Report No. 40496-PA Panama Country Financial Accountability and Procurement Assessment Report December 31, 2006 Central America Country Management Unit Regional Operations Department 2 Operations Services Department Modernization of the State Latin America and the Caribbean Region Division (RE2/SC2) The World Bank Inter-American Development Bank Document of the Inter-American Development Bank and the World Bank Panama CFAA: Tableof Contents i TABLE OF CONTENTS PREFACE ............................................................................................................................................. i11 EXECUTIVE SUMMARY .................................................................................................................... V Main conclusions and key recommendations........................................................................................ Methodology ........................................................................................................................................ v vi ... vu1 Specific Conclusions and Recommendations -Procurement ............................................................... Specific Conclusions and Recommendations -Financial Management ............................................ x ICOUNTRYBACKGROUND . ............................................................................................................. 1 Economicaland Political Evolution...................................................................................................... 1 3 The C F M C P A R inthe Country Context............................................................................................ The Public Sector .................................................................................................................................. 4 I1 LEGALAND INSTITUTIONAL FRAMEWORK . ......................................................................... 5 Public Procurement Framework............................................................................................................ Financial Management Framework....................................................................................................... 5 The Integrity of the System................................................................................................................. 8 Conclusions and Recommendations.................................................................................................... 16 13 I11 KEY CROSS-CUTTINGISSUES . ................................................................................................. 20 Public Financial Management Out-Turns ........................................................................................... Comprehensivenessand Transparency ............................................................................................... 20 Conclusions and Recommendations.,.................................................................................................. 24 21 lV BUDGETCYCLE . ........................................................................................................................... 26 Budget planning .................................................................................................................................. 26 Revenues: Predictability and Controls 29 Cashand Debt Management ............................................................................................................... ................................................................................................ Expenditures: Predictability and Controls.,........................................................................................ 30 -32 Accounting. Recordingand Reporting................................................................................................ 36 ExternalAudits.................................................................................................................................... Conclusions and Recommendations.................................................................................................... 39 38 V PROCUREMENTOPERATIONSAND MARKET PRACTICES . ............................................. 45 Efficiency of Procurement Operations and Practices.......................................................................... ....................................................................................... 45 46 E-Procurement..................................................................................................................................... Supply Management and Strategic Planning 47 48 Functionality of the Public Procurement Market................................................................................ Examples of ParallelOrganizational Systems and Practices .............................................................. 50 Recent Achievement on the Procurement Reform.............................................................................. Conclusions and Recommendations.................................................................................................... 51 56 ANEXXES .............................................................................................................................................. 59 Annex I Action Plan .................................................................................................................... 59 Annex I1 Annex I11 Electronic Government Procurement Assessment......................................................... Public Financial Management Performance Measurement Indicators .......................... 65 66 Annex IV Government Procurement Strategy Assessment............................................................ 67 Annex V References........................................................................................................................................... BackgroundPapersand Persons Interviewed................................................................ 68 73 Panama CFAA: Tableof Contents ii LIST OFTABLES,BOXESAND FIGURES: TABLE1:TOTALCONSOLIDATED NON-FINANCIAL PUBLIC EXPENDITURES 3 TABLE2: AGGREGATE REVENUEEXECUTION 20 TABLE3: VARIANCEINAGGREGAE PRIMARY EXPENDITUREEXECUTION 21 TABLE4: VARIANCE INPRIMARYEXPENDITURE COMPOSITION 21 TABLE5: BUDGET MODIFICATIONSPRIMARYEXPENDITURE TO 33 TABLE6: SELECTEDQUALITY ASSURANCE DATA THEACP DURINGFY05 FOR 49 TABLE7: PROCUREMENTOFWORKS 51 TABLE8: POTENTIALSAVINGS 53 BOX 1: MAINLAWS REGULATIONSGOVERNINGPUBLICFINANCIALMANAGEMENT AND 5 BOX 2: PROGRAMTO STRENGTHENAND MODERNIZE ECONOMIC AND FISCALMANAGEMENT 7 BOX 3: PUBLICPOLICYREFORM TECHNICALASSISTANCE PROJECT 12 FIGURE1:CONTRACTSOF GOODS AND SERVICESPAIDBY MEF'SNATIONAL TREASURY 34 FIGURE2: STRUCTUREOF THEACP PROCUREMENTSYSTEM 49 FIGURE3: PROGRESSIVEIMPLEMENTATIONOF QUICK SAVINGS PROGRAMS 55 This report was prepared by a team composed o f Diomedes Berroa (Sr. Procurement Specialist, WB), Roberto Camblor (State Modernization Specialist, IDB), Patricia de Baquero (Sr. Procurement Specialist, WB), Enzo de Laurentiis (Regional Procurement Manager, WB), Stephen Doherty (Sr. Social Development Specialist, IDB), Stefan0 Tinari (State Modernization Specialist, IDB) and Manuel Vargas (Sr. Financial Management Specialist, WB). Other staff members and consultants contributed with background papers (Annex V). Carlos GonzAlez (Budget Director, MEF) and Edilberto Ruiz (Procurement Director, MEF) coordinated the report on behalf o f the Government o f Panama. The preparation team thanks the Minister o f Economy and Finance, Mr. HCctor Alexhnder, the Controller General, Mr. Carlos Vallarino, the former Controller General, Mr. Dani Kuzniecky, and other Government authorities and officials for their cooperation and support. The Team also appreciates the support o f Jeremy Gould (Resident Representative, IDB) and staff o f IDB's Resident Regional Procurement Manager), Roberto Tarallo (Regional Manager - Financial Management, WB) Mission in Panama, and Jamil Sopher (Consultant), as well as the leadership o f Bernard Becq (former andJorge Sapoznikow (Sector Chief, IDB). Panama CFAA: Preface iii PREFACE The Country Financial Accountability and Procurement Assessment Report (CFANCPAR) is a diagnostic tool that covers the government's ability to fulfill its fiduciary responsibility to the citizenship, in managing public resources through sound public financial management (PFM).' As such, it seeks to support development objectives by facilitating a common understanding o f the state o f PFM systems, practices and accountability arrangements. On that basis, the assessment makes recommendations with the ultimate goal o f increasing the efficiency and transparency o f public expenditures. Information obtained in C F M C P A R s can also help development agencies to identify potential risks to the use o f loan or grant proceeds, posedby weaknesses inPFM arrangements2 The World Bank and the Inter-American Development Bank (IDB) have agreed to collaborate inthe overall coordination of PFM diagnostic work. The two participating Banks expect that their collaboration in Panama will foster a common understanding o f how the CFANCPAR could support the country's development agenda, and make good use o f their combined efficiencies o f scale. This report was prepared on the basis of: (i) interviews held with several government officials and stakeholders from the private sector, non-governmental organizations, and development agencies; and (ii) a series o f reports and other documentation (summarized inAnnex V). TheParticipating Banks' AssistanceStrategies On account o f the government's "Strategic Vision o f Economic and Employment Development Toward 2009", the World Bank's Interim Strategy Note (ISN) for FY06-07 lays out a step-wise program that aims to generate a more robust policy dialogue, based on the preparation and findings o f several core diagnostic analytical pieces (including the CFANCPAR) and a development policy loan (DPL) in FY06. Then building from this base, in FY07 the Bank would undertake additional analytical work and could finance a few selected investment projects. The core o f the IDB's Country Strategy for 2005-2009 i s to promote sustainable economic growth and to reduce poverty. It will seek to do this through promotion of competitiveness and investment in human capital. Central themes running through this strategy are the improvement o f governance and transparency. The achievement o f fiscal sustainability will be sought by, among other measures, strengthening the financial situation o f both central and local government and improving the management o f public expenditure and external debt. The specific measures which the strategy will support include: the implementation o f the Fiscal Responsibility Law, the Fiscal Equity Law and the reform o f Social Security. On the income side o f budget, the bank will support the strengthening o f the Internal Revenue and Customs Services and the Directorate o f Land Registration. On the expenditure side o f the ' The ~ ~~~ CFAAKPAR combines two exercises that have traditionally been carried out separately: the Country Financial Accountability Assessment (CFAA) and the Country Procurement Assessment Report (CPAR). The CFAAKPAR, however, is neither an audit nor is prepared following audit procedures (World Bank, 2003). Panama CFAA: Preface iv budget, the Bank will promote actions to improve the management o f Social Security and the management o f the budgetary process. The latter includes the implementation o f a single Treasury account, modernizing the system o f public acquisitions, improving the programming o f public investments, the introduction of management by results, improving the management o f state assets, and the consolidation o f the Integrated Financial Management System3at both national and local levels. In addition to its inherent value as a diagnostic tool, the C F M C P A R has special relevance through its relationship to the participating Banks' assistance strategies, lending programs, and policy dialogue with the country. The linkages are particularly strong inthree areas: Reform of public finance and modernization of the State. Public financial management systems that contribute to operational and allocative efficiency are critical elements o f public sector effectiveness. These features, together with fiscal transparency, can positively influence the governance en~ironment.~Hence, in these areas the CFANCPAR constitutes a key non- lendingservice o fthe participatingBanks. Design and implementationof the participatingBanks' lending program. The exercise can provide valuable information to help the government with the design o f capacity-building programs under its ongoing modernization agenda, and will feed into the implementation o f ongoing operations (e.g., IDB's Second Fiscal Management Project and World Bank's Public Policy Technical Assistance Project), and the preparationo fprospective follow-up operations. The central component of the World Bank's I S N will be a single-tranche DPL operation, founded on the Government's medium-term development strategy and based largely on fiscal and pension reforms enacted to date. Following its dual developmental-fiduciary role, the implications for the CFANCPAR are two-fold: (i) while emphasizing country ownership o f reforms to date, PFM policy dialogue around the DPL would be strengthened, facilitating the government access to technical expertise and global experience; and (ii) the review o f the country's PFM arrangements will inform whether and how the DPL should include measures to address identified fiduciary weaknesses. Managementof the participatingBanks' lending portfolio. Since the public sector main fiduciary issues have an effect on the implementation o f investment projects, the CFAAKPAR recommendations should help streamline the correlated processes and reduce transaction costs, under adequate fiduciary safeguards. Currently being supported by IDB loan "Progama de Gesti6n Fiscal IT' Loan 1430/OC-PN approved in2002. 4 The governance environment and certain PFM functions (e.g., procurement and revenue administration) are also important aspects o f a country's enabling environment for business and investment. Panama CFWCPAR: Executive Summaiy v EXECUTIVESUMMARY This Country Financial Accountability and Procurement Assessment Report (CFANCPAR) analyzes the government's fiduciary responsibility to manage public resources through transparent institutions and efficient systems o f budgeting and procurement. Accordingly, the recommendations contained in this report seek to identify areas where public financial management (PFM) can be improved, with the goal o f strengthening fiscal discipline, enabling more efficient allocation o f resources, and increasing operational efficiency. In that sense, emphasis i s made in short-term recommendations that can be implemented under the framework o f the government's strategy and available resources, and medium-term strategic initiatives to address remainingprincipal challenges. This approach and the ensuing recommendations are consistent with the government's own reform vision and program, and reflect an intense policy dialogue on PFM system reforms with key government counterparts over the past several months. They are also fully integrated within the broader context defined by the public expenditure review (PER) prepared by the World Bank. The draft CFANCPAR was discussed with the government and the feedback receivedwas incorporatedinto this version. Main conclusionsand key recommendations The PER conveys at least three messages that are o f critical relevance to the C F M C P A R : (i) in spite o f a recent successful turnaround in Panama's fiscal performance, the public debt ranks among the highest in Latin America, stressing the need to persevere in maintaining fiscal discipline and inreducing the debt toward a less vulnerable level; (ii) there is significant room for improving the efficiency o f public spending, as evidenced by the social outcome indicators that are not commensurate with the amount o f public spending; and (iii) there also appears to be significant room for improving the distributional impact o f public expenditures. Furthermore, many features o f Panama's public finances that reduce the impact and efficiency o f public spending, and that have resulted in missed opportunities on the revenue side, are common across sectors, including but not limitedto: (i) absence o f proper sector planning and budgeting; (ii)imbalance between maintenance and investment expenditures, and blurred distinction between both insector budgets; (iii) lack o f systematic monitoring and evaluation o f programs and projects; (iv) inadequate targeting and allocation o f resources; and (v) weak administration o fpublic assets. The design and performance o f public financial management and procurement systems can influence the above-mentioned factors. Inthat sense, the following paragraphs summarize the main C F M C P A R conclusions and recommendations. These are elaborated further in the subsequent sections o f this executive summaryand inthe body o f the report. Inaccordance with comments from the MEF, availability o f resources for maintenance inthe recurrent budget i s very low. Therefore, institutions incorporate those expenditures into the capital budget. Panama CFAAGPAR: ExecutiveSummaly vi The CFANCPAR concludes that the PFM system inPanamapossessesa number o f strengths that permit fiscal discipline control,6 such as legal powers to contain budgeted expenditures, timely monitoring o f budget execution .data and cash flows, centralization o f revenues, and adequate debt management. Furthermore, concrete actions have been taken recently to enhance transparency o f public finances, such as the increase in information that has been made publicly available and the legal protection given to rights o f access to that information. The cited qualities are good bases to continue advancing inthe areas of strategic allocation o f resources and operational efficiency. With respect to the former, the initiatives underway to develop a medium-term budget framework should continue, with particular emphasis on the gradual development o f the "bottom-up" budgeting process (i.e. preparation o f costed strategic plans with aligned investment programs), and on better control o f in-year budget modifications to enhance the credibility o f the original budget as the main tool for policy implementation. Interms o foperational efficiency, traditional procurement practices inthe central government and the seemingly cost-ineffective internal controls, restrict the capacity to generate important savings in budget implementation. Government procurement could be optimized under the framework o f a comprehensive public procurement strategy comprising, among others, cost reduction strategies (price benchmarking, consolidation for economies o f scale) and more efficient procedures (including basic tools such as standard documents, manuals and guidelines). Transactional controls (both ex-ante fiscal control and the entities' own procedures) could be streamlined and applied more selectively, based upon risk management considerations, and complemented by strengthening o f external audit capacity. Implementation o f the previous suggestions should consider three fundamental actions: (i) execution o f training and capacity building programs, including sectorial entities; (ii) development o f monitoring and evaluation systems applicable to both reform and performance o f public procurement and financial management; and (iii)review o f the institutional settings that may be leading to duplicate or conflicting functions (e.g., between external audit and other administrative-type operations). Finally, and in large part as a result o f increased transparency, issues with the reliability and quality of financial information (e.g., tax and payment arrears, quality o f financial statements, and coverage o f financial audits) have emerged and should gradually be addressed. Methodology The evaluation o f the financial management system i s based largely on the PFM Performance Measurement F r a m e ~ o r k .The framework assesses six critical dimensions: (i)budget ~ The report does not address the quality o f fiscal policy or whether fiscal discipline has actually been maintained, but it looks at the features o f the system that -used properly- would support that objective. 'The Measurement Framework includes a set o f 28 high-level indicators and has the following main objectives: (i)to constitute anintegratedframework to supportthe governmentandother stakeholders inmonitoringthe performance o f country P F M systems, processes and institutions over time; and (ii) to contribute to the P F M modernization process, by determining the extent to which actions are yielding improved performance and by increasing the ability to identify and learn from reform success. The framework has been developed by Public Panama CFAAICPAR:ExecutiveSummary vii credibility; (ii)comprehensiveness and transparency; (iii) planning; (iv) predictability budget and control in budget execution; (v) accounting, recording and reporting; and (vi) external scrutiny and audit. Procurement aspects are organized in the report around the four key pillars set forth by the Baseline Indicator System (BIS) developed by the OECD-DACNorld Bank Joint Venture on Procurement.8 These pillars are: (i) the legal and regulatory framework; (ii) institutional the framework; (iii) procurement operations and market practices; and (iv) integrity o f the system. While a full application of the BIS indicators was not included inthe scope o f this report, the government i s currently undertaking this exercise as part o f its efforts to establish a procurement monitoring and evaluation system. The report updates the findings o f the previous CPAR presented to the government by the World Bank in 2001, which are largely still applicable. However, this update focuses primarily on short-term actions and medium term strategic initiatives which can ensure the sustainability o f the reform, improve the efficiency o f procurement process, and generate savings, areas identified as the main challenges and priorities for the government. Implementationo f several o f the actions discussed duringthe preparationo f the C F M C P A R i s already underway. In addition, this report includes an in-depth review o f procurement procedures and practices o f two public sector entities, the Panama Canal Authority (ACP) and the Social Security Administration (CSS), which are recognized as having efficient procurement systems. These systems are defined by distinct, in the case o f the first entity, and supplementary, in the case o f the second, sets o f rules. However, these rules contain the same basic principles found in the public procurement law (Law 56), and the entities mostly operate within the same domestic market and draw from the same pool o f human resources as the rest o f the public sector. The analysis clearly demonstrated that their success is the result o f several combined factors which are present in all sound procurement systems and, consequently, can be used as benchmarks for improving the overall public procurement system in Panama. Many o f these practices can be replicated even utilizing, in some cases, the same tools and/or actively transferring knowledge from the two well performing institutions to the rest o f the government. The subsequent sections o f this executive summary present the key conclusions and recommendations for each o f the dimensions and pillars mentioned previously. The body o f the report i s organized as follows: Chapter Iprovides a brief country context, Chapter I1 describes the PFM legal and institutional framework, including the integrity o f the system, Chapter I11 looks into key cross-cutting issues, Chapter IV examines thoroughly the budget cycle, and Chapter V discusses procurement operations and market practices. Expenditure and Financial Accountability (PEFA, 2005), an international partnership including, among others, the World Bank and the IMF.Additional information can be found inwww.pefa.org. The BIS was the joint product of a wide group of donors and developing countries and was endorsed by the Paris High Level Forum on Development Effectiveness o f2005. Panama CFMCPAR: Executive Summary viii Specific Conclusions and Recommendations-Financial Management Budget credibility. The execution outturns o f the recent three years as compared with the original budgets show good ratios at the aggregate levels o f revenues and expenditures, a key feature in terms o f the ability to maintain fiscal discipline. However, when the outturns are broken down to the institutional level, and particularly in capital expenditures, significant variances (resulting in part from numerous and large in-year budget modifications) emerge. Improved control o f budget modifications and execution variances could enhance the "credibility" o f the original budgetplanning process as instrument o f sectorial public policy. As is well known by the government, payment arrears constitute a non-transparent form of financing that has affected the quality of fiscal information, and has likely increased the cost o f doing business with the state. The efforts made so far to reduce delayed payments could be complemented with the production o f certain key information, such as the reconciliation between payable amounts reported in central government fiscal balance reports and in financial statements, and the preparation o f auxiliary records with age profiles. Comprehensiveness and transparency. Relevant characteristics o f the Panamanian budgetary system are its ample coverage, the classifications used, and the quantity o f information that i s put in the public domain on a timely basis. The budget documentation could nevertheless be improved through the implementation o f certain practices from the Fiscal Transparency Code, and the capacity to analyze the financial performance o f the decentralized sector and the State's shareholding participation in enterprises could be strengthened. These matters are important from the point o f view o f both "consolidation" o f fiscal risks and revenue management. Budget planning. Worth noting are the clarity and orderliness o f the annual budget formulation process, the procedures for legislative scrutiny and approval, the transparency o f the system for approving in-year modifications, and the recent initiatives to develop medium- term fiscal and budget frameworks and result indicators. The report suggests strengthening the "bottom-up" process (i.e. the strategic sectorial plans properly costed), enforcing compliance with the public investment programming procedures (including the quantification and evaluation o f implications on recurrent expenditures), connecting the budget with procurement plans, and developing indicative ceilings for the discussion o f sectorial budget projects. Predictability and control - revenue^.