STATUS REPORT ON PARAGUAY MCA THRESHOLD PROGRAM

UNCLAS ASUNCION 000978

SIPDIS

C O R R E C T E D C O P Y (ADDED TAGS)

PASS TO: WHA/BSC (MDRUCKER, KREAD, CCROFT, BFRIEDMAN),MCC (MLONGI,
MKLADAKIS),USAID (DAA/LAC TCORNICK, LAC/SA SLYNCH; RBRINKLEY),ODP/MCC
(PDELP, BKURTZ),TREASURY

SIPDIS

E.O. 12958: N/A
TAGS: ECON ECPS PREL PGOV PA
SUBJECT: STATUS REPORT ON PARAGUAY MCA THRESHOLD PROGRAM

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SUMMARY
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1. (U) Paraguay was the first country in the Western Hemisphere to
begin implementation of a Millennium Challenge Account (MCA)
Threshold Program. Under a bilateral agreement signed in May 2006
and due to conclude November 30, 2008, Paraguay's Threshold program
provides $34.6 million in U.S. assistance for ten integrated
objectives, or components, all designed to combat the country's
systemic corruption problems. The program achieved impressive
results in several components and performance as measured by MCA
scorecard indicators. Paraguay has significant hurdles still, both
within the Threshold Program and beyond on other key anti-corruption
bellwethers, if it is to one day qualify for an MCA Compact. Post
will report Septel our support for proposed Stage II Threshold
program for Paraguay.



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IMPRESSIVE RESULTS AT MID POINT
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2. (U) Paraguay is now 18 months into its 30 month long MCA
Threshold Program designed to formalize the economy and combat
corruption. Among its most tangible achievements, Paraguay
substantially streamlined its business registration process, cutting
costs and time for the entrepreneur and leapfrogging over 74
countries in the World Bank's 2008 Doing Business survey. With MCA
technical assistance, the Supreme Court developed and approved five
comprehensive reform measures that when implemented in early 2008
should substantially improve judicial accountability and efficiency.
Paraguay also continued its strong macro-economic management,
providing support to its highly-visible business tax compliance
campaign, which is now in full swing. Additionally, two key internal
investigation units at the Ministry of Finance (set-up through the
MCA program and the Treasury's Office of Technical Assistance) have
already met and exceed program-end targets for developing and
prosecuting corruption cases.


3. (U) As a quantitative and qualitative measure that compares the
performance of 95 countries eligible to compete for Millennium
Challenge Corporation (MCC) assistance, the FY 2008 MCC Performance
Scorecard validates Paraguay's strong results for the Threshold
Program's first year. Paraguay is now above the median ("green
category") for 13 of the 17 MCC Score Card performance indicators.
The strongest performance is in the indicators for Economic Freedom,
where Paraguay scores "green" in all six indicators (Business
Start-Up, Fiscal Policy, Regulatory Quality, Land Rights and Access,
Trade Policy, and Inflation). In the critical control-of-corruption
indicator, Paraguay demonstrated concrete progress, though it still
is in the "red" due to the significant challenges remaining. It
ranks in the 30th percentile, well ahead of its percentile on the FY
2007 scorecard (17 percent),and markedly better than its
cellar-dwelling standing in 2003 of 8 percent.

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STATUS BY COMPONENT
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4. (U) Within the Threshold Program's focal points of fighting
impunity and formalizing the economy, there are ten program
components. Post internal measures of results and performance in
each of these components are "Green" for exceeding or meeting
targets to this point; "Yellow" for on-track but with some issues or
time delays; and "Red" for major issues. Six components have
"Green" status, and four components are judged to be "Yellow"

FIGHTING IMPUNITY

COMPONENT 1 - Increasing investigative capacity of the Public
Ministry (Attorney General's Office).

-- Objective: Improve investigation and internal control capacity of
the Public Ministry.

-- Activities: Facilitate appropriate penal investigation processes
through the modernization and strengthening of technical,
scientific, and human resources offices in the Public Ministry;
produce more reliable evidence through specialized analysis; and
strengthen safeguards for the handling and storage of evidence.
Strengthen the Public Ministry's internal control and disciplinary
system by installing effective systems and mechanisms for handling
accusations, oversight, supervision, and sanctions that will foster
increased impartiality of prosecutors and staff as they carry out
their work.
-- Indicator: Number of investigations carried out by the Economic
Crimes Unit.

-- Beneficiary Institution: Public Ministry

-- Status: This component has "Yellow" status. The legendary Public
Ministry bureaucracy has been slow to comment on or approve needed
reforms, but in general the Public Ministry has supported
implementation. The refurbishing of the lab building and the
procurement of the lab equipment are about six months behind
schedule, affecting implementation and training of personnel.

COMPONENT 2 - Improving effectiveness of judicial oversight and
disciplinary system.

