Peru - Public Sector Management Project

Document of The World Bank FOR OFFMCIAL USE ONLY Repwt No. 10457 PROJECT COMPLETION REPORT PERU PUBLIC SECTOR MANAGEMENT PROJECT (LOAN 2204-PE) MARCH 27, 1992 MICROFICHE COPY Report No. 10457-PE Type: (PCR) SARMIENTO,/ X31677 / T9 115/ OEDD2 Public Sector Management Division Technical Department Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  LIST OF ACRONYMS BTORs - Back-to-Office Reports CIET - Centro Interamericano de Estudios Tributarios (Interamerican Center of Tax Studies) COFIDE - Corporaci6n Financiera de Desarrollo (State Development Finance Bank, Subsidiary of CONADE) CONADE - Corporaci6n Nacional de Desarrollo (National Development Corporation) CONASEV - Comisi6n Nacional Supervisora de Empresas Valores (Financial Markets Regulatory Agency) DGCP - Direcci6n General de Cr6dito PGblico (General Directorate of Public Credit, MEFC) DGPF - Direcci6n General de Politicas Fiscales (General Directorate of Fiscal Policy, MEFC) DGPP - Direcci6n General de Presupuesto Pfblico (Government Central Budget Office, MEFC) ESAN - Escuela Superior de Administraci6n de Negocios (School of Business Administration, a private university) FUNDESARROLLO - Fundaci6n de Desarrollo (National Development Foundation, overseer of SES) ICSA - Inversiones Cofide, S.A. (Holding Company for SOEs, Subsidiary of CONADE) IMF - Internationa] Monetary Fund INAP - Instituto Nacional de Administraci6n P(iblica (National Institute of Public Administration) INP - Instituto Nacional de Planificaci6n, National Institute of Planning IPSS - Instituto Peruano de Seguridad Social (National Institute of Social Security) MEF/MEFC - Ministerio de Economia y Finanzas/Ministerio de Economia (Ministry of Economy and Finance) OAS - Organization of American States PSF - Public Sector Foundation (Same as FUNDESARROLLO) PSM - Public Sector Management SES - Senior Executive Service (Senior Executive Service) SOE - State Owned Enterprise TALs - Technical Assistance Loans TOR - Terms of Reference CURRENCY EQUIVALENTS Currency Unit: 1000 soles = 1 Inti as of 01/01/86 Average Market Rates for Period End of 1981 US$1 = 0.42 Intis End of 1982 US$1 = 0.70 Intis End of 1983 US$1 = 1.63 Intis End of 1984 US$1 = 3.47 Intis End of 1985 US$1 = 10.98 Int4. End of 1986 US$1 = 13.95 Int4s FISCAL YEAR January 1 to December 31  FOR OFmFCIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Oface of Dwctor-G..wal Opeatmns Ivaluatin M*arch 27, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on PERU - Public Sector Management Loan (Loan 2204-PE) Attached, for information, is a copy of a report entitled "Project Completion Report on Peru - Public Sector Management Loan (Loan 2204-PE)," prepared by the Public Sector Management Division, Technical Department of the Latin America and the Caribbean Region. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment This document has a restricted distribution and may be used by recipients only in tht performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OMCIL USE ONLY PROJECT CQMPLETION REPORT PUBLIC SECTOR M AGEHENT LOAN (LOAN 2204-PE) TABLE OF CONTENTS Page Ng. PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EVALUATION SUMMARY .i.i.. . . . . . . . . . . . . . . . . . . . . . PR I: PROJECT FROM THE BANK's PERSPECTIVE . . . . . . . . . . . . 1 A. Project Identity .... . . . . . . . . .. . 1 B. Background .... . . . . . . . . . . .. . 1 C. Project Objectives and Description . . . . . . . . . . . . . . 1 D. Project Design and Organization ... . . . . . .. . 2 E. Project Implementation . . . . . . . . . . . . . . . . . . . . 3 F. Results.. 4 G. Sustainability.. 4 H. Assessment by Component.. 4 Improvements in Program Budgeting System . . . . . . . . . . 4 Improvements in Senior Level Management Recruitment, Retention, and Compensation s.5 Public Sector Management Training . . . . . . . . . . . . . . 6 Debt Management.. 7 Tax Administration.. 8 Capital Markets . . . . . . . . . . . . . . . . . . . . . . . 8 Housing Investment and Savings . . . . . . . . ... . . . . 8 System of Short-term Macro-economic Indicators . . . . . . . 8 National Development Corporation (CONADE) . . . . . . . . . . 9 Inversiones COFIDE, SA (ICSA) ..9 Assistance to MEFC in Monitori.ng Investment Programs of SOEs 10 Assistance to IPSS ..10 Individual Consultancies within the MEFC . . . . . . . . . . 11 I. Bank and Borrower Performance ..11 J. Lessons to be Drawn for Future PSM Technical Assistance Projects 12 K. Project Relationships . . . . . . . . . . . . . . . . . . . . . 14 L. Consulting Services . . . . . . . . . . . . . . . . . . . . . . 15 M. Project Documentation and Data .... . . . ....... . . 15 ,PART II: PROJECT REVIEW FROM THE BORR,OWER'S PERSPECTIVE . . . . . . 16 (none completed) PART III: STATISTICAL INFORKATION . . . . . . . . . . . . . . . . . 17 1. Related Bank Loans .... . . . . . . . . . . . . . . . . . 17 2. Project Timetable . . . . . . . . . . . . . . . . . . . . . . . 18 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS (contd.) Page No. 3. Loan Disbursements: A. Cumulative Estimated and Actual Disbursements . . . . . . . 19 B. Cumulative Disbursements by Quarter . . . . . . . . . . . . 19 4. A. Project Firancing . . . . . . . . . . . . . . . . . . . . . 20 B. Project Cost Breakdown by Component . . . . . . . . . . . . 21 5. Status of Covenants .... . . . . . ..... . . . . . . . . 22 6. Use of Bank Resources .................... . 25 1. Studies and Reports Available in the Project File . . . . . . . 26 2. Summary of Components, Activities, and Outputs . . . . . . . . 