Nicaragua - Institutional Development Project

Document of The World Bank Report No. T-6534-NI MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 15.7 MILLION TO THE REPUBLIC OF NICARAGUA FOR AN INSTITUTIONAL DEVELOPMENT PROJECT FEBRUARY 24, 1995  CURRENCY EQUIVALENTS US$1 = 7.2 Nicaragua C6rdobas (January 1995) FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS CERAP Committee for the Reform of Public Administration (C'omite para la Reforma de la Andministracion Publica) DIGEFUP Directorate General for Public Administration (TDirecci6n General de [Fincion Piiblica) ERC Economic Recovery Credit ICB International Competitive Bidding IDA International Development Association IDB Inter-American Development Bank IDF Institutional Development Fund INAP Government Training Institute (Instiluto Nicaraguense de Administracion Puiblica) LIB Limited International Bidding PFP Policy Framework Paper PHRD Policy and Human Resources Development Fund SDS Service Delivery Survey SIGFA Integrated Financial Management System (,Sisema IJtegrado de Gesti6n y A uditoria Financiera) TA Technical Assistance UCRESEP Coordinating Unit for the Reform of the Public Sector ((nidad Coordinadora para la Reforma de Sector PIublico) UNDP United Nations Development Programme USAID United States Agency for International Development  NICARAGUA INSTITUTIONAL DEVELOPMENT PROJECT TECHNICAL ANNEX SECTION A: PROJECT DESCRIPTION Background 1. When the current Government of Nicaragua assumed office in April, 1990 it faced severe challenges. The economy, devastated by mismanagement and civil war, was characterized by a cumbersome, centralized public sector, a small over-regulated private sector, and atrophied market institutions. Exports and GDP per capita had declined to 40 percent of the levels attained in the mid 1970s, and macroeconomic imbalances, inherited from the previous administration, had resulted in hyper-inflation and a massive external debt more than five times the size of the GDP. During 1991 and 1992 the Government implemented a strong stabilization program supported by the IMF. It also began a structural adjustment program, supported by IDA, aimed at transforming Nicaragua into a market economy capable of achieving sustained growth. An element in the structural adjustment effort were programs to fundamentally alter the size and role of Government through employment downsizing, privatization of parastatal enterprises, and the reduction of Government policy intervention in economic decision making. 2. Despite considerable progress in stabilization and adjustment, by early 1994 private sector investment and economic activity had not rebounded as anticipated. A major contributing factor was the continuing drag on the economy of the public sector. Even after privatizing over 300 firms, labor force reductions, and major efforts at budget restraint, the non-financial public sector remained large, accounting for 40 percent of GDP. Despite a high tax burden, the 1994 fiscal current deficit in the non-financ:al public sector, before donations, is about 8 percent of GDP. Moreover, service delivery remains weak as public sector financial management processes are rudimentary, human resource management is nearly non-existent, and the mission, structure and function of individual ministries remains, in many instances, outdated and inadequate. 3. The authorities, fully cognizant of these deficiencies and the failure of the economy to respond as anticipated to the earlier adjustment measures, embarked on an intensified program of adjustment with increased attention directed to public sector reform and modernization. IDA supported this initiative with a second Economic Recovery Credit (ERC II), approved in June, 1994, which aims at, among others: (i) a 15 percent reduction in public employment; (ii) continued privatization of public enterprises; (iii) reform of state banking institutions; and (iv) the design and launching of a comprehensive public sector modernization program. Preparation of a Technical Assistance (TA) project to support reform design began in early 1994. Using both PHRD and IDF grants, the Government was able to prepare diagnostic studies and action programs focused on institutional restructuring, civil service and financial management reform, and the development of an information technology improvement program for the public sector. Given the progress achieved in reform design and their strong desire to accelerate reform implementation, the authorities requested that the proposed TA credit be expanded into a more comprehensive, implementation oriented Institutional Development Project.  2 4. Project Objectives: President Violeta Chamorro issued Decree 44-94 in October, 1994 initiating a public sector modernization program and creating a cabinet level oversight C'ommittee for the Reform of the Public Administration (CERAP), headed by the Minister of the Presidency. The goal of the reform is a public sector which is "small, strong, efficient.. and [which] acts as a facilitator to the private sector." Successful implementation of a comprehensive, coherent, and well-targeted public sector modernization program would represent an important advance in Nicaragua's ongoing structural adjustment effort. The proposed project would be a major source of support for the reform effort. Its objectives would be improvement in service delivery by those institutions restructured under the program and increases in public savings attributable to the program. 5. Project Concept: Institutional restructuring is the heart of the reform program and the proposed project. It would involve the systematic re-engineering of up to 20 ministries and decentralized institutions over a five year period. Project execution would be phased with no more than five institutions joining the program in any given year in order to limit demands on the Government's overall reform management capacity. An important degree of "self-selection" would be utilized in determining the order of entrance into the program to ensure commitment and "buy-in" by the participating institutions. 