^ The continuing implementation o f the Revenue Directorate's strengthening project i s critical and should help to, inter alia, make better use o f the comprehensive tax information system inplace (e-Tax). Special attention i s needed on the audit and fraud investigation capacity (human resources, plans and methodologies), on the cleaning up o f the taxpayer accounts to allow -among other things- the proper measurement and follow-up of tax arrears (and accordingly improve the correlated statistics), and on the institutional internal controls (including the information system's security safeguards). Predictability and control - cash and debt. Key features o f the system, such as the centralization o f central government revenues, regular preparation o f cash flows, and adequate The CFMCPAR covers only certain general aspects of tax administration. Panama CFMCPAR: Executive Summary ix public debt management and records, permit a good handle o f the government's cash position. On the other hand, measures could be introduced to give Treasury more control over idle balances and to reduce the large fragmentation o f payment bank accounts, as well as to attend to the timely and independent reconciliation o f the principal account (Cuenta 210). Payment practices could also be modernized and unified, and the procedures to record and service debt could be simplified. Predictability and control - expenditures. There are ample transactional controls in place, which seem particularly effective in the payroll system. For non-salary expenditures, however, the procurement and payment controls in general do not seem efficient and tend to dilute accountability. In that sense, the effort to develop tools that facilitate fiscal control (guidelines, checklists, IT systems) i s commendable. Looking forward, a selective application o f ex-ante controls, with the introduction o f differentiated techniques based on risk assessments (at the level o f entities and types o f transactions), is advisable. As for the executing entities, it is recommended to conduct in-depth reviews o f their internal administrative systems and procedures, to eliminate duplicative and/or unnecessary steps, as well as to enforce more effective follow-up to the internal control weaknesses reported by the external auditors. Accounting, recording and reporting. Important advances have been made in terms o f the timeliness, scope and publication o f quarterly budget execution, fiscal balance, debt and payroll reports, as well as annual financial statements. Still, there i s a need for an integral improvement o f the quality o f the financial statements (e.g., accounting standards, disclosures, and consolidation), and for the modernization o f the managerial and accounting control o f property, plant and equipment. External audit. The timeliness and publication o f financial audit reports are notable features, but not their coverage. Given the large spectrum o f entities subject to external scrutiny, better application o f risk management methodologies in the planning and execution o f external audits could be pursued. Certain relevant entities, key revenue and expenditure lines, critical processes (e.g., application o f procurement rules) and budget execution reports could then be covered explicitly. In more structural aspects, it is important to retake the dialogue and make decisions in the medium term about a possible separation o f external audit functions from other incompatible tasks (endorsements, payments, and consolidationo f financial statements). Other general issues. The report suggests preparing and implementing information technology policies (at least for financial management), with the objective o f setting certain limits and rules to the proliferation o f separate and sometimes incompatible applications. This should help, along with other actions, to advance SIAFPA's integration and enhance its relevance as a tool for management. loOn the other hand, the government could consider the preparation o f a financial management law, with the objectives o f ordering the current loThe MEFintends to improve system integration through the development o f an improved, more flexible, web- based version o f SIAFPA. On the other hand, the Presidential Secretariat o f Governmental Innovation (SPIG) considers necessary to work jointly with the MEF and the CGR to develop a new system to plan and manage in real time governmental resources (iGRP), given SIAFPA's problems (technological infrastructure, lack o f articulation and integration, coverage, and supporting staff). Panama CFAA/CPAR: ExecutiveSummary X institutional settings (which in some cases assign duplicate and/or conflicting functions) and o f givingmore stability to the budgetary norms that are currently applied on an annual basis. Finally, the performance measurement indicators documented in this report could be used by the government as the baseline for a monitoring and evaluation system to assess impact of reforms over time. Specific Conclusionsand Recommendations-Procurement Legal and Regulatory Framework. The legal framework for public sector procurement already includes the basic elements to support a transparent and competitive environment and a modern institutional framework based on the centralization o f normative and policy functions and decentralization o f operational functions. However, the legal framework should be improved by introducing greater clarity in some very important areas such as, for example, qualification and evaluation criteria, the total amount o f the performance security, justification for direct contracting, and selection o f consulting services, and by simplifylng administrative requirements which currently contribute to delays, overlaps, and inefficiencies in the procurement process. The most serious problem with the previous procurement law (Law 56, 1995) was its limited and fragmented application due, among other reasons, to a proliferation o f differing interpretations and application practices and splitting o f contracts to avoid the overly legalistic approval procedures and controls. It is estimated that, in practice, 80 percent o f government procurement under the cited law applied only to the acquisition o f small projects and the purchasing o f common goods and services. Moreover, to partly bypass the current convoluted budget and administrative requirements, the Government has made extensive use o f international financial agents to implement its key projects and large contracts. However, even within the simplified context o f the "Facilitation Projects" administered by UNDP, it takes the Ministry o f Public Works 180 days on average to complete award a contract following National Competitive Biddingprocedures. A major accomplishment inthe area o f the legal framework on procurement has been already taken. A new procurement law, (Law 22 o f 200611), has been recently enacted. The Law, effective on December 29 2006, i s anticipated to play a major role in transforming the government procurement system. The GOP has already developed an action plan for the implementation o f the Law, including drafting regulation frameworks, developing an e- procurement strategy, etc, which will be financed under a World Bank Technical Assistance Operation under implementation. Institutional Framework. The structure o f the current institutional framework i s appropriate and there i s strong leadership and political support for the reform at the highest level o f Government. The three key institutional stakeholders (the DCP, the CGR, and the Presidential Secretariat for Government Innovation) are cooperating very closely and share a I`Law 22 was approved by the National Congress on June 8,2006, and ratifiedby the Executive Branch on June 27,2006. (Gaceta Oficial No. 25,576 de 28 de Junio de 2006) Panama CFWCPAR: ExecutiveSummary xi sound vision o f the reform's objectives. The role and independence o f the DCP would be further strengthenedbythe proposednew law. These three institutions have launched several good initiatives, but have not yet developed a well articulated procurement policy and a strategy defining clear priorities and arrangements to ensure that the reform produces the desired impact in the short to medium tem and i s sustainable after the initial thrust. For example, the DCP is in the process o f developing a plan to implement framework contracts which can help achieve significant savings. However, other countries' experiences have shown that significant market analysis, a careful strategy, and an appropriate legal instrument are essential to avoid potential pitfalls such as market concentration and higher prices. In addition, it i s important to point out that framework contracts address only one aspect o f the reform (i.e. improving economies o f scale) and cannot resolve by themselves all the inefficiencies which are affecting the system. In addition, this contractual approach is appropriate only for certain types o f relatively simple goods and services. Currently, there i s still little consolidation o f procurement across government entities due to lack o f planning, statistics, and controls on the overall demand, the fact that Panamacompras still does not include enough key functionalities to be used as procurement management tool, and other inefficiencies inthe system. The DCP should adopt as soon as possible a comprehensive strategy focusing on short and medium term actions to produce measurable results in the priority areas for the Government: (i) increase efficiency through simplification o f processes; (ii) achieve better economies o f scale and standardization; (iii)accelerate development and utilize more efficiently new technology and methodologies; and (iv) promote transparency and efficiency by increasing the use o f competitive procurement. The strategy should include a national plan to build accountability and sustainable capacity in the procuring entities, the development o f basic tools and methodologies, and detailed planning o f the resources necessary to produce these tools and implement the DCP's mandate. One o f the most important initiatives to accelerate the modernization o f the procurement system i s the adoption o f a strategic plan to complete the development and implementation o f Panamacompra. The plan should define all management aspects o f the system, the resources needed, technical details o f its subsequent phases, and regulatory changes necessary to implement each o f them ensuring a smooth transition to an electronic public procurement marketplace. Among other aspects, a unified goods catalogue, based on international standards, and a single database o f suppliers are particularly important. The overall procurement strategy should also include a risk map o f all potential obstacles with a strategy to overcome them, a stakeholders' analysis to maximize the effectiveness o f the relationships among public sector institutions and develop strategic alliances with the private sector and civil society, and a communication campaign to improve the image o f the Government as business partner, which was damaged by chronic late payments and inefficiencies as noted previously. Panama CFMCPAR: ExecutiveSummary xii The main implementing tools include standard biddingdocuments, manuals and guidelines on aspects such as planning and contract management, a procurement monitoring and evaluation system, and risk management tools developed and managed inpartnership with the CGR. The monitoring and evaluation system will be very important to ensure that the reform is implemented consistently throughout the public sector producing the desired impact in terms o f increased efficiency, savings, perception o f transparency and competitiveness, and that the system is updated on an ongoing basis after the reform i s completed. The monitoring and evaluation system should be integrated with the risk management tool to ensure that, as noted previously, the intensity o f the ex-ante control i s commensurate to the capacity and quality o f internal controls in the procuring entities (e.g. by raising thresholds for ex-ante review for the entities which perform better). Finally, the system should utilize the above mentioned benchmarking with the good practices found inthe ACP and the CSS. Market Operations and Practices. While ex-ante external control contributes to procurement delays, one o f the most significant causes o f administrative inefficiency lays in the internal bottlenecks o f the procuring entities. For example, in the Ministry o f Education, public bidding requires 20 distinct administrative processes divided in 84 practical steps, o f which all but one process and 2 steps are internal requirements o f the Ministry. Clearly, it i s essential that these requirements be significantly streamlined eliminating unnecessary reviews and duplications. Significant savings can be also achieved by introducing an integrated program which utilizes framework contracts, price benchmarking, and other cost reduction methodologies, provided that a careful overall strategy i s developed, the right legal instrument utilized, and other complementary actions are taken to increase efficiency. For example, a project focusing on intense price benchmarking and consolidation o f items with standard specifications procured on a regular basis in large quantities by several entities, can generate savings ranging from US$44 to 68 million (equivalent to 8 to 12 percent o f the annual procurement budget o f the Government), depending on the items included in the program. The CSS, the first public sector institution after the ACP to utilize framework contracts, already achieved savings for approximately 18 million dollar and a significant reduction in the times required for ex-ante control since rolling out this approach a year ago. The starting point to achieve an effective cost saving strategy i s an in-depth analysis o f the structure o f the demand and the offer in the procurement market with the objectives o f identifylng the best opportunities for quick gains, designing an implementation program in phases (starting with items which are easier to consolidate and present an elevated saving potential), and defining other details o f the strategy such capacity strengthening, technical assistance, and constituency building. Another example o f potential cost reduction approaches is a greater use o f international procurement for certain items. As the domestic market is dynamic and can meet adequately the demand of the Government, almost every goods and services are procurement locally. However, a high level assessment o f this approach carried out duringpreparation o f this report suggests that costs are not always below internationalmarket prices for all items procured. Panama CFMCPAR: Executive Summary xiii Integrity of the system. The legal and institutional frameworks for transparency, anticorruption, and access to information in Panama have been already significantly modernized and can adequately support a sound financial management and procurement system. However, the integrity o f the system could be further strengthened in significant ways by: (i) accelerating implementation o f Panamacompra; (ii) establishing an independent protest review tribunal; (iii) publishing financial disclosure information o f public officials; (iv) simplifymgrequirements for prosecution o f embezzlement and corruption cases; and (v) andproviding increased legal protectionfor whistleblowers. Panama CFMCPAR: Country Background 1 I.COUNTRYBACKGROUND Economical and Political Evolution 1. Panama i s an upper middle-income developing country with a per-capita gross national income (GNI) o f US$4,450 in 2004. It has a population o f around 3 million inhabitants, o f which more than half (57 percent) resides in urban areas and 10 percent i s o f indigenous descent. In spite o f Panama's relatively high per-capita income level, a surprisingly large share o f the population (37 percent) continues to live below the national poverty line, and around 17 percent lives in extreme poverty. Most o f human development indicators have failed to improve significantly during the last six years, in spite o f positive economic growth and significant amounts o f public social sector spending. Still, Panama's social indicators are generally better than the regional averages, and similar to those exhibited byother upper middleincome countries. 2. Panama has been characterized as a dual economy, consisting o f a dynamic service exports sector that i s very competitive at the global level and a protected domestic market for agricultural and manufactured goods. The services sector accounts for 75 percent o f Panama's GDP and over half o f its total exports. The dominance o f this sector is explained by the country's unique geographic location between North and South America and rests on four main pillars, comprising the operations o f the Panama Canal, the Colon Free Zone, the International Banking Center, and the provision o f flag-of-convenience services. 3. Another distinctive trait o f the Panamanian economy i s its monetary regime, which has been tied to the U S Dollar as legal tender since the early 1900s. This regime has provided a stable anchor for the economy over the years, as manifested by low inflation rates, low interest rates and the absence o f major currency crises. The adoption o f a US Dollar-based regime also has meant the removal o f active monetary and exchange rate policies from Panama's arsenal o f macroeconomic policy instruments, forcing a greater reliance on fiscal and trade policies. 4. The possible trade agreement with the United States. In 2004, bilateral trade between the United States and Panama totaled $2.1 billion, with U.S. exports accounting for $1.8 billion o f that amount. Between 2002 and 2003, U.S. exports to Panama grew over 30%. Nearly half o f Panama's total imports come from the United States. U.S. foreign direct investment inPanama totals roughly $25 billion. Panama currently enjoys broad access to the U.S. market. In2002, over 90% of Panama's goods exports to the United States came in duty free under unilateral benefits programs like the Caribbean Basin Initiative (CBI) and the and the Generalized System o f Preferences (GSP) or under 0% MFNtariffs. 5. Panama i s currently negotiating a free trade agreement with the US with essentially the same objectives established for the CAFTA countries and which i s expected to supersede domestic regulatory frameworks in several areas including procurement. All trade agreements recently negotiated by the U S included detailed procurement rules and access to effective remedies for bidders who allege a violation o f these rules. Panama CFAA/CPAR: Country Background 2 6. Political context. Panama i s a presidential democracy with a unicameral legislative assembly and an independent judicial system. Inthe previous administration (Moscoso, 1999- 2004), the government's most important achievement was securing approval o f a Fiscal Responsibility Law in 2002 that was seen to provide an adequate framework to institutionalize fiscal discipline and achieve medium-term fiscal sustainability. But the law was ineffective. Tax receipts over the five-year period remained almost stagnant, while current spending rose steadily to cover the swelling ranks o f civil servants and growing interest payments. Public debt grew from 60 percent o f GDP in 2000 to 66 percent of GDP in 2004. Little attention was given to program evaluation and there was a paucity o f analysis on the efficacy and efficiency o f public spending, despite pressing social needs and limited resources. Alleged corruption was a cause o f widespread public dissatisfaction. 7. President Martin Torrijos was elected with a strong mandate inMay 2004. His party also attained a majority in the National Assembly. The new administration i s focusing its attention on Panama's most pressingchallenges: fiscal and social security reforms. The fiscal deficit (excluding the Panama Canal Authority) reached 5% o f GDP in 2004, but the new administration i s taking measures to put the deficit on a declining path aimed at reducing it to 3.6% o f GDP in 2005 and decreasing further to about 1 percent o f GDP by 2007. A fiscal reform approved in February 2005 included measures to contain current expenditure and increase the efficiency o f tax collections. The final goal o f the reform i s to generate savings, facilitate social investment programs and develop a solid economic base that stimulates growth and employment. 8. The government's program. In June 2005, the government made public an ambitious development plan for the five-year term o f its administration: "Strategic Vision of Economic and Employment Development Toward 2009", which articulates the five pillars o f the government's economic and social development policy: (i) reduction o f poverty and improvement in income distribution; (ii) an economic growth policy to create employment; (iii)reform of public finance; (iv) development of human capital; and (v) reform and modernization o f the State. The third and fifth pillars are o f particular relevance to the CFANCPAR. 9. The government's program to regain fiscal stability i s already underway. It consists, among other measures, of: (i)rationalization o f current expenditures, including avoiding unnecessary expenses, with transparent, effective and efficient public procurement and contracting mechanisms; (ii) reform geared to capturing more resources through a fairer tax tax structure and a more efficient tax administration; (iii)improved management of the budgetary system geared to achieve more productive investments; (iv) establishment o f responsible accounts payable management; and (v) provision o f accurate information through transparent accounting standards. 10. The state reform and modernization area includes actions in various fronts, including: (i) ensuringtransparency and eradicating corruption from the public sector; and (ii) redesigning the government's functions by getting rid o f obsolete activities, simplifjmg and reducing bureaucratic dealings, and streamlining administration through improved staff professional training. Panama CFWCPAR: Country Background 3 ThePublic Sectog2 11. The national government accounts for the lion's share o f total public spending, as local government spendingrepresented around 2 percent o f the total in 2005.13At the national level, public sector consists o f 17 central government entities, 24 decentralized institutions, 10 public enterprises, 7 financial institutions and the Panama Canal Administration (PCA). The central government accounts for about one-half o f total spending while the decentralized institutions account for 25 percent. Excluding the financial sector and the operations o f the Panama Canal Authority (ACP), total public spending at the national level has averaged around 31 percent o f GDP over the last decade (Table 1). Including the operations o f the ACP would add another 5 percent o f GDP, raising the total to about 36 percent o f GDP. Table 1:Total Consolidated Non-Financial Public Expenditures (by Institutional Grouping; on accrual basis, aspercent of GDP) 1996 1998 2ooo 2001 2002 2003 2004 2005 2006 actual actual actual achlal actual actual actual budgetbudget central&- 18.5% 20.3% 20.0% 20.4% 19.3% 17.7% 19.8% 18.1% 19.3% DecentralizedInstitutions 11.1% 12.2% 13.7% 12.0% 12.1% 11.5% 13.1% 13.9% 11.4% Public Enterprises 9.1% 6.0% 3.G% 2.9%0 3.1% 2.8% 2.9% 2.8% 3.2% TOTAL 38.8% 38.5% 36.8% 35.4% 34.6% 31.9% 35.8% 34.9% 34.0% less Inter-InStiMiod T ~ X S -4.1% -4.1% 4.4% -4.6% 4.7% -3.8% -3.8% -3.8% -3.7% nrrAL 347% 344% 32.4% 30.8% 29.9% 28.1% 32.0% 31.0% 30.3% Source: PER, basedon MEF. Note: Total NFPS expenditures excludethe PCA andpublic financial institutions, andare calculatedas total expendituresby institutional groupingminus amortizationof debt and minus total inter-institutionaltransfers. 12. Although Panama's level o f public expenditure as a share o f GDP ranks among the highest inthe region, its tax ratio i s one o f the lowest. This i s explainedby the unusually large inflow o f non-tax revenues. The total revenue intake by the central government averaged 16.5 percent o f GDP during 1993-2004, o f which a full 6.5 percent o f GDP (40 percent o f the total) consists o f non-tax revenues. This unusual composition o f revenues i s mainly explained by the Panama Canal and related activities. 13. The single largest expenditure item in the central government budget i s the debt service. This reflects Panama's high level o f public indebtedness, which reached around 66 percent o f GDP in 2004. Total interest and amortization payments on the public sector's domestic and foreign debt accounted on average for 37 percent o f total central government spendingduringthe last decade. After public debt service, the most important spenders are (in declining order) the ministries o f Education, Health, Justice and Governance, and Public Works, which together account for 44 percent o ftotal central government spending. 14. The most important public financial institution i s the National Bank o f Panama (BNP), which operates as a commercial bank and also serves as the main financial intermediary for the national government, but without the power to issue money. Most of BNP's deposits come from other public sector institutions. It also administers the Fiduciary Abstracted from the Public Expenditure Review, PER (World Bank, 2006). l3Central government transfers to municipalities account for barely 0.1 percent o f the central government budget. Panama CFAAICPAR: Country Background 4 Development Fund (FFD), which was created in 1995 as a repository for the proceeds from the privatization of public enterprises and the sale or concession of Canal Zone assets, to be used for financing public development projects. The CFAMCPAR in the Country Context 15. Good PFM institutions allow governments to balance the three interrelated objectives o f budgetary performance: aggregate fiscal discipline, efficient allocation o f resources according to the Government's policy priorities, and operational efficiency in the use o f resources (Schick, 1998). Institutions, understood as sets of formal and informal rules, influence behavior o f public officials involved in the process o f planning, allocating and spendingpublic money aimed at implementing government policies andprograms. 16. Objectives. With the view o f strengthening the performance o f Panamanian PFM institutions at the three cited level^,'^ the overall objectives of the C F M C P A R are to: (i) document and update analytical knowledge on the legal and institutional framework and systems for budget planning and execution, procurement and contracting, fiscal reporting and external oversight; and (ii) accordingly propose a set o f recommendations, thereby helpingthe Government in the design or implementation o f capacity-building programs under its ongoing public sector modernization a enda. Emphasis i s put on fundamental actions that could enhance operational efficiency. Hs 17. To that effect, Chapter I1 describes the PFM legal and institutional fkamework, including the integrity o f the system, Chapter I11looks into key cross-cutting issues, Chapter IV examines thoroughly the budget cycle, and Chapter V discusses procurement operations and market practices. The ultimate goal i s to contribute to the government program's strategic pillars cited earlier, particularly on reform o fpublic finance and modernization o f the State. 14The Public Expenditure Review (World Bank, 2006) analyzes other aspects (fiscal reform, quality o f sectoral expenditure planning and allocation) that have a significant impact on the three levels o f budgetary performance. IsThefundamental actions found throughout the report respond primarily to the results of the application o f the P F M Performance Measurement Framework (Annex 2). Panama CFWCPAR: Legal and institutionalFramework 5 11.LEGALAND INSTITUTIONALFRAMEWORK Financia1Management Framework 18. The PFM legal instruments are contained in various laws and regulations listed in Box 1. There i s no financial management law per se, as the relevant rules are found inorganic legislation and in a large section o f each annual budget law dealing with budget administration procedures. Box 1: Main Laws and Regulations GoverningPublic FinancialManagement I Articles 267-278 o f the Constitution regulate the general state budget. Articles 279-280 regulate the functions o f the Office o f the Controller General o f the Republic (CGR). I The Organic Law o f the Ministry o f Economy and Finance (Law 97, 1998) and its Regulations (Decree 52, 1999) establish MEF's leadership inpublic sector budget administration and financial management. I Each annual Law o f the General State Budget lays out the Budget Administration General Norms. I The Public Contracting Law (Law 56, 1995) and its Regulations (Decree 18, 1996) normpublic procurement. I The regime for ex-ante control fiscalizacidn) and ex-post audits (examen de cuentus) is established inthe Organic Law o f the CGR (Law 32,1984). I The Tax Code and other specific legislation, such as recent tax reforms (Law 61,2002 and Law 6,2005) provide the framework for tax administration functions. I The Fiscal Responsibility Law (Law 20,2002) sets certain fiscal deficit and debt targets. I The Law on Transparency (Law 6,2002) establishesrules for the improvement o f transparency inpublic management and grants individuals the right to access public information. m The MEFhas issuedvarious manuals related to budget classification, formulation and execution, as well as user guides for the IntegratedFinancial Management System (SIAF). -The I CGR has issued the public sector accounting and auditing standards. 19. M a i n institutional arrangements. The Ministryof Economy and Finance (MEF) i s responsible, inter alia, for the direction of public sector budgetary administration and of public finances. Accordingly, it houses typical financial management regulatory directorates: National Budget, Investment Programming, Revenues, Public Credit, Procurement, Treasury, Accounting, and IntegratedFinancial Management System(SIAFPA), among others. 20. The Office o f the Controller General of the Republic16 (CGR) is an independent constitutional body with the authority to exercise fiscal oversight on @scalizar) all management o f funds and other public goods, through ex-ante or ex-post contr01s.l~Other functions o f the CGR include, inter alia, setting public accounting methods, reporting the financial situation of the public administration to the legislature and the executive, and maintaining national accounts. For the purposes of this report, three directorates are relevant: Fiscal Control (Fiscalizacidn),Methods and Systems o f Accounting, and General Audit. The National Assembly elects the Controller General for a term equal to that o f the President o f the Republic (five years). The Controller can only be removedby the Supreme Court of Justice ifjustifiedunder the law. Inaccordance with the Constitution, the CGR determines the cases inwhich it will exercise both ex-ante and ex-post control, or only ex-post control. The latter, however, has rarely beenput into practice. Panama CFWCPAR: Legal and institutional Framework 6 21. The National Assembly approves the annual budget and possesses other budgetary attributes (see Chapter IV), but it cannot authorize expenditure items and programs that are not contemplated inthe budget. 