-- Objective: Improve the capacity of the internal control and
disciplinary systems in the judiciary

-- Activities: Strengthen the Supreme Court's Superintendence
Council through the creation of an effective system for 1) internal
controls to deter judges, judiciary branch public employees, and
related legal professionals from engaging in corrupt activities; and
2) disciplinary measures to make those involved in corruption and
misbehavior accountable for their actions.

-- Indicator: Time to process cases (reduction) and number of cases

-- Beneficiary Institution: Supreme Court/judiciary

-- Status: This component has "Green" status. The internal control
area of this component suffered from several months of initial
delays due to the contractor, and the approval of the new
disciplinary framework was delayed by the Supreme Court for three
months. However, lost time has been recuperated and the Supreme
Court has approved new comprehensive frameworks for both
disciplinary issues and internal controls. Full implementation of
the new systems will begin in February 2008. Additionally, the
Supreme Court has established and is supporting new offices linked
to transparency and accountability. Training of administrative
personnel is on-going.

COMPONENT 3 - Strengthening internal control systems and citizen
oversight.

-- Objective: Strengthen internal control systems and increase civil
society oversight that supports the Controller General's Office
(CGR)

-- Activities: 1) Adopt an efficient and transparent internal and
external control system based on standard operations management
systems and access to improved Integrated Financial Management
System; 2) create necessary organizational infrastructure to
implement a standard internal control model in the five most
important ministries; and 3) strengthen the external control
functions carried out by the CGR, incorporating standardized
financial performance into the management culture.
-- Indicator: Number of public entities implementing new procedures,
which mandate implementation of Controller General's
recommendations.

-- Beneficiary Institutions: CGR, Auditor General, and Ministries of
Finance, Education, Public Works, Health, and Agriculture.

--Status: This component has "Yellow" status. Many aspects of this
component are ahead of schedule. However, the implementation of a
standard model for internal control in five pilot ministries is
eight months behind schedule due to apparent resistance from the
Presidency to approve necessary reforms with sufficient teeth. The
GOP provided a new facility for the Auditor General's Office.
Extensive training has been completed and ethics and good governance
models have been established in four ministries.

COMPONENT 4 - Improving the integrity of public records and registry
processes.

-- Objective: Improve the integrity of public registries and
implement an integrated virtual management & registry system.

-- Activities: Network and integrate the databases of the Automobile
Registry, the Criminal Records Registry, and the Identification of
Persons Registry. Strengthen the Identification of Persons Registry
to maintain a more reliable system of personal identification.

-- Indicator: Number of agencies networked and percentage of
accessible information.

-- Beneficiary Institutions: Identifications (ID) and Supreme Court
(Auto Registry and Criminal Records Registry)

--Status: This component has "Green" status. It is supporting
several areas outside its original scope: the Civil Registry,
strengthening both the Auto Registry and Criminal Records registries
(not just integrating the databases),and incorporating a new
passport system. Progress has occurred in the Auto and Criminal
Records registries. A new ID/passport system was delayed six
months due to difficulties in reaching consensus with the GOP on the
scope of the effort. However, the parties finally the terms and a
major competitive procurement to install the new system is now
underway.


COMPONENT 5 - Increasing legislative oversight of budget execution.


-- Objective: Improve capability of Congressional oversight of
public budget expenditures

-- Activities: 1) Improve the efficiency and transparency of
Congress to analyze and oversee budget expenditures by public
entities; 2) make information more accessible to the public in order
to promote citizen oversight; and (3) establish mechanisms that
promote coordination between Congress, other branches of government,
the CGR's Office, and interest groups from civil society on public
budget oversight.

-- Indicator: Number of public agencies utilizing new budget
expenditure reporting structure subject to Congressional oversight

-- Beneficiary Institutions: Congress, CGR and 5 ministries

-- Status: This component now has "Green" status. It started five
months late due to a lack of Congressional participation; USAID
issued a stop-work order and a change in some of the congressional
leadership has since markedly improved political will and
participation. Since June 2007, the Congress has significantly
improved its performance. Training of Congressional staff and
design of budget expenditure reporting format is underway.

FORMALIZING THE ECONOMY

COMPONENT 6 - Improving the efficiency of tax collection.

-- Objective: Increase operational efficiency and transparency of
government tax authority


-- Activities: Simplify, standardize, and expand use of documents
verifying sales and relocation of goods in order to reduce informal
business transactions and increase tax payment compliance.

-- Indicator: Reduce to 35 percent the shortfall in value-added tax

-- Beneficiary Institutions: Ministry of Finance- Tax Authority

-- Status: This component has "Green" status. Tax compliance teams
have been selected and trained and have been actively implementing
activities such as simulated purchases to determine compliance with
tax regulations. Court-ordered temporary suspensions of
non-compliant businesses began in early October.

