Bolivia - Public Financial Management Operation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4555-BO MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT EQUIVALENT TO US$11.5 MILLION TO THE REPUBLIC OF BOLIVIA FOR A PUBLIC FINANCIAL MANAGEMENT OPERATION PROJECT May 6, 1987 This document has a restricted distribution and may be used by recipients only in the performance of their offical duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT Currency Unit - Bolivian Peso ($B) - until 12/31/86 = Boliviano (SB) - after 01/01/87 $b 1,923,000.00 = US$ 1.00 - at 12/31/86 Sb 2.00 = US$ 1.00 - at 03/31/87 SDR 1.00 - USS 1.278 - at 03/31/87 US$ 1.00 - SDR 0.113 - at 03/31/87 I FISCAL YEAR January 1 to December 31 ABBREVIATIONS BAB - Banco Agricola de Bolivia BCB - Banco Central de Bolivia BANEST - Banco del Estado BAMIN - Banco Minera de Bolivia CGR - Contraloria General de la Republica COFADENA - Corporacion de las FF.AA. para el Desarrollo Nacional COMIBOL - Corporacion Minera de Bolivia ENDE - Empresa Nacional de Electricidad ENFE - Empresa Nacional de Ferrocarriles ENAF - Empresa Nacional de Fundiciones ENTEL - Empresa Nacional de Telecomunicaciones FONEM - Fondo Nacional de Exploracion Minera INE - Instituto Nacional de Estadistica IDB - Interamerican Development Bank LAB - Lloyd Aereo Boliviano SIDERSA - Siderurgica Sociedad SAFCO - Sistema de Administracion Financiera y Control UNDP - United Nations Development Program USAID - United States Agency for International Development YPFB - Yacimientos Petroliferos Fiscales Bolivianos  FOR OF"ICIAL USE ONLY PUBLIC FlIAZICIAL tAlAGUE OPERATION CREDIT AND PROJECT SUMIARY Borrower: Government of Bolivia Executing Central Ministries, Controller General's Office, and Central Agencies: Bank of Bolivia Amount: SDR 9.0 million (US$11.5 million equivalent) Terms: Standard IDA terms Eiancig Plan: Government - d,400 8,4001/ IDA 9,450 2,050 11,5007 IDB/UNDP (parallel) 1,510 90 1,600 USAID (parallel) - 3,060 3,060 Total: 10,960 13,600 24,560 Staff ApQraisal Report Nb. 665t-BO 1/ Less than 4% of Government contribution, for staff and facilities, is incremental. Thi document has a restricted distibuton 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.  MEMNORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DVELOPMENT ASSOCIATIO TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO BOLIVIA FOR A PUBLIC FINANCIAL MANAGEMENT OPERATION 1. The following report on a proposed developmenc credit to Bolivia for SDR 9.0 million (US$11.5 million equivalent) is submitted for approval. The proposed credit, on standard IDA terms, would help finance a Public Financial Management Operation. 2. Background. When the Paz Estenssoro Government took office in August 1985, it adopted a bold economic reform program to control inflation, cut fiscal deficits, restore external balances, improve the efficiency of a reduced public sector, and create the conditions for private sector growth. The record of the Government's first 20 months in office is extraordinary. With incisive stabilization policies in place, Government now is addressing institutional constraints which chreaten to undermine full implementation of the economic reforms and impede efficient resource mobilization and use. Actions have been taken and planned to improve public sector performance at the center and in major public enterprises, with IDA support. A Government priority is to install basic cash management, budgetting and control systems and capabilities in the main ministries and public entities; these moves are prerequisites for effective financial management in Bolivia. Another priority is implementation of the 1986 tax reform, crucial if stabilization measures are to be maintained and growth resumed. The tax reform embodies: major simplification, with a focus on value added and wealth; use of the banking system network for collections, which has been tested in Bolivia, proven successful elsewhere In Latin America and encouraged by IMF; and more effective auditing and non-compliance actions. With this new regime, a lean kvernment tax administration is being mounted under the new Ministry of Taxation. A third institutional reform area encompasses major improvements in the banking system, to establish a sound framework for monetary management and financial intermediation. The Government has initiated this reform with a reorganization of the Central Bank, to limit its role to central banking functions, reduce staff to efficient levels, install sound accounting and i.ternal central systems, and establish solid banking inspection. After ..atensive preparation, the Central Bank re-zganization was initiated in February 1987. . 