Bolivia - Second Public Financial Management Operation Project

cz~~~~1-/ c- ;60-, 1)cnmeut of The World Bank FOR OMCIAL USE ONY 8til'.k:ll'+.M, Ax. ::D";A.- .' ,li.AT 'l ' : R epNot. P-5557-BO MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 8.5 MILLION EQUIVALENT TO THE REPUBLIC OF BOLIVIA FOR A SECOND PUBLIC FINANCIAL MANAGEMENT OPERATION JUNE 4, 1991 This document has a restricted distribution and may be used by redpients only i the performance of their offcial duties. Its contents may not otberwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS Currency Unit - Boliviano (Be) US$1 Sb 3.45 (February 1991) WEIGHTS AND MEASURES 1 hectare (ha = 10,000 square meters (m2) 2.47 acres (a) 1 kilogram (kg) 2.205 pounds (lbs) 1 metric ton (m ton) = 1,000 kg ABBREVIATIONS CGR - Contraloria General de la Rep6blica (Office of the Comptroller General of the Republic) CONSAFCO - Consejo del Sistema de Administraci6n Financiera y Control (Government Financial Administration and Control Board) GAO - General Accounting Office GOB - Government of Bolivia IDB - Inter-American Development Bank MOF - Ministry of Finance PFMO - Public Financial Management Operation (Cr.1809-BO) POA - Programa Operativo Anual (Annual Operational Program) SAFCO - Sistema de Administraci6n Financiera y Control (Financial Administration and Control Systems) SAFCOLaw - Law on Financial Administration and Control Systems USAID - United States Ageucy for International Development  FOR OFFICIAL USE ONLY EOLIVIA PUBLIC FINANCIAL MANAGEMENT OPERATION II Credit and Proiect Summary Borrowers Republic of Bolivia Beneficiary: Ministry of Finance and Comptroller General of the Republic aM29nt: SDR 8.5 million (US$11.3 equivalent) Terms: Standard IDA terms, with 40 years maturity Financina Plant Government of Boliviat US$ 11.0 million* IDA: US$ 11.3 million Total USs 22.3 million * Counterpart funds generated from USAID's Economic Support Fund Economic Rate of R=turnt Not applicable Staff Aywraisal H=r,t: No. 9558-BO M2: IBRD NO. 16591 This document has a restricted distribution and may be used by r-cipients snly in the performance of their oMcial duties. Its contents may not otherwise be disclosed withow. World Bank authorization.  INTERNATIONAL DEVELOPMENT ASSOCIATION MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE GOVERNMENT OF BOLIVIA FORA SECOND PUBLIC FINANCIAL MANAGEMENT OPERATION 1. The following memorandum and recommendation on a proposed credit to the Government of Bolivia for SDR 8.5 million (USS11.3 million equLvalent) is submitted for approval. The proposed credit would be on standard IDA terms with 40-year maturity and would be central to more efficient use of Bolivia's scarce fiscal resources, eliminating inefficient public investments by making transparent the financial results of the administration in general and of public enterprises and investment projects in particular. 2. Bagkoround. Bolivia"s itconomic crisis, which culminated in hyperinflation of 24,000 percent in mid-1985, was fueled by the virtual nonexistence of a public financial management system, which permitted an explosive growth of the fiscal deficit and spurious financing of public expenditures. The multiplicity of antiquated and conflicting legal provisions governing public financial management resulted in an arbitrary budgetary process; a complete vacuum of accounting systems resulted in the absence of reliable financial data on the expenditures and performance of public institutions; cash and debt management were based solely on the availability of cash; and the audit control function resulted in external pro-controls in which auditors interfered with the entity's managerial process. The Paz Eutenesoro Government in September 1985 adopted bold reforms designed to control inflation, cut the fiscal deficit, and restore external balance. In parallel, it began a reform process of public financial management to establish the financial information, administration and control systems critical to efficient management and controlled use of public resources. 