6. IDC financed consultant services would assist CERAP undertake diagnostic studies of the mission, structure, and function of institutions nominated to enter the program as well as design and support implementation of the institutional restructuring process. Institutional Restructuring Agreements (IRAs) would be negotiated between CERAP and each participating institution Each IRA would establish objectives and performance benchmarks focused on identifying the appropriate mission and enhancing the main service delivery capacities of the participating institution, as well as delineating the resources (technical assistance, training, information technology, etc. financed by IDA or other donors) to be made available by CERAP to support the restructuring process. Each IRA is expected to remain in force for at least two years. Annual performance reviews, including Service Delivery Surveys (SDS), being designed with the support of the Economic Development Institute (EDI), would measure the institution's progress against agreed objectives and establish the basis for any modifications in the IRAs for the following year. While the Government is confident that all ministers and heads of institutions would actively support the restructuring process, Government sponsored incentives, in addition to those provided through IDA and other participating donor resources, would include increased responsibility in budget formulation and execution, improved human resource management and training, and scope for selective pay adjustments for essential professional and technical personnel financed out of reform related savings. 7. The project would also finance three critically important cross-cutting components (civil service reform, financial management reform, and investments in information technology) necessary to sustain improved service delivery in the restructured institutions. These systems must be designed as overarching, enabling systems for the public sector as a whole. The installation of these components, however, would be targeted first on those institutions with IRAs in force. Although not a separate component per se, training would be an integral aspect of the reform effort, to be delivered initially by the substantive consultants in each project component. The project would also implicitly complement the Government's decentralization efforts by  3 providing training to local officials and supporting, through the restructuring process, the expansion of decentralization initiatives currently being piloted in several institutions. Project Components Institutional Restructuring ($7.05 million, including training, 22% of total base costs): 8. The Problem: Diagnostic studies' of seven ministries, two decentralized institutions, and five local governments commissioned by IDA during project preparation, as well as a separate assessment of pay and employment practices, have documented a generic set of institutional weaknesses in the public sector. Among the salient findings are the following: * Most ministries, especially those whose controlling legislation sets multiple objectives, are not fulfilling their stated missions nor ensuring that their activities fully reflect current Government priorities; * Confusion and fragmentation of responsibilities is common due to overlapping legal mandates among institutions; * Various services could be provided more productively by the private sector, * Within institutions there is organizational confusion and fragmentation. Some ministries have more than one organization chart, of which none reflects reality; * Departments within ministries frequently operate with excessive autonomy, pursuing independent agendas, * Weak mechanisms for target setting and performance measurement, the poor state of information systems, and the lack of feedback into the budgetary process in all institutions studied attenuate performance and accountability, * The high proportion of donor funding to total resources available to some ministries increases the influence of donors' interests and objectives, which may diverge with those of the government, heightening confusion and fragmentation of purpose; * Ministries appear to be overstaffed at the top and bottom, and * Across ministries there are large numbers of small "management units" whose existence appears to respond to pressures other than rational work organization. Out of 20 institutions studied, 12 had an average of less than four employees per manager. One ministry has 17 administrative units in its Central Activities Program, of which two have an average of 25.5 employees, while the other fifteen average only 3.01 employees per unit. Another ministry has three units averaging 20.3 persons and 19 averaging 2.07 persons. Whether or not this Nicaragua: Institutional Diagnosis and Restructuring Study, November, 1994  4 pattern also reflects the impact of separate donor projects and ad hoc attempts to overcome low pay levels, there appears to be too many supervisors for too few employees. 