas, will receive payment inhll. The issue with the rest is that, although Congress can authorize increases, in the end, what is financed depends on what the Treasury disburses (the plan de caja), what agencies actually generate through their r-ecur-sosinstitucionales, and what they are able to obligate. 156. There is a dynamic going on here which looks more risky than it is, although in the end it does not encourage a rational, prioritized allocation o f resources. Congress (or more accurately, individual members or blocs) increases budgets to please various constituencies, makes cuts for those it wishes to punish or where there is no pay-off for any member, andjustifies the resulting increments through its modified estimate of total revenues. The Senate and House each get their own opportunity, although the Senate tends to have the most influence on the final allocations and generally is more consistent with the Executive proposal than is the House version. The bilateral commission which gets the first cut at the budget, is generally perceived as having little influence, so that furtherchanges are those negotiatedwithinthe chambers, between them andtheir clients, and eventually, insofar as there are discrepancies, by a final vote in the House. The bottom line, however, is determined by the funds available (what Treasury disburses and for the "rich" owners of institutional funds what they generate) plus whatever agencies are willing to risk committing inexcess (the floating debt). 66 THEVIEW FROMWITHIN 157. Before turning to a final analysis, this section examines another input, a small survey conducted in conjunction with the IGR, asking legislators how they evaluated their own performance andproblems. This was not a representative or random sample, as it was restricted to 8 deputies and 6 senators who agreed to participate. However, it does add still another perspective on the situation. 158. First, all agreed that there were problems, although they did not believe a constitutional amendment was needed to resolve them, and they did not feel the Congress's current powers were excessive. In fact several said Congress should have a larger role, especially in determining the budget and monitoring its execution. Second, among the factors cited as impedingits performance, the following were mentioned most often: inadequate technological infrastructure, poorly prepared human resources, out o f date by-laws, inefficient systems for choosing commission members and heads, poorly prepared legislators, and lack o f technical-administrative support. Respondents also noted that deputies, because o f their manner o f selection (small districts, internal primaries), had to take special care to maintain good relations with their principal constituents. Interestingly, party leaders were perceived as having slightly less impact on voting than the Executive, with 68 percent citing a great influence for the former, and 78 percent for the latter. 159. Third, despite the perceivedneed for more equipment andbetter advisors (and the admission that most o f the latter owed their appointments to political campaigns), the obvious conclusion, that this was the result o f the Congress's own priorities, was never mentioned. Instead the call was for higher budgets, more donor assistance, and staff training. There was agreement that the system for selecting commission members and heads was a source o fproblems - especially as a result o f annual elections. Although the heads o f each chamber believed they had effected improvements to their administration, poor administrative support was a complaint from the others. Again, more technology was the most frequent recommendation. 160. As regards their role in the budgetary process and processing o f other major legislation, respondents felt it was insufficient, but largely because the Executive tended to lead and provided them with inadequate information. They suggested that the changes made to the budget came from individual members, and that this was because the chambers lack the ability or information to treat the document more holistically. Ex-post evaluations were described as "absoZutamente vitudes." The informants' own assessment o f the extent o f internal corruption was 6.5 on a scale o f 1-10 (ten the worst), and what existed they blamed on the general culture. A still worse popular image o f corruption was attributed to poor information. Finally, the following table (Table 7 ) shows respondents' evaluation o f their relations with other Government entities. (While not included, their evaluation o f civil society groups was generally critical). 67 Table 7: Assessment by a Simple of Legislators of their Relations with other Government Agencies Very Good Good OK ' Poor Other Chamber 92% 8% Presidency 42% 25% 25% 8% Ministry o fFinance 16% 24% 60% Ministry o fHealth 24% 24% 44% 8% Ministry o fEducation 34% 24% 42% State Enterprises 16% 33% 17% 34% Comptroller 15% 70% 15% Judiciary 50% 18% 16% 16% Public Ministry (a) 8% 32% 16% 44% Municipalities 92% 8% ANALYSISAND RECOMMENDATIONS 161. Congress' self evaluation i s not unexpected, and would probably parallel that o f the Judiciary, and many other public entities. Political motivations and their negative impact are not ignored, but not emphasized either. However, even in less patrimonial systems, legislatures with any power always work on the basis o f favors to constituencies and those who finance their campaigns. The point i s not to eliminate this, but to counterbalance it with a consideration o fbroader issues andthe quality o f public services. Part o f the solution involves providing the necessary tools. Of course, Paraguay's Congress has privileged other uses o f its resources. Given these priorities, it is valid to ask whether, ifprovided through outside sources (donors) such resources would be used to the intended ends. The Judiciary's experience is not promising, although here donor strategies must take part o fthe blame. 162. Changing the logic o f congressional actions i s difficult, and modifying the Paraguay version will require some specific legal and constitutional modification^.^^ There are ways, however, o f limitingits impact -ranging from reserving a certain portion o f the budget for "client services," to encouraging more agreement within the Executive on its own priorities. This suggests a three-pronged approach to the underlying problems: The Executive's efforts to establish global priorities, especially at the level o f the cabinet commissions, and so eliminate some o f the potential for individual agencies to negotiate with the Congress. This should be combined with improvements in the quality o f information, coming from Finance, provided to Congress to guide its deliberations on the budget. Despite congressional perceptions of the Executive's predominant role in shaping their own decisions, it is evident that the lack o f a united front andthe enormous potential for individuals 77This might include changesto some legislation onparty operations, onthe budgetaryprocess (perhaps giving more importance to the bilaterial commission) and having internal selections o f commission members and chamber authorities be less frequent. 68 and agencies to lobby the legislature directly, are a major source o f the changes the Executive later criticizes. 0 Assistance to the Congress in working on changes in its internal operating rules, including: (i) the shift from annual elections o f all commissions and authorities (requiringeither a constitutional change or reinterpretation); (ii) reengineering o f internal administrative systems; (iii)design o f improved used of existing technological resources; and (iv) development o f criteria for appointing and distributing human resources so that even if partly selected through patronage, they have the necessary qualifications and are doing appropriate work. The last issue could be addressed by reserving some appointments to be made by individual members, and leaving the rest for a selection committee working with merit-based criteria. 0 Conditioned by agreement to the second set o f changes, donor assistance in providing the equipment desired, and training and other technical support. It is doubtful that simply providing resources will do much on its own. Thus, the donors will have to be more focused with their assistance, requiring that it be linked to concrete performance goals. 163. The survey and less systematic interviews suggest there is interest among some members o f Congress inimproving their performance and image, as well as ideas o f how this might be done. The question is whether those with this interest recognize and powerful enough to insist that just having better human and information tools i s not sufficient; they also have to be used. The likelihood o f that happening will increase if certain internal changes can be effected - most specifically those included in point two above. This constitutes more than a demonstration o f political will; it also gives formal shape and legal status to the new order o fbusiness. The other side o f the coin is a change in Executive practices, which itself could help push the Congress to make its own reforms. Here the Executive both needs to set its own priorities, discipline its members inrespecting them, andprovidemore andbetterinformationto the Congress. Whether or not the latter uses it at first, this step could help improve relations with Finance in particular. No one, anywhere, is going to make the legislature a highly technical body - by design it is supposed to be more responsive to a variety o f outside forces. The goal is thus not to eliminate that characteristic, but rather to give it a more global perspective. The alternative, to reduce the Congress' power in budgeting and other legislation, is probably not feasible under the prevailing political environment (in fact, as noted, the legislators want still more power). Hence, through a combination o f the three sets o f measured outlined above, and with the cooperation o f several parties (and not only the Congress), the immediate aims are to provide the space and opportunity for a better, more technical analysis o f laws, and to reduce the opportunities for individuals or specific organizations to capture the legislative process. 