32  PROJECT COMPLETION REPORT PUBLIC SECTOR MANAGEMENT LOAN (LOAN 2204-PE) PREFACE (i) This is the Project Completion Report (PCR) for the Public Sector Management Loan in Pert, for which Loan 2204-PE in the amount of US$10.2 million was approved on September 30, 1982. The Loan was closed on December 31, 1986 (the original loan closing date was December 31, 1985). Total disbursements amounted to $10.07 million. The amount of US$131,868 was cancelled as of May 5, 1987. (ii) The POK was prepared by the Public Sector Management Division of the LAO' Technical Department (on behalf of the LA1 Country Department). This report is based largely upon a review of the documentation transferred to the Bank follovi.ng the closing of the Bank Resident Mission in 1986. This documentat' wi may have been incomplete. The PCR is also based upon extensive interviews a.. h Bank staff involved in project design and implementation, as well as discussions with the current country team who are working on many of the issues addressed in the original project. The existence of three evaluations of the project also facilitated preparation of this report. These include: (a) an Interim Eraluation by the Bank's central Public Sector Management Unit (pzepared in 1984 and issued in February 1985); (b) an evaluation conducted by tho Peruvian Auditor General's Office (Contraloria, December 1984); and (c) a Government contracted evaluation conducted by an independent consultant (Peruvian Government, 1986). This PCR also reflects the findings of two back-t.v-office reports (BTORs) (October 1985) which focused on training and State Owned Enterprises (SOEs) in connection with a proposed follow-up operation. (iii) Given the length of time that has elapsed since the project was completed, the present Government was unable to prepare a Part II to this PCR or comment on Part I.  - ii - PROJECT COHPLETION REPORT PUBLIC SECTOR MANAGEMENT DOAN (LOA 204-PE) EVALUATION SUMMARY Introductin 1. This loan was one of the first to appart a Government sponsored structural adjustment program in the Latin American region, and ri of the earliest for the Bank. The loan was both innovative and ambitiou- It was intended as an umbrella funding structure for activities that wc' assist the GOP in tne arduous task of altering fundamental roles for gover;. in tne face of an economic and political zlimate of increasing uncertaiinty. Hosevor, it came to serve as a mechanism for loosely controlled short-term crisis management, with many of its activities responding to the exigencies of the rapidly deteriorating economic environment rather than the intended institution strengthening and transfer of management capacity. While a numrer of achievements under the loar. made important short term contributions to the management of principal functions of Central Government, the long term contributions of the loan were circumscribed by deterioration in the climate of reform in Per6 during the last two years of the Belaunde Government, by a weakening of Government resolve to continue reform, and by weaknesses in the design and implementation of some activities under the loan. The catastrophic erosion of economic institutions, policies, infrastructure and production during the Garcia Government further precluded the possibility of sustaining reforms intended. Thus, the loan was moderately successful in its short term operational objectives and activities and unsuccassful in its long-term institution building objectives. Oiective-s 2. By addressing the key management problems at the level of the Central Government and in State-Owned Enterprises (SOEs) the project intended to improve overall performance of Government (see Part I, parp- 3-9). Key objectives were: (a) assistance to the Central Government to (i) design and implement a program budgeting system in each of the Ministries; (ii) improve methods for hiring and retaining civil servants and develop an adequate compensation system, particularly for senior managers; (iii) assist in key policy areas such as the improvement in debt management, public investment management, reforms in the financial system, tax incentives and administration, and development of a system of short-term macroeconomic indicators;  - iii - (b) assistance to the parastatal sector and strengthening of the National Development Corporation (CONADE) and its subsidiary state holding company (ICSA, and to assist selected individual SOEs; (c) training of public sector managers. Implementation Experjence 3. In presenting the loan to the Executive Directors, the Bank correctly identified the main risks of the lending operation as the possibility of Project failure on political grounds and the complexity and involvement of a number of Government and private institutions. However, with hindsight these risks were underestimated. Most of the project was implemented during the period of the Belaunde administration (1980-1985), the last years of which were marked by economic deterioration, growing social unrest and disintegration of the government coalition that had supported the project. Th# lack of consistent leadership within the MEFC over the course of the loan and lack of strong counterpart involvement at levels below high management further contributed to the lack of institutionalization of project compcnents. The shift in administrations from President BelaCinde to President Garcia (August 1985) had a further negative impact on the possibility of implementing some consultant recommendations that had prospects for being successful (e.g., tax), and on relations between Bank and Government more generally. Petr( suffered a catastrophic erosion of economic institutions and policies during the Garcia Administration (see Part I, para 8). 4. Discrete, well-defined project activities with clear terms of reference provided for a strong early implementation record. Major management system improvements were designed in MEFC (budget system, debt management, tax administration), ICSA and PESCAPERU (Part I, paras 12, 20, 25-28). However, the systems developed were not implemented over the longer term either because of lack of adequate counterpart involvement or the precedence of short-term crisis management over longer-term system implementation, or both. Activities that lacked transparency and clear direction from the beginning (eg., the PSF and training) were not successful, even in the short term (paras 14, 16-19, 23). Sustainability 5. It would have been difficult to sustain any public sector management project in the political and economic climate of post-1985 Pert. However, evaluations conducted by the Bank in 1984 and, especially the Government in 1986, indicated that while some high-quality technical work had been completed by consultants hired under the project prior to the Garcia administration, much of the work had not been "bought into" by the beneficiary agencies. In some Instances, foreign consultants appear to have developed systems and programs without incorporating nationals from within the administrative structure in the process. In others, commitment of key individuals existed at the outset, but this commitment waned as these individuals were replaced (see Part I, paras 10 and 11).  X iv Findings.-and Lessons Learned 6. While few institution-building advances could have survived the Garcia administration, there are several key lessons that can be learned from serious problems already evident during the Belaunde years. Attempts at PSH reform need to be limited in scope and well-focused in areas where there is strong commitment at all levels (political, managerial, and technical), particularly in weak and/or uncertain political and economic environments. Successes can then serve as the basis for future reforms. The proportion of total funding left unallocated in project design and the complexity of activities under technical assistance loans should be kept to a minimum. Acceptance and institutionalization depends upon the transparency of sensitive reforms. Transparency in the funding and selection of personnel is essential to avoid the appearance of politicization. For these reasons, technical assistance loans tend to require greater levels of supervi3ion than other projects. Finally, continuity in progress requires the maintenance of commitment on the part of Government and the creation of a sense of ownership of project activities in the institutions affected by project activities. This sense of ownership is critical for the long term sustainability of reforms (see Part I, paras 34-43).  P11JECT COMPLETION REPORT BLIC '4ECTOR MANAGEMENT LOAN (LOAN 2204-PE) PART I: PROJECT FROM THE BANK'S PERSPECTIVE A. groiect Identity Project Name: Public Sector Management Project Loan Number: 2204-PE Regional Unit: Latin America and Caribbean Region Country: Perd Sector: Public Sector Management B. Background 1. The Project had its origins in the major economic rehabilitation effort undertaken by the Government initially in 1978 and more vigorously in the post-1980 period. The newly elected BelaCinde Government in July 1980 named an economic team comm't ed to a stabilization and structural adjustment program aimed at improving economic efficiency, decontrol of the economy, promotion of the private sector, and policies aimed at job creation and targeted bocial programs. Government made important headway in a number of areas, including accelerated import liberalization, the streamlining of export incentives, and efforts to create financial incentives for investors through the rationalization and liberalization of the financial system. At the same time, there were initial efforts to strengthen public sector institutions and to transform the important public enterprise sector through increased autonomy. 2. In spite of these policy initiatives, economic performance lagged far behind expectations and, once again, reducing public sector deficits became the major economic challenge facing Perci's economic managers. Efforts to gain greater expenditure control led the Government to follow a more restrictive financial program in 1982 with the support of an IMF approved comprehensive EFF arrangement. "'aced with mounting problems in the management of an expanding public sector investment program, in September of 1981 the Government of Perd requested technical assistance from the Bank to strengthen management capabilities throughout the public sector. Appraisal in November- December 1981, a post-appraisal in February 1982, and follow-up negotiations in July 1982 led to Board approval in September 1982. C. Project Objectives and Descrigtion 3. The project's main goal was to provide technical assistance which would tesult in improved management throughout Perd's public sector so as to enable the country to make better use of its scarce financial and human resources. While the project aimed at providing the Government with more  -2- adequate management tools and managerial staff, the Government- in a parallel effort--intended to reduce the siza of che public sector through the sale of enterprises to the private sector. 4. The project, as originally designed, consisted of: (a) technical assistance to the Central Government (i) for the design and implementation of a program budgeting system in each of the Mini&tries; (ii) for the improvemert of methods for hiring and retaining civil servants and de,.Lopment of an adequate compensation system, particularly for senior managers; (iii) assistance in key policy areas such as debt management, investment planning, reforms in the financial system, and taxation; (b) technical assistance to the parastatal sector for upgrading and strengthening of ICSA to make it an effective holding company for State-owned enterprises and for improved management of a selected number of individual State-owned enterprises; and (c) training (including scholarships to foreign universities) for public sector managers through existing or newly developed courses at two private higher education institutions and at the Central Bans. 5. Several additional components were added during the course of the project, financed mainly from unallocated and reallocated funds. The component to strengthen the Peruvian Institute of Social Security (IPSS) pro -ideci immediate improvements in collections and reporting procedures, for example The 1983 budget review of SOEs offered clear and reasonable recommendations for strengthening pricing policies in SOEs. Similarly, a number of individual consultanciei offered sound policy advice on specific problems such as export promotion. D. Project Design and Organization 6. The inadequate managerial capacity of the State is a major bottleneck to Peruvian development. The project correctly focused on critical areas for improving public sector management--the budget, debt, state enterprises, tax reform and training and compensation of public sector managers. The technical work of many of the consultants was of high quality. Nevertheless, several weaknesses in the deslgn of the Project hindered its effectiveness throughout its life. A comprehensive interim evaluation of the loan (Bank Report, June 1984) correctly identifies two key design problems. First, the Project failed to formally include the strengthening of overall strategic planning and policy advice in the Central Government, relying instead on informal commitment and mechanisms for coordinating macroeconomic policy. The result was reliance on key individuals for implementation of project activities which proved fateful in a deteriorating economic and political environment with high turnover at the political and technical levels. Second, flexibility and fungibility in the use of unallocated and reallocated project funds "created pressures, sometimes from very high Government sources, to finance low priority activities" (Bank Report, 1984). Third, the complexity of project activities and the involvement of numerous organizational entities overextended the absorptive capacity of Government.  -3- Finally, lack of clarity in the training and research o,mponents in ESAN anc the Universidad del Pacifico and the absence of cleac '.OR for individual research activities resulted inA a number of studies that were only loosely connected to the objectives of the Project (Bank Report, 1984; BTOR for PSM II, 1985). 7. The Project had a rather complex administrative structure with overall supervision and coordination of project execution certered in a project coordinator responsible to the Ministar of Finance in the MEFC. Central Government and training components were executed directly through the MEFC, while the parastatal rector component was executed by CONADE/ICSA. The Project complexity was further increased by the involvement of other institutions: the Escuela Superior de Administraci6n de Negocios (ESAN", the Universidad del Pacifico, and the Central Banl: in the training component, the National Institute for Public Administration (INAe) for civil service reform, and individual SOEs in the parastatal technical assistance component. The signing of a separate Project /greement with the Bank by CONADE/ICSA and of a Complementary Participation Agreement with the Borrower and the Bank by other participating institutions--the Central Bank, the National Institute of Public Administration (INAP), ESAN, and the Universidad del Pacifico--was intended to clarify the respective organizational obligations and responsibilities. Similarly, upon creation of the Public Sector Foundation (PSF) responsible for promoting the Senior Executive Service (SES), this Foundation was to enter into contractual arrangements with Government as a condition of loan effectiveness. There were substantial delays in the creation of the PSF and in implementing its charter and contractual responsibilities. Lack of clear guidelines for its use and transparency in hiring eliminated any possibility of effectiveness. E. Project Implementation 8. The failure to create a macroeconomic institutional framework, and even to provide for early policy advisory group involvement (as required under the Loan Agreement), hampered the sense of ownership of individually designed systems, such as the budget system. The Policy Advisory Group was not created until 1984, fully one and onie-half years after the signing of the Loan Agreement. Lack of careful integration of technical personnel from beneficiary agencies in the development and imp'lementation of systems further hampered a sense of ownership. This absence of an institutional framework and Peruvian ownership of the project is evident in the frequent turnovers in Project coordination: eight different Project Coordinators supervised the activities of the project from within MEFC over the lfe of the project, and only the last two coordinated the project on a full-t.me basis (Peruvian Government Evaluation, 1986). This rapid change in Project coordination signaled the lack of Government commitment to the Project as well as the deterioration within the MEFC. Also, in the absence of overall policy direction individual components were relatively isolated from each other and a coherent institutional framework. In addition, the lack of strong countarpart involvement at levels below high level managemant in each stage of the design and implementation work resulted in reluctance to accept and to implement recommendations from international consultancs. Interim evaluations note, for example, the relative isolation of (extremely well paid) consultants from the functioning staff of the MEFC (Bank Report, 1984; Peruvian Government, 1986) which further diminished the project's sustainability. Recent discussions  -4- with personnel from the Office of the Public Budget (DGPP) suggest a similar isolation of consultants, especially the international firms. F. Results 9. The areas where the project had the greatest success include the strengthening of ICSA management, the initial short-term assistance in preparation of the 1982 budget, the tax administration activities by CIET, and assistance to IPSS and to PESCAPERU. However, given the unstable political and economic environment many of the results from these activities were not sustained. The greatest weaknesses in the project include efforts to establish a functioning PSF, the linking of training and research activities to public sector management, and the establishmant of a macroeconomi^~ framework for sustaining many of the individual activities. G. Sustainabilitv 10. It would have been difficult to sustain any public sector management project in the political and economic climate of post-1985 Perd. However, evaluations conducted by the Bank (1984) and the Government (1986) indicate that prior to the assumption of power by the Garcia Administration in 1985, many project activities had not been "bought into" by the beneficiary agencies. In some instances, foreign consultants appear to have developed systems and programs without incorporating nationals from within the administrative structure in the process. In others, commitment of key individuals existed at the incepticn of the project, but this commitment waned as these individuals were replaced. Institution-wide commitment was not inculcated. In addition, the lack of strong counterpart involvement at levels below high level management in each stage of the design and implementation work resulted in reluctance to accept and to implement recommendations from international consultants. While a number of achievements under the loan made important short term contributions to the management of principal functions of Central Government, the long term contributions of the loan were circumscribed by deterioration in the climate of reform in Per(i under the Belaunde Government, by a weakening of Government resolve to continue reform, and by weaknesses in the design and implementation of some activities under the loan (para. 6). The catastrophic erosion of economic institutions, policies, infrastructure and production during the Garcia Government further precluded the possibility of sustaining reforms intended under the loan. Thus, the loan was moderately successful in its short term operational objectives and activities and unsuccessful in its long-term institution building objectives. 11. As the present government embarks on efforts to revitalize economic activity and effective public sector action, it could be appropriate to examine the degree to which some of the management systems developed unde. the project, and described below, could be revitalized. H. Assessment by ComRonent 12. Imptovements in Program Budgeting System (USS1.878.000). A principal subcomponent of technical assistance to the Central Government was to be the design and implementation of a program budgeting system within the central budget office of MEFC and in each of the Ministries. The immediate decision to assist in the examination of the 1982 budget (prior to loan  -5- effectiveness) as a means for gaining systematic control and understanding of the budget system was excellent. This action provided tangible short-term results. The component was successful in the design of a more effective budgeting system for the Central Government: in the creation of a more rationalized expenditure classification system; in linking (partially) expenditures to program objectives; and in creating a computerized system for budget preparation, for expenditure authorization, and for budget execution reporting. Aggressive action on the part of consultants and the existence of high level governmental support for these activities early in the project added to the success of the design of this activity. 13. However, implementation of systems was more problematic, partially a result of: the deterioration of the economic situation in PerC in which short-term crisis management took precedence over development of longer-term systems; decreasing high-level support and leadership for the control over budget authorization, personnel, and salary payments; and the strong perception that consultants were "in charge," rather than serving a role of transferring needed skills to a trained counterpart group in government. The relative isolation of consultants and a small counterpart group meant that implementation fell short of goals. Weaknesses in the development of a toherent macroeconomic framework, coupled with limited creation of improved institutionalized technical capacity within the DGPP, resulted in short-term exigencies overwhelming longer term budget rationalization. While software was developed, institutionalizing the use of programs as part of the budgetary process did not occur. The end result is that the systems developed to assist in the budget process have remained dormant, including a 1986 set of recommendations by an independent consultant regarding budget management and investments. When asked in November 1990 the status of the budget programs developed, personnel in the Direcci6n General de Presupuesto P(blico indicated that the software was "somewhere," but not in use. Key personnel in the DGPP noted that there was no integration of the software system. 14. Im_rovements_iLn Senior Level Management Recruitment. Retention and ComDensation (USS40.000). Perd's civil service, established in 1950, had degenerated over the years, mainly as a result of rapid expansion of government employment and er-oding compensation. There was no well-defined system of vigorous qualification standards for recruitment and career advancement. As a result, good managers were scarce in the government service. The Project aimed to prevent the loss of top managers through the creation of a Senior Executive Service (SES) which would not be subject to the limitations of the civil service salary scale, and a Public Sector Foundation (PSF) which would finance the SES through contributions of public and private enterprises. Of all of the components in the Project,, this one experienced the greatest difficulty. Virtually none of the original allocation (US$700,000) was actually disbursed. Only about $4A,000 was used for a technical study on how the operation of the SES by PSF would function. As the Bank's Interim Evaluation of the Project notes, while the effort was innovative and forward-looking, it was plagued from the outset by political controversy. The requirement that the PSF contract with Government to establish and operate the SES was not established until March 1984. No clear proposals or terms of reference for technical studies to determine the function of PSF existed until September 1984. Criteria for recruitment, retention, pay structure, obligations of members, and other activities of the PSF were never firmly established. A technical study finally contracted in  - 6 - November 1984 did lead to a series of recommendations regarding norms and criteria for selection and development of SES personnel, including recommendations about turnover, definitions of beneficiaries, and training. However, the PSF had become a source of political patronage long before firm systems were designed. Both the source of funds for the PSF and the use of funds by the PSF remained unclear, as did its accountability. The PSF became a politic-1 institution and came under public criticism for rewarding political supporters rather than providing a neutral, professional pool of executive talent to assist in the pursuit of developmental goals. 15. In order for the PSF to achieve any of its objectives, there was a clear need for tra..sparency in all aspects of the use of the SES, especially in the sources and uses of funds and in the criteria for recruitment and retention of members. Lack of transparency clearly made the SES and the FUNDESARROLLO appear politically motivated and driven. The role and activities of the SES and the PSF needed to be defensible before the Peruvian Congress, public opinion, and within the bureaucracy of government itself. Instead, it was perceived as a means of political patronage. While the concept of the SES and more profound civil service reform was (and remains) a valid and critical element in the improvement of effective public administration in Perd, the implementation of this proposal would have required careful design, supervision, and control to assure that it did not become a means of political patronage. 16. Public Sector Management Training (USS1.650.000). A third major activity under the Project was the development and implementation of public sector management training programs aimed at igh level managers in ESAN and the Universidad de Pacifico. The Central Bank did not participate as originally envisaged and there were no externally recruited professionals or overseas scholarships as foreseen in the President's Report. This component represented 7.8% of project funds in the original allocation of funds, but accounted for more than 16% of actual project costs. 17. Activities under this subcomponent were not well defined at appraisal or in the loan documents. A number of activities (research and curricular) that were not directly related to the goals of the project were carried out. For example, one study conducted under the auspices of the Universidad del Pacifico and financed under the loan focused on the broad sweep of the role of the Paris Club; another provides a discussion of large- scale housing projects in Per(t and the role of the Junta Nacional de Vivienda; a third study focuses attention on territorial problems between Ecuador and PerCi. While interesting, their relevance to the project is somewhat stretched. Studies financed were not always clearly structured, contracts for studies were not prepared, and cost monitoring for specific studies was weak. Separate audits for ESAN and Pacifico were conducted, but supervision of thu studies in terms of costs and quality was uneven and there was a widespread perception that consultants and professors had received exorbitant salaries compared to local norms (PSI II BTOR, October 1985). While a graduate program in management was created at Pacifico as a part of the Project, several reviews suggest that the program was not serving to funnel personnel into public service. 18. Several additional difficulties can be noted:  -7- (a) In the absence of closer supervision by Government, the universities appeared to pursue their own institutional goals rather than the goal of strengthening public sector management in Government; (b) Often, research activities were less applied than theoretical, making their utility to serving the strengthening of public sector management less apparent; (c) The number of individuals trained by the institutions, both through in-service seminars and workshops and in curricular programs within the institutions, appear to be far fewer than anticipated, and much more eypensive on a unit basis (i.e., cost per trainee); and (d) Case study materials prepared as training devices were not carefully supervised for applicability and utility. 19. While the focus on strengthening these two institutions to better serve the needs of public sector management was an appropriate activity under the loan, there was clearly a need to provide more direct supervision and clear leadership of these activities. The design of the project correctly recognizes that effective and sustainable reform in administration requires the existence of supportive training and research activities. As several evaluations note, shortcomings in this subcomponent may have been a result of turnover in project coordination, lack of a Government counterpart in training, loose accountability, and a failure in sustained supervision of this component by the Bank (Peruvian Government, 1986; Bank Rep .t, 1984). 20. Studies to Strengthen the Public Sector in Key Poicy-Areas (USS2.083.000). A fourth subcomponent contemplated the provision of technical assistance and the execution of a number of studies in key policy areas for the strengthening of public sector management. One key area was the strengthening of debt management by the central government. The consultants proposed a new legal and institutional framework to clarify reporting and control relationships by type of debt (long-term, short-term, central government, minority/majoricy-owned SOEs), and the responsibilities of the principal debt control agencies. One MEFC staff member was also trained in New York and an in-house seminar on how to run computer programs was conducted in Liwa. This activity resulted in more rapid reporting of accounts payable over the period 1983/84. While the consultants succeeded in developing a potentially effective computerized system for debt reporting and recording, the exigencies of short term debt refinancing resulted in less-thaui-effective use of Government resources for institutionalizing this system. Alfo, inadequate involvement of staff of the Directorate of Public Credit (DGCP) in the work of the consultants resulted in weak efforts to implement consultant recommendations and the computerized system. The failure to create legal mechanisms for requiring entities of the State to provide debt information meant that the system was not fully effective. Lack of Government commitment is evident as well in the failure to provide DGCP with the authority to enforce debt ceilings and to use unofficial data as a means of verification of indebtedness of entities. Corflicts and the lack of coordination between the Central Bank and the Banco de la Naci6n also hampered implementation.  -8- 21. Several other studies, including strengthening tax administration, streamlining tax incentives systems, and strengthening lint among tax systems at various levels of government, produced sound policy rec-wmandations for improving collections and administration, as well as an analysis of the legal norms affecting tax administration, including substitute texts for then current legislation. The main recommendations -if the consultants were to: (a) Develop a more selective system of incentives eliminating: incentives which are biased toward capital-intensive production methods, the automatic and indefinite duration of benefits, incentive relating to the general sales tax, the credit for reinvestment of profits, and most geographically specific incentives; (b) Reduce the excessive tax burden on some income groups by setting a maximum rate of 45%, reducing the number of brackets from 14 to 7 and restructuring the tax schedule, while also making the system more comprehensive and fair by overhauling and simplifying deductions and exclusions; (c) Strengthen the regional and local tax systems and improve revenue sharing; and (d) Make the incentives for nontraditional exports more cost effective and bring them in line with international agreements with a view to avoiding retaliatory duties. 22. Studies by the Centro Interamericano de Estudios Tributarios (CIET) led to the promulgation of several changes in legal and regulatory codes. Clear TOR from the General Directorate of Fiscal Policy (DGPF) and the high quality of collaboration with personnel in DGPF resulted in satisfactory performance of these study components. The objectives of studies conducted for the Corporaci6n Nacional Supervisora de Valores (CONASEV) on capital mar,kets and housing investment and savings in Perd were less well defined. There appears to have been no efforts to carry these studies beyond the diagnostic stage. 23. Finally, the development of a system of short-term macro-economic indigagors for improved management was intended to provide Government (MEFC) with a means for linking fiscal and monetary policy and balance of payments for the near term. While a set of reports and systems for collecting and incorporating indicators were developed under the project, it is clear that changing political realities by the end of 1984 resulted in weaknesses in the implementation of these activities. Much political controversy surrounded the high cost of the provision of services under this consultancy And the propriety of the contract itself. A national consulting firm received a total of US$540,000 for assistance rendered over the period of one year (1984) for the services of three consultants. The consultants did provide reports and a basic data system of economic information for use in conjunction with the development of an annual economic program. However, once again, failures in the development of a coherent macro-economic institutional framework, coupled with deep institutional and political rivalries in Perd, affected the implementation of the system of indicators to be used for macro-economic projections.  -9- 24. Reforms in the Parastatal Sector (USS736.000). Assistance to the parastatal sector in Perd proved difficult to carry out given the unwieldy nature of the sector, its haphazard expansion in the 1970s, weaknesses in central government control over the direction and monitoring of performance in the sector, weaknesses in the performance of many of the individual SOEs, and increasing Government unwillingness to encourage alterations of State-SOE relations. 25. Earlier efforts to rationalize the sector led to the creation of the National Development Corporation (CONADE) to review SOE plans and investment projects, to review individual SOE performance and possible improvements, and to bring SOEs under a single management roof. In addition, a separate holding company had been created prior to this loan, Inversiones CQFIDE.- SA (ICSA) with the purpose of bringing SOEs under one central control and of divesting approximately 60 SOEs. Reducing the confusion of the roles of these entities was one of the functions of assistance to the sector. 26. The project design included two subcomponents to assist in rationalizing this sector. The first was to provide technical assistance to ICSA and train staff in order to strengthen its capacity as a holding company and secretariat to CONADE. A management information system was to be designed to provide effective guidance for and financial control over SOEs. Finally, a survey of all major SOEs to determine critical problems in identified key parastatals was to be conducted. Principal achievements under this subcomponent include: (a) Strengthening of ICSA management control through the establishment of a str4tegic planning and management by objectives system (MBO) for establishing jointly agreed targets for subsidiary SOEs; (b) Effective control over smaller SOEs by ICSA through the development of a management information system; 'c) Improvements in ICSA capacity to assist performance in firms held. (d) Intensive studies of several large parastatals (AeroPerd, Sociedad Paramonga Ltda., Cementos Yura, Palma Aceitera S.A., SIDERPERU) were conducted, although the original intention of a survey of all major SOES was altered by ICSA. Both Bank and Government evaluations note, however, that the MBO system was too generic and not adapted to the reality of public enterprises in Per(. This component was reasonably successful in the design of systems and technically competent recommendations and activities were evident. Weaknesses in implementation can be accounted for by the deteriorating economic and political climate.of Per4 and a lack of sustained political will, by the pressing demands of short term problems, and by the lack of careful adaptation of systems to Per(. There were, however, some significant achievements in the improvement of the management and activities of SIDERPERU, including a dramatic reduction in inventories, the reduction of a small portion of excess workers and a debt refinancing scheme negotiated by ICSA. 27. In addition, an activity under this subcomponent, unforeseen in the original project design, was intended to provide assistance to CONADE to  - 10 - clarify and to strengthen its supervisory role. Assistance to CONADE resulted in recommendations that CONADE be restructured as an autonomous institute reporting to the President rather than a holding company in competition with ICSA and in conflict with central management in MEFC. These recommendations were not implemented, a result of Government unwillingness to place SOEs more clearly under Inversiones COFIDE, to alter CONADE's role, and to separate ICSA and Inversiones COFIDE, SA, and to privatize agreed upon SOEs. In part, the weakness of this activity was the result of failure of the consultants to recognize the reality of relationships between line ministries and their SOEs, as well as the complicated nature of the interactions among MEFC, CONADE, and ICSA. This unwillingness to alter these organizational relationships became more pronounced with the transition to the Garcia Administration. 28. A second subcomponent called for the provision of technical assistance to individual SOEs to strengthen performance. Only 35.5% of the projected funds were disbursed due to the failure of SOEs, with the exception of PESCAPERU, to apply for assistance. In the case of PESCAPERU, assistance aimed to devise and implement a new strategy for the state fishing industry given changes in both the quantity and type of fish currently available in Peruvian waters. The report offered the Ministry a clear review of existing conditions and alternatives for the industry, and realistic recommendations by the consultants were well received by the then Minister of Fisheries. These recommendations focus on the establishing of production quotas (i.e., catches), the commercial viability of alternative fish, readjustments in personnel levels in the Ministry, and criteria for the reorganization of the Ministry. However, later efforts to reduce the staff which were recommended by the consultants proved impossible to implement. Again, initial strong support and leadership for reform by the Head of PESCAPERU proved short-lived, and the institutionalization of reform efforts was not accomplished in the face of changes in PESCAPERU's management, the deteriorating political climate, and increasing Government unwillingness and opposition to the implementation of reforms in the public enterprise sector. 29. Assistance to MEFC in Monitoring Investment Programs of SOEs (USS860.945). Work conducted for the MEFC on public investment monitoring and a review of the investment program of SOEs for 1983 did not prove effective over the longer run. This component, while not originally included in the Project, fits within the framework of assistance to strengthen the management of SOEs. A lack of Belaunde Government willingness to strengthen central control of SOEs generally weakened efforts to carry out the consultants' recommendations. While the study offers sound policy advice, particularly with regard to pricing policies in SOEs, Government failed to implement recommendations. Little long term institutional development of Government capacity to review SOEs was developed through the consultancy, little training and few procedural mechanisms for continued monitoring were provided. Problems of monitoring and controlling SOE investment activities in the political climate of the project were in part a result of Government's lack of commitment, but also suggest a failure on the part of consultants to appreciate political realities in Per(