9. As indicated above, the Government has pursued public sector reform and downsizing since assuming office in 1990. It has reduced public sector intervention in the market, demobilized much of the military, privatized over 300 parastatal companies, and initiated sector programs with important institutional development components utilizing assistance of IDA, IDB, and USAID in the agriculture, health, and education sectors. The Government also implemented a voluntary labor force reduction program between 1991 and 1993, financed by USAID, which resulted in the separation of approximately 25,000 employees. The combined impact of these and other initiatives is demonstrated in Table l. Table 1: Public Sector Employment 1977-93 (thousands) Government Unit 1977 1990 1993 Central government 24.1 67.2 57.3 Security and defense 9.2 109.2 24.9 Rest of non-financial sectors 7.7 20.9 16.2 Flinancial sector 2.2 9.1 3.5 CORNAP (holding company for 0.0 78.0 4.3 state owned companies) Total 43.2 284.8 106.2 GDP per public employee 679,225.0 63,734.0 169,654.0 (1980 cordobas) Source: Ministry of Finance 10. In spite of the substantial progress made in reducing the size of the public sector, the 1994 ratio of GDP per employee is still only about a fourth of its 1977 level. Similarly, the ratio of total population to the public sector as a whole, less defense and security, dropped from 98.1 persons per public servant in 1977 to 63.5 in 1990, recovering to 76.9 by April 1994. While these figures must be used with caution and recognition accorded to an increased commitment to social sector investments, the analysis suggests further global reductions are warranted within the context of carefully prepared institutional restructuring programs. 11. The Government's Program: In a Public Sector Management Development Policy letter to IDA in March, 1994 the Government indicated its intention to consolidate past reforms and launch a more comprehensive public sector modernization program. A Government white paper in July, 1994 identified institutional restructuring as the keystone of the reform program. The Government subsequently advanced the concept of explicit contractual agreements (i.e., IRAs) between CERAP and participating institutions to govern and discipline the institutional restructuring process. During project appraisal the Government and IDA agreed on a model, or generic, IRA (see Annex 1). CERAP, with IDA assistance, is presently developing the initial four IRAs which would serve to launch the institutional restructuring program no latter than mid 1995. The authorities and IDA have agreed that at least one IRA would be formally contracted prior to  5 credit effectiveness. Assurances were provided by the authorities that IRAs would be negotiated between CERAP and participating institutions as a condition for entrance into the program. 12. Institutional restructurings would be based on diagnostic reviews of the mission, structure, and function of the institution, with a view toward eliminating duplication and fragmentation, contracting out or privatizing functions wherever appropriate, strengthening program formulation, human resources capacity, and financial management and, in general, strengthening the institution's ability to execute a well defined, service oriented mission. The Government has nominated the ministries of Finance, Government, Environment and Natural Resources, Transportation and Construction, and the Social Security Institute to initiate the restructuring process during 1995. Diagnostic studies have been, or will soon be, completed in all these institutions. An additional five institutions would join the program during 1996. Diagnostic studies to prepare for these and subsequent restructurings would be carried out with IDA financed assistance. Subject to the progress achieved in the initial ten institutions, the availability of funds and the Government's ability to manage program expansion in a systematic and efficient manner, up to 20 institutions could be restructured during the five year life-of-project (see Table 2). The Government and IDA have agreed to undertake a mid-term review of the program after the project's second year. A central concern of this review would be to determine if the third and fourth rounds, each respectively involving up to five institutions, should go forward as indicatively planned or, alternatively whether the available resources should be used to further deepen and extend the institutional restructuring process underway in the initial 10 IRA institutions for an additional one or two years. Both the authorities and IDA agreed during appraisal that a decision to continue to expand institutional coverage during the project's outer years, versus a more intensively focused, institutional deepening of the ongoing program, could not be decided a priori, but should await the results of the mid-term review. Table 2: Institutional Restructuring Schedule Year 1 2 3 4 Total 1995 1996 1997 1998 Number of Institutions 5 5 5 5 20 Beginning Restructuring 13. Proposed IDA Assistance ($5.7 million in Technical Assistance and $.26 million for Training): IDA would finance a competitively awarded, two-year renewable contract with a firm with relevant international experience. The firm would: (i) assist the CERAP Commission for Administrative Reform establish and operate the IRA process, (ii) provide direct technical assistance (both management and sector specific) to the selected institutions implementing IRAs, (iii) design and carry out diagnostic studies for prospective restructuring institutions; (iv) assist and support CERAP in its effort to establish and implement the SDS; (v) assist CERAP carry out the annual IRA performance reviews, (vi) provide selected professional expertise to support relevant training programs, (vii) assist CERAP establish the overall management framework and implement the Public Sector Modernization Program, and (viii) oversee the coordination of the contractors responsible for providing technical assistance to the other components of the program. The proposed consulting services are expected to be about 144-person months of long term residential assistance and 124 person-months of short term advisory support. Additionally  6 this component would cover management training activities to be designed and initially implemented by the technical assistance contractor and subsequently replicated and extended by [NAP to participating institutions. 