69 Box 6: RecentCongressionalPlansandActivities to ImproveInstitutionalPerformance Members of Congress are well aware o f the criticisms levied at themby other governmental actors and the public in general. Thus current leadership, inpartnership with other deputies and senators, has begun to take the idea o f improving their image and real operations more seriously. The views from the two chambers differ somewhat. As the Congress as a whole i s presidedby a Senator, his thinking reflects both institutional perspectives and those o f his Chamber. During his one-year tenure he reported he had prioritized legislative strengthening, an emphasis on improved law-making, and better relationships with other governmental agencies and with other national legislatures. While most o f his specific proposals have yet to be implemented, they include advances in automating the members' offices, creation o f a virtual library on comparative legislation, professionalization o f the congressional commissions, strengthening o f the press office, more outreach to citizens, and a better web page. The President o f the lower house had similar proposals, but put more emphasis on improved relations with the gobemaciones and augmenting their input into the selection o f investment projects. Both leaders emphasized improving the Congress's role in the budgetary process, suggesting that the control and evaluation functions need much more development, and that giventhe short time they have to review the Executive budget, they need to establish mechanisms for raising their technical capacity. Congressional leadership is already seeking external funding and technical support for these proposals. 70 CHAPTER V: CONCLUSIONS 164. The IGR began with the argument that Paraguay's inadequate governance performance i s the result o f institutional patterns emerging from the country's historical development, which are the product o f what other authors have called a party-dominated, predatory, or privatized state. This thesis i s not new, and draws on analysis already done and published by Paraguayan and foreign observers. The IGR coincides with them in holding that this traditional style o f politics has not disappeared and in fact under its current form, creates some additional impediments to efforts to break with the path dependencies and the vicious circles they generate. Political mobilization and divisions within the traditionally dominant partyhave increased the number o fveto players as well as o f the interests to be attended. Moreover, some probably well intended, but poorly timed or designed constitutional and legal changes have created more veto points which the players can activate to obstruct change. The new and worthy emphasis on operating under a rule of law thus limits contemporary reformers' ability to use the expedient short- cuts favored byprior regimes. SHORT-TERM, AGENCY-SPECIFICAGENDA 165. The IGR has not attempted to elaborate on the outlines o f this scenario as it has been amply discussed elsewhere. Instead, it has focused on the implications for the three organizations studied, especially as regards the impact o f existing structures, resource endowments, attitudes, and practices designed for another logic and currently resulting in lower levels o f performance (as well, o f course, as lending themselves to traditional rent seeking behavior). This was done inthe belief that some of these institutional elements can be modified at the agency level and thus that the system can be changed from within. "From within" i s a relative concept. What i s meant, and has been stressed, is that organizational leadership, once having recognized shortcomings inoutput, identified their immediate causes, and defined specific improvements (e.g. more taxes collected, faster processing o f pension cases, lower floating debt or deficit spending, execution o f approved budgets in line with global priorities) can reengineer and rationalize intemal procedures and resource distributions to effect the improvements. The specific recommendations may look "technocratic," but they are designed to influence incentive systems, reduce opportunities for rent seeking, and encourage managers to track performance by giving them the ability to do so. Such internal strategies may not maximize returns on resources. They should improve them, and inmany cases in a way that outside observers can appreciate. Outside appreciation is important because tolerance for modifying intemal processes (and for the costs that imposes on beneficiaries o f the present arrangements) will depend on building constituencies who see this as worthwhile. The value o f creating a system for monitoring process flows inthe abstract means nothing; it becomes significant when it i s seen as causing requests to be addressed more rapidly and without the need to apply speed money. 166. Congress, in this sense, i s the hardest of the three branches o f government to address. Its problems have their greatest impact on operations external to itselfand so are 71 difficult to measure in terms of "own goals." However, more efficient use o f its own resources, more holistic budget analysis, and even an improved external image might suffice as proxies. Congress may want more information from the Executive to do its ownjob better. The public maybe less impressed by this measure thanby any impact on Congress's increased transparency and better articulation o f its value added. One way o f demonstrating the improvement would be Congress's engagement in public discussions with the Executive over the basis for the budgetary changes it introduces and their implications for national development goals. 167. For Finance, as representative o fproblems faced by the Executive as a whole, and the Judiciary, the primary emphasis i s on introducing the concept o f strategic management and making internal changes in line with it. (This is also relevant to Congress, but obviously less broadly given its design and functions). The point i s to replace the no longer functional, and no longer desirable arbitrary, top-down (from the Presidency) control with effective oversight, direction setting, and monitoring o f results by organizational leaders themselves. As Paraguay's organizations did not evolve with this end inmind, the conversion will require some internal restructuring (but not a macro- reorganization), the better collection and use o f information, introduction o f systems to track internal procedures and employee performance, setting o f output goals at the suborganizational level (including for individual employees), and procedural simplification and rationalization. Given the mass o f potential changes, this process is best structured around output targets for each organization and its component parts. Otherwise there will be no clear way to set priorities and a possible emergence o f inconsistent reforms. For example in Tributacidn,the goal o f increasing overall revenues should take precedence over increases inreturns to the individual parts to ensure a more efficient distribution o f functions and adequate cooperation and information exchange. BothinFinance and inthe Judiciary this means the designation o f a body responsible for monitoring and coordinating change, and probably implies the establishment o f an office or official to assist the ultimate authority (the Minister or the Court) inreaching decisions on change policy. 168. Despite the general argument against reliance on legal change, there are a few constitutional amendments that might help: changes to the composition and mandates o f the Judicial Council and Jurado; a provision to have the Attorney General, and not the Supreme Court, make the final selection o fFiscales; alteration o fthe provision for annual elections o f congressional committees and authorities, among others. However, they are less critical, and would not merit a Constituent Assembly for their own sake-especially given the other, less positive amendments that might result. The Bank has also identified areas where increased staffing, additional resources, or broadened mandates would be desirable, but again they are matters o f detail and if not effected, would not work major damage. Fortunately, many o f these counterproductive details do not have a legal foundation and are currently supported largely by inertia - for example, the multiple clearances, the failure to track document processing, or Finance's internal audit units' emphasis on legal compliance. Unlike the human resource system (see below), targeted readjustments inthese areas are thus unlikely to stir up political opposition, or ifthey do, will have less explosive impacts because they affect the interests o ffar smaller groups. 