Document of The World Bank FOR OFFICIAL USE ONLY Report No: 74313-PA INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL FINANCE CORPORATION PROGRESS REPORT ON THE COUNTRY PARTNERSHIP STRATEGY FOR THE REPUBLIC OF PANAMA (FY2011-2014) February 13, 2013 Central America Country Management Unit Latin America and the Caribbean Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank's Policy on Access to information. The date of the last Country Partnership Strategy was August 10, 2010. CURRENCY EQUIVALENTS [US$1 = I Balboa (February 6, 2012)] FISCAL YEAR January I to December 31 ABBREVIATION AND ACRONYMS AAA Analytical and Advisory Activity ACP Autoridad de Canal de Panam CAF Development Bank of Latin America CAPRA Central American Probabilistic Risk Assessment CAT-DDO Catastrophe Deferred Drawdown Option CCT Conditional Cash Transfer CPPR Country Portfolio Performance Review CPS Country Partnership Strategy DPL Development Policy Lending DRM Disaster Risk Management FDI Foreign Direct Investment GEF Global Environment Facility IBRD International Bank for Reconstruction and Development IDB Inter-American Development Bank IFC International Finance Corporation M&E Monitoring and Evaluation MIGA Multilateral Investment Guarantee Agency NLTA Non Lending Technical Assistance OECD Organization for Economic Cooperation and Development RAS Reimbursable Advisory Services RdO Red de Oportunidades (conditional cash transfer program) REDD Reducing Emissions from Deforestation and Forest Degradation TA Technical Assistance WBG World Bank Group WSS Water and Sanitation Services IBRD IFC Vice President: Hasan A. Tuluy Bernard Sheahan Country Director: C. Felipe Jaramillo Jean-Philippe Prosper Country Manager: Ludmilla Butenko Roberto Albisetti Task Team Leader: Ludmilla Butenko Luciana Marchesini i JOINT IBRD-IFC COUNTRY PARTNERSHIP STRATEGY PROGRESS REPORT FOR THE REPUBLIC OF PANAMA Table of Contents I. Introduction ........................................................1 II. Country Context .................................................... 2 III. Relevance of the Country Partnership Strategy. .......................... ..... 5 IV. Progress toward achieving CPS Objectives and Outcomes ......................... 6 V. Proposed Modifications to the CPS...............1........................1 VI. Risks ............................................................ 12 Tables: Table 1 - Selected Economic Indicators (2008-2015)....................4.......4 Table 2 - Portfolio of Projects under Implementation............. ................ 10 Table 3 - Portfolio of Trust Funds under Implementation ..................... ..... 10 Table 4 - Panama Planned vs. Actual Lending ................1..................1 Annexes: Annex 1 - Revised CPS Results Framework for Panama ....................... 14 Annex 2 - Review of the Progress Achieved under the Pillars of the CPS .. .............. 23 Annex 3 - Non-Lending Activities ..................................... ...... 29 Annex 4 - Panama Economic Achievements ............................... ..... 31 Annex 5 - MIGA Support for the Metro Project Financing ...................... 39 Annex 6 - IFC Recent Investments and Results .................................. 40 Annex 7 - Standard CPS Annexes ..................................... ....... 41 ACKNOWLEDGEMENTS The World Bank Group greatly appreciates the close collaboration with the Government of Panama in the preparation of this Country Partnership Strategy Progress Report. Contributions from the World Bank Panama Country Team and Task Team Leaders were critical to the production of this document. Special thanks go to several colleagues including Oscar Calvo-Gonzalez, Friederike Koehler-Geib, Maria Gonzalez de Asis, Sabine Perrissin, Meylin Gem and Andrea Kucey. We also appreciate the support provided by Sonia C. Molina. II  PANAMA COUNTRY PARTNERSHIP STRATEGY PROGRESS REPORT I. Introduction 1. This Progress Report assesses the implementation of the current joint IBRD-IFC Country Partnership Strategy (CPS) for Panama for FYI 1-14. The CPS was built around three pillars aimed to support Panama in addressing its development challenges: (i) economic growth that builds on Panama's competitive advantages; (ii) providing greater opportunities for all; and (iii) a transparent and efficient public sector that provides returns to society. The third pillar was cross-cutting and aimed to support growth and provide for a more efficient and effective public sector. 2. The World Bank Group (WBG) focused within each of these pillars on areas in which it had a comparative advantage by virtue of prior successfully-implemented programs in Panama or relevant regional and global expertise. At the same time, the program was intended to be flexible and responsive to evolving client needs. The CPS envisaged US$400 million in new IBRD lending commitments by the end of FY12, purposely leaving the program for FY13-14 flexible, so as to retain the demand-driven aspect of its engagement in Panama. 3. During the first part of the CPS period (September 2010-December 2012), Panama posted some of the highest growth rates among emerging economies, due to massive public investment in infrastructure, strong growth in many sectors and private consumption. This growth has promoted "shared prosperity", as poverty and inequality were significantly reduced, on the back of income growth and substantial public transfers. Considerable reforms have been achieved (e.g., tax policy and administration, doing business) and progress has been made towards achieving CPS outcomes, despite a slower-than-anticipated delivery at the start of the program and subsequent changes in its composition. Some of the outcomes and many milestones under the three pillars have been met or are on track to be met (e.g., completion of the national health and disaster risk management plans, recertification of 20 percent of beneficiaries of the conditional cash transfer (CCT) program, and creation of 59 agricultural productive alliances). 4. The original CPS pillars remain valid, though some of the outcomes that the Bank expected to influence by means of IBRD lending have been achieved through other sources (e.g., in the roads sector). Strengthening of social protection systems, basic health services, water and sanitation in remote rural communities, access of poor urban households to water and sanitation, agricultural productivity and conservation of forests and biodiversity remain an important part of the portfolio. At the same time, in line with the increased demand for technical assistance and advisory services rather than financial support, the envisaged lending program has been scaled down. 5. Knowledge products and advisory and convening services have become an increasingly important part of IBRD's program to help Panama face its new challenges. An emerging topic has been adaptation to the approaching change of phase, from the boom of public investment in infrastructure-especially the expansion of the Panama Canal-to a new phase focusing on Foreign Direct Investment (FDI) attraction to leverage the operations of the expanded Canal for sustained shared prosperity. The Bank has delivered well-received work to support this agenda, 1 providing tools to frame a development strategy for the reverted areas around the Canal and implementation of the maritime and logistics strategy; a study on better jobs and the role of human capital; and help in organizing high-profile annual investors conferences. This thrust of Bank support will continue for the remainder of the CPS through policy notes, and other Analytic and Advisory Activities (AAA). 6. The IFC program has focused on fostering further development of Panama's financial markets and infrastructure through support to micro- and trade finance, cellular networks, clean energy production, the Panama Canal expansion, and promoting investments oriented to low- income groups. This engagement has built on synergies with the Bank, specifically on promoting competitiveness through Doing Business Reform advisory services, technical assistance (TA) to improve the transparency of the country's tax system and enhance its ability to exchange tax information to meet the standards of the Global Forum'. IFC's committed portfolio to date is US$560 million, including US$300 million for the Panama Canal expansion project. 7. MIGA has issued a US$320 million guarantee to support financing of the Panama City metro construction, its first coverage of a sovereign financial obligation in Latin America. Two advisory services in support of the fiscal sustainability objective-on public debt management and asset management-are planned by the WB Treasury. The WBG engagement in Panama will continue to focus on providing tailored support from across the institution. 8. One important lesson learned during the implementation of the CPS is that in an upper middle-income country, knowledge products tailored to specific country demands and complemented by development policy lending (DPL), can be a more appropriate and effective tool than conventional investment loans. II. Country Context 9. Panama's economic growth has been one of the fastest in Latin America over the past decade, a trend that has even accelerated in recent years. It quickly rebounded from the 2008 global economic crisis, and real gross domestic product (GDP) grew by 7.6 percent in 2010, reached 10.6 percent in 2011, and is projected at 10.5 percent for 2012. The major drivers of growth during this period have been massive public investment and private consumption. In terms of sectors, infrastructure construction has been the main source of growth, helped by housing construction, retail and wholesale trade, transportation, communications, and tourism. Growth of domestic credit, export and foreign direct investment also provided important growth impulses. 10. Strong growth and public transfers have translated into impressive poverty reduction. The poverty rate fell from 48.5 percent in 2002 to 27 percent in 2011, while extreme poverty decreased from 21 to 11 percent over the same period2. Poverty has become more of a rural phenomenon due to the much larger reductions in poverty in urban areas. The highest incidence of poverty is observed in the three remote and sparsely populated indigenous areas (comarcas) 1 Global Forum on Transparency and Exchange of Information for Tax Purposes. 2 Preliminary Government data for 2012 estimates poverty rate at 25.8% and extreme poverty at 10.4%. 2 -Ngobe Bugle, Emberi, and Kuna Yala-containing less than 6 percent of the total population3 but concentrating 16 percent of the poor and 28 percent of the extreme poor. Better targeting of poverty interventions and providing access to services in isolated communities remain challenges for the Government's social programs. 11. Economic growth has been pro-poor and contributed to more widely shared prosperity. The growth of the income of households in the bottom forty percent of the income distribution reached 7.3 percent between 2002 and 2010, far exceeding the average income growth of 4.3 percent over the same period. In addition, a measure of economic growth adjusted for equity yields a rate of 7.1 percent compared to the 5.8 percent in annualized GDP growth in 2002-2010. This is due to a decrease in inequality levels, with the Gini coefficient dropping from 0.57 in 2002 to 0.53 in 2011. 12. However, Panama's Gini coefficient is still at the mid-range of Latin American countries and there remains a significant unfinished agenda on social inclusion, reducing income inequality and improving service delivery, especially in rural and indigenous areas. Addressing these challenges would be critical for Panama to converge towards the most advanced countries in terms of shared prosperity. 13. Panama has made substantial progress in integrating into the global economy, leveraging its unique geographical position and turning into a trade and logistics hub. The expansion of the Panama Canal has shown significant progress4, as well as other major infrastructure projects to increase connectivity and competitiveness (e.g., expansion of the international airport, construction of local airports, port facilities, primary and secondary roads, metro in Panama City, metro bus project, creating cold storage and warehousing to boost agricultural production, etc.). While the large public investment program has put upward pressure on public expenditures, the budget deficit has been kept under 3 percent of GDP and overall fiscal sustainability has improved as public debt decreased from 53 percent of GDP in 2007 to 42 percent of GDP in 2011. 14. Tax policy and administration reforms helped increase tax revenues and a new sovereign wealth fund was set up to ensure that part of the additional revenues from the expanded Canal will be saved for spending during emergencies or recessions. To improve the efficiency of public spending, the authorities also implemented important reforms in public procurement and embarked on reforms to improve service delivery such as the restructuring of the water and sanitation sector. Panama has been actively developing its domestic capital market by issuing treasury notes, thus diversifying financing sources and reducing government exposure to refinancing and interest rate risks. Reflecting the strengthening of public finances, low debt, and a favorable growth outlook, the three major credit rating agencies awarded Panama investment grade in 2010 and have since further upgraded their ratings. The latest Doing Business Report Based on the data of Encuesta de Hogares de Panama (household surveys), 2010. Overall project is at 50 % completion, with most of the dredging works finished. The completion of new locks construction, at 37% now, is expected by April 2015 instead of October 2014, with the expanded Canal fully operational by June 2015. The sovereign wealth fund is expected to accumulate savings from annual Panama Canal transfers when they exceed 3.5% of GDP starting in 2015. 3 highlighted progress made in a number of areas of business regulation reform (paying taxes, dealing with construction permits, and registering property). Table 1 - Selected Economic Indicators (2008-2015) Estimated Projected 2008 2009 2010 2011 2012 2013 2014 2015 (annual percentage change) Real GDP 10.1 3.9 7.6 10.6 10.5 8.5 7.0 6.6 CPI Inflation (eop) 6.8 1.9 4.9 6.3 5.0 4.9 4.5 3.8 (in percent of GDP) Savings and investment Gross national savings 16.7 24.9 15.5 16.4 17.5 19.2 18.6 16.6 Gross fixed investment 27.6 25.6 26.4 29.0 30.0 31.0 29.7 26.5 Fiscal accounts Central government Total revenues (including grants) 19.8 18.5 18.6 18.7 19.7 19.7 19.2 19.2 Current revenue 18.4 18.1 18.4 18.6 19.0 19.2 19.0 19.1 Tax revenues 10.6 10.9 11.6 12.1 12.6 13.0 13.0 13.1 Nontax revenues 7.8 7.2 7.0 6.5 6.4 6.2 6.0 5.9 o/w Panama Canal fees and dividends 3.0 3.2 3.1 2.9 2.9 3.0 3.5 3.5 Capital revenue 1.1 0.3 0.1 0.2 0.6 0.5 0.2 0.1 Total expenditure 19.4 19.9 21.1 22.2 23.2 22.8 21.4 21.3 Capital expenditure 5.6 6.2 7.4 8.4 9.1 9.5 8.1 8.0 Primary Balance 3.4 1.4 0.1 -1.2 -1.4 -1.3 0.5 0.4 Overall Balance 0.3 -1.5 -2.5 -3.5 -3.5 -3.1 -2.2 -2.1 Nonfinancial Public sector Overall Balance (excluding ACP) 0.4 -1.0 -1.9 -2.3 -2.5 -2.8 -2.7 -2.1 Overall Balance (including ACP) 2.5 -0.4 -3.4 -5.5 -4.3 -3.7 -2.9 -1.8 External sector Current Account Balance -10.9 -0.7 -10.8 -12.8 -12.5 -11.8 -11.1 -9.9 Trade Balance (of goods) -19.9 -9.0 -17.1 -19.6 -18.6 -17.9 -16.9 -16.2 Net exports from Col6n Free Zone 0.0 8.1 1.8 1.8 1.7 1.7 1.6 2.2 Services Balance 13.6 13.8 12.9 12.2 11.1 10.6 10.2 11.0 Net factor income -6.9 -6.0 -7.0 -5.9 -5.3 -4.9 -4.8 -5.1 Net current transfers 2.3 0.5 0.5 0.4 0.3 0.4 0.4 0.4 Foreign direct investment 9.3 5.2 8.8 9.1 9.2 9.3 9.0 9.0 Total Public Debt 41.3 44.0 44.1 42.6 42.1 41.0 39.9 39.1 GDP (in millions of current US$) 23,002 24,163 26,590 31,084 35,902 40,713 45,394 50,115 Source: Contraloria General de Panama, IMF and World Bank staff calculations Note: ACP = Panama Canal Authority. 