14. Expected Outputs: The expected outputs of the Institutional Restructuring component would be: (i) enhanced service delivery by participating institutions as recorded and measured through annual service delivery surveys and institutional performance reviews to be carried out by CERAP; and (ii) more rational and cost effective recurrent and capital expenditures at the individual institutional level, expressed in terms of each participating institution's contribution to public savings. Civil Service Reform ($3.34 million, including training, 10% of total base costs): 15. The Problem: Improvements in institutional performance will require complementary reforms in several areas including the civil service system. A comprehensive diagnosis2 undertaken during project preparation identified a range of legal, institutional, and policy weaknesses in managing human resources, including the following: * Public sector employment in Nicaragua has never been governed by a civil service code. The Government vetoed civil service legislation passed by the outgoing administration, believing that it would not establish an appropriate framework for a professional and merit based civil service; * There is no national establishment register with a file on each employee, no job classification system, no government-wide occupational based salary schedule, and no uniform set of policies and procedures guided by a central personnel agency, * The policy framework for the functioning of the civil service is based on custom and tradition, augmented by separate laws and individual collective bargaining agreements negotiated at the ministry level, * Ministries often have separate and distinct codes which govern human resource management. Consequently pay, grievance procedures, medical benefits, occupational injury regulations, leave, death and severance benefits, and fringe benefits relating to food and clothing vary widely among institutions. Staff in some ministries work a five-hour day for eight-hours pay. Some agreements give employees the right to strike. Although many agreements have not been renegotiated upon expiration, they continue in force; * Personnel administration is rudimentary within each institution. Recruitment, hiring, firing, and promotion are generally handled outside of the personnel division, without uniform institutional standards and procedures. Performance evaluation, except during a probationary period at the onset of employment, does not exist; 2 Nicaragua Civil Service Diagnostic Revicw: October. 1994.  7 * Training opportunities for staff at all levels is extremely limited. Much of the training that exists is initiated and financed by international donors as ad hoc interventions rather than part of a coherent public sector human resource management and career enhancement program; * Management style tends to be authoritarian rather than consultative, motivating, and directed toward problem solving; * Although there is limited data, civil service pay appears to be substantially below that of the private sector across all occupational classifications, especially for technicians and senior managers. Average earnings in government were 791 Cordobas/month ($115 equivalent) in 1993 versus 1,600 Cordobas/month ($229 equivalent) in the private sector (see Table 3); Table 3: Average Monthly Earnings By Economic Sector and Occupation February 1994 (Cordobas) Sector Laborers Services Administrative Professional Managers Average Technical Mines 988 848 1,163 1,671 2,291 1,077 Industry/Man. 1,706 2,061 1,872 3,884 6,255 2,189 Gas, Water 1,041 906 1,204 2,110 3,425 1,498 &Elect. Construction 1,142 770 1,072 1,687 4,371 1,128 Rest. & Hotel 1,046 873 1,560 2,191 5,209 1,719 Transportation, 1,394 1,494 15,117 2,465 3,669 1,562 Storage, and Communication Insurance 0 1,006 1,367 2,151 5,000 2,170 Personal 951 794 1,152 2,016 3,191 1,536 Services General 791 Government Ministry of 817 Health Teachers 577 Ministry of the 1,514 Presidency Source: Ministry of Labor * There appears to be a wide range of salaries for similar occupational classifications within the public sector, reflecting the absence of any formal wage structure for the government and misclassification of individuals as a result of weak personnel administration (see Table 4);  8 Table 4: Minimum, Maximum, and Average Monthly Salary of Selected Positions in the Ministry of Agriculture (Cordobas) Occupation Minimum Maximum Average Department Head 735 6,000 2,133 Office Head 772 1,822 1,202 Executive Secretary 425 3,680 751 Office Secretary 422 722 562 Project Analyst 847 5,000 1,651 Veterinary "A" 1,272 4,500 1,882 Analvst-Ag. Prod. "A" 847 1,522 1,256 Sanitary Specialist "A" 670 1,272 1,019 Statistical Analyst "A" 772 1,560 1,198 Economic Analvst "A" 1,222 3,500 2,065 Agricultural Inspector 452 2,736 1,086 Lab Quality Technician 472 2,574 1,030 C.P.F. Agent (A) 234 1,250 510 Janitor 234 500 315 Chauffeur-Light Vehicle 272 1,000 503 - Ad hoc arrangements to overcome low pay through donor financing of Nicaraguan consultants associated with donor financed projects may be unsustainable if international assistance diminishes and the consultants abandon the public sector. One ministry has 425 regular positions and 555 Nicaraguan consultants associated with 27 donor financed projects. These consultants are paid on average twice the prevailing rate for the corresponding occupational categories on the government payroll, and - The ongoing program to reduce public employment under the Government's "Labor Mobility Program" should be strengthened by tightening controls over new hiring, ensuring that departing employees are not the most productive, linking reductions to institutional priorities and restructuring goals, and permitting institutions to share in the budgetary savings achieved, perhaps to provide program support and performance incentive payments to the remaining work force. The latter would be facilitated were donors to contribute to a severance payment fund, to relieve the pressure on the Government's recurrent budget which is currently financing severance payments. 