72 MID-TERM, CROSSAGENCYAGENDA 169. For change to be most effective it will also have to cross institutional boundaries, and in the end address some major common problems. The most significant o f these is undoubtedly humanresources. The decision to give public employees tenure and related rights prior to reforming their appointment system and vetting the list o f current employees was a strategic setback, but it has been done. It now serves as a cautionary lesson to others contemplating similar changes. Moreover, the model adopted i s somewhat outdated and not entirely consistent with other reforms being pursued. Permanent tenure, whether inrank, position, or the abstract remains important as a means o f protecting employees from political reprisals. However, it also protects those who, as the saying goes, decide to retire inplace. Inthis regard, the classic civil service model is in conflict with the current emphasis on results (Box 7). It i s demonstrably counterproductive when simply appended to a patronage system. Paraguay i s not equipped for results management and, in fact still has not determined what human resources it needs, where, or how to select them. A reasonable approach would be to introduce legislation (a new civil service law or if need be, a constitutional amendment) to facilitate the removal o f employees for cause, for insufficient skills, or because their jobs are not needed; to make some provision for tying reimbursements to performance; andto allow movementtowarduniformpay scales. 170. Infact, aconstitutionalamendment or very limitedlaw mightbepreferable, as the country needs time to decide how it will determine staffing patterns, salaries, and selection criteria before it tries to formalize this legally. If Paraguay decides to go for another overarching law, it would be advised to allow for incremental adoption, either by agency or by function (budgetary or procurement staff) so as not to paint itself into a corner.78 Given the various vested interests (ranging from the employees themselves, to their political patrons) and the likelihood that Congress would make further modifications, targeted rather than global change i s recommended, taking advantage o f having a more cautious Supreme Court in place. Part o f the changes, as has been suggested by the Bank elsewhere,79might simply recognize groups o f employees who will continue to be appointed "politically," thereby opening the way for merit appointments for the rest. 78Shepherd (2003) infact recommends an incremental approach to civil service reform, noting that comprehensive reforms have generally been a failure throughout the region. 79See World Bank (2001). Bolivia, the country treated, faces a similar situation inits parties' dependence on controlling public employment as a means o f garnering support. Given that no one believed the system could be abandoned immediately, the Bank's recommendation was to limitthe number o f appointments subject to any sort o f political quota and to try to introduce merit criteria even there, ifonly on a secondary level. 73 Box 7: Civil Service Reforms Human resources may be the heart o f public sector performance, but a satisfactory means o f managing them inthe face o f contemporary needs remains a universal challenge. The classic tenured civil service, whether in its Anglo-Saxon or Continental variation, protects public employees from political interference in their hiring, promotions, and dismissals. However, it is hard to reconcile with the new emphasis on results or with the often rapidly changing needs o f public sector organizations.' Moreover, its adoption in Latin America has usually been partial and flawed. Merit appointment and standardized job descriptions and salary schedules are less often honored than the assumption that once in place, civil servants can remain forever. The move to open-ended contracts, promoted by the New Public Management (NPM) school in Australia, New Zealand, and now in the United States, has been criticized for similarly flawed implementation. While conceptually appealing, inpractice, imperfect evaluation systems, limitedability to define agency needs (and so to hire the right employee), and the lesser attractiveness o f untenured employment work against it. Good employees may be more willing to head for the private sector with its higher salaries, fewer regulations, and clearer standards for evaluation. Also, the system works against attracting employees willing to immerse themselves in government procedures, which are not transferable to other jobs. There i s an emerging preference for a mixed system - a core o f permanent workers, a larger number o f contractors, and a measure of outsourcing.' However, this theoretically attractive alternative also faces many practical obstacles. One further problem i s how to make a transition to whatever new system is intended inthe face o f legal and political obstacles. Twelve years after its introduction, Argentina's federal career service incorporates only a quarter o f civilian employees; those working under collective contracts or already guaranteed stability preferred not to make the change. Cutbacks in work force, attempted inthe 1990s, often occurred without systematic attention to who should go and who should stay. Voluntary retirements to cut overall employment and make way for new workers are reputed (e.g. Peru) to have lost those with marketable skills. They also are expensive. Uruguay, which appears to be an exception to the rule, reduced the number of public employees 10 percent and claims an annual savings of $34 milli~n.~ However, the calculations do not include the pensions paid to early retirees. The enclave approach - development o f a parallel workforce hired with fewer guarantees but with higher salaries - has worked for a time in single agencies (again Peru during the 1990s is an example), but is criticized for its seemingly inevitable contagion by politicization and patronage and for abandoning the rest o f the work force to low salaries and still lower incentives. Shifts in political leadership also pose problems. Brazil's relatively successful use o f untenured, higher paid senior appointments worked during the Cardoso admini~tration,~ but is criticized for a lesser emphasis on merit under the Labor Party. Mexico, which lacks a federal career service, managed well during the last decades o f PRI dominance because talented employees were valued by more technical ministries. With a new party inpower, the old "merit network" has not held up as well. ' Shepherd (2003). Shepherd (2003) Bhansali (2004). Shepherd (2003). 74 171. Even the agenda laid out here is far too ambitious for one reform "champion" to manage. Thus its adoption and effective implementation will depend on a coalition o f reformers within the leadership o f the various institutions. Fortunately, the ultimate champion, the President o f the country, has stated his dedication to improving the situation. His continued backing will be essential for the movement to go ahead. Still, its operationalization will depend on the ability o f organizational leaders to develop their own programs and in tum to build their own intra-institutional coalitions to advance them. Here the concept of change management becomes extremely important. While many o f the recommendations involve ways to alter incentives from the top down, the process will be facilitated iforganizational members internalize its objectives. For this to happen, there must be more emphasis on two-way internal communication, greater opportunities for participation inplanning exercises, and higher receptivity to employee feedback. The Bank team was struck during its interviews by lower-level employees' lack o f knowledge o f reform proposals, both in the Ministry and the Judiciary. The same can't be said for the Congress only because it still has no consolidated reform plan. The changes sought extend beyond simple compliance with new rules to an ability to recognize and apply their underlying principles in novel situations. It i s evident both the Court and the Ministry are aware o f the problem and are taking steps to resolve it, but they may not be doing enough. Participation and communication are not simply goals for their own sake, but are important tools inadvancing institutional change (Box 8). 172. The report's organizational focus has divertedattention from several additional cross- cutting and medium-termgoals. The first o f these is the need for coordination at the inter- organizational level. The best example is the need for the Executive to put more emphasis on establishing and enforcing its global priorities inorder to ensure a constructive congressional role in the budgetary process. Likewise the Judiciary's disinclination to self-manage effectively might be addressed through appropriate actions by the other branches, not, it should be stressed, as intrusions into judicial independence, but rather as the articulation o f `societal demands for better performance. Reducing impunity, especially incorruption cases, will require planningacross institutions and across governmentalbranches. The Frenchterm "la chaine penale" (the criminal chain) offers a good way to conceptualize the challenge. While applied only to criminal justice, the underlying concept is worth extending to such other issues as improving budgetary design and execution (which cannot be fully achieved only by steps limited to Finance), prioritizing investment expenditure, or reducing contracting irregularities. 