1/ Gross debt of the non-financial public sector, and including the debt of the ACP and excluding the Sovereign Wealth Fund 15. The country has done well in terms of primary education enrollment, which is almost universal, and has also initiated an early childhood development program. However, the quality of education, both secondary and tertiary, continues to lag behind the needs of the economy. The lack of adequate skills, quality of educational outcomes and preparedness of the Panamanians to join the workforce at the level required by a fast-growing and competitive economy remains a major challenge. While unemployment is low, at 4.2 percent in 2011, the shortage of qualified labor is a significant issue for both private and public sectors. As a short-term solution to attract 4 qualified professionals, the Government recently changed the immigration law making it easy for qualified foreigners to receive resident permits in Panama. However, to ensure medium- and long-term sustainability, the country needs to embark on education reforms, going beyond coverage. 16. In order to improve transparency and address reputational risks associated with offshore financial centers, the Government has taken both legislative and institutional actions to implement the recommendations of the Peer Review of the Global Forum to effectively apply international tax agreements and exchange information for tax purposes. Some of these actions included international tax agreements, reforms to the fiscal code, and resolutions to oversee international taxation. Further steps are needed but the Government's commitment to this process makes it likely that this outcome will be reached. III. Relevance of the Country Partnership Strategy 17. Overall, the CPS overestimated Government demand for investment lending, and as a result some of the planned operations did not materialize. This was due to several factors: fast growth generated higher revenues for own financing; rigorous debt management and fiscal space limits set by the Social and Fiscal Responsibility Law limited the demand for external financing from the IBRD and other development partners; the use of country rules for procurement in large infrastructure projects to fast track implementation precluded the Bank's participation; and in the social sectors, the Government decided not to borrow for some new projects containing a substantial recurrent costs component. 18. At the same time, the development goals supported by the CPS strategic areas of engagement remain relevant, as does the CPS overall objective of supporting improvement of Panama's productive capacity, enhancing public sector efficiency, increasing basic public services coverage in remote areas and promoting inclusive growth. The continued strategic focus of the CPS on the three pillars is predicated on the need to further strengthen the foundations for medium-term competitiveness and growth, especially in terms of sustainability, as well as the continued mitigation of social vulnerabilities, particularly with regard to the rural and indigenous population. 19. Panama continues to seek Bank support in the priority areas set out in the CPS, with the exception of the roads sector, where the country was able to expand and upgrade the network without IBRD financing (e.g., over 58 percent of secondary paved roads are by now in good condition). Similarly, while the ongoing health and social protection projects have shown substantial execution, the new lending envisaged in the CPS for these sectors was not requested by the Government, as it opted not to borrow for recurrent expenditures in light of fiscal sustainability concerns. The client predominantly used own financing and funds already secured from other development partners. 20. The outlined CPS outcomes, with the exception of those associated with dropped lending activities, are relevant and will contribute to the country's development goals. They are expected to be achieved through: (i) the implementation of the ongoing projects in the portfolio; (ii) support to the Government with AAA, non-lending technical assistance and convening 5 services; and (iii) support to institutional reforms through development policy lending (DPL). Given the political cycle, the Bank will also prepare demand- and supply-driven sector policy notes and will facilitate the dialogue with all stakeholders to prepare the ground for the Bank's strategy with the next administration. 21. The shift towards knowledge and convening services as the bulk of new activities for the remainder of the CPS period is presented in detail in Annex 3. In terms of new lending, the second DPL of the series (US$100 million) will be delivered in FY13, and the third one (US$50 million) is expected in FY14, with potentially one more investment operation6 for the remainder of the CPS, following a request from the Government received in December 2012. This Progress Report further maintains the principle of flexibility that underpinned the CPS and takes the opportunity to streamline the Bank's engagement in Panama as the current political administration enters the second part of its term. IV. Progress toward achieving CPS Objectives and Outcomes 22. Overall, considerable progress has been made towards achieving CPS milestones and outcomes. A detailed description of progress towards CPS results in each of the three pillars is presented in both the revised Results Matrix (Annex 1) and in Annex 2. Significant reforms have been achieved under the CPS in critical areas... 23. The DPL reform actions related to legislative change at the onset of the political cycle have been particularly successful as illustrated by the tax policy and tax administration reforms undertaken by the Government to widen its tax base and reduce tax exemptions thus maintaining fiscal sustainability by keeping the fiscal deficit within the limits of the Social and Fiscal Responsibility Law. 24. Together with the social protection project, the DPL contributed to the reform of the Government's CCT program, Red de Oportunidades, RdO (e.g., by providing tools for the recertification of the eligibility of beneficiaries) and helped streamline and target transfer programs better. It has been an integral part of the Government's social protection agenda, together with its flagships-the Beca Universal scholarship program, covering all eligible children in grades 1-12 in public schools, and the "100 a los 70", a non-contributory pension program. However, like in other sectors, these programs have been affected by institutional weaknesses, fragmentation, and lower budget allocations resulting in lower-than-expected results (e.g., in the implementation of the M&E system to assess results in pilot social sectors). 25. Given the fast growth and reduction in poverty levels, the Government is incorporating vulnerability dimensions in the eligibility criteria of its social policy instruments (e.g., "RdO", "100 a los 70", and the new "Guardian Angel" disability program). The eligibility criteria of RdO include household income indicators, with data collected through the Vulnerability Census. The Ministry of Social Development has recently passed a resolution establishing the Social Vulnerability Survey to assess risk dimensions among eligible elderly (e.g., income level, health 6 Subject to IBRD's lending capacity, demand by other Bank borrowers and global economic developments. 6 conditions, one-person household), with a similar instrument being developed for the "Guardian Angel" program. 26. The reform of the public procurement system in Panama continues to deliver tangible benefits. The procurement system has undergone a significant upgrade, with technical assistance from the World Bank for the design and implementation of PanamaCompra, a fully transactional e-procurement platform, which the Government is now working to expand beyond common use goods and standard services contracts. It serves not only as an effective means to promote transparency and efficiency in government procurement, but also as a business tool for companies interested in competing for public contracts. The Bank has also supported improvement of financial reporting and auditing practices, contributing to the country systems agenda. 27. Water sector restructuring to foster improved provision of water and sanitation services, especially in rural areas, is a priority for the Government and a process is underway to modernize Panama's water and sewerage authority7 and reform the institutional framework of the sector. This has created an environment conducive to mobilizing resources for the sector, and the Bank has worked closely with two main development partners in the country-the Inter-American Bank for Development (IDB) and the Development Bank of Latin America (CAF)-to enhance policy dialogue and coordination. The draft law has been prepared and is awaiting review by the National Assembly. .... combined with tangible results achieved through ongoing IBRD operations 28. The targeted results of IBRD operations under implementation relate directly to the overall CPS outcomes and in many cases important progress has been achieved despite various implementation challenges. 29. Key accomplishments were achieved under all three pillars, such as: over 36,000 hectares of forest are now under effective conservation; 59 productive alliances were formed with small- scale producers receiving financing to access markets; the national disaster risk management plan for 2011-2015 is under implementation; a water supply and sanitation master plan has been completed for the cities of Chilibre, Alcalde Diaz, and San Miguelito; 144 rural water organizations were supported by the rural water project leading to 41,257 people in target areas receiving improved water and sanitation services; the number of framework agreements for procurement of goods and standard services has increased and e-procurement is now widely used by the public sector, with surveys conducted to measure public views of the system. 30. One of the objectives of the WBG partnership with Panama has been to help decrease gender gaps, improving the lives of poor and indigenous women in particular. The Health Project contributes to higher percentages of women receiving at least three prenatal controls, and births attended by trained personnel. Participation of women in environmental sub-projects8 of the GEF Rural Productivity project is at 43 percent exceeding the targeted 40 percent of beneficiaries. The Instituto de Acueductos y Alcantarillados Nacionales (IDAAN). 8 Sub-projects include forest conservation, natural resource management, reforestation, production of medicinal plants, etc. 7 Bank-supported CCT program transfers resources to mothers to improve their families' living standards. 31. Another important objective has been focusing on addressing poverty and inequality within the most vulnerable indigenous communities. Six out of the seven ongoing investment lending projects serve indigenous and poor communities, and Indigenous Peoples Plans put in place in consultations with the beneficiaries are monitored regularly. The coverage of indigenous population by mobile health clinics services went up from 120,000 to 213,193 people exceeding the target of 180,000; 46.3 percent of the CCT program is targeted at indigenous recipients; and 10,847 indigenous people are receiving improved water and sanitation services. Knowledge and Convening Services have been an important element of the CPS 32. Knowledge and convening services have become an increasingly important part of the support provided by the Bank to Panama. In terms of AAA, while the CPS anticipated delivery of ten pieces, twelve have been delivered to date, with the total number expected to reach thirty over the CPS period, including a reimbursable advisory service (RAS) to frame a development strategy for the reverted areas around the Canal-a new Bank instrument for Panama which paves the way for future engagement on this basis. This number also includes regional analytical pieces that specifically cover Panama (e.g., Trade Facilitation and Regional Integration in Central America; Regional Poverty Study; Regional Social Expenditures Review; Good Jobs: the Role of Human Capital). The Bank has maintained a follow-up dialogue on Accounting and Auditing Report on the Observance of Standards and Codes (ROSC) and support regarding International Financial Reporting Standards (IFRS). It has also provided convening services to Panama, specifically in the area of competitiveness, trade and logistics, and increasing efficiency of public procurement. Annex 3 provides detailed information about non- lending activities. Some CPS outcomes are no longer sought or have been modified 33. Results in the third pillar to support a transparent and efficient public sector have been slower to materialize partly due to the long structural delay of the effectiveness of the Enhanced Public Sector Efficiency investment lending operation. While good progress has been made in some key areas, such as procurement, areas like implementation of the new version of the Integrated Financial Management System remains a medium-term agenda which is likely to take time in terms of showing results in key outcome indicators. In light of this, the revised Results Matrix in Annex 1 proposes some new outcome targets which are more realistic. The original CPS outcomes remain relevant but would only materialize during the next CPS period. 34. Slow progress in enhancing the quality of higher education and innovation remains a challenge for the Government, and the shortage of qualified labor in Panama's fast-growing economy is becoming a serious limitation to its competitiveness. The quality of the higher education and innovation systems has not yet adapted to the needs of a dynamic global environment. The AAA on Higher Education and Innovation for Global Competition initially planned under the CPS was replaced by the regional study on Good Jobs: The Role of Human Capital which includes a thorough diagnostic of tertiary education and vocational training issues 8 in Panama. More needs to be done in this area in the near future and the Bank is planning a policy note on the sector to foster dialogue with a variety of stakeholders in Panama in the lead up to the political transition. No lending in the education sector is planned at this time but could be envisaged under the next CPS. IFC has a growing presence in Panama 35. IFC engagement in Panama has built on synergies with the Bank, specifically on promoting competitiveness through advisory services to improve the investment climate in the areas covered by the Doing Business report and to respond to the challenges related to tax transparency. IFC has continued to support private sector development in financial markets and infrastructure, and to promote investments oriented to low-income groups. During the CPS period, IFC has made investments in the housing and banking sectors to expand residential mortgage lending to low-income households, expected to increase access to financial services to over 2,700 individuals; supported lending to SMEs in the agricultural sector to benefit 260 farmers; and supported increase in trade and regional integration through US$150 million in trade guarantees to a local bank. The details of the IFC portfolio are presented in Annex 6. 36. Infrastructure investments included participation in the financing of the Panama Canal expansion (US$300 million), a hydro-power project estimated to provide power for 270,000 customers (US$38 million), a green-field cellular network built by a local phone company estimated to create 500 direct jobs, US$10.5 million in taxes and other payments to the government and 700,000 phone connections. Overall, success has been impressive where activities benefited from strong government ownership 37. In areas where the Government has put in place institutional structures with the appropriate legal and resource backing, results have been achieved and sometimes exceeded expectations as, for example, in the case of the tax administration tribunal in terms of number of cases resolved, or the implementation of PanamaCompra in terms of the number of contracts for common use goods processed. Implementation 38. While there has been a shift to AAA in terms of new activities, the bulk of the CPS development results are still expected to be delivered through the existing portfolio of lending operations, with complementary advisory and convening services. The portfolio performance is satisfactory for the most part, despite slower-than-expected disbursements. The portfolio includes eight projects totaling US$302.4 million in commitments, including a DPL with Catastrophe Drawdown Option (CAT-DDO) (US$66 million) and a GEF grant (US$6 million), in human development, infrastructure, rural productivity, disaster risk management, and public sector efficiency. A total of US$142 million in investment lending remains to be disbursed, with three projects spanning beyond the CPS period. Two projects, Social Protection and Metro Water, representing 21 percent of total commitments are currently rated moderately unsatisfactory. 