3. IDA assistance in public financial management began in 1984 and culminated in the approval of the Public Financial Management Operation (PFMO - Cr.1809-BO) in December 1987. The PFMO, which is now fully disbursed, was successful in establishing the overall legal framework and the foundation within the central government for an integrated financial administration and control system. First, the leaal lorovisions governing public financial management were replaced by a single comprehensive statute, The Financial Administration and Control Law (SAFCO). A budget formulation process based on the modern participatory approach was designed with manuals and standards for program-based budgeting. The formulation process, however, remains over centralized, problems have materialized in use of the new coding and classifications, and the Budget Subsecretariat in the Ministry of Finance (MOF) lacks capacity to monitor budget execution. In the area of Accountina, the General Accounting Office (GAO) was established under MOF to promulgate accounting standards throughout the public sector. A short-term Emergency Program, introduced under PFMO, at present provides aggregate statistics for the non-financial public sector, but a more permanent integrated accounting system that has been created needs to be disseminated more widely and harmonized with other existing systems. In the area of cash manaaement, the responsibility has been consolidated into the Treasury under MOP to transform the task into a management of budget execution. Further  work, however, is necessary on forecaoting cash flows, and cash management procedures need to be extended to the decentralized institutions. In the area of auditina, the SAFCO Law formally abolished the Comptroller-General's ox ante control functions, thus ridding the system of its previous built-in incentives for corruption. However, experienced auditors are in short supply, and external control functions can be performed only when proper accounting systems are in place. Internal audit guidelines have been produced, but further training is required in their use. 4. These reforms, though constituting only the first phase of improvements to the system, have had measurable impact on public financial management, including (i) eeduction of the budget deficit from 7.5% of GDP in 1987 to 0.8% in 1988 (enabling attainment of agreed IMF targets for 1989 and 1990); (li) production of budgets that reflect Government's priorities in terms of expenditure cPilings and entities's operational goalas (iii) public investment decisions based on financial analysis of requesting entities; and (iv) closer monitoring of wage bill increases by the Cabinet. The aggregate statistLces for the non-financlal public sector produced under the Emergency Program have been crucial for public expenditure planning and control and helped Bolivia to reach an agreement with the IMF. 5. in spite of the major progress achieved under PFMO, additlonal work Ls needed to: (L) finalize the integration of the accounting system at the central level; (ii) expand comprehensive accounting reforms to a select number of decentralized public entities; (iii) broaden the scope of the financLal administration and control systems at the center and disseminate them to benefit decentralized '.nstitutions and local governments; and (iv) incorporate the remaining non-financial public entities into the now financial management and control system. 6. Rationale for IDA Lendino. IDA's involvement in the project is a logical extension of Lts role in assisting the Government of Bolivia (GOB) to carry out its strategy to resume an acceptable rate of growth. Apart from the basice of maintaining macroeconomic stability and creating incentives for prLvate Lnvestments needed for growth, the main objective of the G08 agenda, and hence IDA's assistance strategy, is to reorient the role of the state toward provision of social and infrastructure services required for long-term development of the country and promotion of necessary private investments, as well as to promote efficient use of public resources to achieve the objectives of the newly deflned role of the state. In this regard, supporting necessary reforms in the public sector to create efficLent, transparent, and accountable institutLonal structures and capacity is at the core of the IDA country strategy. More specifically, PFMO II aims at enhancing GOB's financial management capabilities critical for policy execution, implementing uniform and compatible guidellnes and procedures for public financial management government-wide so as to ensure a more efficient use of its scarce resoure"es. This would be achieved through: (a) expanding comprehensive accoun .ng reforms to a selected number of representative decentralized institutions; (b) broadening the scope of exlsting financial administration and control systems to the local governments and decentralized institutions; and (c) including other nonfinancial systems needed for efficient allocation of resources. The maLn objective of this effort is to create financial management and control capabilitLes at the entity level, not only wLthin the central ministries, furthering financial dlscipline throughout the public sector. Furthermore, the proposed project would strengthen the capaclty  of the Comptroller General of the Republic to enforce accountability for results in the exeroise of its public responsibilities. 