173. These comments raise a second issue, which i s the need for clearer definitions o f and possibly some readjustments to the existing balance o fpowers. This is a longer term project, but the immediate costs are very high. Executive and legislative incursions into judicial operations, some supported by law and others clearly ultra vires, pose a real risk to maintaining a sufficient level o fjudicial independence. This has become more than a matter o f horizontal accountability and now threatens the Judiciary's ability to effect internal reforms. The executive-legislative balance is also precarious although at any given moment it is hardto tell who has the upper hand. Here the problem is less apermanent reduction 75 Box 8: ChangeManagement Change management is the latest version o f a concept that has been formally studied for decades and practiced for centuries if not millennia. At its most basic, it represents the idea that altering how a person, organization, or entire system operates depends on more than simply telling individuals to act differently. In more traditional authoritarian regimes, the rest often involved using force to back up the orders. However, contemporary culture andthe nature o f the changes sought require a different approach today. This report has already suggested the numerous institutional andpolitical obstacles to change at the agency level, and emphasized that the mere enactment o f a new law or plan guarantees neither that employees and citizens will respond in the desired fashion, nor at all. This is especially true o f the kinds o f complex behavioral changes discussed here. It is far easier, given sufficient authority, to eliminate subsidies, fire 10 percent o f the work force, or raise interest rates than to increase cooperation among independent entities, raise their productivity, or ensure they collect, analyze and use information to guide their work. That said, it also bears mentioning that successful change of either type depends on the inherent quality of the plan, law, or strategy. A reduction inwork force usually did lower, if only temporarily, the wage bill, but rarely produced improvements inthe quality or quantity o f services. One-off changes are often as easily reversed as they are enacted, and their impacts tend to be narrow, if dramatic. Many predicted downstreambenefits never materialized, either because they required additional complex change (e.g. the creation o f well functioning, independent regulatory agencies), or because proponents ignored other potential outcomes (e.g. the capture o f privatized enterprises). Aside from realistic objectives and a good, basic plan, effecting complex change requires getting a variety o f agents to modify a series o f behaviors. This can be done through rules and effective sanctions for noncompliance. However, as systems o f actions become more complex, attempting to regulate every step can produce paralysis and encourage rule-avoidance, evenby those who simply want to do their jobs. The tumto results management attempts to escape that dilemma by rewarding workers for what they produce, not how they do it. The downside is the often narrow focus and the fact that inpublic agencies how things are done often does matter. All these methods have their place, but the change management approach adds to theman emphasis on using two-way communication and broader participation as a way o f inducing stafl to adopt the objectives as their own and o f incorporating external clients as partners inand monitors o f the process. Such methodologies are useful anywhere, but are critical inovercoming interest-based opposition They may overemphasize the potential for consensus; some conflicts cannot be reconciled. They dc usefullycall attentionto the role ofinternal andexternal constituencies insupporting reform. Successful efforts usually involve a mixed strategy. The New York and other U.S. police reforms o f the 1990s combined a results focus (crime rates) with greater community outreach and a crackdown on intema' corruption. Ecuador and Peru's reforms o f their tax agencies replaced most personnel, used a focus or results and teambuilding, and widely publicized their efforts and advances. Client involvement indecisior making has been an important element o f Chicago's school board reforms, in community health program in Peru, and in Brazilian experiments with municipal budgeting. Continuing success also requires monitoring progress and a willingness to switch methodologies when they cease to work or when increasec support opens the way for more radical measures. I Source: World Bank Staff. 76 o f independence than periodic tendencies for each branch to cross over into the other's arena (e.g. the Executive's unusually proactive role in the purge of the Supreme Court or the Congress's redesign o f the budget.). Although occasionally facilitated by the legal framework, the underlying causes and their remedies lie elsewhere. The legal framework undoubtedly is flawed, but apart from some necessary modifications, the real solution lies in the creation o f effective disincentives for its violation and a consensus on the value o f following the rules. The subjugation o f the Judiciary is a major contributor, aided and abetted by the persistence o fthe traditional political logic. 174. The Bank claims no expertise in the area o f strictly political reforms. It does recognize that some changes to laws regulating the party systems may be in order. Care should be taken, however, as this area i s notorious for its silver bullets, some o f which have already been adopted in Paraguay with highly disappointing results. It remains debatable whether open or closed lists, party primaries, greater or lesser party discipline can overcome practices rooted inmore fundamental informal understandings. Absent a broader consensus on the desired results, laws are likely to be subverted in their application when not simply drafted to undercut their initial intent. 175. A fourth area, the greater involvement o f citizen constituencies, might help resolve many ills. Paraguay's authoritarian tradition persists even in the strategies o f its reformers, encouraging reform champions to see their task as one o f personally prevailing over their opponents. Unfortunately this style is more suited to the one-off structural reforms o f the 1990s than to the far more complex challenge o f reengineering institutions and promoting good governance.80 Ifbehaviors are to be modified permanently (a problem even the earlier structural reforms did not resolve), induced changes must either be sustained until they produce different attitudes, ideally because they are perceived as generating better results, or there must be a simultaneous effort to convince organizational members that the new behaviors are valuable in their own right. One way to advance on both tracks is to ensure citizen groups are adequately informed about the reforms or even involve them at the design stage, creating more permanent support for their adoption. This can be a time consuming process. It is essential, however, for ensuring that reforms survive beyond the tenure o f an administrationor individual leader. 176. Since the importance o f institutional reform was declared a decade ago, those attempting it and those analyzing their progress have come to realize that it i s far more difficult to execute than macro-structural adjustments. It rarely can be achieved through what have been called "one-off' or "stroke-of-the-pen'' measures. It requires far more attention to a mass o f details and implies more coordinated, longer term efforts. A recent emphasis on greater selectivity (as opposed to holistic "capacity building") does not undercut these arguments, but rather reemphasizes the centrality o f strategic planning and management, and o f understanding the overall environment before deciding where to intervene. The Bank has shaped its analysis andrecommendationswith this understanding; if everything i s not possible, then choosing well is a perquisite for success. 80There i s infact a body o f literature on the incompatibilities between the fust-generation reliance on closed, technocratic decision making and constitutional short-cuts, and the methodologies most conducive to second generation reforms. See Santiso (2001). 77 REFERENCES Aguilera-Alfred, Nelson, Dionisio Borda, Fernando Masi, and Donald Richards (2004), "Understanding Reform in Paraguay," Draft report prepared for Global Development Network. Alesina, Alberto, Ricardo Hausmann, Rudolf Hommes y Emesto Stein (1999) "Budget Institutions and Fiscal Performance in Latin America". In: Journal of Development Economics 59, August. Alvarez J.A, (2004)"Evaluaci6n de 10s Factores de Gobemabilidad e Ingobernabilidad que afectana1Nuevo Gobiemo delParaguay." Unpublisheddraft. (2004), "Trabajo PrActico sobre Presupuesto. Maestria en Politicay Gesti6n Publica." Universidad Cat6lica Nuestra Sefiora de la Asunci6n. Asunci6n. Unpublished draft Amnesty Intemational (2002), "Report 2002, Paraguay." (On line: http://web.amnestry.orn/web/ar2002.nsf/amr/Para~uay. Bertello N, (2004), "Impact0 de las decisiones del Poder Legislativo sobre el Presupuesto General de la Naci6n del Paraguay". Unpublished background paper prepared for Proyecto Fortalecimiento del Proceso Presupuestario de la Republica del Paraguay. SSEAF. Bhansali, Lisa (2004), "Public Sector Governance in Uruguay," draft paper for World Bank studyUruguay Sourcesof Growth, August. Borda, Dionisio (200l),"Presupuesto, Politica Fiscal y DesempeAo Econ6mico en la Transici6n." Asunci6n. Paraguay: CISDEP -Fundaci6n onrad Adenauer. Borda, Dionisio and Femando Masi (1999), "Oportunidades y Desafios de: L a Reforma del Estado." Asunci6n Paraguay: CADEP. Caballero, Esteban and Alejandro Vial (eds) (1994), Poder Legislativo en el Cono Sur. Asuncibn, Paraguay: CED. Coordinadora Derechos Humanos Paraguay, Derechos Humanos en Paraguay 2002. Asunci6n: CODEHUPY. Della Porta, Donatella (2000), "Political Parties and Corruption: 17 Hypotheses on the Interactions Between Parties and Corruption." Florence: European University Institute, Working Papers No 2000/60. Drago, Mario (2002), "Coordinaci6n de las Oficinas de la Presidencia y de las Relaciones Intenninisteriales," in Lucian0 Tomassini and Marianela Armijo (orgs.), Reforma y 78 modernizacidn del Estado: Experiencias y desafio. Santiago, Chile: Instituto de Asuntos Publicos, Universidad de Chile, pp. 59-104. Galindo, Pedro (2003), "Indicadores Subjetivos: Estudios, Calificaciones de Riesgo y Encuestas de Percepci6n Publica sobre 10s Sistemas de Justicia. Resultados Recientes para las AmCricas," Sistemas Judiciales, Santiago, Chile, Centro de Estudios de Justicia de lasAmkricas, 3:6, pp.4-35. Gacitua Marib, Estanislao, Annika Silva-Leander, and Miguel Carter (2004), "Paraguay: Social Development Signs for Poverty Alleviation," draft paper prepared for World Bank, January. Gobierno de la Republica de Paraguay, Instituto del Banco Mundial, Consejo Impulsor del PlanNacional Anticorrupcibn en el Paraguay(2000a), "Diagnostic0 sobre 10spadronesde comportamiento y Desempefio Institucional, Gobernabilidad, y Cormpciitn en el Sector Publico de Paraguay." Draft. Gobierno de la Republica de Paraguay, Instituto del Banco Mundial, Consejo Impulsor del Plan Nacional Anticorrupcibn en el Paraguay (2000b), "Plan Nacional Anticormpcibn," Draft, November 29. Hammergren, Linn (2002), Do Judicial Councils Further Judicial Reform? Lessons from Latin America. Washington DC: Camegie Endowment for International Peace, Working Papers, Ruleof Law Series, No. 26. Ibhiiez, J and V. Sosa (2003). "Reinventando la Gestion Publica en el Paraguay." Asuncibn, Paraguay. Instituto de Desarrollo (2004), "Who decides on Public Expenditures? A Political Economy Analysis of the Budget Process in Paraguay." Draft paper prepared for the Inter- American Bank, December. Instituto Intemacional de Gobernabilidad (IIG) (2002), Libro Blanco sobre la reforma institucional en Paraguay. Draft, November, for PNUD/ Paraguay Inter-American Commission on Human Rights, Organization o f American States (1987), "Paraguay" (on line: www.cidh.or~/countrvre~/Para~ua~87en~/intro.htm~ (2001), "Third Report on the situation of Human Rights in Paraguay," (on line: http://222 .oas.orn/cidWcounrvrep/Paranua~/O1endchap4.htm. Conrad, International Monetary Fund, Department o f Public Finances (2003),"Paraguay: Modemizacih de laAdministracih Tributaria y Aduanera". FinalReport Kaufmann, Daniel, A. Kraay, and P. Zoido-Lobath (1999), "Governance Matters.'' World Bank PolicyResearchWorking Paper, No. 2196, The World Bank, Washington. 79 (2002), Governance Matters 11,Policy World BankPolicyResearchWorking Paper2772, The World Bank, Washington. Makon Marcos (1998), "Analisis y Recomendacionessobre la Refonnade la Administracibn FinancieraParaguaya". Finalreport for IDB. Miranda, Anibal (2003), Legislacidn Anticorrupcidn: Convenios, Leyes, Decretos-Leyes y otros Instrumentos contra la corrupcidn, el enriquecimiento ilegitimo, crimen organizado y delitos conexos,Anotados y comentados,Vol. I.Asunci6n: Miranda y Asociados. Nickson A. and P. Lambert (2002), "State Reform and the "Privatized State" in Paraguay". Wiley Interscience. (www.interscience.wi1ey.com). North, Douglass (1990), Institutions, Institutional Change and Economic Pevformance. Cambridge: Cambridge UniversityPress. Pangrazio, Miguel h g e l (2001), Corrupcidn e Impunidad en el Paraguay. Asunci6n: Ediciones y Arte. Pkrez-Lifitin, Anibal (2003), "Presidential Crises and Democratic Accountability in Latin America, 1990-1999," in Susan Eva Eckstein and Timothy P. Wickham-Crowley (eds), WhatJustice? WhoseJustice? Fightingfor Fairness in Latin America. Berkeleyand Los Angeles: University of California Press, pp. 98-129. Paraguay, Constitution (1992, amended to May, 2000). (On line: www.oefre.unibe.ch/law/icl/paOOOOO html. Ramirez Pefia, Blanca Estela (2000), Los institutos juridicos de control del sector pzibli-co nacional. Asunci6n: Intercontinental Editora. Rivas, Maria Victoria (2002), Informe de Paraguay. Proyecto de Seguimiento de 10s Procesos de RefonnaJudicial en Amkrica Latina. Santiago de Chile: Centro de Estudios de Justicia de las Amtricas. Rodriguez J. y Bonvecchi R. (2004), "El Papel del Poder Legislativo en el Proceso Presupuestario: La Experiencia Argentina" - Serie Macroeconomia del Desarrollo No. 32, CEPAL, Santiago de Chile. Rodriguez Silvero, Ricardo and Nora Lucia Ruoti Cosp (2003), Paraguay: Politica Fiscal para una Economia Social del Mercado. Asunci6n: onrad Adenauer Stiftung. Ruoti Cosp, Nora Lucia (2002), Temas de Derecho Tributario, Vol. 11. Asunci6n: A.G.R Servicios Grhficos. 80 Shepherd, Geoffrey (2003), "Civil Service Reform in Developing Countries: Why I s It Going Badly?" Paper prepared for 1lth Annual Anti-Corruption Conference, Seoul, Korea, May25028. Tomassini, Lucian0 and Marianela Armijo (orgs.) (2002), Reforma y modernizacidn del Estado: Experiencias y desafio. Santiago, Chile: Instituto de Asuntos Publicos, Universidad de Chile. UNDP (2002), Diagnostico Institucional deLa Republica del Paraguay. Ufia, Gerardo. (2004), "Principales Caracteristicas del Proceso Presupuestario del Paraguay- Diagnostico Preliminar." . Background paper prepared for Seminario "El Presupuesto como Instrumento para el Mejoramiento de la Eficienciadel Gasto Social" World Bank - BID. Asuncih, Paraguay, June. USAID (2004), Paraguay Democracy and GovernanceAssessment. Draft, April 12. Villegas R. Et a1(2001), Informe valoracidn actuarialpara la CajaFiscal de Paraguay. World Bank (1997), "Paraguay: Principal Constraints to Private Sector Development." Washington: February, www.worldbank.org. World Bank (200l), Bolivia: from Patronage to a Professional State. Bolivia Institutional and GovernanceReview. Vols. Iand11. Washington D.C., The World Bank, Report No. 20115-B. World Bank, (2002a), "Building on Strengths: Lessons from Comparative Public Administration Reforms." Draft Report, June 24. World Bank (2002b), The Juicio Ejecutivo Mercantil in the Federal District Courts of Mexico: A Study of the Uses and Users of Justice and Their Implicationsfor Judicial Reform. Washington, D.C, Report No. 22635-ME. World Bank (2003aJ An Analysis of Court Users and Uses in Two Latin American Countries, Washington D.C., Report No. 26966, October. World Bank (2003b), Brazil: Judicial Performance and Private Sector Impacts. Washington DC, Report No. 26261-BR. World Bank (2003~)~ Dominican Republic: Public Expenditure Review. Washington DC, Report No. 23852-DO. World Bank (2003d), Paraguay Policy Options for the New Administration: Creating Sustainable Growth,Volumes Iand11, report 29854-PA. 81 World Bank (2003e), Paraguay: Social Development Issuesfor Poverty Alleviation, draft, June 24. World Bank (20030, "Republica del Paraguay: Evaluacibn del Sistema de Contratacibn Pfiblica," Report No. 25908. World BaWInter-American Bank (2003), "Paraguay: Country Financial Accountability and RiskAssessment," draft, September 29. World Bank (2004), Making Justice Count: Measuring and Improving Judicial Performance in Brazil. Draft report, November. BackgroundReports Commissionedfor the IGR: These are listed separately and are all on file inthe World Bank Barg, Marcelo, "Congreso." FinalDraft, December, 2004. ,"Encuesta y Entrevista en profundidad a actors claves de la H. Camara de Senadores y Diputados de la Republica de Paraguay." Draft, January, 2005. Grafe, Fernando, ``Diagnostic0 Institucional de la Caja Fiscal de Paraguay." Final draft, June, 2004. Hammergren,Linn, "La evasibn impositivay el Rolde la Abogacia del Tesoro." Final draft, June, 2004. ,"ElPoderJudicial," Finaldraft, December, 2004(incorporatedinreport) "Transparencia." Final draft, June, 2004. Santa Maria, Benjamin, "Relaciones Entre Ministerio de Hacienda y Gobemaciones: Presupuesto y Contrataciones." FinalDraft, June, 2004. Spinadel, Pablo, "Analisis de la Subsecretaria de Estado de Tributacibn." Final draft, June, 2004. Ufia, Gerardo, "Analisis de la Macroestructura: Ministerio de Hacienda, Republica del Paraguay." Finaldraft, June, 2004. "Analisis del Proceso Presupuestario: Ministerio de Hacienda, Republica de Paraguay." Final draft, June, 2004. ,ElRol del Congreso en el Proceso Presupuestario: Analisis de sus principales caracteristicas en relacibn a1Gasto Publico." FinalDraft, December, 2004. 