9 Table 2 - Portfolio of Projects under Implementation Proj ID. Proj. name Board Closing Amount Disbursements Balance # approval date (US$ m) (US$ m) (US$ m) Proj P083045 PA GEF Rural Productivity 6/15/2006 6/28/2013 6.0 5.8 0.2 1 P082419 PA-Water&Sanitation in Low-Income Comm. 7/17/2007 11/30/2013 32.0 19.1 12.9 1 P098328 PA Social Protection project 7/26/2007 12/31/2013 24.0 15.7 8.3 1 P064918 PA Rural Productivity 3/21/2007 7/31/2014 39.4 26.9 12.5 1 P122738 PACATDDO 10/18/2011 11/30/2014 66.0 0 66.0 1 P106445 PA Hlth Equity & Performance Improvement 8/5/2008 12/31/2014 40.0 23.0 17.0 1 P119694 PA Metro Water and Sanitation Improvement 5/18/2010 9/30/2015 40.0 2.0 38.0 1 P121492 PA Enhanced Public Sector Efficiency TAL 3/3/2011 9/30/2016 55.0 2.4 52.6 1 Data as ofFebruary 11, 2013 302.4 94.8 207.6 8 39. The ongoing portfolio also includes a number of Bank-executed trust funds strategically aligned with the IBRD operations and supplementing the growing non-lending TA program. Table 3 - Portfolio of Trust Funds under Implementation Fund Name Program Closing Date Grant Amount Disbursements Fund Balance USD USD USD Strategy for the Development of Panama's Areas Revertidas SFLAC 03/01/2013 300,000 271,794 28,206 Preparation of a Performance-Based Efficiency Improvement Contract PPIAF 06/30/2013 74,975 50,885 24,090 Maritime and Logistics Strategy Implementation - Phase I SFLAC 06/30/2013 280,800 244,910 35,890 Probabilistic Risk Assessment CAPRA GFDRR 08/31/2013 500,000 306,318 193,682 Social Protection and Rights' Based Policies in LAC NTF 10/30/2014 125,000 0 125,000 1,280,775 873,907 406,868 40. Portfolio implementation was affected by the political transition a few months before the CPS launch. As a result, FY10 disbursements represented 11.8 percent of undisbursed balances. Disbursement levels improved in subsequent years, reaching 16.2 percent in FY11 and 15.3 percent in FY12 (excluding DPL disbursements). Initial delays in implementation and relatively low disbursements stemmed from several factors: / structural delays in reaching loan effectiveness (Enhanced Public Sector Efficiency and Metro Water and Sanitation Improvement projects); / high project staff turmover in some Project Implementation Units; / lengthy approval processes for project restructuring, mostly by the Comptroller's Office; / slower disbursements on some of the projects due to lower allocations in the national budget-this also affected loans from IDB and CAF. 41. Many of these concerms are valid for the remainder of the CPS period, and the dialogue with the Government and project staff on improving project implementation is ongoing. Annual Country Performance Portfolio Reviews (CPPRs) held jointly with the Ministry of Economy and Finance and the implementing agencies that have helped sharpen the focus on implementation and resolution of bottlenecks will continue. As will sector-specific "mini-CPPRs" and regular meetings with the Ministry of Economy and Finance to review implementation progress of each project. Furthermore, enhanced supervision is in place for projects that are encountering implementation challenges. 42. As a result of a sustained close engagement, several projects (Water and Sanitation in Low-Income Communities, Health Equity and Performance Improvement, Social Protection, 10 Rural Productivity and the accompanying GEF grant) were restructured to accelerate implementation and ensure achievement of their development objectives. Since the restructuring, significant progress has been observed, with ratings upgraded for two projects, Water and Sanitation in Low-Income Communities and the Rural Productivity GEF grant, from moderately unsatisfactory (MU) to moderately satisfactory (MS). V. Proposed Modifications to the CPS 43. The modifications proposed to the CPS respond to the country's evolving needs and demand, while aiming to bolster the chances that Panama can continue deepening its shared prosperity path. In order to deliver quickly on its planned program, and facing fiscal space constraints, the Government has resorted primarily to other sources of funding, thus substantially reducing uptake of new IBRD lending. As a result, the composition of the program changed to reflect increased focus on demand-driven knowledge services. Compared to the US$400 million in new lending envisaged, a total of US$221 million in new IBRD commitments has been delivered to date in support of enhanced public sector efficiency, fiscal management and efficiency of expenditures, and disaster risk management. Table 4 - Panama Planned vs. Actual Lending CPS Lending Program (IBRD in US$ million) Status at Progress Report FY11 Plan Strengthening Panama's Social Protection System TA $50 Dropped Enhanced Public Sector Efficiency TA (P121492) $75 Delivered ($55) Social Protection Additional Financing $15 Dropped Road Asset Preservation $110 Dropped Programmatic Broad-based Growth and Efficiency - DPL I (P123255) $50 Delivered ($100) Total Planned FY11 $300 $155 delivered FY12 Plan Catastrophic Risk Deferred Draw-Down Option Operation (CAT-DDO) $50 Delivered ($66) (P122738) Programmatic Broad-based growth and efficiency DPL II (P127332) $50 Moved to FY13 ($100) Total Planned FY12 $100 $66 delivered FY13-FY14 Programmatic Broad-based growth and efficiency DPL II (P127332) -- Under preparation ($100) Programmatic Broad-based growth and efficiency DPL III $50 Moved to FY14 ($50) Strengthening the Network of Basic Health and Nutrition Services TBD Dropped Secondary Roads Development TBD Dropped Total Planned FY13-FY14 $50 $150 44. Aside from the second DPL (US$100 million) in FY13, a potential third DPL (US$50 million) in FY14 and potentially one more investment operation before the end of the CPS period, no new lending is envisaged. This is in line with the Government's decision to maintain its fiscal space with regard to international debt as stipulated under the Social and Fiscal Responsibility Law. The rest of the investment lending planned under the CPS is therefore being dropped with this Progress Report, as is presented in the Results Matrix (Annex 1). 45. The Government has expressed continuous interest in the WBG's non-lending services which, complementing the ongoing portfolio, will represent the bulk of the Bank's new activities moving forward. Some of the topics that are expected to be taken up are: Panama urban growth strategy, digital inclusion, rural water and sanitation strategy, analytical work on labor markets, 11 training and skills. The CPS Progress Report outlines program activities planned over the next two years which would support economic growth, competitiveness, greater opportunities for all, and enhanced public sector effectiveness (see Annex 3 and Standard CPS Annex B8). 46. Going forward, the IFC program in Panama is expected to grow, capitalizing on previous investments in infrastructure and financial markets, and eventually expanding into the service sector. Some opportunities include support to the infrastructure value chain related to the Panama Canal expansion and continuation of support in trade finance. IFC is also evaluating opportunities to support private tertiary education. The newly-established IFC office in Panama is expected to coordinate IFC's operations in Central America, and eventually provide support to the Caribbean. VI. Risks 47. Economic: The risk of lower-than-expected growth leading to lower results of tax reforms did not materialize. The main economic risks derive from the fiscal stance and the country's vulnerability to external shocks. Some risk of overheating has stemmed from the combination of expansionary fiscal policy, high growth rates, and expansionary US monetary policy to which Panama is tied through its currency peg. Yet this risk is subdued as headline inflation is declining and the global environment is conducive to a smooth transition to trend growth in the medium term. There is some risk that fiscal balances may deteriorate. This would not compromise debt sustainability but would slow the reduction of the public debt-to-GDP ratio and limit room for maneuver should negative shocks hit the economy. The main mitigating factors are: flexibility in the timing of capital expenditure; the majority of public infrastructure projects are being executed on time and within budget, and are expected to be completed before the end of the current Administration's term; and the Government has been actively raising revenues. In addition, Panama is vulnerable to external shocks. Strong domestic fundamentals, the fact that a large part of the current account is financed through relatively stable FDI inflows, accumulation of savings in the sovereign wealth fund9, and the country's access to multilateral financing for investment projects are likely to alleviate this risk. 48. Institutional: The main institutional risks relate to weak participatory processes and the quality of public institutions. To improve transparency and efficiency of public spending, the Government is implementing reforms in the areas of fiscal management and procurement, such as strengthening budget execution, accounting and controls through an integrated financial management system. These reforms are supported by several donors, including the World Bank, through investment and TA projects that are expected to improve the monitoring and evaluation of public investment and spending. The effectiveness of some of the reforms depends on the capacity and ability of the Government to involve relevant stakeholders to create consensus around reforms. The Bank will closely engage with the relevant stakeholders on the reforms supported by the CPS, while recognizing the weaknesses of consultations as a general problem. 9 As pointed out by IMF and Moody's analyses, the effect of the sovereign wealth fund may be less than expected as the net savings in the fund (savings less incremental debt incurred during the year) will likely be low if the Government were to register the maximum permissible deficits under the Social and Fiscal Responsibility Law. 12 49. Political and Social: With presidential elections coming up in May 2014, the speed of implementation of the Government program may lead to challenges in dealing with sensitive policy actions. Some opposition could occur regarding the recertification of eligibility of CCT programs as some current beneficiaries may cease to receive benefits, as a result of better targeting. The consultation process has started, following preparation of a communication strategy for current beneficiaries. In response to concerns voiced by some legal firms and other stakeholders regarding tax transparency reforms, the administration has opened a participatory process to reach out to stakeholders and better communicate the benefits of the proposed measures. The risk to the IBRD investment program is mitigated by the fact that all operations were properly consulted during their preparation phase and Bank teams are doing due diligence to ensure that the dialogue with all stakeholders remains open during implementation. The Bank will continue to stress the importance of strengthening the dialogue so that stakeholder concerns are captured and addressed. However, the Bank recognizes that the country is entering the pre- electoral phase and this presents a risk to the pace of the implementation of the WBG program and reform in general. 50. Environmental and Natural Disaster: The risk that the Government's ambitious investment plan could be delayed due to natural disasters and environmental concerns did not materialize. To reduce this risk, the Bank will continue to work closely with the client to ensure that all environmental evaluations and mitigation strategies are properly implemented during project execution. In those cases where environmental issues have been identified during supervision missions, remediation measures have taken place including restructuring, modification of environmental frameworks or preparation of new environmental plans, capacity building, and increased environmental supervision and project monitoring. 51. The impact of a possible natural disaster could be partially mitigated by the DPL with a CAT-DDO approved in FY12, which would provide immediate liquidity to the Government to attend to affected areas and populations. Emergency grants that Panama has received from IDB, CAF, and the Central American Bank for Economic Integration show that financing from these institutions is an important factor in Panama's response to natural disasters. In addition, potential financing through the sovereign wealth fund would be available to mitigate the impact of certain emergencies in the future. The country's National Plan for Disaster Risk Management (2011- 2015) defines specific actions to increase disaster resilience. To mitigate the risk of policy uncertainty, the Bank will work closely with the client to evaluate the impact of policy changes and facilitate broad country dialogue on risks. The DRM dialogue promoted by the CAT-DDO is leveraging other disaster risk reduction activities and interventions, such as promoting wide participation and ownership by local stakeholders and vulnerable groups. This includes the development of local disaster risk reduction platforms in indigenous regions which take into account specific vulnerability needs and integrate traditional knowledge into the DRM agenda. 10 Although according to the World Bank's Natural Disaster Hotspot Study, Panama ranks 14th among countries with the highest economic risk exposure to multiple hazards. 13 Annex 1 - Revised CPS Results Framework for Panama Government Objectives Outcomes the Bank Program Milestones Progress achieved towards Suite of products and services FYI1-FY14 Expects to Influence Milestones at Progress Report CPS Pillar 1: Economic Growth that Supports Competitive Advantages (Enhancing the environment for investment and productivity) Fiscal Management of A. Maintain Revised outcome: The Tax reforms are completed to Achieved. FY14): rsDP sres(YII macroeconomic stability Government mobilizes additional lower tax rates and widen tax base. F Dv Y ( 3 and enhance Panama's tax revenue including a DPL-I Derreparation(F13 productive capacity to 1 percentage point per GDP Key changes to corporate income (i) milestone achieved; (P1322) expand opportunities for increase in ITBMS revenues job growth outside the (baseline: 2009=2.1). to 27.5 % in 2010 and to 25% in (ii) data not yet available. DPLIII Planned FY14 traditional urban centers,. ale ucoedopd subsequent years; (ii) corporate Enhanced Public Sector Erisedoutcomedrop income tax is collected monthly Efficiency TA loan Delivered Government maintains fiscal instead of yearly, at 1 % of gross FY11 (P121492) sustainability by maintaining fiscal revenues, and excess payments at Public Debt Management deficit within the limits of the the end of the year may be credited Advisory Services (RAS planned Social and Fiscal Responsibility towards the following year. FY14) Law. Changes to personal tax include: Social and Fiscal Responsibility (i) maximum marginal tax rates for Nieilsonwchee Law limit: 2.9% individuals fall from 27 to 15% ; (ii) higher exemption threshold MaimendLgscsSrty '1(ii) about 17,000 of the lowest-paid was reported with a 1. 1- 1.4 times MaimendLgscsSrty Current level: 2.5%- workers are exempt from personal increase of income per capita, Implementation Phase I income tax due to increase in (data will be available once exact Delivered FY1 2 (SFLAC- threshold of compliance from number of workers is confirmed by TF099440) $6,000 to $11,000; (iii) primary counterparts) Maritime and Logistics Strategy adjustments to indirect taxes lImplementation Phase 1 Planned include the tax on final sales of FY14 goods and services and the tax on Strategy for Development of CIF imports rise from 5 to 7% Areas Revertidas Delivered FY13 (RAS, SFLAC-TF0101 50) Doing Business Reform Advisory Services (IFC) - underway Trade Facilitation and Regional Integration in Central America - underway (P 120272) The current level is high in light of significant government investments in infrastructure i 2011, and should taper off i the next two years. 