3. Project Objectives. The proposed Bolivia Public Financial .'anagement Operation (PFtFO) aims to improve efficiency of resource mobilization and use, by implementing programs to improve organization, staff and systems in three key areas: public financial administration and controls, tax administration, and the banking system. Substantial technical support in the development and initial implementation of these three programs is being provided under a US$1.5 million IDA-financed Project Preparation Facility (PPF) advance for the proposed operation. The PFMO is designed to achieve tangible performance improvements, while laying the foundations for  institutional reforms over the medium term. In the two principal years of project implementation, reliable and timely financial administration and control systems and a core of qualified staff would be functioning in the most important ministries and public entities. In tax administration, the program aims to have the new tax regime functioning successfully, with organizational reforms made, and efficient systems installed for all taxes. In the banking system, the PFMO would support improvements in Central Bank organization, procedures and capabilities in accounting, banking inspection, monetary policy, and debt management, and implementation of agreed restructuring programs in the two large public development banks. 4. Project Descriptiou. The PFMO consists of three mutually reinforcing but separate components. (1) The Financial Administration and Control (SAFCO) component incorporates substantial technical assistance in developing norms, installing basic systems and training core local staff to provide timely and reliable financial information, efficient administration, and effective controls in key ministries and 12 major public entities. Formal and on-the-job training should result in at least 300 qualified, well-paid staff assigned to the institutions covered under the first PFMO. Entities covered are expected to have reliable, compatible and timely accounting, cash management, and programming and budgetting systems in place; budget and project execution capabilities would have been strengthened substantially. This program will be overseen by the SAFCO Council, comprising the Ministers of Planning, Finance and Taxation, the Controller General of the Republic, and other members satisfactory to the Association. A full time SAFCO Executive Secretariat will coordinate day-to-day operations. IDA would finance consultants, analysts, fixed-term appointments to the Executive Secretariat, and foreign equipment and materials. USAID, under parallel financing arrangements, has committed to finance US$3.0 million in incremental local currency costs. Government would fund base salaries and facilities. (2) The Tax Administration component would be managed by the Ministry of Taxation. The 18 month action program deals with organizational improvements, and installation of well functioning systems for tax collection, compliance, auditing and statistics for the new tax regime. IDA would fund the fixed contract local team, and consultants for organizational improvements, auditing and statistics. IDB and UNDP, under parallel financing, will continue to fund consultants for tax collection and compliance systems, with US$1.6 million in additional financing. (3) The Banking System componePt supports organization, staffing and systems improvements in the Central Bank, needed for successful completion of its recent reorganization, and technical assistance through the Central 3ank in implementing agreed action programs to restructure Banco Agricola and Banco del Estado. A detailed action program for restructuring the two development banks acceptable to IDA, will be finalized by January 1, 1988. For all other project elements, detailed implementation plans, Year I action programs and terms of reference have been agreed in substance with Government implementing agencies and parallel financing sources. 5. Rationale for IDA Involvement. The Government of Bolivia and IDA attach top priority to: (a) strengthening key institutions to enable execution of reforms, economic management, and efficient operations of a smaller public sector; and (b) establishing the bases for reactivating the economy, through financial sector reforms, internal and external resource  -3- mobilization, and restructuring of productive capacity. The PFMO would sujpport key first steps in building the organization, staffing and systems needed to achieve these objectives. Substantial IDA support in improving public financial management is warranted at this time. The measures are needed urgently, the Government's economic team is committed to the agreed programs for institutional reform, and leadership for each component is strong. IDA is playing an active role in coordinating donor support in the public financial management area to ensure coherent approaches in the three areas. The IMF has provided important technical inputs in preparing the t Central Bank reorganization. The IMF Accounting Advisor to the Central Bank is the head of the IDA-financed accounting team. The new IMF Resident Representative to Bolivia is a leading Latin American central banker, which will facilitate IMF technical support for the Banking System component of the PFMO. Arrangements have been made to ensure that this technical advice and close coordination with the IMF will continue during