82 ANNEX I:ADDITIONAL TABLES 1. The following organizations charts were all elaborated on the basis of interviews and reading of the law. This was necessary given the lack of any official versions, but it also accounts for some inconsistencies among them. This is less inaccurate reading than the fact that internal units' official titles and their functional place in the "chain of command," sometimes differ. Figure4: Organizationofthe FinanceMinistry,January2004 i/ ImplementationUnit 1 I Undersecretaryof Financial I Administration \` Legal Department I I I ~~ vA Undersecretaryof Economy and Integration Services L I w I I I TechnicalAdvisors II II ' Directorate II 4 Administration and HR I I -w Private Secretary IT Department Office of the ~ - Undersecretary ----t Administration and HR Adfndnst;tn Secretary General Decentralization I 1 I Coordination Unit Planning and Coordination ----c Public InformationUnit and Archives 4 LegalDepartment I Directorof Public Debt Library and Credit 4 upp port unit I Directorof IT and Communication -iTraininggm{lacity - Centerfor Capacity I 1 I Building in Financial Administration Procurement Unit ................................... .Y ................................... : i , I; Directorfor !i Directorfor ;I -I! . _ . _ . _ . - . - . _ j i i Budaet I!Pensions and ; 1 f Debt Policy f Fiscal Policy f j i' Unit i i Unit i; f Economic f Uintfor fI i Research ! . . : . i i Integration ;] Unit ! j j I j ....................................................................... ! Accounting i Public `: Procedures !! ! ! - . - . - . - . - . - _ I ................................... ..-.-.-.-.-.I i i , : Source: World Bank Staff. 83 Figure 5: Organization of the Undersecretariat Tax State General Administration and Tax Sections Only Tax Undersecretariat 1 0Areas interviewedfor IGR Source: World Bank Staff. 84 Figure 6: Organizational Chart for the FiscalBox Under Secretary, Ministry of Finance I General :;eftorate I I Operational Legal Counsel Control Office (19) General Secretary IT Support Unit (15) (6) Pension Coordinating Area (2) Service Dept. Of Benefits History Retirees (13) Dept. 1 I I I I I Veterans and Retiree's Dept. (20) ~ (5) Heirs (18) ,,'! Heirs(7) ~ It\\ i Accountingand i -------; I Budget Dept (6) i '----------------I Eliminated by Law I I 2.4345 Area or De artment (No. oFstaf9 I I Source: World Bank Staff. 85 Table 8: ContributiveandNon-contributivePensions(2003) Beneficiaries (no) Pension (millions of guaranies) Direct Heirs Total (%) Directs Heirs Total ("?) Public Administration 6.486 1.383 7.869 14,2 97.752 9.144 106.896 11,8 Judiciary 387 56 443 0,8 9.888 540 10.428 1,l Universities 495 32 527 1,0 13.200 612 13.812 1,5 Teachers 12.252 843 13.095 23,6 213.180 5.628 218.808 24,l Military 3.963 2.862 6.825 12,3 113.928 58.464 172.392 19,O Police 2.534 1.043 3.577 6,5 72.048 19.236 91.284 10,l Total contributive 26.117 6.219 32.336 58,4 519.996 93.624 613.620 67,7 Veterans. 7.43 1 14.688 22.119 39,9 118.308 163.848 282.156 31,l Honorary pensions 362 362 0.7 1.848 1.848 0,2 Disabled children of veterans. 115 115 0,2 1.296 1.296 0,l Unmarrieddaughters o f veterans 462 462 0,8 7.956 7.956 0,9 Total non contributive 7.793 15.265 23.058 41,6 120.156 173.100 293.256 32,3 TOTAL 33.910 21.484 55.394 640.152 266.724 906.876 100,O Source: Elaborationbased on data providedby the Caja Fiscal. 86 Table 9: Congressional Modificationsto the Executive Budget by Expenditure Object (2002-2004) Expenditure Category Executive Proposal Approved Difference Variance 100. Personal Services 3,950,170,214,007 3,749,832,851,558 -200,337,362,449 -5.1% 200 Other Services 824,479,434,189 718,439,430,497 -106,040,003,692 -12.9% 300. Consumption Goods 473,021,897,765 476,683,019,215 3,661,121,450 0.8% 400. Exchanged Goods 2,351,590,891,365 2,191,870,786,452 -159,720,104,913 -6.8% 500. Physical Investment 1,740,394,542,347 1,769,392,187,273 28,997,644,926 1.7% 600. Financial Investment 1,091,643,457,539 1,035,321,031,695 -56,322,425,844 -5.2% 700. Debt Service 1,715,788,714,442 1,668,902,138,757 -46,886,575,685 -2.7% 800. Transfers 2,620,473,662,727 2,676,294,391,330 55,820,728,603 2.1% 1900.Other Expenditures 346,898,563,0531 507,756,844,9681 160,858,281,9151 46.4% TOTAL 15,114,461,377,434 14,794,492,681,745 I I -319,968,695,689 I -2.1% 2003 I100. PersonalServices 3.824.059.319.3281 3.777.896.484.7051 . . . . -46.162.834.6231 . . . -1.2% 200 Other Services 8431567;487]404 785,023,391,548 -58,544,095,856 -6.9% 300. Consumption Goods 541,670,821,520 495,107,899,006 -46,562,922,514 -8.6% 400. ExchangedGoods 2,566,954,818,342 2,527,367,983,198 -39,586,835,144 -1.5% 500 Physical Investment 1,868,384,349,711 2,287,724,635,262 419,340,285,551 22.4% 600. Financial Investment 989,000,006,424 1,033,990,817,754 44,990,811,330 4.5% 700. Debt Service 2,135,902,820,582 1,618,302,769,849 -517,600,050,733 -24.2% 800. Transfers 2,629,267,450,615 2,560,548,392,119 -68,719,058,496 -2.6% 1900.Other Expenditures 444,700,905,6301 460,173,758,754) 15,472,853,1241 3.5% Expenditure Category Executive Proposal I Variance 100. PersonalServices 4,045,309,816,5821 2.0% 200. Other Services 846,317,051,884 857,244,170,412 10,927,118,528 1.3% 300. Consumption Goods 511,274,402,857 573,215,485,079 61,941,082,222 12.1% 400. ExchangedGoods 2,676,068,459,091 2,639,534,328,278 -36,534,130,813 -1.4% 500. Physical Investment 2,086,500,125,944 2,187,462,534,587 100,962,408,643 4.8% 600. Financial Investment 1,139,596,056,935 1,012,374,926,140 -127,221,I 30,795 -1I.2% 700. Debt Service 2,573,814,248,142 2,276,369,447,694 -297,444,800,448 -11.6% 800. Transfers 2,677,743,337,458 2,962,327,088,871 284,583,751,413 10.6% 900. Other Expenditures 474,745,095,9421 478,221,367,1851 I .n._.n..I IUlAL I 1- 1 1 4 111-*a - 1 - 1 A - -11 1L.. ..-A L l l l --If,u44,41L,IaJI 3,476,271,243 0.7% a 1 "-1 a.Cn, 1I,uJl,JOU,DY4,aJDI 1l,lll,uuY,Llu,uOl I u.970 Source: Elaborationbased onMinisterio de Hacienda data. 87 Table 10: Congressional Modifications to Executive Budget, by Central Ministries (2002-2004) EXECUTIVEBRANCH Office of the President 5.189,573,855 Office of the Vice President 4,653,851,445 4,343,051,445 -310,000,000 Ministryof Interior 400,994,670,257 413,566,628,898 4,571,958,641 1.1% Miinstryof Foreign Relations 133,049,422,442 131,573,567,767 -1,475,854,675 -1.1% Ministryof Defense 302.160.864.789 290,100,715,382 -12,060,149,407 -4.0% Ministryof Finance 134,902,364,602 138,231,759,914 3,329,395,232 2.5% Ministryof Educationand Culture 1,366,349,996,454 1,376,142,644,533 9,792,648,079 0.7% Ministryof Public Healthand SocialWelfare 460,599,606,379 564,000,000,000 103,400,393,621 22.4% Ministryof Justice and Labor 131,790,314,926 121,262,107,246 -10,528,207,680 -8.0% Ministryof Agriculture 274,577,051,315 265,290,694,439 -9,286,356,876 -3.4% Ministrvof lndustrvand Commerce 21.803.789.829 21,231,357,903 -572,431,926 -2.6% Ministjof PublicWorks and Communication 752,103,575,3331 776,559,428,7131 24,455,853,3801 3.3% IUUJ EXECUTIVEBRANCH 1 Executive Proposal I Approved I Difference IVariance Officeof the President .... ..-~ I 168.844.862.4831 157.213.918.910I -11.630.943.573 I -6.9% ~ ~ Ofice of the Vice President 3,591,774,050 4,343,851,445 752,077,395 20 9% Ministryof Interior 358,401,418,955 425,615,166,231 67,213,747,276 18 8% Ministryof Foreign Relations 179,126,262,293 191,789.110,396 12,662,848.103 7 1% Ministryof Defense 305,265,314,932 294,218,814,987 -11,040,499,945 -3 6% Ministry of Finance 146,239,205,012 144,692,877,029 -1,546,327,983 -1 1% Ministryof Educationand Culture 1,423,850,782,378 1,389,620,480,804 -34,230,301,574 -2 4% Ministryof PublicHealthand SocialWelfare 615,569,456,733 618,690,090,539 3,120,633,806 0 5% Ministryof Justiceand Labor 140,987,879,026 130,987,879,026 -10,000,000,000 -7 1% Ministryof Agriculture 324,694,073,061 325,750,126,532 1,056,052,671 0 3% Ministryof Industryand Commerce 29,961,711,941 29,961,711,941 0 00% Ministaof PublicWorks and Communication 719,449,535.252( 1,227,563,453,6121 508,113,918,3601 70.6% EXECUTIVEBRANCH Executive Proposal Approved Difference Variance Officeof the President 208,849,454,599 165,868,198,926 42,781,255,673 -20.5% Ofice of the Vice President 3,906,092,917 4,393,073,317 406,980,400 10.2% Ministryof the Interior 369,979,598,840 403,966,879,432 33,987,280,592 9.2% Ministryof ForeignRelations 191,474,268,915 199,045,998,475 7,571,729,560 4.0% Ministryof Defense 306,155,026,921 309,587,711,177 3,431,884,256 1.l% Ministryof Finance 223,226,964,046 186,260,909,119 -36,966,054,927 -16.6% Ministryof Educationand Culture 1,500,452,621,253 1.515,621,377,437 15,168,756,184 1.O% Ministry of PublicHealthand SocialWelfare 677,256,025,530 611,929,083,570 -65,327,741,960 -9.6% Ministryof Justice and Culture 85,669,307,620 118,055,609,847 32,386,302,219 37.8% Ministryof Agriculture 188,518,222,575 303,307,862,201 114,789,639,626 60.9% Ministryof Industryand Commerce 73,890,263,050 46,618,334,339 -27,271.928,711 -36.9% Ministryof PublicWorks and Communication 762,484,332,375 947.247.956,339 184,763,623,964 24.2% TOTAL 4,591,743,778,649 4,811,902,994,179 220,159,215,530 4.8% 88 ANNEX 11:A BRIEFREVIEW OF PARAGUAYANHISTORY AND THE IMPACT OFRECENT CHANGES 1. There i s no question that Paraguay's unique history set the stage for its present problems. Fromits independence in 1811until 1870, its government was inthe hands o f three dictators, Josk Gaspar Rodriguez de Francia (1813-1840); Carlos Antonio Lopez (1841-1862) and the latter's son, Francisco Solano Lopez. (1862-1870). While all ruled with a heavy hand, observers give them credit for creating a strong, independent state, highly patriarchal, but holding the nation together and probably discouraging free-lance rent seeking.'l Unfortunately, this also allowed them to pursue some rather idiosyncratic goals, resulting in a unique economic model o f near national autarky, and in the case o f Solano Lopez, the country's entrance into the devastating War o f the Triple Alliance (1864-70) inwhichthe nationlost twenty-fivepercent of its territory andpossibly halfits population.82 The war also reversed many o f the economic and institutional accomplishments o f the earlier era, andwas followed by a lengthy (1870 to 1954), but abortive effort to introduce a liberal democracy, for the most part, under a Constitution modeled on that o f Argentina from 1853. 2. The experiment did give the birth to the two traditional parties, the Colorados (officially the Asociacidn Nacional Republicana, ANR) and the Liberals (Partido Liberal Radical Aute`ntico, PLRA), but was otherwise characterized by instability, caudillismo, a further cementing o f vertical patron client relationships, and rampant corruption. Although the Colorados held control until 1904, and the Liberals until 1936, presidential tumover was frequent, with 43 presidents serving within the 76-year period, and 9 between 1904 and 1912 Between 1932 and 1935, the country embarked on another destructive war, this time with Bolivia for control over the Chaco region. It successfully defended its territory, but again lost a large portion o f its population. In 1936, the Febrista coup returned the Colorados to power and eventually placed Paraguay's first real military dictatorship, headed by General Higinio Moringo, who until almost the end o f his reign (1940-1947) governed without the support of either party. Under Moringo, the 1870 Constitution was replaced by one enhancing both presidential powers and state control. A civil war led to his replacement by his eventual Colorado allies, who governed from 1948 to 1954, but again with considerable instability and under six separate presidents. 3. The anarchic interregnum o f the Colorados set the stage for the emergence o f General Alfred0 Stroessner, and his creation o f a system whereby he would rule the nation for three and a half decades, first repressing the opposition (1954-1967) and then gradually co-opting them. Aside from a mix o f force and material enticements, Stroessner's real innovation was to consolidate support in the Colorado party and the military, thereby giving himself "near monopoly control over the nation's economic, ''Aguilera-Alfredetal.,p. 16andciting (Nickson, 1997). 82USAID (2004), p. 4. 83USAID (2004) p.4. 89 political, and coercive resources.y's4Post-1947, Colorado Party membership had already become the key to Government employment or advancement in the armed forces. Stroessner gave the party a more populist tone, enhanced centralized control though the creation o f a network o f regional (seccionales) andward (sub-seccionales) organizations, and purgedit and the military o f all members suspected o f disloyalty. Eventually, even the Liberal opposition was allowed a place, one-third o f the seats in Congress (even though the now official Colorado Party inevitably won more). Rent-seeking was another cement o f the system, but it was controlled and organized from the top down. This arrangement made formal structure and legal rules less important. Things happened not because the bureaucracy was organized to produce them, but because the man at the top wanted them so. Nonetheless, well-placed public employees and private sector collaborators were allowed to amass large fortunes, especially during the late 1960s and 1970s when the country dramatically expanded its investments inlarge infrastructure. 4. The Stronato's end came because o f the system's inability to deal with the predictable challenges: the declining health and abilities o f its leader and the limits to its capacity to control the ambitions and divergences among its own members or to respond to the demands of a more mobilized and differentiated society. Stroessner's ouster in 1989 did not end military or Colorado domination. It did initiate the gradual dissolution o f the united bloc. The first civilian President in decades was elected in 1993, and the military's role was substantially diminished after an abortive coup in May 2000. Divisions among the Colorados have facilitated the emergence o f additional parties and, in2003, the ANR's lossofits traditionalmajority control ofthe Congress. 5. Under the first post-Stroessner Government, a new Constitution was drafted with the aim o f introducing more modern structures and substituting a system o f checks and balances for the former centralized control. Among the most important changes were those intended to enhance the independence and the powers o f the Judiciary and the Congress vis-a-vis the Executive Branch, create an independent control agency (the Contraloria) and a state attorney's office (the Procuradoria), set up an electoral tribunal (within the Judicial Power) to settle disputes over elections, foment territorial decentralization though the introduction o f municipal and departmental elections and the earmarking o f revenue sources for both bodies, and the inclusion o f a long list o f citizen rights and responsibilities, among which the most important for the IGR are the guarantees provided to public employees and the recognition for them and others o f rights they have acquired though custom or practice. While written in the spirit o f breakingwith the old order, the new basic document posed and continues to pose certain practicalproblems: 0 It was, and remains, inconsistent with aspects of the larger body o f existing legislation. While theoretically taking precedence in case o f conflicts, where the conflicts are not openly recognized, contradictory practices continue. Recognized, conflicts have sometimes led to further disputes, because of differing constitutional interpretations, the weight o f vested interests, or the simple difficulties o f full compliance. 84Aguilera-Alfredet al., p. 18. 90 0 It contains some conflicts of its own (for example, the question o f who - the Congress or the Supreme Court-- has the final say in interpreting the Constitution) as well as areas o f insufficient specificity (the only recently resolved question as to whether the Contraloria's mandated control function eliminated that exercised by the Tribunalde Cuentas). 0 It has given an unusually large number o f powers to Congress, allowing its members considerable control over bothjudicial and Executive functions. 0 It provides organizations with mandates they are not yet capable o f fulfilling effectively. Problems here range from insufficient resource endowments and a need to update secondary laws governing their structure and functions to their contagion bytraditional vices. 0 In the rights it guarantees explicitly or implicitly (acquired rights) it provides a base, as yet unrealized, for substantial challenges to Government programs and especially to efforts to introduce further reforms. 0 While the Constitution leaves many details, and especially those regarding the internal organizations o f govemment entities, to secondary legislation, much o f this, including laws defining the powers and structure o f the Executive branch agencies has yet to be rewritten. Moreover efforts to modernize some, like the basic law on public employees, have been stymied by challenges founded on now constitutionally guaranteed rights. 6. Alongside these legal changes, one thing that has not been altered i s the central role o f patronage and other particularistic exchanges inthe attainment and use o fpolitical power. In fact, their importance i s believed to have escalated because o f several factors accompanying the transition. These include: (i) the heightened competition among and within parties; (ii)law mandating party primaries (ending central leadership's control a over the list o f candidates, putting a premium on aspirants' independent access to resources to finance campaigns and attract supporters, and thus reducing party discipline); (iii) increased value o f government employment (of itself and as a source the o f rents) ina era o f economic downturn; and (iv) the proliferation o f interests andinterest groups seeking government attention. Paraguay's political system has achieved levels o f competition and mass participation unparalleled in its history, but its politics are still conducted in the traditional mode. 85 There are visible demands for change, and now an Administration officially dedicated to advancing it, but the very size o f the system, the many entrenched interests, and the greater decentralization o f political power have produced a seeming excess o f veto points and veto players. The impact on governance, as suggested above, is largely negative, which in turn has produced a growing disillusionment with the benefits o f the new democratic style. In regional surveys, 85One decided improvement report inInstitution de Desarrollo (2004) is the legal prohibition on the former practices o f deducting payments to parties from public employees' salaries. It i s not clear whether the practice has been stopped entirely, but it was not mentioned during interviews despite a willingness to discuss numerous other forms o f abuses. 91 Paraguay is one of the countries with citizens expressing most tolerance for a retum to strongman rule.86 Whether or not recognized as such, the crux of the matter i s the inability of the politics of patronage to advance programs in the general interest; an inability of the existing system to produce common as opposed to particularistic goods. 