22. As will be noted in ensuing chapters, there are four main areas in which the institutional settings seem subject to improvements: (i)payment operations are fractioned, with CGR handling payroll and debt service, and MEF the other payments; (ii)similarly, public debt databases are maintained by both the MEF and the CGR; (iii) organic law MEF's (Law 97) grants it the function o f keeping the integrated government accounting and preparing the consolidated financial statements o f the public sector, a function that i s still performedby the CGR; and (iv) CGR's external audit responsibilities seem incompatible with its ex-ante control and administrative-type tasks. 23. Financial management systems. The development and consolidation o f an integrated financial management system (SIAFPA) i s a central feature o f the government's Program to Strengthen and Modernize Economic and Fiscal Management, financed by IDB and currently inits second phase (Box 2). 24. SIAFPA i s the official government system for financial and budgetary records. Under the basic premise of operational decentralization and normative centralization, it follows two structures: (i) executing entities, SIAFPA institucional contains modules for in budget, procurement, treasury, accounting, fixed assets and inventories, and fiscal control; and (ii)at the central level, SIAFPA consolidado contains normative modules for budget, treasury, public debt, and accounting. 25. SIAFPA operates in 23 NFPS entities (including the whole central government), while other entities use an earlier budget execution system (SRPG) or other information systems. Even though the expansion o f SIAFPA has gradually contributed to standardization, the abundance of disconnected IT applications for financial management is still tangible.I8 '* For example: SIAFPA, SRPG and other systems are used for recording budget execution and accounting transactions. EPD i s used for management o f most, but not all, government payrolls. The budget formulation system, the public investment system (SINIP), the debt management system (DMFAUSIGADE), and the fixed assets registry, to name a few, are not directly interfaced on-line to SIAFPA. The MEF intends to improve system integration through the development o f an improved, more flexible, web-based version of SIAFPA. On the other hand, the Presidential Secretariat of Governmental Innovation (SPIG) considers necessary to work jointly with the MEF and the CGR to develop a new system to plan and manage in real time governmental resources (iGRP), given SIAFPA's problems (technological infrastructure, lack o f articulation and integration, coverage, and supporting staff). Panama CFWCPAR: Legal and lnstitufional Framework 7 Box 2: Programto StrengthenandModernize Economicand Fiscal Management The main objective o f the 2"dphase o f the program is to increase public sector efficiency and effectiveness inthe economic and fiscal spheres. The objectives o f the Loan have been recently reviewed with the government, following the change o f administration. The review o f the project components has slightly modified the original calendar for disbursement, and the agreed goals have been defined as follows: (i) enhance the MEF's planning capacity; (ii)strengthen financial management; (iii) make tax collection more efficient and effective; (iv) improve the quality o f public investment; (v) expand the management and oversight capacity of the customs administration; and (vi) strengthen the institutions o f the land-registry system. Strengtheningof financial management a. Budget Directorate (DIPRENA). To improve budget management and make it more expeditious, accurate, and transparent, the following activities are planned: (i)design a methodology to review the programming structure o f the national budget, and introduce a multi year budget programming; (ii) conduct a diagnostic study o f the current programming structure; (iii)define and implement a new programming structure aimed at making the budget a means for administering public management and assessing its performance in physical and financial terms; (iv) incorporate the interface with the public revenue subsystem into the budget cycle; and (v) train its staff inthe new methodologies adopted. b. General Treasury Directorate (DGT).Plans are to reduce the government's current financing expenditures by: (i) consolidating efforts within the operation o f the Treasury, reducing the time for payment to service providers from 120 to 30 days; and (ii)carrying out the program to implement an integrated account system in the Treasury, ,cutting the daily average balance from US$SOO millionto US$150 million, with a respective decrease ininterest costs. c. Public Debt Directorate (DCP). Improving external and internal debt management will reduce the costs of managing the public debt. The following activities will be carried out: (i) the transfer o f debt registration finalize and payment functions between the MEF and CGR; (ii)support streamlining o f the debt registration and payment process; and (iii) design and adopt a quality control methodology for data entered in the SIAFPA and reports on public debt management. d. National Accounting Directorate (DNC). The following activities will be carried out: (i) formulate procedures to verify the quality o f accounting information; (ii) define the methodology for consolidating the public sector's financial statements; (iii) methodologies for financial and economic analysis o f consolidated financial design statements; and (iv) support implementation o f the DNC training plan. e. SIAFPA. The following activities are proposed: (i)fine-tune and extend SIAFPA to the decentralized public sector and local governments selected by the Government o f Panama; (ii) define a standardization plan for SIAFPA; (iii) incorporate into SIAFPA interfaces with other related systems, e.g., revenue, investment, and the integrated account o f the Treasury; and (iv) design back-up and contingency plans. Full implementation o f SIAFPA throughout the public sector i s expected to bring an increase in the sector's productivity, a decrease in public procurement costs, and greater transparency and control inexecution o f the budget. Modernization of the publicinvestmentsystem The general objective of this component is to strengthen the planning, programming, and control o f the public investment budget so the public sector can pursue investment options that yield the highest returns and are the most consistent with the government's macroeconomic targets. The key element o f this strengthening is the "control tower"-an information system built on a Web application coupled with Intranet-based communication as a core component of the SINIP-that will provide information on the public sector's investment project portfolio to the entire country. The Directorate of Investment Programming (DPI) undertakes a number o f activities to strengthen the SINIP, as follows: Institutional strengthening through a scheme that takes into account three components: (i) training and technical assistance, (ii) methodologies, standards and procedures; and (iii) integrated project portfolio the system (banco integrado deproyectos). Structuring o f the Inter-institutional Technical Committee to foster project feasibility. New design o f the system to manage investment initiatives. Execution of an action plan to contract a consulting firm to undertake the development and implementation o f the integrated project portfolio system, with a view o f satisfying the needs o f users and the improvement o f the defined methodology. DPI's plans include the review o f methodology for the formulation, monitoring and management o f project initiatives. which will serve as basis for the new svstem. Panama CFAAOAR: Legal and Institutional Framework a DPI actions also include the development o f a training program to strengthen the process o f formulation and monitoring of project initiatives, as well as the use of the information system. The new systemconcept takes into account the development o f functionality for the identification o f training needs in executing entities. On the other hand, the contracting o f an international consultant to coordinate the formulation o f a medium-term sectorial public investment plan (2006-2010) is underway. Strengtheningof the tax system a. With the objective o f implementing procedures for institutional planning and management control: (i) studies will be conducted on evasion and on key economic sectors to provide input for the institutional plans; (ii) the single taxpayer registry will be evaluated and courses o f action will be proposed to give the General Revenue Directorate (DGI) better knowledge and more information on the units administered; (iii) management control and planning methodologies will be established for all areas; and (iv) the organizational structure of the action programs adopted will be reviewed and adapted. b. To implement effective controls and combat tax evasion: (i) capacity will be created for investigating and detecting tax evasion; (ii) new computer systemswill be set up to support inspections; (iii) implementationof the structural measures to prevent evasion will be assessed; (iv) specific audit techniques will be developed by economic sector; and (v) auditors will be provided with computer-based means for their field work. c. Strengthening o f IT resources: (i) the D G I will receive support to consolidate its IT independence within the framework o f policies defined by the MEF and the exchange o f information that must necessarily occur with other areas o f the government; (ii) support will be provided to develop and administer its own systems; and (iii) infrastructure will be reinforced and updated to manage electronic data systems. d. Establishment of institutional communication policies: (i)policies will be established to foster better compliance with tax obligations by taxpayers; and (ii) large-scale, permanent channels of information on the tax system will be put inplace, aimed both at the community and at the system internally. e. To promote training and improvement in the services offered by tax administration personnel and boost operational capacity, support will be provided for: (i)creation o f a unit to coordinate staff training and management; (ii)implementation o f specific procedures for the selection, hiring, evaluation, and promotion of employees under the current Administrative Career Act; (iii) design and implementation o f training plans, with emphasis on the areas o f tax control and inspection; and (iv) application o f management procedures that allow the DGI to administer more expeditiously the physical and financial resources assigned to it. f. With regard to internal control, the program will promote the formalization of procedures by means of guidelines or manuals and will establish internal control procedures. Source: IDB(2002, slightly updated in2006) Public Procurement Framework 26. Overview of the legal framework. Law 56 o f 1995 and its implementing regulations, included in Decree No. 18, 1996, constitute the basic regulatory framework for public sector procurement in Panama. Strengths and weaknesses o f the law are addressed in detail in the 2001 CPAR. However, an inter-institutional committee o f the Government prepared a new draft procurement law which was endorsed by the fill Cabinet and will be submittedto Congress shortly. This document is discussed separately below. 27. Law 56 and regulations set forth all the basic principles which are required to support a competitive and transparent procurement system including the foundation for a sound institutional framework for policy development and implementation. The most important shortcomings included insufficient clarity in important aspects such as bidders' qualification, evaluation, and the amount o f performance security (up to 100 percent o f the contract value at the discretion of the procuring entity), excessive and vague justifications for direct contracting, lack o f appropriate rules for selection o f consultants, and overly legalistic provisions which introduce some rigidity inthe process (e.g. excessive formality and multiple Panama CFAAICPAR: Legal and institutional Framework 9 documentary requirements). The latter problem, in particular, is compounded by the ex-ante control rules set forth in CGR's enabling statute, and various layers o f internal approvals established by agency-level rules. Among the justification for direct contracting, one o f the most frequently abused i s "obvious urgency" which i s too broadly defined. Another case where excessive latitude and lack o f clarity may lead to abuses i s the procuring entity prerogative to award the contract directly when two consecutive processes have been voided for lack o f participant^.'^ 28. The most serious problem with the Law 56 o f 1995 is its limited and highdegree o f fragmented application due, among other reasons, to a proliferation o f differing interpretations and application practices and splitting o f contracts to avoid the overly legalistic approval procedures and controls. It i s estimated that, in practice, 80 percent o f government procurement under the current law applies only to the acquisition o f small projects and the purchasing o f common goods and services. 29. Another consequence of the burdensome budgetary and procurement processes has been the extensive use o f external financial agents such as UNDP and IICA to execute projects and large contracts managed by central government agencies. 30. New Procurement Law. A major accomplishment in the area o f the legal framework on procurement has been already taken. A new procurement law, (Law 22 o f 2006), published inthe Gaceta Oficial on Jun 28,2006. The Law, scheduled to be effective on December 29 2006, i s anticipated to play a major role in transforming the government procurement system. 31. The new Law constitutes a step in the right direction in reforming the regulatory framework as it addresses, in part, several o f the weakness previously identified, strengthens the independence and mandate o f the DGCP, and facilitates the transition to an electronic procurement system. The GOP has already developed an action plan for the implementation o f the Law, including drafting regulation frameworks, developing an e-procurement strategy, etc, which will be financed under a World Bank Technical Assistance Operation under implementation. 32. Examples of Parallel Regulatory Systems. While several autonomous bodies follow their own rules in addition to the law, the ACP utilizes a completely independent procurement system2'. There are many factors in addition to a sound set o f rules which contribute to the efficiency o f the ACP's procurement system. However, some o f these factors are rooted, at least in part, in its regulatory framework which is well designed and incorporates modern principles and approaches inGovernment contracting laying the basis for streamlined procurement processes and controls. While the latter are strong and innovative, the main thrust o f the ACP's rules i s the cost efficiency and quality o f the procurement outputs, and the most favorable conditions for disposition o f obsolete goods and the ''The language o f Art. 46 and 58 o f the Law 56, allows, but not mandates that the procuring entity award the contract to the only participant. However, the entity may, at its discretion, award the contract directly to a different party who had not participatedinthe bidding. 2oBased on Art 312, Title XIV o f Panama's Political Constitution, Articles 52-59 pf the Enabling Law o f the ACP, the ACP Contracting Regulations, and further internal rules addressing procedural details. Panama CFMCPAR: Legal and institutional Framework 10 concessions granted by the ACP. ACP's regulatory framework recasts the procurement cycle as a process o f supply management, involving a full range o f management decisions in addition to the selection process. Principles found in the ACP's system o f rules go much beyond the basic value o f open and transparent competition, also present in the Public Procurement Law, to provide clear guidance on many key aspects o f an efficient system including, inter alia, ensuring fair and equitable treatment o f bidders and contractors, the use performance-based specifications, delegation o f contracting authority, procurement planning to increase efficiency through appropriate consolidation, access to procurement information by prospective bidders and contractors, bid protests, and evaluation o f contractors' past performance. The control system includes, inter alia, ex-post audits, clear rules o f ethics and financial disclosure, and an efficient procurement information management system which automatically flags suspicious activities such as contract fiactioning and collusive practices. The ACP procurement rules also sets forth detailed provisions on contract administration, including prompt payment to contractors and computation o f interest in case o f late payment, maintenance o f records and internal audit, and clear ethics and code o f conduct measures and sanctions. For control purposes, the Same Contracting Officer i s prohibited fiom performing more than two o f the following tasks: approval, receipt acknowledgement, and payment authorization. 33. Another important example o f the "parallel procurement regimes" existing in Panama i s the Social Security Administration (CSS). In addition to Law 56, detailed procurement provisions are included in its recently reformed enabling law2' and the Law on Drugs and Other Health Sector Goods22. These sets o f rules are complemented by detailed procedures on the procurement process which were fully revised in 200523and standard bidding documents which set the basis for transparent competitive processes and equitable contractual relationships. The CSS parallel regime sets forth a more comprehensive and modern regulatory fiamework than the Public Procurement Law, particularly with respect to the use of framework contracts. Many details are appropriately included within lower level, flexible sources (i.e.interna1 procedures and biddingdocuments). However, the recent success o f the CSS in improving procurement efficiency and transparency can be credited more to its organizational reform, the efficient use o f technology and new contracting approaches, and the leadership o f its Director than legal reform. 34. Overview of the Institutional Framework and Management Capacity. The key institutional stakeholders include the MEF, in particular, its Public Procurement Directorate (DCP), the CGR, and the Presidential Secretariat for Government Innovation (SPIG). 35. The DCP i s the primaryregulator and, by law, it i s required to actively participate in the system's oversight together with the CGR (e.g. by approving direct contracting, an activity which historically has absorbed a significant portion o f its resources). 36. The current Government has placed strong emphasis on procurement reform as a way to streamline public administration and increase the efficiency o f public spending. As a 2'Law 51 o f 2005. 22Law 1 of2001. 23Various internal rules such as the "Procedures for the Purchase o f Goods Utilizing Framework Contracts" (N. 260-05) and the "Procedures to Address Breaches o f Contracts inFramework Contracts" (178-05). Panama CFMCPAR: Legal and InstitutionalFramework 11 result, the DCP received a stronger mandate and full political support to revive the reform process. Currently, the DCP has effective leadership, i s developing a sound vision for its strengthened role, and is beginning to coordinate well with other key Government stakeholders, in particular the CGR and the SPIG. In addition to those allocated by the Government, adequate resources to support the initial phase o f the reform are available through the World Bank's Public Policy Reform Technical Assistance Project which has a specific component for this purpose (Box 3). Panama CFAA/CPAR: Legal and institutional Framework 12 Box 3: PublicPolicy ReformTechnical AssistanceProject The objective o f the project i s to consolidate and deepen the reforms needed to accelerate growth and reduce poverty, by strengthening the government's economic monitoring and planning, policy formulation and execution capacity. The project promotes the achievement o f this objective by assisting the government in the implementation o f selected commitments and policies, the design of selected new reforms and the improvement o f its capacity to carry out poverty and economic monitoring, and analytical evaluations. More specifically, the objectives o f the project include the following: (i) promoting trade reform and liberalization; (ii) contributing to fiscal sustainability and public sector efficiency by strengthening the overall capacity o f the government to monitor economic data and improve macroeconomic policy formulation and implementation; (iii) improving the quality o f poverty data and information on social expenditures so as to increase the relevance, efficiency and targeting o f social programs; and (iv) improving the efficiency and transparency inpublic procurement. Strengtheningthe public procurementsystem 1. Improving the public procurement legal framework. This sub-component supports an overall review of existing procurement and related regulations, and the drafting and processing o f an amendment to Law 56, and comprehensive regulatory decree, using a participatory mechanism (workshops) to involve all stakeholders. The amendment to the Public Procurement Law would aim at strengthening the leadpolicy, regulatory and institution building role o f the DCP, closing existing loopholes, and removing inconsistencies. 2. Building institutional capacity for handling procurement. The government believes that it i s necessary to strengthen the capacity for handling public procurement and this sub-component supports the strengthening o f the DCP and the government agencies' procurement units to provide them with the resources to carry out their duties and to undertake a phased program aimed at: (i) developing standard procedures and bidding documents o f general application nationwide; (ii) reviewing and adjusting procedures; (iii)developing and implementing a human resources policy; (iv) carrying out an assessment o f available human resources; and (v) designing and implementing a training program for procurement officials. 3. Developing a public procurement system. This sub-component supports the establishment o f a Public Procurement Information System and setting the basis for Electronic Government Procurement (EGP). The project finances technical assistance, training and equipment for the development ifthis system. The government has recently refocused the procurement sub-component as part o f the policy dialogue carried out during preparation o f this report, including some o f its recommendations. For example, selection processes are underway to retain consultants who will help the DCP develop an overall reform strategy, prepare baseline indicators utilizing the OECD-DAC Procurement Joint Venture BIS tool, reviewing administrative processes to identify inefficiencies and bottlenecks, and carry out transparency perception surveys. Source: World Bank (2001, slightly updated in2006) 37. During 2005, the DCP has been restructured to provide technical assistance to procuring entities on the interpretation and application o f the regulatory framework, supervise the consistent implementation o f the system as a complement to the CGR's control function, develop tools such as biddingdocuments, build capacity inprocuring entities, and manage the e-procurement system. The new leadership and restructuring have resulted in more efficient workflows (from 90 to 30 days average to respond for approximately 70% o f the processes) and launched an outreach campaign to begin collaborating more effectively with the private sector and civil society organizations (e.g. with the local chapter o f Transparency International). The latter will require a significant effort as the DCP will need to overcome a negative image o f the public procurement system and the state as a business partner for the private sector24. Inaddition, during preparation of this report, the DCP began cooperating more closely with the Public Policy Technical Unit responsible for implementing the World 24 Several private sector representatives interviewed by the mission indicated that many reputable Panamanian companies either do not contract with the Government or, by corporate policy, rely only on the procurement market only for a limited share of their business. Panama CFAAICPAR:Legal and institutional Framework 13 Bank project and refocused the procurement plan to address some o f the emerging needs o f the DCP, as identifiedby its leadership and preliminarily confirmed by this CPAR update. 38. The CGR i s also in the process o f reviewing its control methodology with the objective o f improving its own efficiency, as addressed in Chapter IV. To this end, for example, the CGR has initiated the development of e-procurement before transferring this responsibility to the DCP and has been an early sponsor o f legal reform to modernize the system. 39. The SPIG plays a central role inpromoting the development o f technology designed to promote transparency and efficiency in the public administration and establishing an environment which i s conducive to its utilization. Inparticular, the SPIG took the leadership inthe development o fthe e-procurement strategy (PanamaCompra) and it is a key partner for the DCP inits implementation. TheIntegrity of the System 40. Ethics and Anti-Corruption Measures. The Government's agenda for state modernization included in the 2005 strategy for economic and social development identifies ethics, anticorruption, and a competitive procurement system as important priorities. 41. Law 6 o f 2002 constitutes the legal framework for transparency in the public administration. As required by the law, on December 15, 2004, the Executive Branch issued regulations 25establishing general principles for the standardization o f codes o f ethics within the central government. All public entities have already issued and disseminated their codes o f ethics and some have posted their code online. 42. The transparency and anticorruption framework is implemented by several horizontal and vertical institutions. 43. The Offices o f the CGR and the Attorney General are the agencies primarily responsibility for enforcement o f anti-corruption provisions within their respective areas of jurisdiction. 44. The CGR26has recently implemented several actions supporting transparency and good governance, such as starting to develop indicators to assess the fiduciary capacity o f public entities and adjust the thresholds for ex-ante reviews accordingly. The CGR Office also established a financial disclosure program for public sector employees, as required by Law 59 of December 29, 1999. According to the CGR, as o f December 25, 2005, 87.3% compliance hadbeen achieved. 25 Cabinet Decree 246 o f December 15,2004. 26 Two offices reporting to the Controller General investigate administrative corruption: (1) The National Directory for Special Investigations (CGR's Resolution 204 of July 1995), which oversees reports on alleged irregularities inadministration o f public funds. This entity has a online system to report cases o f misuse ofpublic funds; and, (2) The Financial Liability Directorate (Direccion de Responsabilidad Patrimonial) Cabinet Decree 36 of February 10, 1990);an entity responsible for undertaking preliminary administrative steps to determine if public funds have been misused.The Direccion is also entrusted to issue administrative decisions on financial liability. Panama CFMCfAR: Legal and lnstifutionalFramework 14 45. TheAttorney General has implemented the following initiatives within the past . year: Strengthening o f the anti-corruption prosecutorial team by appointing a new . specialized senior prosecutor. Creation o f an "internal affairs" office responsible for investigating cases o f .. misconduct involving staff at the Attorney General's Office. Adoption o f an anticorruption agenda at national and international level. Sponsoring o f a bill to expedite investigation and prosecution o f cases o f corruption cases. 