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 -------------- SUMMARY -------------- ¶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. -------------- IMPRESSIVE RESULTS AT MID POINT -------------- ¶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. -------------- STATUS BY COMPONENT -------------- ¶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.