86Latinobardmetro,as cited inUSAID(2004). 92 ANNEX 111: DEPARTMENTAL GOVERNMENTSAND THE BUDGETARYPROCESS BACKGROUND 1. Compared with the situation o f comparable entities elsewhere in Latin America, Paraguay's departmental governments (gobernaciones) are sui generis. They represent the 1992 Constitution's first, but incomplete, step toward greater decentralization. At present, the gobernaciones are politically independent o f the central government, with their own elected authorities, but administratively dependent, their activities subject to the same budgetary authorization process as those o f any agency in the "decentralized sector." They are also nearly wholly dependent on the central government and the municipalities for their revenues. One interviewee stated that they and their leaders are "caudillos politicos sin territorio que viven de subsidios, carecen de aplicaciones informciticas completas,y sonfanciticos de la descentralizacidn." This characterization i s overly harsh, but few doubt that their current role is predominantly political. They are mechanisms for generating votes through the execution o f local social development projects financed with transfer payments. 2. The IGRdoes not address the obvious questions as to whether the situation might be improved (from the standpoint o f greater efficiency, better services, or more effective attention to the broader needs o f the population) through a redefinition o f the roles and powers o f the gobernaciones. It bears noting that there are those who believe the gobernaciones should disappear, ceding their functions either to the municipalities or to a lesser number o f regions. Their own leaders havejoined with those o f the municipalities and the respective associations (AJUDEPA and AJUMPA) to promote greater powers and revenues for both. Also several donors have worked with both types o f local government incapacity buildingprojects. Giventhat the gobernaciones account for only slightly more than 1 percent o f total public expenditures, the amounts at stake are not large and the room for significant rent-seeking (or even political leverages7)not great. It i s in fact a general impression that the municipalities, accounting for up to 3 percent o f the national budget, and with greater hnctional independence, are more disorderly in their management o f their funds. The Minister o f Finance has expressed dissatisfaction with their participation in the budgetary process. The view is mutual. The gobernaciones also complain o f a history of nontransparent and unsatisfactory relations with Finance. 3. Basic Information on Organization and Financing: The political structure o f the gobernaciones is relatively simple: an elected gobernador and junta, the former acting as Executive, the latter as a legislative-oversight body. Conflicts between the two have become more frequent in recent years, with juntas demanding the recall o f a s7 This comment refers to leverage for nationalparty leaders. The gobernaciones do serve as apolitical base for their own members, and it was reportedthat manygobernadoresview their positions as a step toward national office. Their budgets are too small to tempt suppliers and contractors working at the national level, but they are interesting and a source o f income to local finns and "consultants." 93 gobernador they accuse o f misuse o f funds or other abuses of office. Across the board, funding i s about half from Treasury sources and the rest from royalties, transfers from municipalities and other fees. Most expenditures are attributed to the operating budget, anduses by source o f funding are divided as follows: Table 11: Government Budgets,by Source andUse, 2003 *In millions ofGuaranies Source: SSEAF 4. Income by source varies by department, especially as regards royalties. Although the Departmental Organic Law (LOD) notes that transfers from the Treasury will be made taking into consideration the social economic situation and developmental level o f the departments, in effect they follow pre-determined percentages and criteria. This guarantees transparency and reduces discretionality, but it clearly has other disadvantages. Although staffing levels are low (see below), much o f the operating budget goes into personnel 5. Budgetary Process: The governors prepare their budgets following the same rules applied to all central and decentralized agencies (POAs or annual program budgets, financial plans, PACs, and annual investment plans for the STP). They also are responsible for their execution. Inall phases o f the budgetary process, they face the same problems as any other entity included in the central budget: they must work within ceilings supplied by Finance, they suffer or benefit from adjustments made by the Congress, and the absence o f an official mechanism for tracking commitments means that they generate their own floating debts. This can be, as it was in 2003 for the entering authorities in Itapha, an unpleasant surprise, when it develops that the outgoing administrationhas accumulated considerable debts with suppliers and contractors. 94 Table 12: Staffing, Population,andBudgetsfor Six Departamental Governments, 2004 Gobernacion Permanent Contracted Population % Extreme Total Budget Staff Staff 2002 Urba Poor% Poor Millions o f n % Guaranies SanPedro 41 30 318,546 17.6 35.0 44.2 9,652 Caaguzu 46 30 443,311 31.6 26.7 44.8 13,642 Neembucu 40 36 76,730 51.2 15.7 32.5 8,539 systems" to hide the real accounts. Even the assignment o f funds to operating or capital budgets has been questioned, but this appears to be less a function o f conscious deceit (were it so, it would run in the other direction - more funds in investment) than simple lack o f understanding. The distinctions made appear to be fairly arbitraryand contractors or materials placed in the operational category might more logically go into the "investment" side. 8. Given their general belief that they are inadequately funded, gobevnaciones also lobby directly with the Congress, with various ministries (especially Health, Education and Interior) to attract programs, and with Finance. Despite the efforts, overall gains can be measured in single digit percentages. Internal and external control o f departmental expenditures i s unusually weak. Interviews suggested that control exercised bythejuntas depavtamentales was minimal and which occurred was politically motivated. As the juntas depend on the governor for their meager budgets, when conflicts break out between the two, govemors can retaliateby delaying expense payments. The Contralovia (CGR) usually reviews only the legality of actions and because o f its own budgetary limitations canrarely do this on site. 9. As regards contracting, the gobernaciones do not appear to be an interesting source o f income for firms capable o f operating at the national level. Instead the departments tend to purchase and contract locally. Preparation for compliance with the old or new contracting law is minimal and violations may originate as much in lack o f information as in any intent to defraud. Even when gobernaciones (e.g., Caazapk) outsource their contracting office, inadequate practices persist. Inthe six gobernaciones visited, there was considerable uncertainty as to the procedures for preparing and executing a PAC, the new rules for the selection o f consultants, or how to select on any other basis but the lowest bid. Sole sourcing, through fractionalization o f contracts, i s frequent, but aside from any desire to benefit friends, is also provoked by uncertainties as to when and whether disbursements will arrive. It i s widely observed that contracting suffers from two perennial abuses: sole sourcing to local suppliers and contractors against the promise of campaign financing and transferring funds to real or fictitious communities for the purpose of gamering political support. CONCLUSIONS 10. Twelve years after their creation, the gobernaciones persist as precarious administrative and political apparatuses, minor cogs in a traditional political structure with evident weaknesses in their administrative and financial management, control functions, and human resource endowments. As a result, they tend to provide limited services ina discontinuous fashion, although they do use local firms, and arguably add an element o f local influence to the overall patronage machine. Even with these limitations, their financial and administrative management could clearly be improved through training, some equipment, and better communication systems. While the impact on material welfare might be minimal, the equally minor investment could bejustified by the fact that these organizations do serve as training grounds for politicians with larger aspirations, that they have a potential for exposing citizens to better practices, and that they are a buildingblock o f national party networks. Whether these budgetary problems 96 originate locally, or in inadequate attention by the center, the recommended improvements are the same. Regarding the arguments over the gobernaciones' future, like all such arguments (and other o f the region's countries also have them), they will not be resolved quickly and thus the premium should be on making the present arrangements function better. 97