COMPONENT 7 - Strengthening border control and customs enforcement;


-- Objective: Strengthen border and customs controls

-- Activities: Aid Customs in the development of an agile border
patrol unit that will deter the smuggling of goods and disrupt the
supply chain that keeps the corrupt and informal economy going. This
will be accomplished by improving (1) land and river border
patrolling, and (2) the monitoring of goods being transported within
the national borders, through a system of surveillance, control, and
repression that will deter the smuggling of contraband.

-- Indicator: Increase value of Customs' seizures to USD 6.5
million


-- Beneficiary Institutions: National Police, Armed Forces, Customs,
Public Ministry

-- Status: This component has "Yellow" status. The MCA-supported
special customs unit has conducted over 150 operations this year,
seizing approximately $5 million worth of contraband. Since July,
activities have been slowed, and per diem payments suspended pending
results of an internal GOP investigation of travel voucher fraud.
This component has also suffered from poor functioning of the
Customs Investigative Unit (CGIA).

COMPONENT 8 - Improving internal investigation capabilities in
Finance, Tax, and Customs

-- Objective: Increase the Ministry of Finance's internal
investigative capacity

-- Activities: Develop and strengthen: 1) the Internal
Investigative Unit of the Ministry of Finance tasked with
investigating alleged acts of corruption within the ministry; 2) the
Investigative Unit of the Tax Authority tasked with investigating
tax evasion and fraud; and 3) the Investigative Unit of Customs.
This will be done by assuring that they have clearly defined roles
and responsibilities, as well as all necessary operations manuals
(i.e. personnel, policies, procedures, etc). The Program provides
support in training, equipping units with adequate office equipment,
investigation systems, computer hardware and software, vehicles,
technical assistance for initial investigative activities, public
awareness campaigns to encourage compliance with the law and
reporting of corrupt actions and establishing a hotline for receipt
of anonymous reports of internal corruption.

-- Indicator: Submit 13 corruption cases correctly to the Public
Ministry for prosecution

-- Beneficiary Institutions: Ministry of Finance, Tax
Sub-secretariat, Customs

-- Status: This component has "Green" status. Two of the three units
are working well and have already surpassed program end targets in
terms of cases investigated, properly prepared and sent to the
Public Ministry's office for prosecution. The performance of the
Customs Investigative Unit, however, has lagged and given the number
of Unit personnel who have not passed re-vetting, will likely need
to be re-constituted.

COMPONENT 9 - Easing legal business registration.

-- Objective: To facilitate the legal establishment of new
businesses, and the regularization of unregistered businesses, by
reducing the time, cost, and complexity of registering a business.

-- Activities: Facilitate the legal establishment of new businesses,
and the regularization of unregistered businesses, by reducing the
time, cost, and steps of registering a business.

-- Indicator: The number of days it takes to register a business.
Baseline is 74 days and target is 36 days.

-- Beneficiary Institutions: Institute of Social Services, Ministry
of Justice and Labor, Ministry of Finance, Ministry of the Interior
(Migrations),Supreme Court, Ministry of Industry and Commerce, and
Asuncion City Hall

-- Status: This component has "Green" status. The program-end
objective of this component has been met. Average time to open a
business has been cut by more than half, now 25 days on average, and
costs have been reduced significantly. Efforts now focus on
encouraging greater use of the system, making use of the system
mandatory. The GOP has its own resources for this although the
contractor is still providing technical advice.

COMPONENT 10 - Promoting investment in "Maquilas".

-- Objective: To promote the installation of maquilas and the
formalization of Paraguayan firms through the maquila regime.

-- Activities: The objective of this component is to promote the
installation of foreign maquiladoras and the formalization of
Paraguayan firms through the maquila regime. The activities for this
component will revolve around setting up a system to promote
investment to replace informal economic activities. An elite corps
of promotional agents working under CNIME's direction is deployed to
seek potential investors.

-- Indicator: Number of Maquila enterprises installed (with approved
programs). Baseline is 38 and end target has been established at

53.

-- Beneficiary Institutions: Ministry of Industry and Commerce
(Maquila Council/CNIME)

-- Status: This component has "Yellow" status. Two maquilas have
been approved and are in the process of installation, four are
registered, and six are preparing a proposal. An additional 15 have
shown solid interest. The process to get approval is cumbersome.
We are talking with the GOP to provide assistance to streamline the
process.



5. COMMENT: Paraguay's program performance and its steady progress
on key MCA scorecard indicators is commendable. The gains are all
the more impressive given the degree of difficulty inherent in
tackling Paraguay's systemic corruption challenges, and that the
country is in the midst of national elections scheduled for April

20. However, much more remains to be accomplished, both within the
Threshold Program and beyond on other key anti-corruption
bellwethers if Paraguay is to qualify in the future for a possible
an MCA Compact. The current MCC and interagency discussions on a
possible Stage II for Threshold Country Programs is vitally
important to Paraguay and strongly linked to our mutual interest in
MCA Compact qualification. Post will share its views Septel in
support of a proposed Stage II Threshold program for Paraguay. END
COMMENT.