46. The National Anticorruption Council28 was created as an advisory body to the Executive Branch on public sector strategies related to good governance, transparency, ethics and anticorruption. The Council, whose membership includes NGOs, religious groups and the media, i s responsible, for disclosing the standard code o f ethics among public officials, creating ethics units within public sector institutions, and advising the Executive Branch on anti-corruption and ethics. 47. As discussed, the Presidential Secretariat For Government Innovation (SPIG)Y~~s i responsible for promoting transparency and efficiency in public administration through the use o f new technology. 48. Civil Society. Law 6 o f January 22, 2002 30 includes mechanisms to encourage active civil society participation in monitoring public administration and Cabinet Decree No. 179 specifically requires the National Anticorruption Council to facilitate this participation with respect to the Government's anticorruption efforts. Among other civil society organizations, the local chapter o f Transparency International3 ', Fundacion para la Libertad C i ~ d a d a n aand~the Comision Justicia y P ~ zhave , ~ ~ ~been very active and outspoken on issues related to transparency, ethics and anticorruption. *'According to Article 217 o f the Constitution, the Public Ministry(under the Attorney General) is responsible for defending the interest o f the State and or municipalities; enforcing laws; overseeing the official conduct o f public servants and ensuring they hlfilltheir duties; investigating and prosecuting crimes and infringements o f the Constitutions and laws; etc 28Cabinet Decree 179 o f October 27,2004. 29CabinetDecree 102 o f September 1,2004. 30Law 6 o f January 22,2002. 31 Transparency International organized a workshop on Law 56, 1995, with the participation o f members o f public and private sectors, and civil society. The workshop produced a Map o f Risk (Mapa de Riesgos), which identified the following key issues: discretional powers given to the public official responsible for the implementation o f bids; excessive use o f sole source; restrictive provisions for qualification o f bidders, limited time for preparation ofproposals, and others findings also identifiedby the CPAR 2001. 32 Fundacion para la Libertad Ciudadana has conducted anti-corruption assessments covering issues related to politics, public contracting; judicial system, access to information. Among the most relevant reports issued by the Fundacionare: Global Integrity Report, Global Corruption Report, and assessments (diagnostic) ofthe public administration. The Fundacion has also participated in educational programs focused on anticorruption, such as Panama CFWCPAR: Legal and Institutional Framework 15 49. Access to Information. The right to access information is grounded on Article 41 o f the Constitution and i s also guaranteed under Law 6, which established the principles o f public access and publicity. Inthe line with the Government's commitment to transparency, the Executive Branch issued a decree in September 2004 further expanding and defining the public's right to i n f ~ r m a t i o nConsequently, anyone can exercise this right with respect to ~ ~ . any matter o f social or private interest3' and public officials are required to issue a prompt response under penalties defined in the law, which also establishes a judicial mechanism for enforcing this right. Citizens whose requests for information have been denied or not addressed in accordance with the law, can request enforcement through a "habeas data", or a court order directed to the public entity to produce the information. 50. Law 6 also requires public entities to periodically publish certain documents (on policy, strategy, internal procedures, etc) on their internet sites and to keep printed copies o f such documents and policies available to the public. However, public entities are not required to establish an office or department to manage this function. Additionally, access to all procurement files, reports and actions i s specifically guaranteed by both Law 56 and Law 6. 51. The exercise o f the right to access information has been further facilitated by the launch in October, 2005 o f the first phase o f the new e-procurement system, PanamaCompra whose enabling decree36 emphasizes the importance o f e-procurement in promoting transparency and competition, and supporting good governance. All central government institutions and autonomous entities are required to post online all public procurement information, contracts opportunities and awards and municipal and other local entities are also expected to eventually begin utilizing PanamaCompra. 52. Access to Appeal Mechanisms.Bid protests constitute an important watchdog for the system which i s widely resorted to by bidders in Panama, but the regulatory framework does not establish an efficient system for review. A Resolution which sets forth procedural formalities to submit a protest has been issued by the DCP six years after the procurement law entered into effecti~eness~~.The DCP's decisions are enforceable only if issued prior to contract award, there i s no timeframe for PPO's review and decision, and the protests' outcome i s not disseminated. 53. While only registered bidders are allowed to submit a protest, in the present regulatory framework there i s no instruction on what constitute an acceptable protest or on the design and implementation o f public campaigns ("corruption stains") for awarenesso f the negative costs and consequences o f corrupt activities. 33 Comision Justicia y Paz has played a key role overseeing activities by the Judicial Branch, and advising the other branches on initiatives for strengtheningjudicial independence. 34 Cabinet Decree 124 o f May 21, 2002. Decree 124, limited the application o f Law 6 to those "interested people", who have a direct personal interest in the information requested. However the new regulation has broader the application o f Law 6 allowing "any person" to request information. 3' Information concerning the compensation o f public servants (on contracting, appointment, payrolls, representations, per diem, etc) is also subjected to public scrutiny under the current legislation. This information has beenposted inwebsites by several government institutions. 36 Cabinet Decree 98 o f September 2,2005. 37 Resolution 109 o f October 15,2001 complementing Law 56 o f 1995. Panama CFAAICPAR: Legal and institutionalFramework 16 how to handle unfounded complains. As a result, the system i s often abused by some bidders who submit frivolous protests simply to disrupt the process. Among the regulatory changes recently adopted by the Social Security Administration (CSS) to improve its procurement efficiency, as discussed below, a 15 percent security was introduced as a condition to submit a protest which is executed if the protest i s not resolved in favor o f the bidder by the Supreme Court which, in accordance with Panamanian law, carries out an independent review in the second instance through its specialized "Third Chamberyy3*.The ACP regulations include a similar requirement for contracts above US$lO,OOO, but the amount o f the guarantee i s 5% and the guarantee i s executed only if the protest i s found to be frivolous and has caused additional expenses to the ACP. However, in the ACP's system, protests alleging irregularities in the bidding documents and disqualification do not require posting the guarantee. Inaddition, determinations on protests must be made within 30 days. Conclusionsand Recommendations 54. Financial management framework. Ingeneral, there is a large legal and regulatory framework that covers each relevant area o fbudgetmanagement. Nevertheless, the practice o f subjecting general budget administration norms o f a "permanent" nature to annual issuance and approval could risk bringing instability to the system. Although not a priority, the government could therefore consider the preparation o f a financial management law, leaving the annual budget laws to deal solely with the specifics of each fiscal year. 55. On the other hand, the distribution o f fiscal functions is clear, yet not always adequate. Noting that in some cases there are legal and even constitutional implications, a fundamental action could be to get policy dialogue underway with the relevant stakeholders to look into mid-term solutions to optimize the distribution o f institutional responsibilities, particularly with respect to payment operations (e.g., payroll and debt service), debt records, administration o f accounting systems and preparation of consolidated fiscal reports, and external audits. 56. The ongoing implementation o f an integrated financial management system (SIAFPA), with the correlated standardization o f procedures, has contributed to the production o f timely and seemingly reliable (though not yet complete) information on government spending. In that sense, SIAFPA contributes largely to the MEF's capacity to control aggregate spending. 57. Recognizing the ambitious plans underway to upgrade SIAFPA's technological platform to an internet based ar~hitecture,~~a thorough review o f the intricate administrative procedures inplace (see Chapters IV and V), and o f the system's own recordingmethods (e.g. lack o f a single accountinghudgetary entry applied throughout the process), could have 38Article 72, Law 5 1o f December 27,2005. 39 Among other advantages, an Internet-based architecture can reduce costs associated with dedicated links, communication systems, maintenance, and upgrades, and thus can significantly ease expansion o f coverage. At the same time, it has to be supported by strong security safeguards. Panama CFMCPAR: Legal and institutional Framework 17 preceded the plans. The prospective linkage between SIAFPA and Panamacompras (see Chapter V) i s a step inthe right direction. 58. More broadly, the government could develop an IT policy (at least for applications related to financial management) that lays out basic standards for development o f software applications, database management, equipment, and integrity safeguards. Among other advantages, such a policy could help avoid the proliferation o f different (and sometimes incompatible) applications and databases, not only across different executing entities, but even within MEF. 59. Looking forward, the public financial management performance measurement indicators documented in this report, could be used by the government as the baseline for a monitoring and evaluation system to assess impact o f reforms over time. 60. Procurement legal framework. There was ample consensus among public and private sector stakeholders that Law 56 on Public Procurement should be modernized to streamline procurement processes and create an environment more conducive to the implementation o f e-procurement, and that the present political climate was conducive to legal reform. 61. The draft law. Adoption o f the new law will support the further implementation and sustainability o f the reform, but the draft could be improved as discussed above. 62. The most serious problem before implementation o f the new law is the fragmentation in the system which makes it very difficult to ensure a consistent compliance across the public sector and the latitude that each procuring entity seems to have in adopting its own requirements for bidding and contracting. For example, this latitude could create potential obstacles to foreign bidders' participation and complicate implementation o f the possible trade agreement with the U.S. Indeed, Panama's institutional and organizational capacity to interpret and implement the treaty consistently across the public sector represents the main challenge. It is important to ensure that efforts to improve the regulatory framework are accompanied by equal emphasis on actions aimed at improving compliance and outcomes o f the system interms o f efficiency and transparency, as discussed inthe following chapters. 63. Procurement institutionalframework and management. Due to the magnitude o f the reform task and the legitimate desire to produce quick results, the DCP has launched many good initiatives, but i s yet to develop a comprehensive strategy clarifylng its priorities, defining tools and methodologies, and ensuringthe sustainability o f the reform effort after the initial thrust. The DCP has selected a consultant to help identify and prioritize short and medium term actions (e.g. which tools should be developed and how), and resources needed for these specific projects as well as for its ongoing activities. The strategy should also include a stakeholder analysis o f the main interlocutors to maximize the effectiveness o f the interaction and develop partnerships, and a map o f potential obstacles to the DCP's effectiveness with options for overcoming them. 64. The DCP has also selected a qualified consultant to apply the baseline indicators system (BIS) developed by the OECD-DAC/World Bank Roundtable on Strengthening Procurement Capacity in Developing Countries to broadly assess the key elements o f a well Panama CFWCPAR: Legal and InstitutionalFramework 18 functioning procurement system4'. The BIS will constitute the basis for a monitoring system to continue measure progress and identify areas where additional emphasis is required. A similar exercise was carried out jointly with the ACP Contracting Department for the limited purpose o f assessing the quality o f the ACP procurement system utilizing an objective methodology which could help derive lessons and guidance inreforming the rest o f the public sector. 65. The design o f any M&E system, particularly one focusing on public procurement where experience i s limited, is very complex and there is no single solution. The DCP should consider a broad spectrum o f M&E methodologies including regular collection o f information, impact evaluations, and surveys focusing on the supply (Le. DCP and the CGR's oversight role) as well as the demand side (i.e. ensuring that findings are the outcome o f participatory evaluations and information i s owned and utilized as much as possible by all stakeholders, including procuring entities and civil society. The BIS should be complemented by a methodology and indicators to measure the performance of procuring entities interms of compliance with the rules, and impact in terms o f the system's ability to produce value for money as well as improve the private sector's perception o f the system's transparency. The latter aspect is also being addressed by a consulting assignment which is underway and could serve as a dynamic tool for periodic assessments. Ideally, these assessmentswould be carried out under a transparency agreement with a leading CSO which would provide a sort o f independent "score card" for the government's transparency facilitating the task and adding credibility to its results. To operate the system, the DCP should select competitively external evaluators and train them on the application o f the indicators. Each finding should be accompanied by a specific recommendation (agreed with the entity) to address the shortcoming identified in the process (specific to procurement and/or financial management) or organization (management, control, human resources). High level ownership and use o f system (Le. all the line Ministers) is essential for its effectiveness and sharing/publication o f results (including recognition and/or awarddincentives) i s important to generate healthy competition among public entities to improve their performance. Finally, there should be clear criteria for incorporating finding at the decision-making level and derive generalized policy implications which guide further reform. 66. Due to limited exercise o f the policy oversight functions by the Ministry o f Finance until recently and a traditionally weak internal control function throughout the public sector, the CGR has become over the years a key player in the procurement process to the point o f being perceived almost a co-administrator. The pervasive ex-ante control and resulting overload adds considerable time to the procurement processes compounding the delays caused by the procuring entities' internal inefficiencies (see Chapters IV and V for further details). However, the CGR shares the Government's vision for stronger accountability and more efficient processes coupled with better capacity and use of technology inthe procuring entities in order to justify a more selective scope for ex-ante control. As recommended in Chapter IV, the CGR could consider developing a comprehensive risk management tool based on 40 This tool has been developed in a highly consultative manner by most donors, a large group o f developing country governments, and implementing agencies and organizations. The system o f indicators is based on benchmarks, objectives, and features o f what is generally considered as an acceptable system as agreed upon by the participants inthe Roundtable, the results o f which (the "Johannesburg Declaration") fed into the HighLevel Forum on Aid Effectiveness held inParis in2004. Panama CFAAICPAR: Legal and lnsfitutional Framework 19 information jointly developed and shared with the DCP to regularly assess the capacity and procurement risk posed by different entities and determine thresholds for prior review which could be raised as the risk decreases. The tool could be eventually fully linked to the DCP's M&E system. Integrity of the system 67. Access to Information. The current legal framework i s adequate and enforceable. Further development o f the e-procurement system, specifically address later in this report, i s considered a major element to continue modernize the state and enhance the effectiveness o f the transparency framework. 68. Protests. The solution adopted by the CSS with respect to protests has been effective in reducing the number o f frivolous protests, but poses an excessive risk and a significant barrier to the exercise o f this important right for bidders which may have legitimate grounds for seeking review. The ACP has adopted a more balanced approach which could be introduced throughout the public sector. In addition, it would be very useful to better regulate the role provided by Law 56 for the DCP by establishing an efficient and independent intermediate level o f administrative review and defining more clearly in the regulations critical aspects o f the protest such as standing, scope o f protestable matters, content and procedures for filing, timing o f protest, time for decision, rules o f evidence, rapid interimmeasures, and standard for review. 69. Ethics, Transparency and Anticorruption. The regulatory and institutional frameworks are sound, but further cooperation with civil society i s desirable to enhance its capacity to hold the state accountable and to cooperate inpolicy development, particularly in the area o fprocurement. Relevant initiatives would includeholding regular consultations and establishing monitoring mechanisms as triggers for civil society action, and enhance civil society organizations' advocacy capacity. Over the past decade, the Republic o f Panama has significantly improved its regulatory framework in compliance with the international conventions on anticorruption to which it i s a party.41 Further improvements would include subjecting senior public employees' financial disclosure to public scrutiny and further simplifying requirements for investigating public officials. Inaddition, specific legislationfor whistleblowers protection i s required. A bill on this aspect is currently being considered by the legislature. 41TheRepublic o f Panama ratified the Inter-American Convention against Corruption, Law 42 of July 1, 1998; and, the United Nations Convention against Corruption, Law 15 of May 10, 2005. In addition, Panama signed the Declaration on the Mechanisms for Follow-up o f the implementation o f the Inter-American Convention against Corruption. Panama CFAAICPAR: Key Cross-CuttingIssues 20 111.KEY CROSS-CUTTINGISSUES Public Financia1Management Out-Turns 70. Selective budget execution ratios can indicate whether the budget i s sufficiently realistic and i s implemented as intended. To that effect, this section focuses on four indicators: (i)aggregate revenue out-turn, (ii)aggregate expenditure out-turn, (iii) composition o f expenditure out-turn, and (iv) stock o f expenditure payment arrears. 71. Revenues. Firstly, a comparison o f budgeted and actual revenue can provide an overall indication o f the quality o f revenue forecasting, a critical factor since budgeted expenditure allocations and underlyingpolicy priorities are based upon it. As shown in Table 2, the recent track record in that aspect has been reasonable: central government's domestic revenue collection has fallen below 94 percent o f the originally budgeted estimates in only one o f the last three years.42Current revenue execution ratios from the rest o f the NFPS have also been reasonably close to the budget. Table2: AggregateRevenueExecution (inpercent ofbudgetedrevenue) 2003 2004 2005 CentralGovernment Domestic Revenue 94.5 87.5 108.8 Current Revenue 98.4 90.1 110.6 Tax Revenue 101.4 97.6 110.8 Non-Tax Revenue 94.4 80.1 110.3 DecentralizedInstitutions Current Revenue 94.6 100.7 IPublic Enterprises Current Revenue 93.2 101.9 Source: Own calculations using CGRMEF data. 72. Expenditures. The ability to implement budgeted expenditures is an important factor in supporting the government's ability to deliver planned public services for the year. As shown inTable 3, recent performance has beengood: inonly one o fthe last three years the variance between the actual central government primary expenditure and the budget has exceeded five percent. Looking at its composition, however, it i s evident that over-execution o f current expenditures has had to be compensated by slowing down capital expenditure^.^^ As in the case o f revenues, the rest o f the NFPS executes aggregate expenditures reasonably close to the budget. 42In2004, the 80 percent executionratio of non-tax revenue was due in large part to the new administration's decision to eliminate the practice of advancing dividend payments from the National Bank o f Panama (BNF'). Conversely, in 2005 the tax reform and an unanticipated amount o f dividends from participation in enterprises boosted up, respectively, the tax and non-tax collections. 43The new administration has made an effort to address expenditures in arrears, resulting in increases to the original budget, which explain partially the over-execution of current expenditures in2004 and 2005. Panama CFAA/CPAR:Key Cross-CuttingIssues 21 Table 3: Variance inAggregate Primary Expenditure Execution (inpercent ofbudgetedexpenditure) I 2003 2004 2005 CentralGovernment (12.8) 4.8 3.0 Current (5.8) 9.0 8.3 Capital (36.9) (7.4) (14.9) DecentralizedInstitutions (8.2) (7.0) Public Enterprises (6.3) 4.5 Source: Own calculations using CGRMEF data. 73. Expenditure composition. The credibility o f the budget can also be measured by the extent to which budget entities receive the resources initially planned: where the composition o f expenditure varies regularly from the original budget, the latter will not be a useful statement o f intent. As shown inTable 4, intwo o f the last three years the variance in central government primary expenditure c o m p ~ s i t i o nhas~ exceeded the overall deviation ~ (Table 4) by more than five percent. Given that this situation reflects largely key budgetary decisions taken during the first year o f the new administration, it i s expected that the government will be inbetter position to control allocational volatility inupcoming years. Table 4: Variance inPrimary Expenditure Composition (inpercentofbudgetedex enditure) CentralGovernment Absolute overall deviation (Table 3) Absolute variance in com osition Difference 10.5 Source: Own calculations using CGR/MEF data. 74. Payment arrears. The identification and control o f expenditure payment arrears i s o f critical importance, as they can constitute a form o f non-transparent financing that affects the credibility o f budget data (and the cost o f doing business with the government, as stressed inChapter V). Since the end o f2004, the government has undertaken a commendable effort to deal with accounts payable exceeding 90 days, and has since reduced the age o f known accounts payable to 30-60 days. An outcome o f this ad hoc exercise was, however, the awareness that many accrued expenditures were not recorded, while the accrued expenditures that were accounted for were not necessarily monitored. Moreover, the balance o f accounts payable in fiscal re orts and financial statements i s not reconciled and age profiles are not available ineither.4'Therefore, as o f the date o f this report the available data on payables (and the share o f those that may be inarrears) cannot be considered reliable and complete. Comprehensivenessand Transparency 75. This section addresses the comprehensiveness o f budget and fiscal risk oversight, and the public accessibility to fiscal and budget information. 44Variance inprimary expenditure composition is calculated as the absolute weighted average deviation between actual and originally budgeted expenditure, as a percent o f budgeted expenditure on the basis of administrative classification (18 budget entities). 45As ofDecember 31,2005 the CGR's fiscal balance report putsthe accountspayable balance at $164.2 million, while the consolidated central government financial statementsreport $284.5 for a similar concept. Panama CFMCPAR: Key Cross-Cutting Issues 22 76. Budget classification. For meaningful tracking o f expenditures to take place, a robust classification system is required. In this dimension, Panama's system for formulation, execution and reporting relies on four main budgetary classifications: administrative (institutional), by funding source, economical (objeto de gusto), and program ma ti^.^^ While the classification system is not based on international standards, it can produce information roughly consistent with those standards, e.g. the programs are similar to functional groups under GFS/COFOG.47 77. Budget documentation. For the legislature to undertake its scrutiny and approval functions, the budget documentation should allow a complete picture o f central government fiscal forecasts, budget proposals and out-turn of previous years. Currently, the annual budget documentation that i s made available to the National Assembly on a systematic basis consists . O f a purpose statement (exposicidn de motivos) through which the Minister of Finance . presents the draft General Budgetof the State Law to the National Assembly; a presentation summarizing the macroeconomic scenario, the budget policy and . certain fiscal and budget aggregates; the draft General Budget o f the State Law, which provides ceilings on major budgetary lines (under economical classification), entities, and programs. It also . includes the general norms ofbudget management; and supplementary data, such as the detailed composition o f revenues, expenditures and investments by entity, and the results indicators by entity. 78. In addition to the detailed information on revenues and expenditures, selected . features o f the mentioned budget documentation are described below:48 the macro-economic assumptions include estimates o f aggregate growth and other . indicators to support the revenue projections, but not the inflation rate; the fiscal deficit presentation improved in 2005, with estimates under both cash and . accrual basis; the deficit financing describes its anticipated composition, but no information i s provided on debt stock and financial assets; summarized budget data are presented for both revenue and expenditure according to the main classifications used, including prior year's budget outturn and current 46The classifiers also provide for functional, sectorial and regional sorting, but these are not used for regular detailed fiscal reporting. 47For the purposes o f this report, the international standard for classification systems is the IMF's Government Finance Statistics (GFS), which incorporates the UN-supported Classification o f Functions of Government (COFOG). 48The list refers to the budget documentation per se, not to the information that the MEF uses for budget preparation. Panama CFAAICPAR:Key Cross-CuttingIssues 23 year's revised budget and estimated outturn. However, the same comparators are not . producedto the same detail as the budget proposal. new policy initiatives are mentioned, but the correlated estimates o f budgetary impact are not clearly explained. 79. Coverage of government operations. Fiscal reports in Panama (i.e., annual budget estimates, in-year execution reports and year-end financial statements) are characterized by their comprehensive coverage o f the central government public sector, which allows a complete picture across all categories. 