14 Government Objectives Outcomes the Bank Program Milestones Progress achieved towards Suite of products and services FY11-FY14 Expects to Influence Milestones at Progress Report Central America Capital Markets Regional Integration - Underway FY14 (P 143240) Central America Integration and Competitiveness Study - underway (P119004) Panama Investors Conference Delivered FY11, FY12 Competitiveness and Doing Business Conference - Planned FY13 Increased agricultural productivity 60 productive alliances formed and Achieved Currently at 59. Rural Productivity project of small scale producers targeted receiving financing to access ongoing - P064918 by the program measured by 25% markets Rural Productivity project (6F increase in sales receipts of small component) ongoing - P083045 scale producers via PRORURAL financed productive alliances [Baseline: 0]12 Current increase 18.8% Percentage of paved secondary The proportion of paved secondary N/A Road Asset Preservation Project roads in good condition is roads in good condition increases (FY1 1) dropped increased by 20%. by 5 percent every year for four [Baseline: 55 percent in 2007. years. Roa Asset) rpeevtodrjc Source MOP]II(Y3drpe Outcome dropped 13 New: Central America Infrastructure and Strategy for Growth - Delivered FY12 (P 122790) B. Improve the higher Government adopts enhanced A strategy for reform of the higher N/A Higher Education and education and innovation policy framework that helps to education, vocational and technical Innovation for Global system to generate the provide the basis for improved training and innovations systems is Competition AAA replaced by skills and knowledge higher education, innovation and ______________ ______________ the Good Jobs: The Role of The original baseline included in the CPS (US$153,933) is being revised as the project has improved its monitoring methodology. The project is not using a single baseline for all productive alliances but instead considers all the baselines of sales of each individual productive alliance once they are selected and monitors theirprogress over time. This is an ongoing process as new productive alliances join in regularly. The M&E of the operation is measuring increases in percentages, starting from "0". 13 The WBG has not been involved in the roads sector under the CPS, as the Administration opted not to request IBRD fnding for road investments. Outcome dropped. 15 Government Objectives Outcomes the Bank Program Milestones Progress achieved towards Suite of products and services FY11-FY14 Expects to Influence Milestones at Progress Report needed to support vocational and technical training. completed. Human Capital - Delivered FY12 globally competitive Outcome dropped14 (P117460) Report No.72912 industries NLTA on Improving Regulatory Framework and Financing of Technical and Vocational Training Programs (FY12) dropped New: Labor Markets, Training and Skills for Competitiveness (Policy note) Planned FY14 CRural ProductivitytProject C. To create a sustainable The Government ensures effective No specific milestone was set for 72.3 percent of the target CPS (6FF) onodi t Project environment for building conservation (protection and this outcome; yet progress is outcome. tourism and conserving sustainable management) of at evident as the project has reached REDD+, as part of the WB globally important least 50,000 ha of forest and other 72.3 percent of the target C The update of the forest vegetation Forest Carbon Partnership bioivesit, fress, nd atual cosstes o glbal outomemap (2013) will provide additional Facility (FCPF) - moved to biodiversity, forests, and ntrleoytm fgoa ucm nomto nti agt NP1 marine-coastal biodiversity significance in the ecocsystems buffer zones of Protected Areas and biological corridor. New: Global indigenous people Baseline: 28,400 (2010) consultation on REDD+ Target: 50,000 organized by the Bank in FY Current: 36,126.5 D. Manage the risk of Government improves capacity to Disaster risk management (DRM) Achieved. National Disaster Risk CAT-DDO delivered FY1 2 natural disasters and respond to disasters and climate and climate change adaptation plan Management Plan 2011-2015 has (P122738) adaptation to climate change by implementing a new drafted. been drafted and approved. Central American Probabilistic change disaster risk management andas climate change adaptation plan. specific Assn ws stt Pa [Baseline: In 210 Panama had no comleDRRThecty5 oDavi comprehensive disaster risk/ ti climate change mitigation plan] New: additional CAPRA Outcome indicator revised: assessments planned for two DRM plan implemented by key sectors ministries. Baseline: 0 Target: 3 ministries 14 The Administration decided not to engage with the Bank in the education sector and this outcome was dropped. FFCPF has moved to UNDP as a pilot Multiple Delivery Partners country. 16 Government Objectives Outcomes the Bank Program Milestones Progress achieved towards Suite of products aad services FYI1-FY14 Expects to Influence Milestones at Progress Report CPS Pillar 2: Greater Opportunities for All A. Improve access to Increased access to water and Strategic plan for the water sector Achieved. i addition, the Water Supply aad Sanitation in quality water and sanitation services in rural and elaborated and broadly discussed, following progress was achieved in Low Income Communities sanitation facilities indigenous areas measured by support ofWSS: ongoing - P082419 77.000 additional people in target - Sector Information System NLTA Moaitoring Country areas with access. Baseline 0 (2008) (SASAR) web interface launched Progress in WSS (MAPAS) in Baseine0 (208)and mobile application operational Central America ongoing Current: 41,257 in certain rural communities. Original target: 77,000 -Monitoring Country Progress in Improvement ongoing - P119694 Outcome tar2et revised: 66,000 Water Supply and Sanitation Improved access to reliable water (MAPAS) report is drafted and N sec IAfomte services in targeted lower income results have been broadly y peri-urban areas; measured by discussed. 100,000 additional people with access00 atiose are. it - 144 rural water organizations Strategy for Rural Water and access ine in 2010 supported by the Saaitatioa (policy aote) - plauned Baseline 0 in 2010project. WSS Political Economy Study Revised outcome indicator: WSS master plan for selected areas ongoing - GPF-TF096729 Improved access to reliable water of Panama Metropolitan Region chiibe, A Scasde an San Partnership with UDB and CAF and sanitation services in targeted developed under a participatory (ongoing dialogue and lower-income peri-urban areas; approach. Miguelito completed. coordination on sector reform) measured by 100,000 additional people with water access and by Preparatioa of a Performance- 60,000 additional people with Contract for efficiency Achieved. Contract has been Based Efficiency Improvemeat sanitation access in these areas. improvements in the W services designed and procurement process Contract for IDAAN Colon Baseline: 0 (2010) provision for the city of Colon is close to completion. Current: data not available'6 designed. New: LatinoSan Regional Target (water): 100,000 Conference -plauned FY13 ___________________Target (sanitation): 60,000 B. Improve poor Improved access for women and Background studies for the Not achieved. The new operation Health equity ad performaace households' access to children to critical health services preparation of new operation are was dropped. improvement project ongoing - quality basic health and as indicated by 95 percent of completed. P106445 nutrition services children under 1 year of age with SThe Metro Water and Sanitation project experienced long effectiveness delays, no data on access extension to report yet. 17 Government Objectives Outcomes the Bank Program Milestones Progress achieved towards Suite of products and services FY11-FY14 Expects to Influence Milestones at Progress Report complete vaccination scheme [Baseline 70% in 2009, source: sengthn Netrof MINSA administrative data] and National Health Plan completed Achieved. (FY13) Dropped. 80 percent of pregnant women and broadly consulted. with at least three prenatal Social Protection Project ongoing controls. [Baseline 70% in 2009 Additional progress: Policy (P098328) source: MINSA administrative dialogue on non-communicable data] diseases (NCD) was carried out Poliynte nsNon- Revised baselines and CPS with the Government, leading to Completed- Report No. 71848 targets- the publication of a policy note that was subsequently included in Setting Standards for Improved Vaccination baseline: 26% the regional report on "Promotion Governance in Health (regional current: 58% of Healthy Lifestyles in Central NLTA) - planned FY14 (P 129669) target: 85% America: Population-based Prenatal control baseline: 20% Responses to Protect the current: 37% Nutritional Status of the Poorest target: 70N e and Most Vulnerable in Times of Crisis and Emergencies (South- South event) - Delivered (TFO010076) Hackathon against Domestic Violence in PA Delivered FY1 3 SocialgProtectionPromectningoin C. Strengthen social Improved consumption levels of Management information system Not achieved. Recertification not SoilPteinPrjcogig protection of the the poor through wider (MIS) monitoring the CCT fwlly implemented, partially due to low - P098328 vulnerable implementation of CCT program fuinctional with 66 percent of national budget allocation. Strengthening Panama's Social as measured by an increase of 400t households recertified and a net Protection System TA loan in the number of beneficiaries. increase in the number of (FY11) Dropped [Baseline: 72,000 beneficiary beneficiaries of 20 percent. Fiscal Management of households in 2010] - Dropped- Expenditures DPL series (FY11- 17 The original baseline was based on administrative data estimates. The corrected baseline based on an individualized roster of beneficiaries was established during the first year of implementation and was much lower than originally expected for both indicators - 26%o and 20%o respectively. Given the revised baseline values, the original targets became unrealistic and were revised after the project restructuring to 850% and 70C respectively. By 2009, the RdO program, which started in the previous CPS period, reached more than 76,590 beneficiary households. Since then the coverage declined reflecting: (i) introduction of the non-contributory pension program ]OO a los 70 in 20 10 which led to 1, 100-- senior beneficiaries migrating from RdO to ]OO a los 70; (ii) exclusion of non- eligible recipients following implementation of MIS in 20 10; and (iii) reduced unemployment and poverty levels. By August 2012, even with the addition of new eligible households the number of beneficiaries reduced to 73,069. Current coverage reflects improvements in program management and in economic conditions. Increase in number of beneficiaries is no longer a relevant indicator in a growing economy, where significant reduction in poverty lowers the number of people covered by social programs. 18 Government Objectives Outcomes the Bank Program Milestones Progress achieved towards Suite of products and services FYI1-FY14 Expects to Influence Milestones at Progress Report New CPS Outcome: The Beca Government adopts measures to Achieved. Administrative FY14): Universal scholarship program expand Beca Universal coverage to measure adopted in 2012, DPL-I Derreparation F13 covers all eligible children in private school students, based on implementation to be verified in (P127322) grades 1-12 in public schools. cost of tuition. the school year 2013. Baseline: 291,000 children (2010) Panaa Po th nt: Current: 481,788 (Dec 2012) Trntig Grohit New CPS target Reduction Delivered FY11 The expected number of A new operational rule for the non- Achieved. Formalized through (P113807) beneficiaries recertified in 100 a contributory pension program is in Ministerial resolution No.255 Central America (CA) Poverty los 70 should be adjusted to 20 place and almost 50 percent of approved in October 2012 Measurement and Statistical percent, as a selective strategy beneficiaries recertified, establishing Social Vulnerability Capacity -Delivered FY11 does not require full recertification Survey (P120378) in specific areas like the CA Poverty Study AAA planned indigenous and rural areas. FY14 Panama Household Survey AAA planned FY14 CA Social Expenditure and Institutional Review AAA planned FYI 4 Social Protection and Rights' Based Policies in LAC: Institutional and Operational Experiences ongoing (NTF TF13463) CPS Pillar 3: Enhanced Public Sector Transparency, Effectiveness, and Efficiency Cental MAnmeatCA of et A. Improve efficiency of Improved mechanism in place in Government implements a unique Partially achieved.a ement public expenditure sector ministries to ensure correct register of beneficiaries of main Implementation challenges Expenditures DPL series (FY11I- budget execution and to evaluate social programs stemming from administration FY14): CpL-it Delivered FY11125) success based on outputs and changes and high staff turnover in DPL-II DerreparationF1235 outcomes. 19 [Baseline: Lack of the Ministry of Social (P120322) sector incentives, targets, Development. DP ove dy F indicators and evaluation in public Evaluation of pilot public Partially achieved. Capacity Enhnce PblFY14 Set Institutionl-ReviewsAA ____programs]____ - Revised___________ programs is carried out, building is underway. Ehne ulcSco 19Original outcome not likely to be achieved during this CPS period, as the Enhanced Public Sector Efficiency project that supports it will continue into the new CPS. 19 Government Objectives Outcomes the Bank Program Milestones Progress achieved towards Suite of products and services FY11-FY14 Expects to Influence Milestones at Progress Report Revisd CP outome:Efficiency TA loan delivered Revised CPS outcome:(P121492) Improved mechanism in place in A program of M&E oriented to Partially achieved. Public Expenditure and sector ministries to ensure correct results is implemented in pilot Financial Accountability (PEFA) budget execution as measured by social sectors. planned FY13 linking the public sector budgeting, investment and procurement Central America Social systems. Expenditure and Institutional Review AAA planned FY14 Additional outcome: Government builds the technical Preparation of Utility Subsidies Achieved. Social Protection Project ongoing building blocks for implementation review and recommendations. of reform in liquefied propane gas Strengthening Panama's Social subsidies. Protection System TA Loan (FY11) Dropped Social Protection NLTA on Utility Subsidies (ongoing) B. Modernize financial Improved capacity to make budget Implementation of new version of Partially achieved. The management and decisions based on systematic the Panama Integrated Financial conceptual model for the new Fiscal Management of procurement systems, provision of information on Management System, SIAFPA. version of SIAFPA has been Expenditures DPL series (FY11- and introduce performance of public programs Pilot ministries have trained staff designed. FY14): performance focus in the [Baseline: No clear rules and DPL-I Delivered FY11 (P123255) public sector procedures that promote togsratepgicall pan mayonitoAcivd DPL-II Under preparation FY1 3 production and reporting of programtors and cy utli (P 127322) performance information] -Expe Sprograms have stronger design DPLIII Planned FY14 nwith baselines, indicators and Deepening the New CPS Outcomes: Bonds targets. domestic market placed in the domestic market Public Debt Management increase as a share of financing Advisory Services (FY14 RAS) needs (baseline: 20090 percent; Government has a vision to Partially Achieved. There is a current: 2011p 30 r) institutionalize performance-based system in place to monitor MEF establishes an M&E unit that budgeting, generates tools for Presidential Goals but there is no ROSC follow-up dialogue and produces/coordinates a number of producers and users of tool yet for producers and users of support on International performance reports, and at least 2 performance information, and has information. Financial Reporting Standards different social programs are under a system to monitor Presidential (IFRS) (ongoing) evaluation. Goals. 