7. if succoeoful, this second IDA-assisted operation would go a long way in strengthening GOB's capacity to manage efficiently its scarce resources and at the same tlme increase accountability for cost-efflcient results in the public sector. Thie would contrlbute to a leaner more efflcient state better able to facLiltate and stimulate private sector development. However, publlc financial management is not a function which can be permanently impro-ed through a technical effort and good will in the short term. Its dynamlc requires permanent attention and enforcement on the part of future BolLvLan governments before the current admLnistrative culture can progressively absorb accountabllty principles and procedures for the longer-term. It is expected that other international donors, such as USAID and IDB and other bilateral assistance, would also help GOB progress further in the future. IDA has expressed a longer-term commltment to the continued improvement of public flnancial management in Bolivia. 8. Proiect Obiectives. The objective of the Project Ls to improve the efficiency, effectiveness and transparency of the Borrower's resource management system through: (i) institutionalLzation of program-based, cash, debt and other resources, management and auditing procedures in eligLble public entities and decentralized Lnstitutions; (il) enhancement of the institutional capacity to implement such procedures, both at the Borrower's ceatral and local government levels through the definition of standards and procedures, in particular, the publlc disclosure, publicity, accountability and obligations of public servants, that would enforce provisLons of the SAFCO Law; (i$i) strengthening the capacity of COR and provision of ex-post control functLons in the Sorrower's government, necessary for the enforcement of accountability for results in the public sector; and (iv) development of skilled manpower to sustain such procedures. Ultimately, the proposed project would contribute to enhancing the efficiency of Lnternational donors' assistance and government' s institutional capacity for the longer-term. 9. Project VescrintLon. The project would include three components: (a) financial manaaement to modernize accounting, budgeting, cash management in Treasury, and government auditing norms and procedures at the central administration level, including manuals and guidelines, and their disseminatLon at all other levels; (b) standards and reaulatio, including review and/or drafting of regulations called for by the SAFOO law in personnel management, procurement, operation-programming and the rationalLzation of the non-financial public sector; and (c) tXaLnLna to ensure a flow of high- and mid-level publLc servants and other professionals competent in modern financial management and auditing, responsible for the operation, dLssemination, enforcement, and sustainability of the newly established norms and procedures. The project would be implemented by three separate agencies, namely MP, CGR and the Training Directorate in OCR, with overall coordination and directlon by ar. existing project management unit under the responsibility of CONSAFCO, the also existLag policy-making board for Bolivia financial administration and control, including the Ministers of Planning and Coordination, Finance, the Comptroller General, the Central Bank President, and the Accountant General of the Republic. 