80. In accordance with the Constitution, the budget of the Panama Canal Authority (ACP) i s approved by the National Assembly but not as part o f the general state budget. The government has further decided to exclude the ACP from the public sector accounts as means to safeguard its financial aut~nomy.~'While separate, ACP operations are reported on a timely basis and made public. 81. Oversight of aggregate fiscal risk. The cited comprehensiveness in financial reporting could facilitate the monitoring of fiscal risk arising from activities o f decentralized institutions, public enterprises and financial agencies. These entities provide budget execution reports on a quarterly basis that are consolidated by the CGR, which since 2005 has also made public the NFPS fiscal balance statement quarterly. Furthermore, the entities' annual financial statements (un-audited) are combined in a report published by the CGR. All in all, however, there i s no evidence that fiscal risk oversight i s performed on a systematic basis. 82. Public access to fiscal information. As noted in the preceding chapter, the Transparency Law (Law No. 6, 2002) grants individuals the right o f access to public information, except o f a confidential or limited access nature, at no more thanprintingcost. In that regard, selected aspects o fthe accessibility to fiscal information are explainedbelow: . annual budget documentation (as described previously in this chapter) can be obtained by the public through appropriate means, including the internet; 50 . monthly budget execution data by entity can be accessedthrough the internet;5' quarterly budget executionreports are routinely made available to the public through . appropriate means uponissuance;52 year-end financial statements and external audit reports are made available to the public through appropriate means upon issuance;53 49An agreement was reached with the IMF to present both the government's definition of the fiscal balance (excluding the ACP) and the more comprehensive measure including the PCA as part of the public sector (IMF, 2006). httd/www.mef.gob.Pa 51idem ` 52http:l/www.contraloria.aob.ua 53idem ' Panama CFAWCPAR: Key Cross-CuttingIssues . 24 information on public bids i s posted in the e-procurement transparency system (Panamacompras), as described inthe previous chapter. Conclusions and Recommendations 83, PFMout-turns. In orderfor the budget to be a toolfor policy implementation, it is necessary that it is realistic and implemented aspassed. 84. The methodologies used in Panama for analysis and monitoring o f budgeted revenues and expenditures, and the coordinated application o f these methodologies, have increased the ability o f the government to maintain aggregate fiscal discipline as planned in the budget. However, the level of inter-institutional variances in execution evidences that there i s still room to increase the credibility o f the initial expenditure budget as an instrument for strategic allocation o f public resources (see recommendations innext chapter). 85. As the government is well aware of, the credibility o f fiscal and budget documentation can also be affected by incomplete recording o f accrued expenditures and identification o f payment arrears. The efforts already underway to clean up payables should continue, complemented with fundamental actions to enforce proper recording o f commitments and accruals, reconciliate balances o f accounts payable between fiscal reports and financial statements, and develop subsidiaryrecords with age profile classifications. 86. Comprehensiveness and transparency. Comprehensiveness of the budget is necessary to ensure that all activities and operations of governments are takingplace within the government Jiscal policy framework and are subject to adequate budget management and reporting arrangements. Transparency is an important institutional value that enables external scrutiny of government policies andprograms and their implementation. 87. To start with, fiscal reporting in Panama has a comprehensive coverage, with minimal unreported government operations. Moreover, a robust budget classification system interms o fadministrative, economic and programmatic items is inplace. Finally, a wealth of fiscal and budget information i s put inthe public domain on a timely basis. 54These are strong pillars to support further enhancements intwo particular areas. 88. Interms of content, afundamental action to enhancebudget documentationwould be the gradual introduction o f international good disclosure practice. Drawing from IMF's Fiscal Transparency Code (IMF, 2001), key aspects that could be brought inare: (i) improved and more comprehensive information on the quantitative macroeconomic framework, on fiscal policy, risk and sustainability, and on the impact o f new policy initiatives; (ii) details o f debt stock and financial assets; and (iii) more detailed comparators between the budget and the ongoing and precedingyears. 54The Executive Secretariat o f the National Committee for Transparency against Corruption (CNTCC) has recommended the creation o f a "Financial Transparency Portal", an informational platform to facilitate free access to any user in real time to financial and budgetary information, using simple formats accessible to the average citizen. Panama CFWCPAR: Key Cross-CuttingIssues 25 89. Other items that could be introduced are the three-year aggregate projections with underlying macroeconomic assumptions, statements describing the nature and fiscal significance o f contingent liabilities, and estimates of tax expenditures. 90. In terms of fiscal oversight, afundamental action would be the strengthening of capacity in MEF and CGR to assess and monitor financial performance and fiscal risks associated with decentralized institutions, public enterprises and shareholding in private companies. Fiscal risk issues could then be consolidated into a report at least annually. This action i s also critical from the revenue management point o f view, considering the large share o f non-tax revenues (around 40 percent) that characterizes the composition o f central government revenues inPanama. Panama CFAA/CPAR: Budget Cyde 26 IV. BUDGETCYCLE Budgetplanning 91. This section looks at the budget formulation process against four principles: (i) because o f their multi-year implications, expenditure policy decisions should be aligned with the medium-term availability o f resources and the sectorial strategies; (ii) that to happen, for the quality o f public investment programming i s key; (iii) effective and orderly participation inthe formulation process by executing entities and political leadership impacts the extent to which the budget will reflect macro-economic, fiscal and sector policies; and (iv) legislative power to authorize the executive to spend public funds should be underpinned by rigorous examination and debate of the budget law. 92. Multi-year perspective.The MEF prepares medium-term (five-year) projections of the fiscal balance. These high level aggregates inform decisions on the budget envelope, but there i s not yet a multi-annual budget per se, i.e. ceilings on the basis o f economic and programmatic classifications that are produced systematically, made easily available, and taken into consideration in the discussion o f annual allocations to sectors and programs. At the time o f preparation o f this report, however, the MEF was conducting initial exercises leading inthat direction. 93. As part o f the mentioned recent efforts, the MEF undertook a debt sustainability analysis to calculate the future primary budget balance needed to stabilize the debt-to-GDP ratio. An experimental specific methodology (considering the characteristics o f Panamanian fully dollarized economy) was built and existing software was adapted to that end. While the analysis i s not as yet officially applied and approved, this i s by itself a good advancement. 94. The challenges at the sectorial level are far more considerable. With some exceptions, there i s general lack o f fully costed medium-term sectoral and programmatic strategies. As a result, the linkages between investment budgets and forward expenditure estimates are weak, as i s the public investment system itself. 55 95* National public investment system (SINIP). While the pervasive weak capacity for medium-term planning i s the main issue affecting the quality o f investment programs, the system itself has a number of shortcomings. Firstly, SINIP was created by decree and is normed, but compliance and enforcement are limited. For example, the fact that certain projects have been incorporated into the budget without following SINIP's appraisal and recording process does not send a good signal to the executing entities (although it should be 55 In accordancewithcomments from MEF's Directorate of Investment Programming (DPI), inthe absenceof a legal framework for the national public investment system (SINIP), efforts in this area will have limited results, with a weak S N I P that is not legally enforced. Thus, the annual efforts or achievements could be diluted the following year or when a change inadministration takes place. Panama CFAAICPAR:Budget Cyde 27 noted that this is no longer a common practice), Moreover, there are inconsistent approaches to the classification o fproject expenditures under the capital or current budget.56 96. On the other hand, o f those projects that were incorporated into the system, economic return analyses are available only for projects financed by international entities. Finally, the programming process is highly centralized, although the government has recently instituted territorial consultative councils as means to involve citizens in the identification o f investment needs. 57 97. Annualbudgetformulation. The MEFprepares a clear annual budget calendar that i s generally adhered to (the budget period i s the calendar year). Accordingly, the MEF distributes the budget policy circular to the executing entities almost six weeks before these are required to present their detailed proposals to the MEF on July 31.58 The circular contains general information about the macroeconomic and fiscal scenario and guidelines on revenues, expenditures and investments that apply across the board. No sectoral specifics, such as indicative ceilings, are provided. 98. The August-early September period i s dedicated to MEF's review o f the proposals and bilateral discussions with the en ti tie^.^' The Minister of Finance presents the consolidated budget to the Cabinet for approval in mid-September. In practice, the Cabinet basically endorses MEF's proposal and the budget documentation i s then presented to the National Assemblybythe end o f September.60 99. A significant recent development was the production o f results indicators by the budget entities, which have been documented for the first time as an annex to the 2006 budget documentation. As i s normal in the introduction o f this type o f instruments, the first set o f indicators deal fundamentally with figures on coverage and are subject to further refinement over time. 56 An informal estimate by the MEF indicates that about 40 percent o f the capital budget is composed o f current expenditure-type programs. 57 The Executive Secretariat o f the National Committee for Transparency against Corruption (CNTCC) has recommended the creation o f a Citizen Unit o f Budget Transparency, which would have among its responsibilities: the coordination o f social audits for the evaluation o f quality and social return o f investments, as well as performance audits to assess the results o f investments inhigh-risk investment projects; the evaluation o f impact in zones o f poverty and extreme poverty; and coordination with the Directorates o f Budget and Investment Programming o f the monitoring o f public policy implementation. 58 The MEF as well as the executing entities beginpreparing informal estimates before the budget policy circular is released. 59 Evidently, there is more room for discussion o f options for capital than for current spending. The MEF has calculated that inflexible expenditures account for about 71% o f the consolidated public sector budget, with remunerations and debt service representing 24.2% and 25.6% o f the budget respectively. Earmarked revenues do not seem to be a major issue, the most important being, in percent o f central government current revenues: interests o f the development fiduciary fund (around 3.5%), the constitutional minimum budget o f the judiciary (2%), and the payroll tax for education insurance (seguro educativo,around 1.7%). 6o The Constitution stipulates that the draft budget must be presented by the President to the National Assembly within the first month o f the first period o f ordinary legislative sessions. These start on September 1, but in accordance with recent constitutional amendments, from 2009 the first sessions will start on July 1. Panama CFMCPAR: Budget Cyde 28 100. Legislative approval. The National Assembly has the constitutional power to approve (with or without modifications) or reject the budget proposed by the executive.61 It can eliminate or reduce expenditures, with the exception o f debt service, contractual obligations and previously approved public investments. It cannot incorporate or increase expenditures without Cabinet's approval, or revenues without CGR's approval. In either case (reduction o f expenditures or increase o f revenues), any proposed allocation o f resulting finds i s subject to Cabinet's approval. 101. In order to exercise the described constitutional rights, the Assembly's Budget Commission dedicates about five weeks for ample discussions (vistas presupuestarias) with the MEF and executing entities before approving inthe first instance the budget law, which i s then subject to plenary approval in two more instances. During the last three years, the Assembly has approved the budget a month in advance o f the beginning o f the fiscal year, thus allowing orderly starts o fbudget execution. 102. Budget modifications. Three types o f budget modifications can take place during the fiscal year: intra-budgetary transfers (traslados de partida) are approved by the MEF after consultation with the CGR about the availability o f balances. Over a threshold o f US$300,000, each transfer is submitted to the National Assembly's Budget Commission for approval;62 below that threshold, the documentation i s submitted to the Commission for information. There are certain limits: (i)certain operational expenditure balances can only be transferred if corresponding to proved savings;63 (ii) allocations for investments cannot be transferred to current expenses; and (iii) transfers cannot increase bud et lines classified under "global allocations", with the . exception o f foreign service.6$ additional credits are budget modifications resulting in an increase o f the overall budget total that can be issued only if revenue budget surpluses are available, and if the CGR issues a favorable opinion on their "financial viability and convenience". These credits are approved by the Assembly's Budget Commission upon request from the Cabinet or the National Economic Council (CENA).65 6' Ifbythe start ofthe fiscal year the budget law has not beenvoted, the executive's proposal comes into effect. Conversely, if the National Assembly rejects the proposal, the budget in effect from the previous year is put again into effect, with the exception o f debt service, contractual obligations and previously approved public investments, which are incorporated as proposed by the executive. 62 The Commission has eight working days to pronounce itself; otherwise, the transfer is considered approved. 63 These operational expenditures are salaries, basic services, contributions to international organizations, social security obligations, and debt service. Asignaciones globales are non-targeted expenditures, such as for national emergencies and other contingencies, and make about 1.5 percent o f the central government primary expenditure budget. 65 Before submittal to the Assembly, additional credits that do not exceed US$2 million are approved by CENA; over that threshold, by the Cabinet after CENA's favorable opinion. CENA is responsible for financial affairs o f the central government and decentralized institutions and, among its functions, issues opinions on public finance matters that require Cabinet approval. It is presided by the Minister o f Economy and Finance, and additionally conformed by the Minister o f Commerce and Industry, a Presidential designate to represent the social area (currently the Minister o f Public Works), the General Manager o f BNP, and the Controller General. Panama CFMCPAR: Budget Cyde . 29 inthe case o f substantiated revenue shortfalls, the MEF can prepare a planto curtail public expenditure for approval by the Cabinet and the Assembly's Budget Commission, resulting ina modification to the budget. Revenues: Predictability and Controls 103. This section examines selective aspects o f tax administration performance from the point o f view o f their contribution to an orderly and predictable budget implementation. The focus i s on MEF's General Revenue Directorate (DGI), which in 2005 collected around 73% o f tax revenues.66 Worth noting i s DGI's comprehensive tax information system (e-Tax), which facilitates several functions, such as maintenance o f the taxpayer registry (RUC), electronic filing o f declarations and payments to third-parties (PAT), processing o f collections data, and maintenance o f the unified taxpayer account (cuenta corriente), among others. 104. Transparency of taxpayer obligations and liabilities. Taxpayer compliance can be facilitated by, inter alia, the clarity and accessibility o f legislation and administrative procedures, and the ability to contest administrative rulings. InPanama, there i s a large set o f tax laws and regulations, which are made available to the public through various means, including the internet for most major taxes. Access i s also given to opinions from DGI's legal department, but these opinions do not createjurisprudence. 105. There are two administrative instances o f appeal against DGI resolutions. First, a reconsideration recourse can be presented before the public official who issued the resolution (the regional administrator) for clarification, modification or revocation. Second, an appeal recourse can be presented before the mentioned official's superior (the DGI, through its Appeals Cornmissi~n).~~Once the administrative channel (which seems obviously biased towards the DGI) has been exhausted, the resolutions can be appealed before ajudicial court. 106. Registration and assessment. Effectiveness in tax assessment depends on various factors, but two key pillars are an enforced registration o f taxpayers and a correct assessment o ftheir liabilities. Inthis regard, the picture inPanama i s mixed. 107. The procedures for assignment o f taxpayer identification numbers and registration in the unified database (RUC) are well documented. The RUC records the basic information o f corporations, individuals and properties, allowing linkages to other government systems, such as the public registry (however, data cross checks are not made With the 2005 tax reform, sanctions for noncompliancewith tax legislationwere increased.6k 66 The main taxes administered by DGI, in percent o f 2005 tax collections, are income tax (42%), value added tax (ITMBS, lo%), and selective consumption taxes (10%). The General Customs Directorate (DGA) administers the duties and ITBMS on imports (26%). "The appealrecourse canbepresentedinsubsidiary formto the reconsiderationrecourse, ordirectly(thus renouncing the reconsideration recourse). The sanction for non-filers o f tax declarations is between US$lOO and US$l,OOO. The interest rate for late payments is o f two percentage points over the rate o f reference for commercial loans. After 60 days in arrears, the taxpayer incurs in tax fraud, sanctioned with a penalty between five and ten times the defrauded amount, or two to five years o f arrest. Other sanctions apply to different instances o f noncompliance. Panama CFMCPAR: Budget Cyde 30 108. As for the audit function flscalizacidn), the use o f certain methodologies for data cross-checks (e.g., with payments to third parties -PTA-) is worth mentioning. However, tax audits are undertaken mostly on an ad hoc basis, evidencing lack o f audit planningand use o f risk-based methodologies, all in large part to the constrained human resource capacity. The ability to conduct fraud investigations and prosecute criminal cases is similarly weak. 109. Collections. The management o f tax receipts and arrears is a critical factor in the ability o f revenue agencies to fund the treasury. InPanama, actual collections are made under contractual arrangements with the banking system and by DGI's own receipt facilities (characterized as "chaotic" on payment deadline dates), and are deposited into the single treasury account (Account 210) maintained by MEF's Treasury Department in the BNP.69 While on one hand these banking arrangements are reasonably effective, on the other the procedures for recording revenues are complex, resulting in delays in the reconciliation o f revenue data.70 110. The major issue in this area is, however, the lack o f reliable data on tax arrears. Unified (Le., excluding customs) taxpayer accounts are in operation, but their contents are subject to major clean up resulting from amnesties, prescriptions, and tardy or inadequate entries and adjustments, all o f which in turn affect the calculation o f interests. Hence, it is difficult to accurately assess DGI's performance on the collection o f outstanding debt. Cash and Debt Management 111. Treasury operations. Planning, monitoring and management o f cash flows and balances are key elements to support budget execution and avoid unnecessary borrowing and interest costs. As noted earlier, Panama's central government revenue i s centralized in a treasury single account (Account 210) managed by MEF's Treasury Department and maintained in the BNP, the government's financial agent. Ingeneral, the management of idle cash i s passive, as government deposit accounts inBNP are interest free.71 112. Once the budget has been approved, the Treasury prepares a yearly cash flow forecast based on historical patterns, debt service projections (input from MEF's Public Credit Department -DCP-) and revenue projections. During the year, the Treasury also prepares monthly and daily forecasts, partly based on daily information it receives from the BNP on the movements and balance o f Account 210.72 Given market conditions, and taking into 69Receipts by D G I and BNP are deposited into the Treasury account within 24 hours; receipts by private banks are deposited within 72 hours (depending on the contracts). 70Part o f the problem relies on the operation o f different systems that are not (properly, or at all) inter-connected: D G I records collections in e-Tax, DGA in SICE, DGT operates the single treasury account system (CUT) with aggregate data received from BNP, and the CGR makes the accountinghudgetary recording in SIAFPA. 71 An exception is the Development Fiduciary Fund (FFD), which has asset management agreements with international firms under regulated risk parameters. At the end o f 2004, FFD's net worth was o f US$1.4 billion and its annual net income was o f US67.6 million. The use o f income generatedby the FFDis earmarked by law to sectorial public investments, but channeled through the budget and Account 210. FFD's financial statements are audited on an annual basis and made public by MEF. 72 The balance and information on the bulk of the payments is sent by BNP the next day, while the specific information on the payments is sent after three days. Panama CFMCPAR: Budget Cyde 31 account the Treasury's cash flow requirements, the DCP issues short-term debt in accordance with an auctions calendar. 113. The bulk of expenditures financed by internal sources are paid directly by the Treasury to providers o f goods and services and by the CGR to civil servants (inboth cases using checks), or transferred to decentralized entities.73 Payments not exceeding US$1,000 can be made by the ministries using a system o f institutional funds authorized by the CGR. The BNP provides the Treasury with data on the balances o f accounts opened by other public sector entities, but otherwise Treasury has no control over them.74Neither does it have it on special accounts required by international agreements to fund project activities, which are managed directly by implementing units or specialized agencies (notably UNDP). 114. At the time o f preparation o f this report, the bank reconciliations of Account 210 were being finalized within three-four months after each month, contrasting significantly with the internal control best practice o f daily reconciliations. The process is conducted by the Treasury itself, who communicated that there are no major outstanding items. N o aggregate information i s available on the status o f other bank account reconciliations. 115. Debt management. The recent Public Expenditure Review (PER) contains an analysis on debt management concluding that in general, and particularly in comparison with other developing countries, Panama's debt management capacity i s high.75 the purposes For o f this report, two features are worth noting: the quality o f debt data recording and reporting (which i s critical for ensuring accurate debt service budgeting, timely service payments and well planned debt roll-over) and the systems for contracting loans and issuingguarantees. 116. Main debt management responsibilities lie with MEF's Public Credit Department (Crkdito Ptiblico), which maintains the public debt database in UNCTAD's Debt Management and Financial Analysis System (DMFASEIGADE). A lar e amount o f information on domestic and external debt i s made public by CrkditoPtibli~o.~'However, the CGR i s responsible for official records and accounting o f debt, makinguse o f SIAFPA to that effect.77CGR publishes the public debt statements on a quarterly and annual basis as part o f its fiscal reporting. 117. The CGR i s also responsible for debt servicing, for which it provides the Treasury a monthly report with the programming o f the incoming month's payments, as well as individual check requests for each payment.78The checks are delivered by the CGR to the 73The Treasury releases payments largely on a first-come first-served basis, but this is an ad hoc policy rather than a formal rule. The extensive use o f payment by checks (as opposed to electronic transfers) contrasts with the sophistication o f Panama's banking system. And, the lack o f an electronic register of providers (i.e., for payment purposes) prevents useful cross-checks with DGI for tax administration objectives and other controls. 74Around 2,700 public sector bank accounts have been identifiedby the BNP. 75World Bank. 2006. 76A complete set of statistics are uploaded to MEF's webpage, for domestic as well as external debt. Regarding domestic debt, there is also a yield curve, the auctions calendar and the outcomes o f the latest auctions. 77DFMAS and SIAFPA are not interfaced, but the data is reconciled on a monthly basis. 78 An agreement between CGR and MEF dated July 11, 2003 states that all payment functions and budget execution of public debt would be shifted to DCP, but it has not been put into effect. Panama CFAAICPAR:Budget Cycle 32 BNP with the relevant payment instructions. Confirmations are then submitted by BNP to the CGR and Crddito Publico so that both SIAFPA and DMFAS are updated. 118. The governance framework for contracting loans i s well defined. Under the budget approved by the legislature, the political and fiscal decisions to contract loans are taken by CENA and made operational by Crkdito Publico. The latter are also responsible for authorizing guarantees, o f which currently there are very few (for the international airport and the electricity company), are documented, and pay a risk premium for the service. Expenditures: Predictability and Controls 119. This section addresses key characteristics o f the expenditure cycle from an internal control and operational efficiency perspective. Because o f its specifics, procurement management i s analyzed separately inChapter V. 120. Availability of funds for expenditures.Reliable information on the availability o f funds to incur expenditures is necessary for the executing entities to implement their work plans. Inconnection to this principle, the first parameter i s the annual budget approved by the National Assembly, which imposes maximum limits to each entity to commit expenditures under its capital and operational programs. Expenditures cannot be committed or paid in absence o f available credit balances. 