2Outcome dropped, as it is not likely to be achieved during this CPS period, since the Enhanced Public Sector Efficiency project that supports it will continue into the new CPS. 20 Government Objectives Outcomes the Bank Program Milestones Progress achieved towards Suite of products and services FY11-FY14 Expects to Influence Milestones at Progress Report New capacity and tools to manage Partially achieved. Government is the validation of cost-risk tradeoffs working to extend maturity and to and risk reports is implemented in appraise more domestic market Crdito Publico. offerings. The Front, Middle and Financial Sector Assessment Back Office ffinctions are Program (FSAP) Delivered FY1 2 operating with a modern structure but this has not yet been formally established. A medium-term debt management strategy has not yet The Comptroller General improves been articulated. the efficiency of budget execution The Comptroller General is Partially Achieved. The design processes by reducing unnecessary making significant progress on of a new internal control ex-ante control mechanisms. reducing ex-ante controls on framework and internal/external [Baseline: Control model based on budget execution- audit function is underway. ex-ante controls with only the existence of three ex-ante and ex- post controls over public expenditures makes execution difficult]. Government increases institutional The Government has developed an Partially Achieved. The Fiduciary Capacity Building capacity to handle improved public HR policy and implemented Government in working towards NLTA Delivered FY11I (P 110049) procurement processes [Baseline: sustainable training programs for the implementation of sustainable currently there is no human the public and private sector. It has training programs in public Ehne ulcSco resource policy or ongoing training designed and implemented procurement for the private and Eonextencd m alict Sec program] standard procurement documents public sector. domestic4market that are increasingly used byP DGCP and rolled-out by the nt ye b governmen agencie.nSupior Stor Assessinmeric Increased savings in public goenetaece.Conference on Public procured goods and services, as The Government has increased the Achieved. Procurement Delivered FYI13 measured by the reduction in the number of Framework Agreements average unit andoor operational for common use goods and costs of key items tracked by the standard services. Functional Public Procurement Directorate. transactional e-procurement in [Baseline: Currently the place and used by the public Government has not developed the sector. Surveys conducted to tools to measure savings and measure public views of the operational costs, this will be done procurement system. with support from the WB] 21 Government Objectives Outcomes the Bank Program Milestones Progress achieved towards Suite of products and services FY11-FY14 Expects to Influence Milestones at Progress Report CPS outcome added: Number of items (of goods commonly purchased by government agencies) covered by framework agreements has increased significantly [Baseline: 2009 = 2,452, current: 2011 = 26,180] 22 Annex 2 - Review of the Progress achieved under the Pillars of the CPS 1. Half of IBRD new lending under the CPS to date was in the form of Development Policy Lending with the First Programmatic Fiscal Management and Efficiency of Expenditures Programmatic DPL (US$100 million) which was approved in May 2011 and contributed to all three pillars of the CPS, and the DPL with a CAT-DDO approved in October 2011 (US$66 million). 2. The current investment lending portfolio includes seven operations (US$302.4 million) in Human Development (social protection and health), infrastructure (water and sanitation), rural productivity, and public sector efficiency. 3. A broad range of non-lending activities, including convening services and knowledge exchanges, also contributed to the results highlighted below. 4. Overall, considerable progress has been realized towards achieving CPS milestones and outcomes. Progress has been most significant under Pillar 1, Growth and Competitiveness. Under Pillar 2, Opportunities for All, results have been mixed, and more needs to be achieved under Pillar 3, Enhancing Public Sector Efficiency. A detailed description of progress towards CPS milestones and outcomes in each of the three pillars is presented in this annex and in the Results Matrix (Annex 1). Pillar 1 - Economic Growth that supports Competitive Advantages 5. Pillar 1 called for maintaining fiscal stability and for actions in four key areas of competitiveness for Panama: agricultural productivity, roads, higher education and innovation, biodiversity and conservation, and natural disaster risk management and adaptation to climate change. 6. The DPL reform actions related to legislative change at the onset of the political cycle have been particularly successful as illustrated by the tax policy and tax administration reforms achieved by the Government to widen its tax base and reduce tax exemptions. Although the tax- to-GDP ratio target featured in the DPL (12.80) has not yet been achieved, the tax-to-GDP ratio increased substantially over the baseline value and reached 12.10 in December 2011. 7. Two instruments-both ongoing-contributed to increasing agricultural productivity, the Rural Productivity investment lending project and the Rural Productivity GEF grant. After a period of slow implementation due to initial changes in project staff and low financing, the project has picked up pace significantly. As of mid-2012, 121 alliance sub-projects involving approximately 4,400 producers and receiving close to US$20 million of grants were at various levels of implementation. The project contributes to increased agricultural productivity of small- scale producers targeted by the program and is well under way to reaching the target outcome of 25 percent increase (18.8 percent at progress report) in sales receipts of small-scale producers via the project financed productive alliances. 8. With regards to the road sector, substantial progress has been achieved under this Administration, both in terms of network expansion, as well as its improvement. The Bank has 23 not contributed to these achievements, however, as the Government relied primarily on other sources of financing and decided not to seek IBRD lending for road infrastructure. The two roads operations planned at the onset of the CPS have been dropped and no Bank engagement in support of this sector is planned under the remainder of the CPS. 9. Less progress has been achieved in enhancing higher education and innovation, and both remain a challenge for the Government as the lack of qualified labor in Panama's growing economy is limiting its competitiveness. The quality of higher education and innovation has not yet adapted to the needs of a dynamic global environment. The current shortage of qualified labor constrains firm growth in international markets and limits productivity growth and thus employment opportunities. The AAA on Higher Education and Innovation for Global Competitiveness initially planned under the CPS was superseded by the regional study on employment generation which includes a thorough diagnostic on Panama. More needs to be done in this area in the near future and the Bank is planning to produce a policy note on the sector to foster dialogue with a variety of stakeholders in Panama. No lending is planned at this time but could be envisaged under the next CPS. 10. The Rural Productivity GEF project has contributed to mitigating the risk to natural ecosystems and global biodiversity stemming from deforestation and lack of sustainable conservation policies. Much progress has been achieved under this grant as 36,126.5 hectares (72 percent of the 50,000 hectares target) are already under effective conservation. The grant is also supporting the National Environmental Agency's effort to update a vegetation and ecosystem map that will monitor deforestation progress. The updated map which is expected to be completed in 2013 will help validate results on the ground. 11. Panama has made great strides in the last two years in the area of disaster risk management and adaptation to climate change. In support of the National Disaster Risk Management Plan, the Ministry of Finance has played an active role in reducing the fiscal impact of natural disasters by: (i) securing contingent lines from IBRD-a DPL with a CAT-DDO for US$66 million approved in October 2011 -and IDB; (ii) designing a reserve fund for natural disasters in the national budget; and (iii) creating a sovereign wealth fund - Fondo de Ahorro de Panama (FAP) in June 2012. FAP funds may be used by the Ministry of Finance in the event of a natural disaster and to purchase catastrophic risk insurance. In the context of the Central American Probabilistic Risk Assessment (CAPRA) initiative funded by the Global Facility for Disaster Reduction and Recovery (GFDRR), Panama successfully carried out the first study on probabilistic seismic risk assessment for the city of David (the second largest city in Panama and one of the most vulnerable), through a TA project supported by the World Bank. It proved to be an excellent mechanism for training and capacity building. The focus is on assessing how health, education and housing infrastructure in David could be impacted by earthquakes. Results are helping to better identify risk management policies and investments, including the need to bolster structures to make them more resistant. More GFDRR-funded activities are envisaged during the second half of the CPS. 12. Since the approval of the DPL with a CAT-DDO, the Government has been consistently implementing its DRM program. Several priority actions of the National DRM Plan have been completed, including: (i) introduction by the Ministry of Housing and Land Use Planning of 24 disaster risk criteria into the TOR for the design of plans of local land use; (ii) update of the National Plan for Integrated Water Resources Management and the National Policy on Climate Change to include key DRM components by the National Environmental Agency; and (iii) passing a decree empowering the Directorate of Investment, Concessions and Risks of the Ministry of Finance to develop a Disaster Risk Finance and Insurance Strategy. 13. Two additional demand-driven initiatives not originally planned under the CPS were undertaken, both contributing to the overarching objective of enhancing Panama's competitiveness: (i) the Maritime and Logistics Strategy Implementation; and (ii) the Strategy for the Development of Panama's Reverted Areas designed to help Panama obtain the best results from use of its remaining "Reverted Areas". This was the first Reimbursable Advisory Services (RAS) to Panama and paves the way for further engagement on such basis. 14. The Maritime Strategy Implementation has aimed to support the Maritime Authority of Panama in the preparation of a Maritime and Logistics Action Plan for implementing the National Maritime Strategy in order to promote sustainable maritime and logistics development through institutional strengthening and generate spillover effects for socioeconomic development and employment opportunities in an efficient maritime-logistics sector. All major activities under the project have been completed and a successful Stakeholder Coordination Workshop (October 2011) led to reaching a broad consensus among the various stakeholders on the key challenges and priority actions to address them. 15. The Areas Revertidas Strategy lays out options for the optimal use of the land in the Canal Zone, leveraging the Canal, integrating development needs, and maximizing the positive spillover effects of investments on these lands. Studies carried out under the Strategy include an Economic Impact Assessment of "input-output" and "crowd-sourcing" models to analyze which economic activities will have the most positive impact for Panama. The RAS also carried out environmental audits of eight sites and provided Panama with a toolkit for doing this analysis going forward. It also estimated the cost for expanding infrastructure and, in turn, calculated the true value of developing sites. In addition, a Residential Development Potential Study was completed for reverted areas in Panama City and Colon with recommendations for market-based tools for sustainable urban growth. Pillar 2 - Greater Opportunities for All 16. The focus of Pillar 2 has been to create greater opportunities for all and promote shared prosperity, with specific outcomes foreseen in the areas of water and sanitation, access to health and nutrition services, and social protection. 17. The DPL series has contributed to the strengthening of social protection of the vulnerable segments of the population through better targeting of the Government's CCT program Red de Oportunidades. Better targeting and the realization that not so many households actually fulfill the criteria for inclusion in the CCT program have led to a lower than initially foreseen number of beneficiary households. The DPL target related to the "100 a los 70" program for the elderly, which established that transfer to at least 10 percent of the program beneficiaries would be dependent upon compliance with health co-responsibility, has not been 25 achieved. Payments are being made to beneficiaries without monitoring and recording compliance with visits to health practitioners. The World Bank, through its Social Protection project, is working with the authorities to address this issue. 18. The current Administration considers the water and sanitation sector a priority and has engaged in a process to modernize Panama's water and sewerage authority (IDAAN) and reform the institutional framework of the sector. This has created an environment conducive to mobilizing resources for the sector and has added pressure on IDAAN to deliver. The Bank has worked closely with the two main partners (IDB and CAF) to enhance policy dialogue and coordination. A number of activities that were linked to water sector policy have not reached their full potential yet, as reform of the sector is still pending. 19. The Bank's engagement in Panama's water and sanitation sector has been strong with two significant lending operations, the first one approved in 2007 under the previous CPS with specific focus on low-income communities, and the second one (approved in May 2010) targeting the Panama City metropolitan area. The latter experienced a long effectiveness delay and it is too soon to report accurately on its progress at this time. 20. While the earlier Bank operation was characterized by an overly ambitious design, which subsequently led to project restructuring and scaling back of some targets, it successfully targeted Panama's poorest population. To date, 25,326 beneficiaries (86 percent of total beneficiaries) live in poor townships, and 10,847 beneficiaries (37 percent of total beneficiaries) live in indigenous comarcas. Expanding access to water and sanitation services (WSS) with an emphasis on community involvement, local capacity-building and social outreach has worked very well in implementation. Communities are developing a sense of ownership of their WSS systems, which promotes sustainability. 21. The project also incorporated innovative activities such as the development of the Information System for Rural Water Supply and Sanitation (SIASAR) web interface, which is revolutionizing the way of doing business in the water sector in Central America and is encouraging South-South knowledge exchange and regional coordination. The Water Partnership Program, the Water Sector Program and other operational and grant programs financed by the World Bank have been instrumental in supporting the launch of the SIASAR in Panama. IDB's upcoming project with the Directorate for the Water and Sanitation Sub-sector (DISAPAS), which draws heavily on the design of the Bank-funded Rural Water and Sanitation project, will support the achievements already gained. 22. The Bank's ongoing operations in health and in social protection have contributed to progress in improving poor households' access to quality basic health and nutrition services. The specific milestone related to the development and dissemination of a National Health Plan has already been achieved. With regards to the second milestone-the completion of background studies for the preparation of a new operation in health-some adjustments have taken place given the Government's decision not to pursue a new IBRD operation in the health sector. However, based on the initial discussions about this new operation a note on "Non- Communicable Diseases (NCDs) at a Glance in Panama" was prepared and discussed with the 26 Government. These discussions also contributed to a sub-regional document on NCDs in Central America. 23. Due to incorrect baselines for outcome indicators in the health sector, the targets set to be achieved under the CPS have been revised and are expected to be met fully by the project end. Although taking more time than originally anticipated, several structural changes in healthcare management have been introduced by the Government, which have a positive impact on the way healthcare is delivered in rural isolated areas. The Bank project supported the implementation of the Coverage Extension Program which aims to provide services through mobile teams in rural areas, at a decentralized level, via the Ministry of Health regional offices. 24. In the first two years of the CPS, the Red de Oportunidades, the Government's social protection program, was strengthened considerably. Coverage was adjusted to take into account the establishment in 2010 of the non-contributory pension program "100 a los 70", which provides cash transfers to eligible beneficiaries over 70 years old, who are no longer covered by the Red de Oportunidades. The passage of Law 86 (November 2010), which introduced an additional eligibility condition, has helped ensure better targeting of the "100 a los 70" Program, which is directed at seniors who are vulnerable and poor. 25. In addition, a new management information system was introduced which enabled the identification and exclusion of households that moved to other regions, had duplicate records, or were no longer eligible due to their employment/income status. The greatest impact on the CCT program, however, has been Panama's sustained growth in the last two years, which has led to a significant decrease in the unemployment rate-from 8.6 percent in 2006 to 4.2 percent by 2012- and an impressive reduction in poverty-from 38.3 percent to 25.8 percent- in the same period21. These positive developments have translated into a reduction in the number of beneficiaries of the Government's social protection programs, and while the current coverage is lower than planned at the onset of the CPS, it reflects important improvements in program management, as well as changing external conditions. The World Bank funded Social Protection operation, approved under the previous administration contributed to this progress. 26. In terms of final outcomes, the CPS now includes a new outcome related to the universal scholarship (Beca Universal) program which aims to cover all eligible children in grades 1-12 in public schools. Pillar 3 - Enhanced Public Sector Transparency, Effectiveness, and Efficiency 27. Under Pillar 3, the Bank aims to contribute to enhanced public sector transparency, effectiveness and efficiency. Bank support includes Investment Lending, Development Policy Lending and AAA. 28. Overall, in areas where the Government has put in place institutional structures with the appropriate legal and resource backing, results have surpassed expectations as, for example, in the case of the tax administration tribunal which has surpassed the intermediate outcome 21 Source: Ministry of Finance, 2012 27 indicator of number of cases resolved, or with the implementation of the e-procurement system PanamaCompra and the number of common use goods contracts processed through it. 29. Implementation has been more challenging in cases where additional legal backing was weak and Government resources scarce. This was the case for the recertification of the 100 a los 70 beneficiaries where the needed legal instruments had yet to be developed to enable the recertification process and the budget allocation was insufficient. As a result, little progress has been made on the DPL target related to compliance monitoring. The target was to achieve compliance with health co-responsibility as determinant of the transfer payment for 10 percent of beneficiaries. Currently payments are being made without monitoring and recording compliance with visits to health practitioners target. The Ministry of Social Development is aware of the challenge but currently does not have the resources to implement a monitoring system. 30. Progress has been strong in the area of modernizing financial and procurement systems, with the introduction of the Integrated Financial Management System (SIAFPA) and PanamaCompra, both designed to contribute to the improvement of the Government's capacity to make budget decisions based on systematic provision of information on performance of public programs. 31. The reform of the public procurement system in Panama continues to deliverer tangible benefits. The procurement system has undergone a significant upgrade in recent years, with technical assistance from the World Bank for the design and implementation of PanamaCompra, a fully transactional e-procurement platform. This electronic system, though not yet universal, serves not only as an effective means to promote transparency and efficiency in government procurement, but also as a business tool for companies interested in competing for public contracts. The improved efficiency of the public procurement for common use goods contracts has reduced purchase times from 56 days on average to 24 hours, and the Government is working to use PanamaCompra more widely for other procurement transactions. 32. Less progress was achieved in terms of improving the mechanisms in place in sector ministries to ensure correct budget execution and evaluate success based on outputs and outcomes. Most of the milestones have not yet been achieved, as the Bank operation designed to contribute to this outcome initially faced serious implementation challenges posed by effectiveness delay, administration changes and high staff turnover in the implementing agencies. The primary outcome indicator under the high-level objective of improving the efficiency of public expenditure has been revised and now reads "Improved mechanism in place in sector ministries to ensure correct budget execution as measured by linking the public sector budgeting, investment and procurement systems". In addition several new outcomes have been added to the Results Matrix (Annex 1) that will be monitored during the remainder of the CPS. 28 Annex 3 - Non-Lending Activities CPS Program Status FY11 Plan Status at Progress Report Poverty Assessment 2008 (draft) Panama Poverty Assessment: Translating Growth into Opportunities and Poverty Reduction (P113807) Delivered Making Progress on Poverty and Inequality Central America Poverty Measurement and Statistical Capacity (P120378) Delivered Public Credit Advisory Services (RAS) Moved to FY14 CA Regional Competitiveness Study Moved to FY13 Additional: Fiduciary Capacity Building NLTA (P110049) Delivered Global indigenous people consultation on REDD+ Completed Convening Services: Investors Conference 2011 Delivered FY12 Plan Status at Progress Report Central American Probabilistic Risk Central American Probabilistic Risk Assessment (TF097502) - Assessment Assessment (CAPRA) for the City of David completed FY12, two more assessments underway (additional new TF has been secured) Public Sector Expenditure and Institutional Social Expenditure and Institutional Review (P133348) (moved to FY14) Review Financial Sector Assessment Program (FSAP) (P127018) Delivered Quick Response / On -demand Analytical Panama Maritime Strategy Implementation Phase I (TF099440) Delivered Support Good Jobs : the Role of Human Capital (P117460) Planned for FY13, delivered in FY12 Improving Regulatory Framework and Dropped Financing of Technical and Vocational Training Programs Additional: Political Economy Study in Water Supply and Sanitation (PO82419) Underway NLTA Water Sector Information System (SIASAR) - Delivered Central America Infrastructure and Strategy for Growth (P122790) Delivered Convening Services: Investors Conference 2012 Delivered FY13 Plan Status at Progress Report Higher Education and Innovation for Global Good Jobs and Role of Human Capital (P117460) Delivered FY12 Competition Public Expenditure and Financial Public Expenditure and Financial Accountability (P121492) Underway Accountability (PEFA) Central America Integration and Competitiveness Study (P119004) Underway (planned for FY11) Quick Response / On-demand Analytical RAS on Areas Revertidas (P129365) Delivered Support NLTA on Utility Subsidies (P129365) ongoing Additional: Doing Business Reform Advisory Services (IFC) Underway Trade Facilitation and Regional Integration in Central America (P120272) Underway Policy Note on Non-Communicable Diseases (Rep. No. 71848) Delivered Improved LAC Country Responses to Protect the Nutritional Status of the Poorest and Most Vulnerable in Times of Crisis and Emergencies (South- South exchange - TF010076) Delivered Social Protection and Rights' Based Policies in LAC: Institutional and 29 Operations Experiences (NTF TF013463) ongoing Monitoring Country Progress in Water Supply and Sanitation (MAPAS) NLTA (P132281) Underway Convenin2 Services: Support to VIII Latin America Conference on Public Procurement Delivered Hackathon Against Domestic Violence in Panama Delivered January 2013 Competitiveness & Doing Business Regional Conference Planned April 2013 Support to LatinoSan Regional Conference Planned May 2013 FY14 Plan Status at Progress Report Additional: Central America Capital Markets Regional Integration (P143240) Underway Poverty Study (P123309) Underway Setting Standards for Improved Governance in Health (P129669) Underway Social Expenditure and Institutional Review (P 133348) Underway (from FY12) Maritime Strategy Phase II (Support to the Logistics Cabinet) Planned Panama Household Survey TA Planned Labor Markets, Training and Skills for Competitiveness Planned Public Debt Management Advisory Services (RAS) Planned (from FY11) Policy Notes (to be determined, including notes on Digital Inclusion, Labor markets, Training and Skills for Competitiveness) Planned 30 Annex 4 - Panama Economic Achievements 1. Panama has made important strides in its economic development in recent years. Panama's economic growth has been one of the fastest in Latin America over the past decade, a trend that has even accelerated in recent years (Figure 3). The country has done well in integrating into the global economy and has leveraged its geographical position, turning itself into a well-connected logistics hub. Panama has also consolidated its position as the most competitive economy in Central America and second after Chile in Latin America and the Caribbean, according to the 2012-13 Global Competitiveness Report. 2. Strong economic growth and public transfers have translated into poverty reduction. The poverty rate fell from 48.5 percent in 2002 to 27 percent in 2011, while extreme poverty decreased from 21 to 11 percent (Figure 1). Poverty has become more of a rural phenomenon due to the much larger reductions in poverty in urban areas. The highest incidence of poverty is in the three remote and sparsely populated indigenous areas Ngobe Bugle, Emberd, and Kuna Yala- containing less than 7 percent of the total population but concentrating 16 percent of the poor and 28 percent of the extreme poor.22 Better targeting of poverty interventions and providing access to services in isolated communities remain challenges for the Government's social programs. 3. Economic growth has been pro-poor and contributed to prosperity being more widely shared. Income growth of households in the bottom 40 percent of the income distribution reached 7.3 percent between 2002 and 2010, far exceeding the average income growth of 4.3 percent over the same period. Panama is catching up with the most advanced countries in terms of shared prosperity. In fact a measure of economic growth adjusted for equity has grown faster than the growth of GDP (7.1 percent compared to 5.8 percent annualized growth in 2002-2010). This is because inequality decreased, with the Gini coefficient dropping from 0.57 in 2002 to 0.53 in 2011. 4. Yet inequality remains in the mid-range for Latin American countries and challenges persist in the public provision of services. In addition, ample scope remains for improving the public provision of social services across the country converging towards the most advanced countries in terms of shared prosperity. For example, children in indigenous communities still have less access to basic services than children in rural or urban areas (Figure 2). 22 These numbers are based on the 2010 Household Survey. 31 Figure 1: Poverty head count, Figure 2: Children's access to basic services (Percent, 2011) (Probability of access)23 0,98 0.95098 20 -35 .83 0 ILI0681 1 1111111 l 1 1 0.26 0 70 E me H eccess to sanitation access to electricity school attendance a * mtypical child in indigenouscommunity Source: World Bank staff calculations, Ministry of atypical child in uiral area Education, Educational Statistics 2010, Household Wtypical child in urban area surveys 2002-10. Source: World Bank (201 1):"Panama Poverty Assessment". 5. As part of a strategy to address the country's development challenges, the Government has been improving tax revenue, efficiency of spending and social protection. At the outset of its term in 2009, the Government presented a five-year strategic plan with the overall objectives of sustainable economic growth and reduction of poverty and inequality. It also presented a strategy to mobilize tax revenue to increase fiscal space for public investment and social protection. The Government is currently implementing two tax reforms that widen the tax base and improve the efficiency of tax administration, and has made significant progress on negotiating a series of bilateral tax information sharing agreements. These revenue measures have been complemented by financial management and procurement reforms to increase transparency and efficiency of spending. The Government has also improved social protection by introducing a non-contributory pension program 100 a los 70 and a universal scholarship program Beca Universal and improving the targeting of the conditional cash transfer (CCT) program Red de Oportunidades. RECENT ECONOMIC DEVELOPMENTS IN PANAMA 6. Panama's strong and relatively stable growth over the past decade has resulted from an open, diversified economy. Panama's real growth over the past ten years averaged 6.8 percent, double the average for Latin America and the Caribbean. The economy is one of the most open in the region. Growth has mainly stemmed from transport and communications, trade, construction and financial intermediation. The strong growth in these sectors has also translated into increases of 1.3 percentage points of total employment in the transport and communication sector, of 0.6 in construction and of 0.5 in financial intermediation between 2008 and 2012. Over time, growth has transitioned to a more domestic demand-driven model on the back of increased 23 Based on Human Opportunities Index estimations, the Figure shows the probability that a child in the different areas will have access to the services. 32 investment growth and related increases in imports (Figure 4). With no independent monetary policy due to dollarization, much of the relative stability can be attributed to prudent fiscal policies that have kept public debt at manageable levels (Figures 5 and 6). 7. After a temporary deceleration in 2009, economic growth has exceeded the pre- crisis pace, mainly driven by massive infrastructure investment and private consumption. The 7 percentage point fall in GDP growth in 2009 mainly resulted from the effects of the global slowdown through declines in credit growth, reduced transshipment and trade financing and a halt in new real estate construction. Yet, the economy continued growing at 3.9 percent in that year, and has picked up based on the public investment program, the Canal expansion and private consumption. Economic growth in 2011 and 2012 reached 10.6 percent and an expected 10.5 percent, respectively, based on massive investment in infrastructure, reinforced by housing construction, retail and wholesale trade, transportation and communication, as well as tourism. The Government's five-year US$15 billion investment program has primarily accounted for the increase of public capital expenditures from 5.6 percent of GDP in 2008 to an expected 9.1 percent in 2012 and the US$5.3 billion expansion of the Panama Canal has also driven up investment rates. At the same time, the external current account deficit widened sharply to 12.8 and 12.5 percent of GDP respectively in 2011 and 2012, up from 0.7 in 2009. Figure 3: Real GDP Figure 4: Real growth-decomposition of (GDP index; 2002=100) aggregate demand components (Percentage points contribution (ihs); percentage change y-o-y (rhs)) 20 20 240- --------------------------- - - - - - - - Gross capital formation - Private cansumptin 7///A Net Exports Public consumption 220 ---------------- ----- --- ----- _ ------15 - Real GDPGrowth (rhs) 15 200 ------------------- ---------------------------- -- 10 10 Trend2003- 180 ---------------------------'------- 5 - 5 160 ---- - - - - - - - - - - - - - - - - - 140 _Meragegowth_rate2003-0 0 0 0 7.9 percent 120----- - - - - - - - - Averagegrowthrate2l0 -12: -5 -5 9.6 percent 100 . . -10 -10 33 Figure 5: Overall fiscal balance Figure 6: Total public debt (percent of GDP)* (percent of GDP) 4 - Overall Balance Central Gov 55 E Overall Balance NFPS excl. ACP External U Domestic 2- 0-0 45 0 40 35 -2- 30 -4- 25 Source: World Bank staff calculations, MEF, Comptroller General, and IMF. Note: * NFPS excl ACP = Non Financial Public Sector excluding Panama Canal Authority. Table 1: Panama-key economic indicators 2008-2015 (percent of GDP, unless otherwise stated) Estimated Projected 2008 2009 2010 2011 2012 2013 2014 2015 (annualpercentage change) Real GDP 10.1 3.9 7.6 10.6 10.5 8.5 7.0 6.6 CPI Inflation (eop) 6.8 1.9 4.9 6.3 5.0 4.9 4.5 3.8 (in percent of GDP) Savings and investment Gross national savings 16.7 24.9 15.5 16.4 17.5 19.2 18.6 16.6 Gross fixed investment 27.6 25.6 26.4 29.0 30.0 31.0 29.7 26.5 Fiscal accounts Central government Total revenues (including grants) 19.8 18.5 18.6 18.7 19.7 19.7 19.2 19.2 Current revenue 18.4 18.1 18.4 18.6 19.0 19.2 19.0 19.1 Tax revenues 10.6 10.9 11.6 12.1 12.6 13.0 13.0 13.1 Nontax revenues 7.8 7.2 7.0 6.5 6.4 6.2 6.0 5.9 o/w Panama Canalfees and dividends 3.0 3.2 3.1 2.9 2.9 3.0 3.5 3.5 Capital revenue 1.1 0.3 0.1 0.2 0.6 0.5 0.2 0.1 Total expenditure 19.4 19.9 21.1 22.2 23.2 22.8 21.4 21.3 Capital expenditure 5.6 6.2 7.4 8.4 9.1 9.5 8.1 8.0 Primary Balance 3.4 1.4 0.1 -1.2 -1.4 -1.3 0.5 0.4 Overall Balance 0.3 -1.5 -2.5 -3.5 -3.5 -3.1 -2.2 -2.1 Nonfinancial Public sector Overall Balance (excluding ACP) 0.4 -1.0 -1.9 -2.3 -2.5 -2.8 -2.7 -2.1 Overall Balance (including ACP) 2.5 -0.4 -3.4 -5.5 -4.3 -3.7 -2.9 -1.8 External sector Current Account Balance -10.9 -0.7 -10.8 -12.8 -12.5 -11.8 -11.1 -9.9 Trade Balance (of goods) -19.9 -9.0 -17.1 -19.6 -18.6 -17.9 -16.9 -16.2 Net exports from Col6n Free Zone 0.0 8.1 1.8 1.8 1.7 1.7 1.6 2.2 Services Balance 13.6 13.8 12.9 12.2 11.1 10.6 10.2 11.0 Net factor income -6.9 -6.0 -7.0 -5.9 -5.3 -4.9 -4.8 -5.1 Net current transfers 2.3 0.5 0.5 0.4 0.3 0.4 0.4 0.4 Foreign direct investment 9.3 5.2 8.8 9.1 9.2 9.3 9.0 9.0 Total Public Debt' 41.3 44.0 44.1 42.6 42.1 41.0 39.9 39.1 GDP (in millions ofcurrent US$) 23,002 24,163 26,590 31,084 35,902 40,713 45,394 50,115 Source: Comptroller General, IMF and World Bank staff calculations Note: ACP = Panama Canal Authority 1/ Gross debt of the non-financial public sector, and including the debt of the ACP and excluding FAP 34 8. Fiscal deficits have expanded to accommodate the Government's crisis response as well as investment and social protection projects. In 2009, authorities raised the fiscal deficit ceiling mandated under the Social and Fiscal Responsibility Law to allow an expansionary fiscal stance in 2009. Social assistance expenditures increased by 6.6 percent in 2009 and stimulus measures included subsidies on basic goods, a new labor program Mi Primer Empleo to help the youth find jobs and an increase in the minimum wage. Since then, the Government with the support of the National Assembly has raised the deficit ceiling of the nonfinancial public sector (excluding ACP) twice to allow deficits to reach 2.9 percent of GDP in 2012. Central government capital expenditure has increased from 5.6 percent of GDP in 2008 to an expected 9.1 percent in 2012, accounting for most of higher public spending. Major public investment projects under the Government's five-year plan include the construction of a first metro line in Panama City (US$1.9 billion), a major improvement of the national road network (US$677 million) and an expansion of airport infrastructure (US$227 million). So far, these projects have been advancing within the budget and planned timeframe and are expected to be finalized before the end of the term of the current administration in May 2014. Table 2: Central government revenues (in percent of GDP) Proj. 2008 2009 2010 2011 2012 Rewnues and grants 19.8 18.5 18.6 18.7 19.7 Current revenue 18.4 18.1 18.4 18.6 19.0 Taxes 10.6 10.9 11.6 12.1 12.6 Direct taxes 5.5 5.9 5.9 5.9 5.9 Income tax 4.9 5.2 5.0 4.9 4.8 Ofwhich : Capital gains 0.0 0.0 0.0 0.0 0.0 Taxon wealth 0.5 0.6 0.6 0.7 0.7 Indirect taxes 5.1 5.0 5.7 6.2 6.7 Import tax 1.8 1.6 1.5 1.7 1.8 ITBMS 2.1 2.1 2.7 3.2 3.2 Petroleum products 0.4 0.5 0.4 0.4 0.4 Other taxon domestic transactions 0.7 0.7 0.9 0.9 1.1 Nontax rewnue 7.8 7.2 6.8 6.5 6.4 Dividends 2.9 2.7 2.7 2.6 2.6 Ofwhich : Panama Canal Authority 1.5 1.8 1.8 1.6 1.6 Panama Canal Authority: fees per ton 1/ 1.5 1.4 1.3 1.3 1.3 Transfers fromdecentralized agencies 1.8 1.6 1.6 1.6 1.4 Other 1.5 1.4 1.2 1.0 0.9 Capital rewnue 1.1 0.3 0.2 0.1 0.6 Grants 0.4 0.1 0.1 0.1 0.1 Source: Comptroller General; Ministry of Economy and Finance; and Fund staff estimates and projections. 1/ Includes public service fees. 2/ Revenues and grants less current expenditure. 9. Panama's debt-to-GDP ratio has been declining along with the risk exposure of the debt portfolio. Rapid growth and contained fiscal deficits are reflected in debt declining from 53 percent of GDP in 2007 to 42.1 percent in 2012. In addition, the quality of the debt portfolio has 35 steadily improved as the authorities have extended the maturities of new issues and smoothed the portfolio redemption profile. The value of Treasury notes issues in the domestic market during 2011 reached US$538 million, which corresponds to 30 percent of financing needs. These policies have significantly reduced exposure to refinancing and interest rate risk. This overall improvement has been recognized by all credit rating agencies, which awarded Panama investment grade in the spring of 2010 and have further improved the rating since. With the last upgrade by Moody's in October 2012, Panama's sovereign rating is on par with Brazil, Mexico, and Peru. The reforms of debt management supported by this operation will further contribute to these improvements. 10. The Government has also addressed low tax-to-GDP ratio through tax reforms that are achieving expected results. The Government has been implementing tax policy and administration reforms that were approved in September 2009 and March 2010. The implementation of the reforms was expected to raise an additional 1.7 percent of GDP in revenues consisting of a 0.9 percentage point increase through the changes in the personal and corporate income tax, a negative impact of 0.6 percentage points through the lowering of the tax rates and the increase of income thresholds, and a further increase of 1.4 percentage points due to other reforms, including 0.5 percentage points related to tax administration reforms. While the first DPL in the series supported tax policy measures under the 2010 tax reform, the DPL II supports their implementation and other tax administration efforts. To date results have been considerable: overall tax revenue as percent of GDP has increased by 1.5 percentage points relative to 2008 and reached 12.1 percent in 2011 and an expected 12.6 percent in 2012 (see Table 2). In 2008 the economy grew at a comparable rate to 2011 and 2012, suggesting that the higher tax-to-GDP ratio results from the reforms rather than an increase in economic activity. 11. However, the tax-to-GDP ratio is still low in international comparison, and reforms supported by DPL II are relevant to further increase spending efficiency. Panama's tax revenues undershoot the Central American average of 13.3 and are significantly lower than the 19.2 percent average for Latin America (OECD, 2011). While dividends and fees from the Panama Canal and other non-tax revenues add another 7 percentage points of GDP to total public revenues, they remain low by international standards. A higher tax-to-GDP ratio would help alleviate the Government's resource constraint, reflected by below-average social spending. Panama spent 9.4 percent of GDP on social expenditure compared to a 13 percent average for Latin America and the Caribbean (ECLAC, 2011). The scarcity of resources highlights the relevance of reforms in the areas of procurement, debt management, and social protection to increase efficiency of spending. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 12. The Panamanian economy is likely to continue growing at a strong pace. Infrastructure investment and private consumption would continue driving growth in 2013 and 2014. The Government's investment program is expected to extend into 2014 when major infrastructure projects would be finalized within budget and the planned time horizon. The Panama Canal expansion is also expected to sustain strong growth in 2013 and 2014. The project is progressing within budget and the expanded canal is expected to be completed in April 2015. After the finalization of the Canal expansion, large private investment projects such as a US$ 6.5 36 billion investment in copper mining due to start in 2013 and new public investments such as a second line of the Panama City metro would further sustain growth. In addition, increased activity around the Canal would help to drive growth. Current growth rates are likely to sustain and lead to a smooth transition towards trend growth in the medium term. Yet, sustaining high growth in the long run will require investment in education and innovation for growth to rely more on increases in total factor productivity and less on capital accumulation. 13. Inflation and current account deficit are expected to remain at manageable levels in the short term and to decrease in the medium term. CPI inflation is expected to moderate to 5-6 percent in 2013. It had reached 6.3 percent in 2011 based on an increase in the minimum wage, record levels of investment and higher commodity prices (food and oil) (Figure 4). The decline is expected to stem from stabilized international commodity prices. In the medium term, inflation is expected to gradually drop to around 4 percent. A potential spike in oil prices and a continued rise in food prices are upside risks to the inflation outlook. The current account deficit has risen largely on account of the import content of the Government investment program and the canal expansion, and is expected to decrease slowly with the investment rates in the medium- term (Table 1). While the large deficit exposes the economy to deteriorations in external demand and changes in the risk aversion of foreign investors, strong domestic fundamentals mitigate the impact of such shocks. The economy's demonstrated resilience during the 2009 crisis and subsequent reforms to improve the financial safety net and financial sector supervision further mitigate external vulnerability. 14. Although the fiscal deficit has been increasing, projections suggest a declining debt- to-GDP ratio on account of strong economic growth. Panama's fiscal deficit is projected to reach 2.5 percent of GDP in 2012 and to be below 2 percent in 2016 (non-financial public sector excluding the canal authority). With the finalization of the current public investment projects and the completion of the Canal expansion, fiscal accounts are expected to improve primarily through higher revenues from the expanded Canal. 15. Under conservative assumptions, Panama's public debt is expected to remain sustainable. A 2013 debt sustainability analysis by the International Monetary Fund (IMF) shows that a combination of a gradual rise in revenue and a containment of current expenditure would allow the authorities to expand public investment while keeping public debt sustainable in coming years. Under a number of alternative scenarios, debt sustainability shows the greatest sensitivity to shocks to the country's growth rates. However, under reasonable assumptions, these shocks are not expected to undermine debt sustainability in the medium term. While a further deterioration of fiscal accounts would decrease the room for maneuver in case of an external shock, it would not endanger debt sustainability. With capital expenditure explaining the bulk of deficit expansion, the Government has some room to cut spending if necessary. In addition, the Government has engaged in reforms to increase revenue, including tax policy and administration reforms and the approval of the Fondo de Ahorro de Panama (FAP) in 2012. This sovereign wealth fund will save transfers from the Panama Canal Authority to the Treasury in excess of 3.5 percent of GDP starting in 2015. Yet, as pointed out by several analysis (IMF and Moody's) the net savings (savings less incremental debt incurred during the year) in the FAP will likely be low if the Government were to register the maximum permissible deficits under the Social and Fiscal Responsibility Law. Regarding mitigation measures, the Ministry of Economy 37 and Finance is also preparing a medium-term debt management strategy, supported by the DPL series. As a result, the quality of the debt portfolio is expected to further improve. 16. Panama's macroeconomic framework is adequate for development policy lending. Fiscal policy remains prudent and consistent with medium-term sustainability. This is even more important given the specific set-up of the economy without independent monetary policy and the large degree of openness. 38 Annex 5 - MIGA Support for the Metro Project Financing 1. On June 29, 2012 (FY12) MIGA issued a guarantee of US$320 million to support the construction financing of "Line 1" of the Panama metro system. Line 1 consists of the Greenfield development, construction, supply, and installation of a 13.7 km metro line between the northern Los Andes and south-west Albrook areas of Panama City. 2. Total project cost is estimated at US$1.9 billion, of which US$1.5 billion is related to the turnkey Engineering Procurement and Construction ("EPC") contract for Line 1. 3. The guarantee issued represents MIGA's first coverage of a sovereign financial obligation in the Republic of Panama, and more broadly in the LAC region. 4. The primary direct developmental benefits of the Line 1 are expected to be: * Increased Travel Time Savings. The main direct beneficiaries of Line 1 are expected to be the users who will significantly reduce their travel time. This benefit is the most significant constituent of the Line 1 benefits, given that the current average commuting 24 time in Panama City is 70 minutes in each direction2, and Line I will significantly save - - -25 on travel time associated with public transportation. * Reduced Vehicle Operating Costs. For those who do not switch to bus and metro, it is expected that the mass transit system, along with additional public works focusing on six key intersections in Panama City, will significantly reduce congestion and therefore reduce private vehicle operating costs associated with congestion. * Greater Environmental Benefits. The reduced congestion expected of an integrated Metrobus and Metro system will also reduce pollution by reducing C02 exhaust pipe emissions. These emissions tend to increase with stationary vehicles which are running (as is typical in times of congestion) and also tend to increase with the time vehicles are on the road. Improved mobility should address these two issues. * Reduced Pedestrian Accident Rates. Another expected benefit of the metro relates to increased urban street safety conditions as traffic congestion is reduced, and pedestrians wait in metro and bus stations for public transport rather than doing so on the road. 24 Based on the 2007 Urban Mobility Study by the World Bank. 25 Based on the report prepared by Deloitte Inc., the GoP consultants for the economic viability assessment of the Line 1, travel time of public transportation increases by 21 minutes from 2009 to 2035 without metro, whereas the transportation time increases by only 5 minutes with metro. 