project implementation. The PFMO supports institutional reforms in the banking system, which form a substantial basis for an IDA financial sector loan, under preparation. These reforms are designed to improve Central Bank operations, banking inspection systems and capabilities, and initiate restructuring of the development banks. As such, the PFMO provides technical assistance to institutional reforms in the financial system, complementing financial sector policy reforms to be supported under the proposed financial sector adjustment loan. 6. Agreed Actions. As conditions of effectiveness, (a) the SAFCO Council and Executive Secretariat would be established, with composition and functions acceptable to IDA; (b) the Borrower will have established satisfac- tory contractual arrangements with tho Central Bank of Bolivia to carry out the banking system component; and (c) a satisfactory administrative services contract will have been signed with UNDP-OPE. Implementation programs, detailed Year I action plans, TORs, and financing plans have been agreed in substance for all components. For each of the three components, respectively, tne following disbursement conditions have been agreed: (a) for SAFCO, establishment of SAFCO satisfactory to IDA, compliance with disbursement conditions for USAID local currency financing; (b) for each component, submission of an acceptable Component Implementation Program and Year I Action Plan. An agreed program for restructuring the two large development banks will be finalized by January 1, 1988. All procurement and consultant selection will follow Bank guidelines. ID and USAID both have confirmed the imounts and timing of needed parallel furns. Completion of necessary arrange- mevL.s for IDB funding of the tax administration component are required not later than one year after credit effectiveness of the IDA Credit; IDB funds are expected to be available by July 1987. A tentative list of the ministries and entities for coverage under the SAFCO program was discussed during negotiations; final selection will be made by the SAFCO Council, and will need to be acceptable to IDA. Arrangements for annual action programs, reporting and monitoring have been agreed. 7. Justification. The institutional reforms and systems improvements incorporated in the proposed Public Financial Management Operation are essential to sustaining the early successes of the Government of Bolivia's new economic policy. During the project period, central ministries and the 12 public entities which account for about 60% of public financial flows would  -4- have basic, reliable and timely accounting, cash management and budget systems in place, and a core of qualified staff managing and operating these systems. The reforms in tax administration are expected to result in dramatic increases over historically poor tax collections. The major reorganization being implemented in the Central Bank and planned for the main development banks- combined with financial policy measures taken and planned--are expected to rationalize and strengthen the banking system substantially. Each of these programs is expected to have concrete impact in improving the efficiency of resource mobilization and use. 8. Risks. The project is designed to improve the depth and profession- alism of public financial management, and to reduce the vulnerability of the civil service to political swings. However, the success of implanting SAFCO, restructuring the banking system, and installing improvements in tax adminis- tration depend on the strong leadership presently responsible for each component. Thus, the operation is vulnerable to major shifts in politics or leadership. These risks have been reduced by: focussing on basic changes over a relatively short period; agreeing on detailed blueprints for each component with implementation already initiated; and creating stable organizational mechanisms, such as CONSAFCO and the SAFCO Executive Secretariat, to protect the technical integrity of the program from political swings. The operation has been tailored to reflect implementation constraints and to focus on basic building blocks during the initial two-year period. 9. Recommendatlons. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D. C.  -5- Schedule A ESTIMATED COSTS FOREIGN LOCAL TOTAL uS $O-- i) Financial Administration 5,910 8,100 14,010 and Control System ii) Tax Administraticn 2,12U 2,530 4,650 iii) Banking System Reforms 1,330 2,620 3,950 vi) Projecc Preparation 1,150 350 1,500 v) UNDP-OPE Administration 450 - 450 Total Project Cost: 10,960 13,600 24,560 Financing Plan: Government - 8,400 8,4001/ IDA 9,450 2,050 11,500 IDBjUNDP (parallel) 1,510 90 1,6002/ UJSAID (parallel) - 3,060 3,060X/ Total: 10,960 13,600 24,560 i/ Government contribution, which is for staff and facilities, is not incremental. 2/ I08 parallel funding for Tax Ad..inistration Component. USAID parallel funding for Financial Administraton and Control (SAFCO) Component.  -6- 9v du a hoject 31a t f t t Ih d iumttemL ciitt Qa stimli Other Total Cost _ (