121. The use o f budget allocations by executing entities is restricted by a monthly commitment program proposed by each entity and approved by the MEF. To the entities' advantage, the remaining balance from each month i s rolled over to the next, and the program can be modified during the year, subject to MEF's approval. On the other hand, the program does not impose an obligation on the MEF to release funds, which is fully linked to cash availability. The commitment program's reliability as an instrumentto enhance predictability o f fundingis therefore dependent on the actual revenue collections. I 9 122. Budget execution programming is also affected by significant modifications to the original budget taking place throughout the year, e.g. 1,534 intra-budgetary transfers and 109 additional credits were made in 2005 (granted, most o f them requested by the executing entities themselves). The central government primary expenditure budget was increased in 13.3 percent as a result. As shown in Table 5, the modifications changed the individual original budgets o f executing entities by 16.7 percent on average, with a standard deviation o f 25.4 percent. The volatility resulting from budget modifications i s particularly marked in capital expenditures. l9 In 2005, predictability o f funding was not an issue, given the extraordinary performance in revenue collections. At certain points in previous years, however, cash shortcomings had a direct effect on the expenditure side, leading executing entities to incur inpayment arrears. Panama CFWCfAR: Budget Cycle 33 Table 5: Budget Modificationsto Primary Expenditure (inpercentoforiginally budgetedexpenditure) 2003 2004 2005 CentralGovernment (net aggregate) 9.6 17.0 13.3 Central Government(absoluteaverage) 13.6 18.1 16.7 CentralGovernment(std. deviation) 14.3 32.0 25.4 Current (absolute average) 4.7 14.1 20.6 Current (std. deviation) 4.8 43.2 52.6 Capital (absolute average) 116.6 67.6 107.4 Capital (std. deviation) 267.9 77.3 222.8 Source: Own calculations using CGR/MEF data. 123. Internal controls for expenditures on goods and services. An effective internal control system should be relevant, comprehensive yet cost effective, widely understood and complied with. Looking specifically at the steps and units involved in a normal contract of goods and services (depicted in Figure l),i s clear that the set o f controls i s comprehensive. it At the heart of the compliance system is the institutional figure o f ex-ante fiscal control, an endorsement (refrendo) process undertaken by the CGR." Ex-ante control is performed by CGR fiscal control officers (fiscalizadores) located in public sector entities, for purchase orders, contracts (and amendments) and payments under US$lO,OOO. Above those thresholds, the endorsements (refiendof) are processed centrally by the fiscal control department o f the CGR. In 2005, 5.8 million documents (including 4.8 million checks) were endorsed by the CGR. The thresholds and the ex-ante control requirement itself can be modifiedby the CGR, but that is rarely done. Panama CFWCPAR: Budget Cycle 34 Figure 1: Contracts of Goods and Services Paid by MEF's National Treasury Procurement I Budget I Accounting I Treasurv IFiscalControl CGR I MEF 1. Backgrounddraft purchase request 2. Blocking o f budget credit F/ 3. Purchase request id-,El 4. Approval of purchase request 5. Award results m----------__,pq / 7. RecordingJournal entry/guarantee 5. of [pre-commitment] 5. Endorsementkontract 3. Date o f order to proceed [commitment] 14. Receipt o f payment request 10. Receipt o f goods and services [accrual] 15. Journal entry 11. Receipt of payment request (gestidn de cobro) 16. Processing 12. Endorsementlpayment request 17. Payment against general fund [payment] 13. Journal entryhransfer ofpayment request 18. Journal entry Source: MEF 124. Inprinciple, the relevance ofthe fiscal control figure lies on its potential as deterrent for noncompliance with budget regulations. The flip side, however, i s that it could be conducive to a culture of poor accountability in the executing entities, as the burden o f regulatory compliance can be perceived to be on the CGR. In any case, the application o f ex- ante controls across the board, as done in Panama, reflects lack o f risk assessment approaches characteristic o f international good practice ininternal controls.81 125. It is rather difficult, if not impossible, to quantify the cost effectiveness and compliance rates o f the internal control procedures. There are indications, however, o f important issues inboth areas. First, as mentioned above, 100percent ex-ante external review o f transactions i s not usually cost-effective from a risk management perspective. Second, the resulting overload on fiscal control officers, plus the other steps included in the process (noting that physical files travel from one unit to another as each step i s completed), have traditionally produced significant delays inthe contracting and payment process. As discussed The one clear and major exception is the ACP, which i s constitutionally exempt from ex-ante fiscal control. Panama CFWCPAR:Budget Cyde 35 infurther detail inChapter V, the number and type o finternal procedures are not only ample, but can vary significantly from one entity to another.82 126. Third, in the past some entities circumvented the commitment restrictions by delaying accrual recording and/or payment until funding became available, generating significant arrears (as noted earlier, this i s less o f an issue now). Finally, as explained later in this chapter, the fact that most individual financial audit reports issued by CGR's Audit Department contain opinions other than "clean" may point to the existence o f problems inthe effectiveness o f the internal control framework. 127. The government i s aware of these issues and is accordingly taking relevant actions, such as the efforts to pay overdue accounts. From the CGR side, it i s worth noting the recent issuance o f fiscal control guidelines and verification checklists, which aim at an orderly and consistent application o f the ex-ante reviews. The integrated correspondence system (SICO) will help with the measurement o f transaction times, eventually enhancing accountability and performance. And, the project o f electronic endorsements (e-Fiscaliza) will help reduce the times relatedto the physical transfer o f documentation. 128. Payroll controls. The CGR executes the personnel payroll for 39 entities, including the central government, representing around 68 percent o f the public sector payroll. For that purpose, information provided by the executing entities is entered into a database management system named EPD ("Structure-Payroll-Deductions"). While subject to improvements, EPD seems to work fairly well. Additions and modifications to the database are entered by the CGR after a review o f the relevant documentation and cross checks with other registries (e.g., public registry, social security). 129. The individual payrolls are prepared by the executing entities themselves, following EPD parameters. The CGR endorses those payrolls and, once consolidated inEPD, issues the payments (after coordination with the Treasury for the account funding). As part o f its fiscal control, the CGR undertakes database testing to detect duplications, which i s a significant step towards implementation of systematic payroll audits. Aggregate payroll statistics are made public by the CGR as part o f its quarterly fiscal reporting. 130. Donor practices. Even though the 2005 budget execution norms require that disbursements o f external funds for projects pass through the Treasury, inpractice those funds are to a large extent deposited directly into special accounts managed by project implementation units (PIUs) or into accounts o f specialized agencies (such as UNDP), and managed in accordance with project-specific procedures. This situation responds partially to an attempt to avoid the complexities o f contracting and payment procedures described a2A sample of 2,590 purchase orders recorded in SIAFPA by three entities noted an average of 52 days between the blocking of the budget credit and the receipt of goods. A separate sample o f 8,830 payments made by Treasury noted an average o f 131 days (standard deviation o f 252 days) between the date of the provider's invoice date and the date of payment. Source: SIAFPA. Panama CFAAICPAR: Budget Cyde 36 earlier.83Even though these separate funds are in-budget, their execution i s normally recorded only at the end o f the year, thus limitingthe coverage o f quarterly reports. 131. Internal audit. An effective internal audit function should provide regular and adequate feedback to management on the performance o f internal control systems. InPanama, the internal control standards issued by the CGR regulate the internal audit function, but do not mandate it. The internal auditor i s appointed and removedby the head of each entity. 132. Internal audit units in central government entities seem to have been generally constituted without technical studies or objective criteria to justify their size or budget. They usually suffer from limitations inhuman, technical and technological resources, which may be a symptom o f the predominance given to the ex-ante control figure. The internal audit reviews do not seem to be performed under risk-based approaches, and no statements on the overall assessment o f the entities' internal control systems are produced. 133. The CGR receives the internal audit annual plans and has the authority to evaluate internal audit units, but there i s no system under which evaluations are formally and systematically reported back to the internal auditors. Even though internal auditors are required to follow up on internal control issues reportedby the external auditors, this may not be done effectively, given the recurrent nature o f some o f the internal control weaknesses reported by the CGR. Accounting, Recordingand Reporting 134. This section looks at the adequacy o f record keeping and release o f financial information for management and scrutiny purposes. 135. In-year reporting. Timely and regular information on actual budget execution i s needed for the entities in charge o f fiscal oversight to monitor performance, and for the executing entities to manage their budget. In this respect, the Panamanian framework i s appropriate: Executing entities are required to produce monthly budget execution reports to be submittedto the MEF, the CGR and the National Assembly's BudgetCommission within ten days after each month, and quarterly financial statements within 15 days after each quarter.84 To a large extent, electronic media i s used to facilitate recording and reporting,85 and aggregate figures are uploaded on a monthly basis to MEF's webpage. 136. The MEF and the CGR present to the President and to the Assembly's Budget Commission a quarterly consolidated analytic report o f the public sector budget execution, within 45 days after each quarter. The report does not allow a direct comparison at the same level o f the original budget (e.g., it misses execution by program), and the notes seem insufficient to helpthe reader understandthe numerical data. It shouldbe noted, however, that '` 83 Infact, there is a project (Dinarnizacidn del Sector Pziblico) whose main actual function is to execute other rojects, by establishing a liaison office with UNDP. However, as noted earlier, an important shortcoming is that information o f execution by special agencies (such as those implementing investment projects) is not incorporated duringthe year to the official accounting records. 85Of the 51 NFPS entities, 19 (including the whole central government) record and report on SIAFPA, 19 on SRPG, and the remaining 13 using other systems. As noted earlier, the CGR records revenue and debt operations. Panama CFMCPAR: Budget Cyde 37 the report does form part o f a larger document produced by the CGR including additional data, such as statements o f fiscal balance, debt and payroll. 137. Annual reporting. The annual Report o f the Controller General, presented to the President and the Assembly on the first o f March following the year reported, contains inter alia the annual budget execution report (with the same presentational features as the quarterly reports), the audited financial statements o f individual executing entities (see next section), and the un-audited financial statements "integrated" by main public sector groupings, i.e. central government, decentralized entities, public enterprises and financial agencies. The integration i s a sum o f the individual financial statements, not a consolidation per se.86 138. The accounting standards a plicable to the NFPS have been issued by the CGR, in line with its constitutional mandate.81: While comprehensive, the standards have a number o f characteristics that are not consistent with international standards, if the International Public Sector Accounting Standards (IPSAS) are used as reference.88 139. Interms o f the NFPS financial statements presented, these are fairly complete, with the evident exception in 2005 o f the social security institute (CSS, the largest decentralized entity). Their quality, on the other hand, i s a concern. First, as will be noted later, most audits contain qualified or adverse opinions on the financial statements (for various reasons, such as lack o f reconciliations between balances and subsidiary ledgers, differences arising from physical inventories, land without titling, certain unrecorded transactions). Moreover, the disclosure o f information through notes to the financial statements i s generally week and, as mentionedbefore, a consolidation i s not yet possible.89 140. Fixed assets. MEF's Directorate o f Cadastre and Patrimonial Assets collects and consolidates registries o f property, plant and equipment on the basis o f data provided by the holding entities. This information, however, is considered largely incomplete and/or improperly valued. Moreover, the registry i s neither reconciled against physical inventories nor used for accounting purposes (e.g., depreciation recording). 86 The budget execution report does contain a public sector consolidated statement with elimination o f reciprocal transfers. ''Thebasis i s accrual accounting, per the relevant documents: Government Accounting Standards (Decree 234), Government Accounting General Manual (Decree 113), and Financial Information Regulations (Decree 4 for decentralized entities, Decree 355 for public enterprises). 88 For example: (i) individualstandardsarenotpartofabroadconceptualframeworkdocumenting items the such as measurement bases and elements o f financial statements; (ii) disclosure requirements for the notes to financial statements are limited; (iii)some features o f budgetary and financial accounting (with different recognition approaches) are combined; (iv) the coverage is incomplete (e.g., trust fknds, detailed aspectso f cash flow statements, leases, financial instruments, investment property, related party disclosures, provisions, accounting changes, assets held for sale); (v) some technical aspects o f classification and disclosure contradict international practice (particularly the income statement, "other assets" and "other accounts payable", and the treatment of public assets); (vi) some standards establish alternative treatments that would difficult prospective consolidations; and (vii) non-accounting elements (e.g., administrative and control practices) are included. 89 Other issues with the quality o f financial statements are: (i)incomplete data on certain departments from the ministries o f education and health; (ii) cash flow statementsmissing; and (iii) certain incorporation by individual entities o f certain accounting policies that are inconsistent with the CGR norms. The method (cost) in use to account for shareholding investments could be evaluated. Panama CFAAICPAR: Budget Cycle 38 141. Contingent liabilities. Other than records o f guaranteed debt, no information is consistently compiled and reported on contingent liabilities. External Audits 142. This section analyzes the arrangements for scrutiny o f public finances, with an emphasis on the key elements o f the external audit function, i.e. the scope and coverage o f the audit, its adherence to appropriate standards, focus on significant and systemic issues in its reports, and performance ofthe full range o f financial audit. 143. Audits. As noted before, the Constitution grants the CGR the power to exercise fiscal oversight on all management of funds and other public goods, through ex-ante (analyzed earlier) or ex-post controls. Its Organic Law (Law 32, 1984) establishes its responsibility to "examine accounts", and MEF's Organic Law (Law 97, 1998) notes that the financial statements audited by the CGR constitute the official source o f information on the financial situation o fthe public sector. 144. In accordance with its mandate, the CGR issues annual audit opinions on the individual financial statements o fpublic sector entities." Because of the large spectrum under purview (51 NFPS entities, 7 financial agents, the ACP, and 86 local governments), CGR's audit plans cover between 25 and 30 financial audits per year. However, these are not rolling plans, as the same reported entities are usually repeated from year to year. 145. The 2004 audit opinions included in the Report of the Controller General covered financial statements of 22 NFPS entities, with certain large institutions left out (e.g., the judiciary and the CSS). The scope i s further limited by the lack o f audit opinions on the financing sources (revenues and debt), budget execution reports, and notes to the financial statements.'' Only a small numbero f audit opinions were unqualified("clean").92 146. Internal control and compliance observations are reported to each executing entity, but are not part of the annual Report or otherwise aggregated for public use. Entities are required to provide formal responses to the audit findings, but their repetitive nature points to the need for better monitoring and enforcement systems and capacity building. 147. CGR's Government Auditing Norms are consistent with standards by the International Organization o f Supreme Audit Institutions (INTOSAI), with the actual practice more focused on transaction level testing. While the audits are performed by a specific General Audit Department (DGA), there i s an inherent independence conflict with other functions cited earlier that fall under the CGR, e.g. the issuance o f endorsements, the payment and recordingof debt and payroll, and the consolidation offinancial statements. 90Certain entities (e.g. the ACP) and externally-financed investment projects are audited by private firms, but there is not a formal approach inpractice to the use o f private sector auditors. 91Some o f these items, e.g. opinions covering the whole set o f financial statements and notes for certain entities, can be found insome CGR reports but not inthe official annual report. 92Ofthe 22 audit opinions issuedon financial statements o f NFPS entities, 2 were unqualified("clean"), 10were qualified, and 10 were adverse. Panama CFAACPAR: Budget Cyde 39 148. Legislative oversight. A way in which the legislature can scrutinize the execution o f the budgeti s through legislative bodies that examine the external audit reports and question responsible parties about the findings o f the reports. The National Assembly In Panama, contrasting with its active role in the discussion and approval o f the budget, does not exercise a formal function with respect to the examination o f year-end budget execution reports and audited financial statements. Conclusions and Recommendations 149. Budget planning.A policy-based budgetingprocess enables the government toplan the use of resources in line with its fiscal policy and national strategy. Effective scrutiny by the legislature helps keep the executive accountablefor its policies. 150. The government is taking important steps towards developing a medium term fiscal and budgetary framework, including the preparation o f macro projections and a first debt sustainability exerci~e.'~ i s understood that a gradual approach i s necessary to validate and It sustain what i s by nature a long-term endeavour. 151. The available multi-year fiscal targets is a good base to implement certain fundamental actions: (i)in key sectors, costed strategic plans could be developed as the catalytic documents for policy assessment and reconciliation o f the top-down and bottom-up multi-year budget planning; (ii) the public investment and procurement programs should be based on those plans, with due assessment o f recurrent cost implications; 94and (iii) indicative ceilings for the selected sectors, broken down to the main economical and programmatic categories, could be developed and referred to in the formulation o f annual budgets. These actions could lead to more meaningful discussions over operational efficiency in the use o f resources, an orderly review o fbudgetary implications o f existing and new policies, and better planning o fthe recurrent costs o f investment decisions. 152. SNIP'S potential as a tool to support policy-based and cost-effective investments could be augmented through certain actions, taking into account the importance o f its strengthening as pillar for the process o f investment planning and evaluation. In terms o f its institutional framework, a public investment policy could be designed, delineating aspects such as private participation in public investments, co-financing arrangements in investments with private returns, competitive mechanisms to access investment funding, and arrangements for maintenance plans. The MEF could restrict incorporation o f projects into the capital budget to those that have undergone due technical SNIP review and registration. Also, thresholds could be established for pre-investment and feasibility studies. All o f this needs to beproperly valued, documented and regulated, under a clear plan o f action. 93 The government could consider opening the discussion of macroeconomic assumptions that underpin the budget to selected non-governmental experts (e.g., research centers, universities) as means to validate the rocess. It could also consider conducting the debt sustainability analyses on an annual basis. MEF's DPI intends to contract international consultant services to coordinate formulation of a Sectorial Public Investment Plan and to prepare a methodology o f the sectorial mkdium-term investment plans for the 2006-2010 period. Panama CFAAICPAR: Budget Cycle 40 153. To facilitate monitoring o f financial and physical progress, better use could be made o f interfaces between SINIP and SIAFPA, and SINIP's reports could be enhanced and made easily available for public scrutiny. Finally, training programs on the methodologies for preparation, appraisal, administration, monitoring, and ex-post evaluation o f projects could be implemented. 154. In terms of budget formulation, the MEF commands a process that follows an established procedural framework in an orderly and timely manner. As more emphasis i s put on medium-term frameworks and results (see below), the government could enhance the process by allowing earlier Cabinet involvement inthe settingo f aggregate allocations, which in turn would facilitate the incorporation of indicative budgetary ceilings (considered international good practice) into the process. As for legislative participation, the Panamanian system largely follows recognized good practices in terms o f procedures for scrutiny, debate, approval and modifications. 155. The recently introduced results indicators by program could progressively reach an appropriate, yet manageable, mix o f dimensions (e.g., effectiveness, efficiency, economy, quality) and ambits (e.g., process, outputs, outcomes).95 Similarly, the sophistication o f cost accounting systems to calculate unit standards and measure the marginal cost o f changes in performance could be gradually built. Credibility o f the new practices should rely on a formal program assessment process that informs budget ceilings and allocations for upcoming years, on higher degrees o f flexibility to entities in the execution o f their budgets and, in the longer term, on introduction o f incentives documented inperformance agreements. 156. As is expected from such a significant overhaul o f the budgetary system, there are capacity gaps in executing entities and in the MEF that need to be addressed. Ina systemthat will necessarily imply more devolution to executing entities, the MEF should shift its transactional focus, and thus develop capacity, to assess the fiscal and budgetary impact o f policy changes and programmatic trade-offs, and to maintain a system o f budgetary accountability (e.g., standardizing reporting formats, assisting executing entities to measure productivity and output, and evaluatingresults).96 157. Revenue collection. Predictable and controlled revenue administration is necessary tofund policy andprogram implementation. 158. Tax administration in Panama has been substantially modernized since 1998, primarily with the operation o f information systems that allow massive data processing, thus facilitating taxpayer compliance and assessment. This report does not intend to evaluate overall revenue management capacity, but looks at selective areas considered critical to the prompt and complete funding o f the treasury. In that sense, a significant start is the effective system in place to ensure that collections are promptly deposited into the treasury single account. However, a number o f other areas could be improved. 159. Fundamental actions recommended to improve effectiveness o f assessment and collection functions, and transparency o f tax data, are: (i) to strengthen the human resource 95 This classification is based on the Chilean experience. G u z m h(2005). 96 See treatment of the subject in Schick (2001). Panama CFMCPAR: Budget Cyde 41 base o f the audit department, develop audit plans and methodologies based on risk assessments, and the forensic capacity to investigate andprosecute tax fraud; (ii) undertake to a comprehensive exercise to clear up the taxpayer account database, including accurate identification o f outstanding debt;97 (iii) to aggregate that information so as to enable better reporting on declared and assessed taxes, including well-classified and reconciled data on arrears (e.g., age profile, amounts indispute, bad debts); and (iv) to review the integrity o f the system itself, developing safeguards against and audit trails o f tampering attempts. 160. In terms of its internal operation, the DGI could develop a strategic plan and enhance its performance monitoring system and indicators. It could also strengthen its internal control department with the capacity to investigate allegations and presumptions o f corruption, and coordinate with the DGA, the public registry and the property registry for data cross-checks. The actions underway to create a large taxpayer unit, develop a plan for control o f stop-filers, and strengthen enforced collections should continue. Finally, and noting that legal changes would be required, the administrative instances o f the appeals system could be made more independent from the DGI. 161. Cash and debt management. EfJicient management of financial assets and liabilities is critical to reduce debt service costs andfiscal risk. 162. The MEF exercises good management and control o f the government's cash position, on the basis o f a single treasury account that captures central government revenues, regular cash flow programming, and use o f effective debt instruments to deal with temporary cash shortages. However, a number o f funds operate out o f the common fund payment system (small but numerous rotating funds, transfers to some decentralized and autonomous entities o f a noncommercial nature, and projects funded by external loans and grants). 163. Such a system can produce idle funds, increase transaction costs, and reduce transparency. Attention should also be paid to the backlog in the bank reconciliation o f the Treasury accounts, a basic internal control task. Two recommendedfundamental actions are therefore to introduce measures that grant the Treasury further control o f public sector bank account balances and their consolidation, and to ensure bank reconciliations are completed shortly after each month (and eventually on a daily basis) by a separate unit. 164. Other improvements to treasury operations could be gradually introduced: (i)to formalize a policy (supported by system restrictions) on the sequencing o f payment releases; (ii) makefurtheruseofelectronic depositsintobankaccounts; (iii) linkpaymentsto to to RUC identification numbers (thus allowing tax administration cross-checks); and (iv) to transfer payment operations for debt service and payroll to the Treasury. 165. The quality o f debt management and records i s high but the correlated procedures are cumbersome. The current assignment o f responsibilities for debt recording and payment could be evaluated to avoid duplications and seemingly unnecessary steps. The interface between DMFASBIGADE and SIAFPA could be approached, but only after the 97Among others, the taxpayer account should differentiate between the non-filing status (not showing any amount inthis case, but indicating lack o f compliance), the debt that is not in arrears status (a debt that has been declared or assessed for which payment is not yet due), and the arrears status (an overdue debt). Panama CFMCPAR: Budget Cycle 42 administrative procedures are revised. The MEF could also consider documenting its debt management strategy in a formal mid-term document approved by Cabinet, containing among others, the quantification o f debt costs and risks under different scenarios. 166. Expenditure controls. Predictable and controlled budget execution is necessary to enable effective management of policy andprogram implementation 167. The procedures to modify the approved budget during the fiscal year are well regulated, conducted in a transparent manner, and give certain flexibility to execution. However, the materiality and frequency o f in-year adjustments is a concern in the sense that they reduce the credibility o f the budget formulation process. While this situation depends on a number o f factors, it could be more closely monitored as a means to avoid shifts across expenditure categories that could affect operational efficiency o f service delivery. 168. There is a comprehensive set o f internal controls, which seem particularly effective inpayroll management. The picture for non-salary expenditures is different. The significant delays in contracting and payment, which have traditionally characterized public sector financial management in Panama, have probably increased the aggregate cost o f works, goods and services indifferent ways as noted inthe following chapter. And the all-encompassing ex- ante fiscal control i s not an incentive to regulatory accountability on the executing entities' side. Furthermore, the untimely and inefficient use o f resources by service delivery units can be a significant obstacle to the recent introduction o fresults inthe budgetingprocess. 169. CGR's recent development o f tools to facilitate fiscal control (guidelines, checklists, and information systems) i s commendable and should continue. Two additionalfundamental actions could be: (i) to apply ex-ante procurement and payment controls more selectively, with the introduction o f differentiated fiscal control techniques based on risk assessments (applicable at different levels, e.g. entity/program and type o f transaction); and (ii)to review carefully the perceived fragmentation and complication in internal administrative systems and procedures within executing entities, so as to eliminate duplications and unnecessary steps. 170. The effective implementation of risk-based approaches to internal control systems necessarily requires increased strengthening o f these systems. While this depends on many factors, two fundamental actions could be: (i) to enforce and monitor the prompt and comprehensive actions by executing entities in response to audit findings; and (ii)to strengthen internal audit capacity, gearing the function towards significant systemic issues o f reliability and integrity o f financial and operational information, effectiveness and efficiency o f operations, safeguarding o f assets, and compliance with laws, regulations, and contracts. 171. Donor practices. External financing is largely incorporated into the budget, but its execution i s not reported on a timely basis and i s usually performed under parallel administration arrangements. While the "outsourcing" approach to project administration seems justified in light o f the issues described above, inthe short term in-year reporting could be enforced to allow for comprehensive analyses of budget execution. Inthe short to medium term, the modernization o f public financial management and procurement practices should serve as basis to increase the amounts of external cooperation that are managed through the government's own systems, supporting a consolidated approach to budget implementation. Panama CFWCPAR: Budget Cyde 43 172. Accounting, recording and reporting. Timely, relevant and reliable financial information is required to supportfiscal and budget management and decision-making. 173. The government accounting function in Panama has been institutionalized and shows important advances, such as the accrual base o f recording, the timely issuance o f in- year and annual budget reports and financial statements (complemented with information on debt and payroll), and the availability o f information through the internet. Still, the official budget execution reports could be improved with annexes that allow a direct comparison at the same level of the original budget (e.g., execution by program), and with enhanced narrative explanations to assist users in assessing the entities' performance, their stewardship o f assets, and the allocation o f resources. 174. The major concern in this area lies, though, on the reliability o f the financial statements. There are a number o f circumstances (affecting accounting standards, records, and reports) that could limit a comprehensive and effective oversight o f the use o f funds, and could provide the opportunity for operational efficiency breaches and increased fiscal risks. 175. Accordingly, fundamental actions could encompass: (i)firm follow up to the issues that have prevented the external auditors from issuing unqualified opinions on the financial statements; (ii) improvements in the notes that provide narrative descriptions or more detailed schedules o f figures in the financial statements; (iii) a thorough short-term revision o f the government accounting standards, with a view o f reaching convergence with international practice inthe medium to long term; and (iv) enforcement o f the consistent application o f the standards to permit, among others, adequate consolidation practices. Efforts could also be made to begin disclosing known contingent liabilities. 176. Procedures for asset management and control could be documented in a modernized property, plant and equipment manual, settinguniform standards to control, record and report costs, revaluations, depreciation, movements, sales and disposals, custodial responsibilities, registries, physical inventories and reconciliations. Additionally, interfaces could be built between the databases inuse and SIAFPA's accountingmodule. 177. External audits. Effective scrutiny through external audit, complemented by legislative oversight, is an enabling factor in the government being held to account for its fiscal and expenditures policies and their implementation. 178. Based on legislation that providesit with adequate room to exercise its external audit function, the CGR has made commendable efforts to perform its audits and issue the respective reports on a timely basis. There are issues, however, in terms o f audit coverage, approach, follow-up and independence that should be taken into consideration as the function i s further modernized. 179. Fundamental actions could be taken to: (i)make better use o f risk assessment techniques to develop the annual (and multi-annual) audit work plan and to plan individual audits, so as to adhere inpractice to international standards and focus better on significant and systemic issues; (ii)in line with the plans, ensure adequate coverage and disclosure of relevant entities (such as the CSS), items (such as revenue and debt), processes (such as application o f procurement rules), and information (such as budget execution); and (iii) Panama CFAAICPAR: Budget Cyde 44 analyze carefully and make decisions with respect to the possible separation o f the external audit function from other ex-ante control and administrative-type tasks performed by the CGR. By enhancing external scrutiny, these actions could increase accountability for efficient and rule-based management o fresources. 180. As a means to broaden coverage, the CGR could formalize the use o f the work o f private auditors for certain entities or programs, under an efficient quality control framework. On other hand, as normative body o f the internal control framework, the CGR could implement better systems to monitor and support the implementation o f actions to address the repeatedly reported internal control weaknesses. 181. CGR's project to enhance the forensic capacity o f the audit department should continue. The initiative to undertake performance audits i s also valid, but in terms o f sequencing it may be prudent to address the financial audit issues first. 182. On the legislative front, buildingupon the extensive role played by the Assembly in the scrutiny, debate and approval o f the budget, instances for formal review, hearings and follow-up to annual audit reports could be implemented. Panama CFMCPAR: Procurement Operationsand Market Practices 45 V. PROCUREMENT OPERATIONS AND MARKET PRACTICES Efficiency of Procurement Operations and Practices 183. The 2001 CPAR identified serious weakness in the main entities' procurement capacity due to the lack o f standard documents and other tools, poor planning and internal control, limited capacity o f staff which have often inadequate professional qualifications and almost no training and suffers highturnover. Consequences identified by the CPAR included a high degree of discretionality in interpreting the law, limited use o f open competition and frequent abuses o f direct contracting (with as much o f 75% o f procurement carried out by shopping and direct contracting), frequent contract fractioning, long delays in contract evaluation and award, late payment to contractors, and generally inefficient procedures. While preparing this CPAR update, the team carried out in-depth assessments o f the Ministry of Works, Education, and Health to validate or update the 2001 findings. In addition, comprehensive evaluations were carried out for the CSS and the ACP to be able to compare the findings in line ministries with other public sector entities generally considered as successful. With the understanding that special conditions apply to these entities, the objective o f this exercise has been to identify good practices which could be replicated and utilize them as internal benchmark for procurement excellence. 184. Generally, procurement o f goods and works in line ministries i s managed by departments established within the Administration Directorate, several steps down in the organizational structure from the head o f the agency. However, procurement responsibilities are fairly dispersed within the institutions9*. 185. Inadditionto confirming the findings o fthe 2001 report, the assessmentof the three line ministries provided some insight on the internal bottlenecks which contribute to delays and inefficiencies. For example, in the Ministry o f Education, contracting requires 20 administrativeprocesses divided in84 practical steps, o f which all but one process and 2 steps are internal requirements o f the Ministry. The average time for a simple shopping process i s six months99. In the Ministry o f Health, contracting requires 18 administrative processes divided in 69 practical steps, o f which all but one process and 2 steps are internal requirements o fthe Ministry. Typically, 246 days are required by MOP to complete a process under Law 56 and 180 within the "facilitation project'' which utilizes UNDP as financial agent for most MOP contracts. Even within this simplified context, MOP needs to implement 38 steps before allowing a contractor to mobilize. 186. Overall, the limited use o f open competition remains a serious problem and is the consequence o f both poor planning capacity and, in some cases, intentional fractioning o f contracts to avoid the time consuming approval procedures. However, open competitive 98 For example seven additional departments participate in the procurement process within the Ministry o f Education. The Engineering Directorate typically participates indrafting specifications and evaluating bids. 99 Indeed, from January to September 2005 when the mission took place, 130 procurement processes had been initiated by the Ministry o f which only 21 had been completed. Panama CFMCPAR: ProcurementOperationsand Market Practices 46 bidding, when used (Le. for contracts above 250,000 dollar), is generally perceived as sufficiently transparent. 187. As noted in Chapter IVYone of the most serious problems has traditionally been the delay in paying suppliers and contractors. These delays add significant cost (a surcharge estimated at between 10 and 20% percent o f the value o f the contract in addition to the cost o f the time overruns) and discourage participation in the procurement market. However, as mentioned previously the current Government is making significant efforts to clear these arrears and notwithstandingthe delays, most public works are generally completed. 188. Some initiatives to increase efficiency have already been launched by line ministries. For example, the Ministry o f Education developed new bidding documents, eliminated unnecessary documentary requirements, and began to allow submission ofmissing documents and information within a specified time instead o f outright rejecting bids, when these requirements are purely legalistic and omissions do not represent a material deviation from the key qualifications. Supply Managementand StrategicPlanning 189. The DCP has just begun developing a policy to implement framework contracts in order to achieve savings through consolidation o f appropriate items (e.g. stationary and office equipment, telecommunication services, and gasoline). However, a well designed approach applicable throughout the public sector i s still missing. It i s very important that the introduction o f framework contracts be based on a careful strategy and an appropriate legal instrument to avoid potential pitfalls such as market concentration and higher prices. Other countries' experiences have shown that without proper planning, this contractual approach can be become discredited by unintended results and its important potential for savings be lost. Inaddition, it is important to point out that framework contracts address only one aspect o f the reform (i.e. improving economies o f scale) and should be part o f a well coordinated, multi-pronged approach addressing the different causes o f inefficiency which affect the system (e.g. convoluted internal administrative procedures, excessive external control, and lack o f consistency). In addition, this contractual approach i s appropriate only for certain types o f relatively simple goods and services. In-depth market studies have not been carried out to support strategic choices and planning methodologies and tools have not been developed to implement the strategy. The planning capacity o f the procuring entities also requires significant strengthening, as discussed above. 190. Currently, with the exception o f the ACP and the CSS, there i s almost no consolidation across the public sector or within institutions. This i s largely due to the lack o f annual planning, limited data and oversight on demand which leads to inefficiency as well as potential lack o f transparency in the utilization o f public resources. These problems are compounded by the fact that the goods catalogue i s still under development and e- procurement i s still incipient and does not include yet key functionalities to implement an efficient consolidation strategy through e-tendering. Additional problems affecting purchasing efficiency include: (i) overspecification; (ii)limited standardization (except for computers); lack o f price benchmarks for goods and services; (iii)limited incentives for suppliers; (iv) lack o f substitute products strategies (e.g. with respect to computer clones); (v) Panama CFMCPAR: Procurement Operations and Market Practices 47 and little attention to potential savings and efficiency resulting from wider international competition for certain items (the vast majority o f purchases are made locally because, as discussed above, there i s a well developed market). E-Procurement 191. The team carried out a comprehensive assessment o f the e-procurement readiness o f the Government jointly with key public and private sector stakeholders and utilizing the standard methodology developed by the multilateral banks. loo The analysis confirmed that the basic conditions for a successful transition to a fully electronic procurement system exist. However, important management and functional aspects which are required to ensure the system's sustainability and to obtain the desired impact interms o f increased transparency and efficiency are still not fully inplace. The system's strong features include: A clear vision, very highlevel political support, strong technical andpolicy leadership, and close cooperation between the two key actors (i.e. the DCP andthe Presidential Secretariat for Government Innovation). A procurement regulatory framework which requires some improvements, but does not impede the establishment o f e-procurement Regulatory frameworks for electronic commerce, access to information, and transparency which adequately support e-procurement. A solid portal (Panamacompras) buildingon the previous experience ledbythe CGR which facilitates identification o fkey success factors and allows to incorporate lessons learned. The examples o f well developed systems established within the ACP and the CSS which successfully demonstrated the impact o f e-procurement. Aspects which require further strengthening include: A strategic planwhich includes aspects such as management, planneddevelopment and detailed implementation o f subsequent phases o fthe system, financing, and human resources. A more comprehensive policy for public procurement including the systems' overall priorities, oversight mechanisms, overall strategic procurement planning(as discussed above), contract management, and relationship with the market. A wider mandate and increased resources for the DCP. Lower level regulatory instruments which define more indetail aspects related to e- procurement, and introduce modern controls based on the system's performanceto enable an assessment o f the system ability to generate value for money, inaddition to the current legal and accounting controls. A single catalogue o fgoods and services based on international standards and mandatory for all public sector entities, and a single database o fproviders. A simplification o fthe procurement processes, as discussed elsewhere inthe report, and, inparticular and simplification o f the external control process. loo See Annex III. Panama CFAAICPAR: Procurement Operationsand Market Practices 48 193. The DCP i s currently working on the second phase o f the e-procurement system, including a link with the financial system and electronic management o f bidding processes. These activities are to be financed, in part, by the World Bank Public Policy Reform Technical Assistance Project.lo'The launching o f Panamacompras has resulted in an average increase o f 30-40 percent in bidder participation per process and the system includes features that are expected to facilitate payment, such as an interactive system which allows contractors to track the administrative process. A full interface with the financial management system i s also planned. Examples of Parallel Organizational Systemsand Practices 194. Several steps were undertaken by the CSS which reflect good practice worldwide in reforming high impact procurement agencies in countries spanning the entire spectrum o f development. First o f all, the CSS conducted a thorough review o f its contracting practices identifying specific problems and bottlenecks. Reforms included important organizational changes which elevated the importance o f procurement within the institution. The procurement department o f the CSS i s a Directorate with greater decision-making and budgetary independence than the procurement departments found in other public sector agencies, and this i s credited by CSS management as a factor inthe recent success. Next, the CSS streamlined purchasing processes simplifylng administrative steps and requirements. Regulatory changes were introduced through the revised CSS enabling law, standard documents were adopted, and other tools and procedural changes implemented (e.g. e- tendering, a catalogue o f goods and services, and the use of framework contracts). According to CSS' management, the team's own empirical observations, and feed back from other stakeholders, the new approach generated initial savings amounting to 18 million dollar, reduced significantly the time required for ex-ante control (from several months to approximately a week), especially for the goods procured through framework contracts, improved stock control, enhanced transparency, shortened payment times, and had a very positive impact on budgeting and financial management. 195. The ACP has long successfully mainstreamed its procurement system within the overall financial management system and does not treat procurement as an isolated technical process, but an integral part o f the decision makingprocess for the management o f the ACP assets and resources. Contracting authority i s delegated down from the ACP Administrator to the to the Manager o f the Contracting Division and to the Contracting Officers who have full authority within the delegated powers thereby setting up an efficient system requiring few approval steps. The Contracting Division has a strong organization, adequate resources and significant independence to exercise its responsibilities. lo' Panama, Public Policy Reform Technical Assistance Project, Loannumber 4635. Panama CFWCPAR: ProcurementOperations and Market Practices 49 Figure 2: Structure of the ACP ProcurementSystem - DecentralizedPurchases: Administrative Units 7 ` -- -7 .ir \. Micro Purchases: Simplifie d Simplified Simplified Blddlngs: ` Purchasem: Purchases Purchases: Uo to 01 1.000 Above BI 100 000 196. All acquisitions are planned in a coordinated manner across units according to set procedures, and standard bidding documents have been long in use. Upon contract completion, the contractor's performance i s assessedand a record o f this assessment i s shared with the contractor and maintained in a central database. All procurement transactions are recorded and monitored through an integrated financial management system with a complete set o f financial, purchasing and inventory functions and including a module on the contractors' past performance. This system i s capable o f generating a wide range o f relevant procurement statistics and interfaces with the Contract Information System (SIC) which manages risk and raises red flags for Contracting Officers and managers on various potential illegal practices such as collusion as contract fractioning as well as inefficient procurement planning. The alert system triggers further investigation. The ACP comprehensive approach to procurement is complemented by a first rate training program tailored to different duties and levels o f delegation and a quality assurance system which includes the only I S 0 9001 certification within the public sector in Panama. As in all modern procurement systems, the ACP established a process to continuously update procurement tools and methodology and incorporate new efficiencies. This effort is led by a special task force designated by the Contracting Department with the clear objective o f seek further simplification o f procedures while maintaining the desired level o f control. Indicator Benchmark Results(averagevalue duringperiod) Client satisfaction 80% 89% Cancelledbiddingprocesses No more than 5% of total Indicator not met duringperiod Time for award in public bidding 80%IIbiddingprocess resulting in award 98% I for goods andservices within 35 daysor less Time for award in public bidding 80 resulting in award 93% for works, negotiated contracts, within 65 days or less andframeworkcontracts. Protests No more than 3% o f Noneduringperiod protests resolved in favor o f the contractor Panama CFMCPAR: ProcurementOperationsand Market Practices 50 197. When an indicator is not met, the reasons are investigated. For example, the indicator on cancelled bidding processes allowed the ACP to focus greater attention on the need to improve budgets' realism, market surveys, and commercial conditions. Functionality of the Public Procurement Market 198. The 2005 public procurement budget o f the Government of Panama (not including the ACP) for projects and recurrent costs was approximately 1,100 million (a 9% decrease from 2004) including goods, works, and services and was executed by 60 institutions with the following composition: 199. Procurement o f goods and services can be broken down as follows: 200. InPanamathere aremore than 34,000 commercial enterprises with total annual sales in the order o f 15,000 million. By and large, the local market is capable to satisfy the government's demand for commonly needed goods and services both interms o f quantity and quality. One o f the reasons o f the domestic market's dynamism is the free trade area of Colon where approximately 10,000 dollar worth of goods is traded annually. 201. Approximately 60% o f the procurement o f goods and services i s concentrated in 8 institutions with the CSS beingthe largest buyer (more than 150 million per year). The other main spenders include: the Ministry o f Public Works (MOP), the National Water and Sewer Institute (IDDAN), the Ministry o f Education, the Savings Institute, the National Bank of Panama, the intl. Airport "Tocumen", and the office o f the President. In order o f magnitude o f their procurement budgets, follow: the ministry o f Finance, the National Lottery, the Ministry of Agriculture, the Ministry of Health, the Ministry of Justice, and the municipal governments. During the year 2005, 2,646 suppliers did business with the Government with 80 taking the largest share o f the procurement market (i.e. the majority o f payments were made to these suppliers). Panama CFAAICPAR:Procurement Operations and Market Practices 51 202. Average annual public investment in infrastructure projects during the years 2001- projects. The largest players inthe area o fpublic works are MOP and IDDANl . 2003 amounted to approximately 260 million including civil works, roads, brid0 es and water B Table 7: Procurementof Works (%million) IAnnual Average IRelativeshareI Public Entity I 2000 I 2001 I 2002 I2003 I 2000-2003- I 2000-2003 Ministeriode Obras Publicas(MOP) I 1061 51I 177I 177I 128I 49% Other institutions 12 20 23 11 17 6% Total 158 222 371 350 262 100% Source:CGR 203. The public sector commissions numerous multi-million construction projects each yearIo3. Domestic firms have successfully performed contracts up to 30 million, although only a few firms have adequate capacity for contracts o f this magnitude. The majority of contracts between 10 and 20 million are performed by joint ventures between a Panamenian and a foreign firm, while there i s adequate competition among domestic firms capable to perform contracts up to 10 million. There are several firms with significant turnovers and capacity o f implementing multiple large project^''^ Many foreign firms have established local offices, but other international firms also typically bid for and are awarded large projects andthe market for largeworks is generally considered as sufficiently open and competitive. 204. In large projects, commercial banks are often willing to engage in an operation similar to "factoring" whereby they advance up to 80 percent o f the payment by the Government to the contractor effectively purchasing the government's debt. The remaining 20 percent i s retained as collateral to guarantee the Bank's commissions. Access to credit i s generally good and there are no particular obstacles for either large or small companies. While late payment may discourage competition and adds costs at all levels o f the market, SMEs are particularly affected because o f their limited ability to pre-finance contracts and continue construction when cash flow i s very slow. Conclusions and Recommendations 205. Benchmarkingwith DomesticBest Practices. Clearly, the efficiency o fthe ACP's and CSS' procurement systems is the result o f the combination o f multiple factors. These lo* The ACP which is the single largest spender inbothgoods and works in not included as it operates under a completely separatebudgetandsystem. IO3 With largestduring the lastthree years beingrespectively48.8,38.3, and29.7 million. I O 4More than 100million inthe case ofthe largest. Panama CFMCPAR: ProcurementOperationsand Market Practices 52 factors include sound rules, streamlinedprocesses, prompt payment to and equitable treatment o f suppliers and contractors, appropriate use o f technology, highly professional and adequately trained and paid workforce, and an environment which i s conducive to control and enforcement. These factors are consistent with international best practices, but not all o f them can be necessarily replicated throughout the public sector. Nevertheless, these successful experiences represent sources o f good practices and innovative approaches which are uniquely relevant to Panama because they are implemented within very similar sets o f rules and legal traditions and by institution which draw from essentially the same pool o f human resources. ACP staff enjoys greater job stability and better salaries and career opportunities than their counterparts in other parts o f the Government `Os, However, the CSS follows the same salary scale as the rest o f the Government. While higher salaries may be a factor, it is not the only one, or necessarily the determining one, in the context o f Panama, in improving administrative efficiency. 