39 Annex 6 - IFC recent Investments and Results IFC's investments have climbed steadily every year since 2006 when the Corporation made just US$1.1 million in commitments to Panama. IFC's commitments in FY12 totaled US$176 million over four clients. IFC's committed portfolio as of June 30, 2012 is US$630 million. Consistent with IFC's regional priorities, infrastructure/sub-national finance accounted for 47 percent of the portfolio, financial markets for 30 percent, and electric power for 9.5 percent. Financial Markets Banco General US$50 million loan to facilitate private sector lending to low- and moderate- income households (FY12). * BBVA Panama US$25 million loan to support the Bank's lending activities to local SMEs (FY12). * GTFP Multibank US$100 million trade finance line to support regional integration (FY12). * QBE US$10 million in non-convertible preferred shares and US$8.5 million in common equity to support the expansion in the medium and low income insurer market (FY10). Infrastructure * Pando Montelirio US$60 million loan (own account) plus US$143 million (mobilization); the commitment is to support a hydropower development that plans to use the water of the Chiriqui Viejo River (CVR) in the Chiriqui Province in Western Panama (FY11). Panama IFC Committed Portfolio (as of June 30, 2012) Total Accumulated IFC Commitments since FY2000Toa (US$ mn)Commitments in Previous current FY12 US100(US$ mn) US$176 Outstanding IFC Portfolio Debt (US$ mn) Equity (US$ mn) Quasi Equity / Loan RM (US$ mn) Total (US$ mn) (US$ mn) US$194 US$21 US$26 US$63 US$304 Mobilization IFC Initiative / B-Loan / Parallel Financing Committed Amount (US$) Parallel Financing US$143 mn Investment Business - Top Sectors and Clients AS Business - Top Sectors Sector 1 Transportation and Warehousing (47%) Sector 1 Doing Business Reform Advisory Sector 2 Finance & Insurance (30%) Sector 2 Access to finance Sector 3 Electric Power (9.5%) Client 1 (Sector) ACP-Panama Canal (Infrastructure/Subnational) (47%) Client 2 (Sector) Multibank- (Trade Finance) (9.8%) Client 3 (Sector) Electron - Pando - Monte Lirio Hydro (Infrastructure) (9.5%) Ranking in Doing Business Report: 61/185 40 Annex 7 - Standard CPS Annexes * Panama At-a-Glance * Annex B2 - Selected Indicators of Bank Portfolio Performance and Management * IBRD/IDA Program Summary * IFC Investment Operations Program * Key Exposure Indicators * Operations Portfolio (IBRD and Grants) * IFC Committed and Disbursed Outstanding Investment Portfolio 41 Panama at a glance 40501 Latin Upper KegDelselopmnent ndicators America middle Panama & Carib knome Agditbuir21 Population,mid-year[illions) 3.5 583 2,452 Surace area[thourand sq.km) 75 20,394 59,328 Population growth[(%) 1.6 1.1 0.7 Urban population(%r,of total population) 75 79 57 GNI[(Atlas method,US$,billions) 24.5 4,505 14,429 GNI per capita (Atlas method,US$) 6,970 7,733 5,884 GNI per capita[(PPP,international$) 12,770 10,926 9,970 0 GDP growth[%) 4.8 6.2 7.8 GDP per capita growth[ 3.2 5.0 7.1 Posertyheadvountrtoat $1.25aday[(PPP,% 7 6 . Posertyheadvountrtoat$12.00 aday[(PPP,% 14 12 . Lifeexpectancy atboihyears) 76 74 73 Ingant mortality[(per1,0001liveboil 17 18 17 Childmalnutrition(X%of children under 5) .. 3 3 Adultliteracy,male[fr,ofagers15and older) 94 92 96 Adultliteracy,remale[fr,ofagers15and older) 93 90 91 Gross primaryenrollmnen,male[(%ofageegroup) 109 119 111 Gross primaryenrollmnent,remale[fr,ofageegroup) 106 115 111 Accesstoanimpposedwater source[fr,of population) 93 94 93 0 m a o n Accesstoimpposedsanitation aciltier[r,of population) 68 79 73 NetAidlFlo.s 1980 1990 2000 2010 NetEDA and orcalad 45 99 15 129 rwhfOadOpraia¾ Jaan 2 2 3 102 1 United States 15 97 -9 12 Spain 0 6 13 6 1 Aid(X%of GNI) 1.3 2.0 0.1 0.5 Aid percaiaUS$) 23 41 5 37 Long-TermEcoovrmietTrends Consumer prices[aninual%change) 13.8 -5.1 1.5 6.7 GDP implicit deflator[aninual%change) 33.7 0.6 -1.2 3.0 Exchangerate[aninualaverage,iocaper US$) 1.0 1.0 1.0 1.0 Terms of trade indemx[2000=100) 84 88 100 86 1980-901990-2000 2000-10 (swrapämus/ PE-h3 Population,mid-year[illions) 2.0 2.4 3.0 3.5 2.1 2.0 1.7 GDP[(US$ millione) 3,810 5,313 11,621 26,689 0.5 4.7 6.8 (c'ssyser Agriculture 8.9 9.8 7.2 5.3 2.5 3.1 2.9 Industry 19.5 15.1 19.1 16.8 -1.3 6.0 6.0 Manunacturing 11.0 9.7 10.1 6.1 0.4 2.7 1.7 Sersvie 71.5 75.1 73.6 77.9 0.7 4.5 7.3 Houseodfinalconsumption expenditure 44.9 56.9 59.9 71.4 3.8 6.4 5.7 General god't final consumptionexpenditure 17.6 18.1 13.2 5.8 1.2 1.7 3.6 Gross capital formation 28.1 16.8 24.1 26.7 -9.2 10.4 10.6 Exports of goodsand seraicer 98.2 86.8 72.6 65.2 0.4 -0.4 7.8 Imports of goodsand seraicer 88.8 78.6 69.8 69.2 1.0 1.2 7.4 Grovssvarins. 24.2 23.1 17.1 Note:Figureasinitalckare for yearsothert'hanthoisespecified..indicatesdata are not available. Deselopiment Economics,Deselopiment Data Group[(DECDG). 42 Panama Balanse ofPagrmentsand Trade 2000 2010 Total merchandiseexports[(Fob) 5,838 11,970 Total merchandiseimnports[ciT 7,655 16,124 m m an Nettrade ingoo and services 1510 -1,049 pm Current ccountbalance 1,074 -2,121 a DPr 9.2 -7.9 Workers'remittances and compensation ofemnployee(rs[reits) 16 231 Reseresinoludiggold 707 2.559 ?1 17 3 Central Government Inance fl Current revenue[inuding gran) 18.2 18.2 oskore Ta revenue 9.6 2.6 Currentempenditure 16.9 13.6 Tjeclgholiggand hnistructulre 2000 2010 Overallsur t pl deficit -1.1 -1.2 Paedrd[g ftal0.) 34.6 42 Higheo marginal tam rate) Fied line and mobile phone Indidal . 7screr(per 100 peopl) 28 200 Corporate 37 30 High technolog mdpos [,of manufactured eport) 1.2 08 EnterinalDebtrand Resour e Flo.s Environment Total debt outstanding and digbued 6,567 11,412 Agricultural land P of land area) 30 3A Total deblerivice 886 1,077 Forei tarea(% ofland area) 45.3 437 Debt ligef (HIPC MORI) Toretial protectedareas , ofland area) 17.7 187 Totaldebt(%ofGDP) 56.5 42.8 Frehwterrekorcerpercapita[cu.meters) 4Ai. 425d Total deblerivice[P of eports) 9.4 4.9 Fresaterw sihdrw P(of internal resources) 0.3 a3 Foregn dihet investment (etriflow) 624 2,363 C02 eisiogne per capita t) 2.0 Portfolig qity (et nrlows) 0 0 D per unit of energune (2005 PPP $ per kg oil eqivaent 9.5 / Capoitot&tolIemal,.Idebt 2010 S 0 Energuepercapita[kgfoialquivalent) 853 re, VorldBank Groenpprtholo 2000 2010 Total debt outstandigngand digburned 283 420 Dibrrmen 22 24 Principal repayment 24 38 ""*- .0 Interest paments 21 17 IDA Total debt outstandigngand digbued 0 0 Dibrremente 0 0 Private Sector Deelopmfe 2000 2011 Total deblerivice 0 0 Time requiredto sarta business (days) 8 IFC/iCcé r/ Cos to sartabusiness[P,of GNI per capita) - 9.9 Totaldigbunedandoutstandigportfolio 226 115 Time required to register propert (days) 32 ohjihF RC rown acount 117 114 DibrrementforC own accont 84 17 Ranked as a majorc saiemnt 1 obusiness 2000 2010 Portfoli saler pregpaymene and [, of managersureyed o who rned) repamentfor Cown accont 2 22 Elecriit ... 3RR Ta.rtes .. T MIGA Grosseoposure- - Stock marketcpiliogn(%of DP) 24.0 40.9 Newg uraeer 0 Bank capital toasseratio()9.6 12.5 Note:Figures in italicsare forymer r otert hant se oppeid. 4 2 .indtedataare notjavailable. -indiates obsierdatio is notapplicable. Deidekspirme, F orderve Dedkim Det. 0 roup (Di09000. 43 Millennium Development Goals Panama W s tedaettoacheveeween 1990 and 2015 fe.'7W. doss lteho:5 t/-2W"Ea Panama. Goal I: halve the rates for ept[e pone r ndgradeli1990 995 2000 2010 Poey headcountratio at $1.25 adayPPP %of population) Poertly headcount ratio at national poyerry line G% of population)]Y?A Share of m consumption to the poorest qunille )S 14 A3 PRevese of malntion % of children under 5) .S Goal 2: ensure that childreen arze able to complete primarn schooling Primary school enrollment (net%) 92 9 9 Primary completion rate % of oIreelant age group) 94 97 Secondary school enrollment (gross %) 66 67 Youth literacy rate C% or people ages 15-24) 95 96 no Goal 3: eliminate gender disparil in education and ecmverwomen. Ratio o girls toboysin primaryand secondar education%) 9 . 100 101 Vomen employed inthe nongiultural sector( ho fnoengiultural employment) 4 43 43 4O Proportion o seats held by women in national parliamentC) 8 A 9 Goal 4: redce under-5 MOrtalitg ba; two-ehirds Under-5 mortality rate (per 1,000) 33 29 26 Infant mortality rate (per 1000 like births) 26 23 21 17 Measlesimmunization (proportionol one -yearods immunized 73 84 97 95 Goal 5: redce maternal MOrtalitg ba; three-fourthes Maternal mortality ratio (modeled estimate per 100,000 like births) 86 71 71 Births attended by skilled health Dtaff % o total) C,88 Contraceptice prevaence C% of women ages 15-49) 61 Goal 6: halt and begin to reverse the Spea d oF HIVGAIDS and ather mIj diseases Pr..In.o)fHIV F populaion age, 15-49) 0.2 1.8 1.4 ad9 Incidence OF tuberculosis (per 100,000 people) 47 47 47 48 Tuberculosis ase detection rateC, allI Forms) 74 100 83 89 Goal 7: halve the proportion od people without sustainable access to basic needs Accesstoanimproedwatersource(%,opopulation) 84 87 90 G3 Access toimpCroed sanitation Facilities (%o) population) 58 62 65 R Forest area C, oItotal land area) 51.0 45.3 43.7 Terrestrial protected areas(C % o) land area) 17.2 17.7 17.7 18.7 C02 emissions (metrictons per capita) 1.3 1.3 2.0 20 GDP per unitl energy use(constant 2005 PPP $ per kg ooil equicalent) 10.1 9.9 9.5 .? Goal 8: develop a global parenship, forf development Telephone mainlines (per 100 people) 8.9 11.4 14.5 15.7 Mobile phone subscribers (per 100 people) 0.0 13.9 184.7 Internetusers(per100people) 0.0 u.1 6.6 427 Computerusers (per 100 people).. Educatiorindictor%) M einimiziti%o-yer ICT indictors{ pripeple} ded oldE} 10. -o--FramyrserrUserrra Note: Figures in italics are For years other than those shpcped.. indicates data are not asaiale 415112 Delsopment Economics Dealoment Data Group (DECDGC. 44i CAS Annex 82 - Panama Selected Indicators* of Bank Portfolio Performance and Management As Of Date 1110/2013 Indicator 2010 2011 2012 2013 Porfoio Assessment Number of Projects Under Implementation 6 8 8 8 Average Implementation Period (years)b 2.5 2.7 3.7 4.2 Percent of Problem Projects by Number 33.3 125 250 25.0 Percent of Problem Projects by Amount 394 7.1 a9 21.2 Percent of Projects at Risk by Number - 33.3 125 37.5 25.0 Percent of Projects at Risk by Amount a,d 39.4 7.1 20.5 21.2 Disbursement Ratio (%e) 12.3 16.2 15.3 8.5 PorffogIo Management CPPR during the year (yes/no) yes yes yes planned Superision Resources (total US$) 974 724 768 686 Average Supervision (US$proect) 89 91 6 98 Memorandum Item Since FY80 Last Five Fs Proj Eval by OED by Number 43 6 Proj Eval by OED by Amt (US$ millions) 1,2148 275.0 % of OED Projects Rated U or HU by Number 35.0 20.0 % of OED Projects Rated U or HU by Amt 20.2 16.4 a. As shown in the Annual Report on Portfolio Performance (except for current FY} b. Average age of projects in the Banks country portfolio c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP) d. As defined under the Portfolio Improvement Program e. Ratio of disbursements during the year to the undisbursed balance of the Banks portfolio at the beginning of the year: Investment projects only * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year 45 CAS Annex B3 - Panama IBRDIIDA Program Summary As Of Date 111012013 Proposed IBRDIIDA Base-Case Lending Program Fiscal year Proj ID us$("J Strategic Rewards Implementation (HMLJ Risks (H.A)Q 2013 PA 2nd Programnatic DPL 100.0 H M Overall Result 10.O CAS Annex B3 - Panama IFC Investment Operations Program 2010 2011 2012 2013* Original Commitments (US$m) IFC and Participants 209.91 85.0 177.7 50.4 IFC's Own Accounts only 104.91 47.0 177.7 50.4 Original Commitments by Sector (%)- IFC Accounts only Trade Finance (TF) 39.0 100.0 57.8 100.0 Financial Markets 18.1 42.2 Renewable Energy Generation 429 Total 10010 100.0 10010 100.0 Original Commitments by Investment Instrument (%) - IFC Accounts only Guarantee 39.0 100.0 57.8 100.0 Loan 23.8 42.2 Quasi loan 14.3 Equity 8.6 Quasi Equity 9.5 Risk Management 4.8 Total 100.0 100.0 100.0 100.0 Data as of December 31, 2012 46 CAS Annex B7 - Panama Key Exposure Indicators - 2007-2014 Estimated Projected 2008 2009 2010 2011 2012 2013 2014 Total debt outstanding and disbursed* (TDO) (US$m) 12,720.6 13,463.1 14,926.0 16,373.9 18,853.5 20,179.2 21,512.4 Net Disbursements (US$m) 822.2 742.5 1,462.9 1,447.9 2,479.6 1,325.7 1,333.2 Total debt service (TDS) (US$m) 1,866.8 1,800.0 2,100.0 1,934.2 2,800.0 2,800.0 2,800.0 Debt and debt service indicators (%) TDO/XGS** 70.7 70.6 71.3 62.9 69.1 65.1 61.2 TDO/GDP 55.3 55.7 56.1 52.7 52.5 49.6 47.4 TDS/XGS 10.4 9.4 10.0 7.4 10.3 9.0 8.0 Concessional/TDO Multilateral/TDO 9.9 11.7 11.9 11.4 10.9 10.6 10.6 IBRD exposure indicators IBRD TDO/GDP (%) 1.2 1.8 1.6 1.3 1.5 1.6 1.5 IBRD DS/public DS (%) 6.3 5.6 5.4 5.6 5.7 6.1 6.5 Preferred creditor DS/public DS (%) 27.8 28.9 30.2 31.4 35.6 33.9 34.9 Preferred creditor debt/GDP (%) 5.5 6.5 6.7 6.0 5.7 5.3 5.0 IBRD DS/XGS (%) 0.2 0.2 0.2 0.2 0.1 0.1 0.1 IBRD TDO (US$m) 270.9 435.0 420.0 399.2 555.8 646.4 680.6 * Includes public and publicly guaranteed, private nonguaranteed, use of IMF credits and net short term capital, excluding the offshore banking sector's liabilities. ** XGS = X of goods+X of services+factor receipts. Source: IMF and World Bank. 47 CAS Annex B8 - Panama Operations Portfolio (IBRD/IDA and Grants) Amounts in US Dollars Millions Accounting date as of 1/10/2013 Closed Projets 54 IBRDIDA * TotaDlbrsed( Active) 848 .f wh ih has been reped 5.89 T.ti Diersed crbeo5d) 523.33 f wh ch h beenrep d 45. Tota D-bursdCActive +Cltodl 611.81 .fwhr has been repad 411.75 Ttl, Undi=bed (Actie ) 2E7.92 Tetl Undisbursed (Ced) 0.109 Total Undisb Aie Csend) 207.92 Acttve p Difference Between Last P5R Expeted and Actial Superv-sNoating OiqginasAfountin US$ Mdkons Dsbursements' Project ID Profect Name De ~ent irn en aion FY IBRD IDA GRANT Canoel, Undlis. Or. Fim Red P122738 PA CAT DDO S S 2012 66 66.0 P121492 PA Enhanced Public Sector Efficiency TAL MS MS 2011 SS 52.6 P083045 PA GEF Rural Productiity S MS 2006 6 0.3 -4_6 0.0 P106445 PA Hlth Equity & Performance Improvement S MS 2009 40 17.0 15.4 Pi19694 PA Metro Water and Sanitation Improvemen MS MU 2010 40 38.0 18.8 P064918 PA Rural Productivity MS MS 2007 39.4 12.5 11.9 PO98328 PA Social Protection project MU MS 2008 24 8.9 8.9 3.1 P082419 PA-Water&Sanitation in Low-Income Comm. MS MS 2008 32 12.9 12.9 Overall Result 296.4 6 208.2 60.9 3.1 CAS Annex B8 - Statement of IFC's Committed and Outstanding Portfolio Amounts in US Dollars Millions Accounting date as of 12/31/2012 Comtet isiuin LN ET Ql+.QE GT RM ALL ALL LN ET Ql+QE GT RM ALL ALL Fiscal Year Short Name Cid-i Cid-iC Cmid- IFC Ctd - IFC Cm,tdiFC Cald- C Cmi- Part Out-IFC out-F dcout-ji Out-EFC Out-IFFC Out- FFC Out - part 2012/2013 BBVA Panarna 25."0 5. g 5 0 25.00 0 25."0 0 1 0 0 25.00 5..0 199/21ff/52012 BanmeGeneralS. 52.55 5. a 0 0 52.5D 5 52.5. 0 fl 0 52.55 00. ,5n1i Del lstrne 0 8.54 10.w0 0 0 10.54 5 5 0.54 10. 5 0 10.54 5.50 0.9 Digicel (Panarna) 32.92 01 0 0 32.92 0 32.92 0 0 0 91 32.92 0.W 510 Eectren 25.01 5 15.w1 0 21.51 61.51 0 15.63 0 9.31:1 0 18.23 43.24 0.W0 25.5.0/2..09 Grupo Mundial 5 9.13 01 0 0 9.13 0 5. 9.13 0 5 1 9.13 5.00 25..91gtu2013 Mutibenk 5. 5. 0 372 0 37.20 0 . 0 0 37.20 0 37.2D 0.0 '25.5.9 PCAJACP 3 11. 0 0 5 5 310.10 5. C, a fl 5 0 5 . Tmtal Pcifflb. 435.42 17.67 25.00 3720 48 48 PANAMA o SELECTED CITIES AND TOWNS MAIN ROADS 0 PROVINCE CAPITALS RAILROADS ® NATIONAL CAPITAL PROVINCE BOUNDARIES RIVERS - - INTERNATIONAL BOUNDARIES 83°W 82°W 81 W 80°W 79°W 78°W 10°N 77°W 1 0N Caribbean Sea TO ats, El Porvenir nguinolaPortobel Ustupo Teribo Bocas del Toro Yanup KUNA DE COSTA BOCAS e Cordi/-eru de K MADUNGANDI R|CA i)GDEL OCusapin Golfo de los Coeté Salud 'pn P A NL M Á Pir KUNA DE TORO LagoChiqu Mosquitos t% OLÓN Tocumen p van° °WR N 9 N ~ ~ ,hi,iqui,&n00 ~ 9°NVulrn aróe Crs Sa ANA9° {i5n B Crist6bl LaChorrero Cañazas aChorcNG E Clovébora Cerro A co, s C H B UG LE C e Blanca Bahia de Chiman° Chu nt, Snta Fé J Ob-d- Corredor CHRIÖUi ta FCp <1'm 13m L2 r S Santo Fé nepåElValle P6Yn A m David . CordiPera Ce rTO , enonom e Chichica C. «1 É'I Pdrega VERAUAS c Rio at delRe r lGuabolá S Agudlce Yaviza Cerro Armulle Nullä7 Tacorcupao DiSanhago Dvisa o DARIEN n-. 7 8°N Sona Ocu Chitre Golfo deYpe 8°N de Soa Boad \Tutf uero Panarnå Liénrr Prr Mutis EMBERA- A (erro5i) Macaracas Islade SANTOS t°Puerto Piaa Coiba Cerr Ls sientos combualA Tonosí 0 20 40 60 80 100 Kilometers (1400m) "4i_______ |__ COLOMBIA- PANAMA 0 20 40 60Miles 7°N PA Cl FlC C CEA N fThis map oos produced by the Map Desg Uit of The World Bank The boundornes, colors, denominotions and any other omormtion sho on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of ony terntory, nr ony endorsement or occeptance of such boundaries. 83'W 82°W 81 W 80°W 79°W 78°W 77'W