10. Agreements Reached. The following agreements have been reachedt A. overall Projects (a) the SAFCO Law will not be waived, abrogated or suspended for the duration of the project; (b) any modifLcatlon to the agreed structures  of tho Ministry of Finance and the Contraloria General de la Republica would be made in consultation with IDAI S. Implementatigns (c) CONSAFCO would maintain for the duration of the project, its current composition (para 9), its Project Management Unit and Project Director; (d) counterpart funds would be made available by GOB through USAID's Economic Development Funds and this would be included in annual government budgets; (e) that for the staffing of the 85 line positions in MP and 23 within CGR included in the project, applicants would be selected in accordance with norms and procedures acceptable to IDAt (f) biannual reports will be provided in February and August of every year, including information on: (i) the number of entities lncorporated into the integrated system, producing financial statements and reporting these to the GAO, (ii) the number of entities producing their own budget submissions, and (iii) their corresponding percantage contribution to the budget; (g) a summary of the biannual reports would be presented tc Congress once a year in an integrated fashion, before it reviews the budget, and would include a progress report on implementation of the SAPCO Law; (h) a first annual work program (POA) for the remaining months of 1991 has been agreed, based on what had been achieved to date in each of the proposed program items; subsequently the POA would be submitted to IDA by November 15, of each year for an exchange of views on what is programmed as compared with what was achieved; (i) the Emergency Program staff would be absorbed by the end of June 1992; and (j) exchange of views between GOB, IDA and USAID in annual tripartite evaluations of achievements should be carried out as a basis for reaching an agreement on the following year POAI the second such review (1992) will be a comprehensive mid-term review to analyze achievements against agreed upon measurable performance indicators and to formulate corrective measures if necessary to improve implementation and outputs; (k) the project and special accounts would be audited on an annual basis by an independent auditing agency, acceptable to IDA, and would be submitted to IDA within six months of the close of each fiscal year; C. Budaetina: (1) program- based budgets to be fully operational at central government ministries and major public enterprises by the end of 1992 and by Regional Development Corporations by the end of 1993; D. Cash Nanaaement and Treasurys (m) changes in procedures and structure of the Treasury would be achieved by the end of 1992: (n) the private commercial banking network for cash transfers would be used starting no later than June 1992; (o) a timetable, acceptable to IDA, for elimination of subtreasuries would be submitted by the end of 1991 and actual implementation of the agreed timetable achieved by the end of 19921 B. agountina: (p) GOB would complete the developrient of an accounting system and implement it for each group of entities as follows: (i) not later than June, 1993 in the 14 representative decentralized institutions; (ii) not later than June, 1994 in the 116 decentralized institutions; (iii) not later than December, 1994 in the 58 decentralized institutions included in the Manual for Decentralized Institutions; (iv) not later than June, 1994 for the adoption of existing Guidelines for Public Enterprises by 50 enterprises of a smaller size; and (v) not later than December, 1994 for the development and implementation of simplified versions of accounting, budgeting, and cash management systems in 90 representative smaller local institutions (provinces, hospitals, educational centers and airports) F. Auditina: (q) the Contraloria General de la Republica would have established the Technical Programming Office, the Legal Affairs Office and the Office of the Deputy Comptroller and carried out other organizational adjustments by the end of 1993; (r) an annual audit plan would be agreed with IDA by the end of December yearly, so as to carry out systematic external audit of the public sector central level entities by the end of 1993 and thereafter expand the coverage of public sector at the decentralized levels; (a) the Contraloria  General do la Republica will inform IDA of the key results of the "special examinations" along with the response that the Government intends to give to the corresponding findings; (t) the Deputy Comptroller General would have extensive training and international experience in the application of general accounting principles, auditing standards and management; and the General State Accountant would have a strong background in management rystems for government financial management; and (u) neither the Offices of the Comptroller General or of the State General Accountant would cease to be independent entities throughout the duration of the project. 11. Benefits and Risks. The main benefit of the project is that it will assiest the Government to institutionalize the public financial management system throughout the public sector to (a) improve the budget formulation process based on coherent uniform public accounting and control systems; (b) provlde instruments to integrate the overall financial status of the public sector; (c) enhance the capacity to hold public servants accountable for their decisions and actions through ex-post audit controls; and (d) develop a cadre of skilled financial and audit experts to operate the system. 12. Three major project risks are (i) high turn-over of staff; (ii) ad hoc changes in the financial management procedures; and (iii) lack of consistent application of information generated by the SAFCO system to the Government's decision-making process. The staff turn-over, caused mainly by low salaries and high private sector demand for skilled manpower (e.g. accountants, auditors), is being addressed through the establishment of the Public Sector Management Scheme where civil service conditions of pay and employment are being adjusted to compete with the private sector. In regard to the ad hoc changes in orocedures, it was agreed with the Government during the negotiations that all institutional and procedural changes regarding the SAFCO system would be made after consultation with IDA. While the largely political risk regarding the Government's possible disregard of SAFCO-generated information in its decision- making process cannot be entirely mitigated, specific actions would be taken to reduce this possibility. It was agreed at negotiations that (a) annual reports would be submitted to Congress on the progress of implementing the SAFCO Law, thus ensuring that Government policy-makers would be aware of the available information; and (b) satisfactory review of project implementation and of the following year's work program on an annual basis would be a condition of continued IDA financing. 13. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreements of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President By Wilfried P. Thalwitz Attachments Washington, D.C. June 4, 1991  ICHD1PLA Page 1 of 1 BOLIVIA PUBLIC FIBNACIAL MANAGNMENT OPERATIOX II Butimatdd Costs and linancina Plan Estimated Costs$ a/ Loal ForpALn TotAl ----US$ million---- Financial Management 3.8 5.4 9.2 Standards and Regulations 0.2 0.8 1.0 Training 2.0 1.4 3.4 Line Positions 3.0 -- 3.0 Project Management 0.3 0.7 1.0 Management Fee (4% of IDA) -- 0.4 0.4 PPF Refinancing 1.5 1.5 Base Costs 9.3 10.2 l9. Physical Contingencies 0.3 0.3 0.6 Price Contingencies 14 0.8 2 Total Project Costs 11.0 11.3 22.3 Financina Plant Looal FZ291M Total ----US$ million---- Government 11.0 ---- 11.0 b/ IDA 11.3Ll . ,Total 11.0 11.3 22.3 a/ The project is exempted from taxes and duties b/ Counterpart funds generated from USAID economic support funds. Note: Due to rounding totals may not always add.  s5=DULR Page I of 2 ROLIVIA PUIBIXC rINANIAL ANWGEMENT O-PERATION II Amounts and Method3 Q1-fp2MXufeImelt (USS million) Proiggt Element IC LC others otal Consultant Services (more than $20,000) 9.3 9.3 (7.1) (7.1)a/ Consultant Services (less than US$20,000) 2.6 2.6 Training 3.0 3.0 (1 (1.-5) Equlpment 0.4 0.5 0.3 1.2 (0.4) (0.5) (0.3) (1.2) Line Positions 3.0 3.0 Procurement Agent 0.4 0.4 (0.4) (0.4) (0.4) (0.5) (9.3) (10.2) -------------------------------------- Note: Figures in parentheses indicate IDA financing. Due to rounding, totals may not add.  SCHEDULE a Page 2 of 2 NaLZfzA PURLIC FINANCIAL MANAMEMENT OPEBATION 1 Allocation of Credit Proceeds Ca*eoorv Crgdit A,ount Percent (US$000) Fnn2 1. Consultant Services 6,290 100 2. Training 1,400 100 3. Office Equipment 860 100 4. Incremental Salaries 0 0 S. operating Coats 1,250 100 6. PP? Refinancing 1,500 100 TOTAL 1L,300 Estimated Disbursemnts of IDA Credit (USS million) IDA FISCAL YEAR 1992 1993 1994 1995 1996 1997 Annual 2.9 2.7 2.0 1.8 1.3 0.6 Cumulative 2.9 5.6 7.6 9.4 10.7 11.3  Page 1 of 1 PUBLIC EINANCIAL MONAGMRNT OPBRATIoN HU Timetable of Key Proiert Proesgaing Rvents Time taken to prepares 11 months Prepared bys Ministry of Finance and comptroller General of the Republic with assistance from IFiO S' a Project Implementation Unit First IDA Mission: July 1990 Appraisal Mission Departure: February 1991 Date of Negotiations: May 1991 Planned Date of Effectiveness: September 1991 List of Relevant PCRe and PPARs: None  Schedule D Page 1 of 2 STATEMENT OF BANK LOANS AND IDA CREDITS IN BOLIVIA (as of December 31, 1990) a CC-- --------------------- --e --------------- ---------------