206. A necessary starting point to determine what and how successful practices can be replicated i s to further develop the DPC's monitoring and evaluation capacity, as discussed above. Indeed, the ACP itself makes decisions on upgrading its system by continuously assessing it through baseline and performance indicators. By harmonizing its performance indicators with those utilized by the ACP and comparing the result o f baseline indicators exercise for the whole public sector with those applied to ACP by the CPAR team and the Contracting Division, the DPC would be able to clearly identify which practices can be replicated given potential political, institutional, legal or financial constraints and constantly benchmark its progress vis a vis a well know, credible system which not only can offer examples, but also technical assistance (e.g. on the design o f bidding documents, training courses, certification program, and career paths), already developed tools (e.g. red flag system), capacity building, and use o f the ACP's world class training facility at conditions to be agreed between the DPC and the Contracting Division. The following table provides an example o f practices which are likely to be major factors' in ACP's and, in some case, the CSS' procurement efficiency and could be replicated throughout the public sector: Decentralizeddelegation o f authority Contributes to streamlining processes, create a culture o f accountability, and an incentive to build capacity Use o f standard documents Improves consistency, helps filling procedural gaps in regulations with a flexible tool, reduces mistakes, and enhances transuarencv Use o f framework contracts Achieves savings through consolidation Ex-post audits Reduce delays and encourage internal control, accountability, and capacity Limited number o f steps required to Avoids duplication and unnecessary delays I building Panama adopted an Administrative Career Law in 1994 (Law No. 9), which is not fully implemented due to the lack o f regulations and a suspension order in 1999. Panama CFWCPAR: ProcurementOperations and Market Practices 53 contract Strict enforcement o f ethics code Better compliance and culture o f accountability Extensive use o f e-procurement Transparent and expeditious processes and well organized data which are available for better planningas well as control Good interface with comprehensive Complete records, quick and accurate financial management system transactions, faster payments, better monitoring and compliance Quick award and payment procedures, High level of bidders' participation and automatic interest paid on delays, fair and lower prices. prompt resolution o fprotests and claims Quality Assurance System and Better monitoring and compliance and benchmarking good basis for cauacitv building; Red flag system Tighter controls, more accountability, better risk management Ongoing training for staff Better compliance, stronger professional ethics, more objective basis for delegation o f higher level functions Record o f contractors' past performance More accurate evaluation o f qualifications, greater incentives for good performance 207. Quick Saving Program. The CPAR update team carried out a high level assessment o f the supply strategy focusing on 10 categories o f consumables goods for recurring needs, with simple specifications, required by all government entities, and currently purchased independently by each one o f them, such as telecommunications, gasoline, computer equipment and printingservices. IO6 The study also looked at the potential for better consolidation o f consulting and professional services and identified the potential for savings ineach one o fthe categories assessedwhich would translate intotal potential savings ranging from 44 to 68 million per year (equivalent to 8 to 12 percent o f the total government procurement bill). The following table relates the savings identified to the overall 2005 procurement budget for goods and services. Table 8: Potential Savings IO6 The assessment details are included inAnnex IV. Panama CFWCPAR: Procurement Operationsand Market Practices 54 208. The DCP should carry out a full diagnosis o f the current supply strategy with the objective o f prioritizing opportunities and developing details o f the cost savings strategy. To succeed, the program should be highly visible within the government and be strongly supported by the highest level. It should also be closely coordinated betweenthe Ministryo f Finance and the CGR close, but efficient control and enforcement o f remedies, as appropriate. Technical assistance will be required to carry out the study and facilitate implementation o f the recommendations. 209. The basic features o f the program should include: e A complete expenditures profile and generating primary data on - Expenses by expenditure category (e.g. salaries, debt payments, mandatory tax revenue transfers, investments, procurement, etc.) - Expenses by government agency - Expenses by procurement item group (e.g. civil works, hospitaVmedica1 services, IT equipment, administrative support staff, vehicles, fuel, etc.) e A benchmarkingexercise to homogenize prices for highvolume products. e A ranking ofprocurement item groups according to the size ofprocurement expenditures. e Identificationo f participatingunits; e Demand and vender market structures e Potential approachesto improve procurement, starting with the largest groups looking at both `moderate' and `aggressive' measures. Based upon this analysis, potential savings will be estimated for each item group from revisingprocurement contract arrangements. The selection o f the alternative approacheswill be based upon internal andexternal factors such as: risks and opportunities, time, lengtho f activities, ease o f implementation, available technologies. e Prioritized group opportunities according to magnitude and ease o f realizing savings potential. e Design o f contractual vehicle (framework contract) and Standard/model bidding documents incorporating cost-reduction measures (eg. consolidation, e-procurement, standardization, etc.) e Identificationo f the unit which would manage the framework contracts. e Design o f subsequentphases according to savings potential and implementation complexity starting with items such as office paper and gasoline e Launcho f first and subsequentphases e A mechanism for systematic'feedback e Training for the unit managing the contracts, participating units across the public sector and private sector participants Panama CFAAICPAR:Procurement Operationsand Market Practices 55 Figure 3: Progressive Implementation of Quick Savings Programs Savings Suggestionof program structure Potential for cost reduction High Implementation Cornplexlty Low 0Conllnue10rnD"l1Ol 0 Benchmarking of pncm 0 Program for eon~olidalionof purchase 210. Continue development of E-procurement The key actions requiredto support the establishment o f a sustainable e-procurement system include a comprehensive procurement policy which includes strategic planning, the strengthening o f the DCP, the establishment o f common standards, improvement to the regulatory framework, and the identification o f the lessons learned from the pilot experience. 211. The DCP should have the resources to continuously develop procurement policy and strategies, monitor the system's performance, quickly introduce new technologies and efficiencies, coordinate capacity building and manage communications to ensure ample informationand build support. 212. The strategic plan should address specific objectives and timeframes at the central government and local level, a participatory approach to e-procurement development which includes the private sector and civil society. 213. The revamped procurement policy should be clearly linked to the Government's overall socio-economic objectives, as defined in the five pillars o f the "Strategic Vision for Economic Development and Employment until 2009". Specifically, procurement policy should support the key objectives o f industrial development, regional development, o f small and medium enterprises, access to information and communication technologies, and electronic commerce. The policy should include quantitative indicators to be monitored independently and the results should be disseminated. 214. A series of executive decrees could address specific procedural aspects consistent with the electronic commerce law and incorporating international standards (e.g., as reflected inthe multilateralbanks' e-procurement guidelines and the electronic communication criteria included inthe UNCITRAL convention currently beingdrafted). Panama CFMCPAR: Procurement Operationsand Market Practices 56 Recent Achievement on the Procurement Reform. 1. The current Government has placed strong emphasis on procurement reform as a way to streamline public administration and increase the efficiency o f public spending. As a result, the Public Procurement Directorate(DCP) inMEFreceived a stronger mandate and full political support to revive the reform process. Currently, the DCP has effective leadership, i s developing a sound vision for its strengthened role, and i s beginning to coordinate well with other key Government stakeholders, in particular the Comptroller General o f the Republic (CGR) and the Presidential Secretariat for Government Innovation (SPIG). In addition to those allocated by the Government, adequate resources to support the initial phase o f the reform are available through the World Bank's Public Policy Reform Technical Assistance Project, which has a specific component for this purpose. 2. During 2005, the DCP was restructured to provide technical assistance to procurement entities on the interpretation and application of the regulatory framework, supervise the consistent implementation o f the system as a complement to the CGR's control function, develop bidding documents, build capacity in procuring entities, and manage the e- procurement system. Under the its new structure, the following improvements have been observed inthe performance o f the DCP: 0 Cost reduction strategies. The DCP has implementedpublic procurement processesfor the provision of key services and goods for the central government that used to be procured in a fragmented manner by each public entity. According to informal estimates by the DCP, the cost reduction strategy already has produced cost savings o f up to 34 percent for the central government, while increasing competition, promoting greater transparency and increasing the quality o f the products/services procured in key areas, such as telecommunicationand office supplies. The DCP plansto apply this strategy to other key services and goods inthe near future. More effective workflow system. Preliminary estimates based on approximately 70 percent o f the procurement processes analyzed by the DCP, indicate that the average response time period fell from 90 days inAugust 2005 to 30 days as o f May 2006. Improved skills mix. The DCP has strengthened its skill-mix, increasing the number o f professionals from 2 to 13, while keeping the overall number o f employees at the same level. The structure o f the DCP also has been redesigned to effectively support and address the areas o f legal advice, e- procurement system, policy and management o f the public procurement system, and special projects. Improved outreach. An outreach campaign was launched to collaborate more effectively with the private sector and civil society organizations (e.g. with the local chapter o f Transparency International). 3. A major accomplishment inthe area o f procurement has been the development o f the new e-procurement system, PanamaCompra, which i s capable o f performing many sophisticated functions, such as business opportunities notifications, on-line status notifications o f payments for providers. An important indicator o f the progress made in implementingthis new system i s that 90 percent o f all public procurement processesinthe Panama CFWCPAR: Procurement Operations and Market Practices 57 central government i s currently taking place through PanamaC~mpra."~More than 100,000 visitors and 1100 registered subscribers have visited the web-site since the beginning of February 2006. The new e-system provides subscribers automatic information regarding ongoing procurement processes o f activities that they may be interested. Furthermore, a module that allows contractors/providers to find out the status o f their requests for payments has been created and another module has been designed to provide CGR with a monitoring tool. 4. The DCP also has made progress in developing a comprehensive procurement reform strategy, preparing surveys to determine perceptions on the effectiveness of public procurement systems, applying baseline indicator systems to assess procurement performance, and designingtraining programs to improve public procurement capacities. The consultant retained for the purpose developing a comprehensive procurement reform strategy has finished the consultative phase with the authorities, with a final report produced in June 2006. Moreover, a consultant has been hired to analyze and redesign the process o f purchases and payments inkey government agencies. Consultant services have been contracted to develop a methodology and conduct surveys to determine private and public perceptions o f the public procurement system. The DCP is inthe process o f applying the baseline indicators system (BIS) developed by the OECD-DACNCrorldBank Roundtable on Strengthening Procurement Capacity in Developing Countries to broadly assess the key elements of a well functioning procurement system."* The BIS will constitute the basis for a monitoring system to continue measure progress and identify areas where additional emphasis i s required. Finally, the DCA i s designing a consulting activity aimed at (i) assessing technical capacities and skills o f public staff responsible for carrying out procurement processes; and (ii)developing a comprehensive training and capacity building programs for the procurement agencies. 5. A new procurement law (Ley 22) approved by the National Congress on June 8, 2006: (i) eliminates parallel frameworks, applicable to several agencies (with exception o f the CSS, the Panama Canal Authority and municipal entities), that have hampered the application o f a consistent public procurement system; (ii)creates an autonomous DCP, as an entity responsible for the interpretation o f the law; and, (iii)establishes several procedures/ systems promoting efficiency, economy and transparency; such as: a) establishing a framework for cost reduction strategies (e.g., price benchmarking, consolidation for economies o f scale), b) creating an independent administrative tribunal to review/decide lo7Cabinet Decree 98 o f September 2,2005, requires all central government institutions and autonomous entities to post online all public procurement information, contract opportunities and awards. Municipal and other local entities are expected (but not compelled) to eventually begin using PanamaCompra. (www,panamacomma,gob.Da The Decree emphasizes the importance o f e-procurement in promoting transparency and competition, and supporting good governance. (Gaceta Oficial25,378, September 5,2005). logThe BLIs are intended to provide a standardized instrument for developing countries and donors to assess the quality and effectiveness o f national procurement systems. The BLIs address four aspects o f a country public procurement system: (i)the existing legal framework that regulates procurement in the country; (ii)the institutional architecture o f the system; (iii) the competitiveness o f the national market; and (iv) the integrity o f the procurement system. Panama CFANCPAR: Procurement Operationsand Market Practices 58 procurement related protests/complains, and c) establishing a sound framework for the implementation o f an e-procurement system. Under the TA operation, the World Bank provide financial and technical support to GOP's actions aimed at implementing the new procurement law, including, among others: a) drafting regulation frameworks and procedures; b) developing an e-procurement strategy; c) and providing office and IT equipment and capacity buildingto thenew autonomous DCP. 6. The CGR i s in the process o f reviewing its control methods with the objective o f improving its operating efficiency and the SPIG (www.innovacion.gob.pa ) continues to play a central role in promoting the development o f technology designed to promote transparency and efficiency in the public administration. Proof o f this i s given by the PanamaTramita (www.panamatramita.gob.pa) and PanamaCompra projects. In the case of PanamaCompra, the next version includes functionalities that will help SPIG in auditingtechnology acquisition by all government entities. 7. Summaw Assessment. The current Government has given priority to procurement reform to streamline public administration and increase the efficiency and transparency of public spending (Le. providing a stronger mandate to the DCP, passing a new procurement law, supporting e-procurement system). The actions taken to date already appear to have had a considerable impact (para.46) and should become even more apparent over time. Implementing the new legal framework and building up consistent practices among procurement agencies will be as or more important than the changes to the legal framework per se. Panama CFMCPAR: Annex I Action Plan - 59 ANEXXES Annex I Action Plan For discussion purposes, the fundamental recommendations o f the report are presented in draft actionplan format here. VI E VI E & B a 3a 3 tsE II VI sM0a8 .3 a9 $1 $1 $1 $1 2 E E 3, E: E 3, E E 7 7 E & E 3, F / ) W u d a, !l c vl 30 vl a, 8 20 P vl a, .3 M fE 99 U # vl 3 rd c Q .s a 3a 3 0 3 B9 0 * z * rh E & E & E E & E & E E Y c) $ $ M d d .3 -4 Y 8 8 8 U d z E d8 m Q) c 5 .I a Q c 0 E m I M z Q) c i a -.8E a 44 E c Q) UE r-: * * sr > m E m m d 8 vi 3 z z - c E Panama CFMCPAR: Annex /I - Public Financial Management Performance Measurement lndicators 65 Annex II Public Financial Management Performance Measurement Indicators See attachment. Panama CFWCfAR: Annex 111 - Nectronic Government f rocurementAssessment 66 Annex III Electronic GovernmentProcurement Assessment See attachment. Panama CFWCPAR: Annex I\/-GovernmentProcurementStrategyAssessment 67 Annex I V Government Procurement StrategyAssessment See attachment. Panama CFAAICPAR: Annex V Background Papers and lnterviews - 68 Annex V Background Papers and Persons Interviewed Listof BackgroundPapers Budinich, Emma (2005). Panama:Notes on Public Investment System. Cosio-Pascal, Enrique(2005). Panama:Notes on Public Debt Records. Fanta, Enrique(2005). Panama:Notes onTax Administration. Guardiola, Ulises (2005). Panama:Notes on Internal and External Auditing. Magnusson, Tomas Inge (2005). Panama: Debt and CashManagement. Background paper for the Public Expenditure Review. Pflucker, Herndn (2005). Panama:Notes on Internal Controls. Rivolta, Mercedes (2005). Panamh: Evaluacidn del estado de avance de las adquisiciones del gobierno con medios electrdnicos. Rodriguez, Alfred0 (2005). Panama:Notes on Public Sector Financial Information. Ruiz, HCctor (2005). Panama:Notes on Treasury and SIAFPA. Shack, Nelson(2005). Panama:Notes on Budgeting. The GuatemalanConsulting Group (May, 2005). Panamd: Evaluacidn de alto nivel de las Compras Gubernamentales. Panama CFMCPAR: Annex V BackgroundPapers and lntetviews - 69 ListofPersons Interviewed NAME POSITION ENTITY Abrego, Merino Secretario Tbcnico de Asuntos Asamblea Legislativa Econdmicos Adames, Luis M. Funcionario Direccibn de Catastro y Bienes Patrimoniales, MEF Aleman Zubieta, Albert0 Administrador General Autoridad del Canal de Panama Alexander, Hbctor Viceministro de Economia Ministerio de Economia y Finanzas Amaya, Benign0 Director Nacional de Finanzas Caja del Seguro Social CSS Aparicio, Luis Analista Desarrollador SIAFPA, Ministerio de Economia y IFinanzas Arias. Maria Teresa IJefa del Deoartamento Leeal ]Autoridad del Canal de Panam6 IDirector de Departamento de Finanzas (Autoridaddel Canal de Panama IJefe de Departamento IDepartamento de Programacidn, Ministerio de Economia y Finanzas Barrios, Soila Programador analista Proyecto CUT, Direccibn General de Tesoreria Secretario de Asuntos Legales Procuraduria General de la Naci6n Gerente regional de operaciones Centro Interamericano de Administraciones Tributarias Asesora Legal en Adquisiciones Ministerio de Economia y Finanzas Directora Sistemas y Mbtodos, CGR Jefe Unidad DGI. Asesoria Juridica Castillo, Elias Castillo. Maeali Y Castillo, Rogelio Departamento de Deuda Publica, Chen, Eva Canal de Panama Consultora Coordinadora Tesoreria Direccibn General de Tesoreria, Coronado, Gerard0 Programador analista Proyecto CUT, Direccibn General de Tesoreria Cosulich Ayala, Jorge Secretario Ejecutivo Centro Interamericano de Administraciones Tributarias de Cardenas, Evelyne Jefe de Area Fiscalizachde Personal y Planillas, Direccibn Nacional de Informhtica, Contraloria General de la Republica De Freitas, Miguel Director Nacional SIAFPA, Ministerio de Economia y -de Finanzas la Cruz, Jonel Jefe Direccibn de Auditoria, CGR De Lebn, Ruben Presidente de la Comisibn de Asamblea Legislativa Presupuestos De Mathos. Lisbeth Jefe Unidad DGI. Cobranzas Panama CFMCPAR: Annex V Background Papers and Interviews - 70 j e Velarde, Dense IJefe de Deuda Externa IDireccibn de Credit0 Publico, Ministerio de Economia y Finanzas Dominguez, Damaso Director nacional de Administracibn Ministerio de Obras Publicas de Contratos Echevers, Marissa Sub-directora de Contrataciones Ministerio de Economia y Finanzas Publicas Echevers, Nestor Coordinador Nacional del Programa Ministerio de Economia y Finanzas de Dinamizaci6n de la Ejecucion del Presupuesto de Inversibn en Instituciones Prioritarias del Sector Publico Eguren, Jose Coordinador Residente UNDP Espino, Osvaldo Jefe de Unidad Auditoria Interna, Ministerio de Obras Publicas Fernandez, Dagoberto Director Nacional de Ingenieria y Ministerio de Educacibn Arquitectura Fernandez, Maria Jefa de Operaciones de Ejecucidn UNDP Nacional Fistonic, Lutzia Directora de Fiscalizacion General Contraloria General de la Republica Galvez, Roberto DeputyResident Representative UNDP Garay, Erick Consultor de Infraestructura Proyecto CUT, Direccibn General de Tesoreria Sarcia, Ricardo Jefe de Unidad Contador, Ministerio de Obras Publicas Sbmez, Ana Matilde Procuradora General de la Nacibn Procuraduria General de laNacibn Sbmez, Edwin Funcionario Direccibn de Catastro y Bienes Patrimoniales, MEF Sonzales, Carlos Director de Presupuesto de la Nacibn Ministerio de Economia y Finanzas Sonzalez, Rigoberto Secretario General Procuraduria General de la Naci6n Sutikrrez, Nelson Director de Operaciones Centro Interamericano de Administraciones Tributarias Halphen, Lebn Jefe Legal de la Direccibn Nacional de Ministerio de Obras Publicas Administracibn de Contratos Herrera, Eduardo Consultor analista Proyecto CUT, Direccibn General de Tesoreria Kuzniecky, Dani Contralor Contraloria General de la Republica Lay, Jacob Consultor analista Proyecto CUT, Direccibn General de ITesoreria Lbpez, Elis IIJefe de Unidad Ministerio de Educacibn Lugo, Roberto lSub Director de Presupuesto de la Ministerio de Economia y Finanzas Nacibn Madrid, Ildefonso Analista Financier0 Operaciones Financieras, UNDP Marin, Jaime Jefe de Operaciones, conciliacibn Departamento de Operacibn, Ministerio bancaria de Economia y Finanzas Martinez, Victor Funcionario Sistemas y Metodos, CGR Maytin, Ang6lica Presidente Ejecutiva del Capitulo Fundacibnpara el Desarrollo de la Panameiio de Transparencia Libertad Ciudadana Internacional vleana, Daniel Director Nacional Direccibn Nacional de Informatica, Contraloria General de la Republica Panama CFIWCPAR: Annex V BackgroundPapers and Interviews - 71 Medrano, Rogelio Jefe, Soporte de Sistemas Direcci6n de Credit0 Publico, Ministerio de Economia y Finanzas Mkndez, Aracelly Director CrBdito Publico Direcci6n de CrBdito Publico, Ministerio de Economia y Finanzas Milwood, Mateo Coordinador del Sector Fiscal Ministerio de Economia y Finanzas Mitre G., Elsie N. Jefa de Control de Entidades Direcci6n General de Ingresos, Recaudadoras Ministerio de Economia y Finanzas Molina, Jaime Coordinador del Sector Servicios Ministerio de Economia y Finanzas Montenegro de Fletcher, Alma Consejo Nacional de Transparencia contra la Cormci6n Morales, Francisco Director Direcci6n Nacional de Contabilidad Mufibn,Vielka Director Direcci6n de Planificaci6n y Presupuesto, Ministerio de Obras Publicas Noriega, Francisco Jefe del Departamento de Compras y Ministerio de Salud Proveeduria O'Meally, Amanda Gerente Contabilidady Finanzas, Autoridad del Canal de Panama Ordas de Rodriguez, Beatriz Directora de Programaci6n de Ministerio de Economia y Finanzas Inversiones Ordas, Beatriz Directora de Programaci6n de Ministerio de Economia y Finanzas Inversiones Ospino, Aliro Jefe Unidad DGI, Incentivos Fiscales Pefia, Lino Funcionario Sistemas y Mktodos, CGR Peiialoza, Jorge Jefe de Unidad Unidad Coordinadora Programa BID- BIRF-CAF, Ministerio deObras Publicas Perez, Rodolfo Ttcnico, Soporte de Sistemas Direcci6n de Crkdito Publico, Ministerio de Economia y Finanzas Previa, Edgardo Funcionario Direcci6n de Catastro y Bienes Patrimoniales, MEF Quijada, Orencio Direcci6n de Metodos y Sistemas de Direcci6n Nacional de Informatica, Contabilidad Contraloria General de la Renublica Revira, Jose Javier IVicepresidente ICamara de Industriay Comercio Reyes, Santiago lconsultor ISIAFPA, Ministerio de Economia y Finanzas Richa, Susana Secretaria de la Comisi6n de Asamblea Legislativa Presuouesto Rodriguez, Francisco Director Nacional de Asesoria Fiscal Contraloria General de la Republica Rodriguez, Gyrelia Encargada de la consolidaci6n de Sistemas y MBtodos, CGR informacibn Ruiz Miro, Edilberto Director de Contrataciones Publicas Ministerio de Economia y Finanzas Ruiz, Jorge Director Nacional de Finanzas y Ministerio de Educaci6n Desarrollo Institucional Said, David Director de UnidadTecnica de Ministerio de Economia y Finanzas Politicas Publicas Sanchez, Enrique Gerente de Division de Contratos Autoridad del Canal de Panama Santos, Ulises Sub-director de Compras y Abastos Caja de Seguro Social Silgado, Carlos Consultor analista Proyecto CUT, Direcci6n General de Tesoreria Simona, August Presidente Camara de Comercio Smith, Walter Jefe Unidad DGI, Estadisticas Soto, Beatriz Jefe de Deuda Externa Direcci6n de Crkdito Publico, Ministerio de Economia y Finanzas Panama CFAAICPAR: Annex V - BackgroundPapers and lnterviews 72 ITarte, Gaspar ISecretario Presidencial ISecretariaPresidencial de Innovacibn I Gubemamental Tuiibn, Vielka Directora de Planificacibny IMinisterio de Obras Publicas Valdes, Ricardo I1Presupuesto Jefe de Unidad IUnidad Coordinadora Programa BID- BIRF-CAF, Ministerio de Obras Publicas I Vasquez, Ricaurte IMinistro IMinisterio de Economia y Finanzas Wong, Jacinto ISecretario Presidencial Adjunto ISecretariaPresidencial de Innovacibn Gubemamental Ysasa, Florencio Presidente Camara de Industria y Comercio Zuleta, Alexis Director Nacional de Compras y Caja de Seguro Social Abastos Panama CFMCPAR: References 73 References Guzmh, Marcela (2005). Sistema de Control de Gestidny Presupuesto por Resultados: La Experiencia Chilena. Presentation. Inter-American Development Bank (2002). Program to Strengthen and Modernize Economic and Fiscal Management (Phase 11).LoanProposal. International Monetary Fund(2001). Code o f Good Practices on Fiscal Transparency. International Monetary Fund(2006). Panama: StaffReport for the 2004 Article IV Consultations. PEFA (2005). Public Financial Management Performance Measurement Framework. Schick, Allen (1998). A Contemporary Approach to Public Expenditure Management. World Bank I n stitute. Schick, Allen (2001). The Changing Role o f the Central Budget Office. OECD Journal on Budgeting. World Bank (2001). Public Policy ReformTechnical Assistance Project Appraisal Document. World Bank (2003). Country Financial Accountability Assessment - Guidelines to Staff. World Bank (Draft, 2006). Public Expenditure Review.