16. The Government's Program: Given the serious macroeconomic imbalances and precarious fiscal position inherited by the Government in 1990, its immediate objective was to reduce the fiscal impact of an excessively large public sector labor force. This was achieved, although some of the Government's more able civil servants left (perhaps inevitably given improving prospects in the private sector). While still pursuing more selective downsizing under a second phase Labor Mobility Program (to be supported by diagnostic reviews under the project), the Government wants to create a properly structured, better compensated, and more professional core of human resources in the public sector. To this end, the Government recently created, within the Ministry of Finance, a Directorate General for Public Functions (DIGEFUP), which  9 will serve as a nascent Civil Service Administration and which has initiated a job evaluation and position classification effort. The Government recently created personnel divisions in line ministries and decentralized agencies which presently perform only a minimal set of personnel management functions, principally preparation of payroll submissions and recording changes in employee status. It is the Government's intention to enhance salaries for scarce technical and professional skills in certain occupational categories, perhaps through the creation of a new civil service cadre. Given immediate fiscal constraints, and as DIGEFUP seeks to define such a system, the Government would permit participating spending agency ministers to utilize a portion of budgetary savings generated through the restructuring process for selective pay adjustments. Finally, with support from UNDP and USAID, the Government has taken initial steps to develop targeted short-term management training programs, and has moved to strengthen the public sector's training capacity in INAP. 17. Proposed IDA Assistance ($3.0 million in Technical Assistance and $34 million for Training): IDA would finance a competitively awarded, two-year renewable contract with a firm specialized in human resources management and with relevant international experience to assist the Civil Service Commission and the DIGEFUP design and carry out the civil service modernization program. The level of effort of this proposed consultant services contract is expected to be in the range of 96 person months of long-term residential assistance and 26 person-months of short term advisory support. Three types of assistance are envisaged: * The contractor would assist the Civil Service Commission and DIGEFUP: (i) draft, and implement upon enactment, a merit based civil service code3; (ii) develop a standard set of regulations to implement the civil service code, covering all aspects of personnel administration from grievance procedures to performance evaluation; (iii) further develop and maintain a government-wide job classification system and supporting computerized establishment register; (iv) develop a service-wide, incentive based salary structure and the capacity to periodically update the salary schedule through labor market wage surveys; (v) design and carry-out targeted staff reductions arising from the institutional diagnosis and restructuring process; (vi) develop and apply appropriate recruitment and staff selection processes, and (vii) strengthen the capacity of DIGEFUP to meet its responsibilities as the rector of the civil service system. * At the individual institutional level, the contractor with DIGEFUP would provide technical assistance, as elaborated in each IRA, to assist the institution's personnel divisions upgrade personnel management practices and implement the new civil service code. * The contractor would assist DIGEFUP design and carry out a core program of training in human resources management (estimated cost $0.34 million). The contractor would also coordinate the training activities associated with the Institutional Restructuring, Integrated Financial Management and Information Technology components (see paras. 13, 21 and 26). 3 It is the Government's intention to send the proposed civil service legislation to the National Assembly for debate and approval. The Executive Branch, however, has independent authority to establish, through presidential decree, the necessary legal framework for the creation of the proposed civil service in the event that the legislation is not passed by the Assembly.  10 This training would be initially developed and delivered by the consultants retained under those components and subsequently replicated and expanded by INAP. The overall IDA contribution to training, across all five project components, would total $2.0 million (see Schedule 2). The UNDP would provide assistance to INAP, in the context of its ongoing capacity building program, in training management, finance, and logistics. 18. Expected Outputs: This component would help establish the legal foundation and supporting management framework at both the central and specific agency level for a modern civil service. Personnel administration and merit principles would be introduced across the Government. A single job classification system, computerized establishment register and supporting salary schedule would be fully functional, enabling the government to effectively control and manage public employment and maintain an occupation based salary schedule. Administrators and staff would receive training in applying the newly acquired personnel management procedures. Moreover, a large cross section of civil servants would have received training in general management, financial management and information technology, and the institutional capability of INAP to sustain this training effort would have been strengthened. Integrated Financial Management ($11.16 million, including training, 34% of total costs): 19. The Problem: The financial management system of the public sector is poor and constrains the Government's ability to execute its policies and programs in a cost effective, efficient, and transparent manner. Diagnostic studies prepared by USAID and IDA4 have revealed: