Bolivia - First Public Financial Management Operation Project

Documenl of The World Bank FOR OFFICIAL USE ONLY ReportSo. 15159 PKOJECT COM.PLETION REPORT BOLIVIA PUBLIC FINANCIAL MANAGEMENT OPERATTON I iCREDIT 1809-BO) DECEMBF.R 11, \995 Public Sector Modernization and Private Sector Development Division Country Department III Latin america and the Caribbean Region This document has a restricted distribution aod may be used by recipients ody in tbe performance of their official duties. Its conteots may not otherwise be disclosed withoul World Bank authonzation.  Currency Equivalent Currency Unit: Boliviano:($B) $84.77 = 1 US$ (as of 06/09/95) Fiscal Year January I to December 31 Abbreviations AGS: Accountant General of the State BAB: Banco Agricola de Bolivia (Agricultural Bank of Bolivia) BANEST: Banco del Estado (State Bank) BCB: Banco Central de Bolivia (Central Bank of Bolivia) CGR: Contraloria General de la Rephblica (Controller General of the Republic) CONSAFCO: Council for SAFCO DGRI: Direcci6n General de la Renta Intema (Internal Revenue Department ) EMSO: Economic Management Strengthening Operation FSAC: Financial Sector Adjustment Credit GOB: Government of Bolivia IDA: International Development Agency IDB: Interamerican Development Bank ILACO: Implantaci6n de la Ley de Administraci6n y Control (Implementation of the Law of Administration and Control) IMF: International Monetary Fund IRD: Internal Revenue Department NEP: New Economic Program NFPS: Non-Financial Public Sector PCR: Project Completion Report PIU: Project Implementation Unit SAFCO: Sistema de Administraci6n Fmianciera y Control (Financial Administration and Control System) SAR: Staff Appraisal Report SOEC: Sistema de Informaci6n sobre Operaci6nes Efectivas de Caja (Cash Operations Information System) UNDP: United Nations Development Program USAID: United States Agency for International Development  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation December 11, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Bolivia - Public Financial Management Operation I (Credit 1809-BO) Attached is the Project Completion Report (PCR) for the Bolivia Public Financial Management Operation I (PFMO I) (Credit 1809-BO, approved in FY87), prepared by the Latin America and the Caribbean Regional Office, with an excellent Part II contributed by the Borrower. The main objectives of this SDR 11.5 million technical assistance project were to: (a) improve financial administration and control of public sector ministries, enterprises, and agencies; (b) facilitate implementation of tax reforms and strengthen tax administration; and (c) reorganize the Central Bank of Bolivia and the state-owned development banks. The overriding goal was to rehabilitate the public sector's capacity to control budgeting and expenditure, increase taxation, and improve financial intermediation as part of a wide-ranging program of economic stabilization and adjustment implemented during the latter half of the 1980s and early 1990s. The PCR notes that budgetary controls have been tightened significantly since PFMO I was approved, the share of tax revenues has increased several-fold, and the Central Bank has restructured its operations to focus on the conduct of monetary and exchange rate policy, jettisoning its involvement in promotional credit. Although PFMO I disbursed well ahead of schedule, its efficacy was blunted by delays in the passage of enabling legislation and in the establishment of key institutions, by inadequate incentives for skilled public servants leading to rapid turnover and the consequent loss of training benefits to the public sector, and by a waning of Governmental commitment to project objectives during its final stages. In a number of instances, the quality of the information generated by the new systems remains deficient and the new norms and procedures have not been widely adopted within the public sector. Credit for the successful reforms must be shared with several other Bank and non-Bank operations, including support from the IMF, IDB, USAID, and the UNDP. Based on the findings of the PCR, the project outcome is rated as satisfactory, institutional development impact as modest, and sustainability as uncertain. Bank performance is rated as satisfactory, and Borrower implementation and compliance with covenants as satisfactory. The quality of the PCR is strong in all areas, except in measuring the project's impact. For example, although the SAR provided an admirable listing of specific project outputs expected, with one exception, these are not discussed in the PCR. A follow-up operation (PFMO II, Credit 2279-BO, approved in FY91) is currently underway. An audit of both operations may be undertaken upon its closing. Attachment " This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents rmy not otherwise be disclosed without World Bank authorization.   FOR OFFICIAL USE ONLY BOLIVIA PUBLIC FINANCIAL MANAGEMENT OPERATION - I CREDIT: 1809-BO PROJECT COMPLETION REPORT TABLE OF CONTENTS Page No. Preface Evaluation Summary iii PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE 1 1. Project Identity 1 2. Background 1 3. Project Objectives and Description I 4. Project Design and Organization 2 5. Project Implementation 3 6. Project Results 3 7. Project Sustainability 6 8. Bank Performance 7 9. Borrower Performance 8 10. Project Relationship 8 11. Consulting Services 8 12. Project Documentation 8 PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE 9 1. Component A: Financial Administration and Control (SAFCO) 9 2. Component B: Tax Administration 13 3. Component C: Banking System Reform 16 PART III. STATISTICAL INFORMATION 19 1. Table I Related Bank Loans/Credits 19 2. Table 2 Project Timetable 20 3. Table 3 Credit Disbursements 20 4. Table 4 Project Implementation 21 5. Table 5 Project Costs 23 6. Table 6 Project Financing 23 7. Table 7 Project Results 24 8. Table 8 Studies Included in Project 26 9. Table 9 Status of Legal Covenants 27 10. Table 10 Use of Bank Resources: Staff Inputs 28 II. Table I I Use of Bank Resources: Missions 28 This reporl was prepared by Messrs /Mne. lit B.S. Gill (Task Manager, LA3PS); John Pollner (LA3PS) and Carmen Machicado (Consultant). I Mlessrs lKrishn.a Challa. Robern Crown and Yoshjaki Abe were, respectively, the managing Division Chicef, Project Adviser and Departmnt Director. This document has a restricted distribution and may be used by recipients only in the performance of their officialduties. Its contents may not otherwise be disclosed without World Bank authorization.   BOLIVIA PUBLIC FINANCIAL MANAGEMENT OPERATION -I CREDIT: 1809-BO PROJECT COMPLETION REPORT PREFACE 1. This project Completion Report (PCR) reviews the performance of the Bolivia: Public Financial Management Operation - I (PFMO-I) for which Credit 1809-BO in the amount of SDR 9.0 million (US$ 11.5 million equivalent) was approved by the Board on May 28, 1987. The credit became effective on December 15, 1987. Most of the project activities were completed in 1991. However, the closing date of the credit was extended, first to June 30, 1993 and then to June 30, 1994, to enable the engagement of consultants in key positions in the Ministry of Finance and the Office of the Controller General of the Republic, so as to facilitate the implementation of the Second Public Financial Management Project (PFMO-II). The project was closed on June 30, 1994 with total disbursements of SDR 8.998 million. 2. Parts I and III of the PCR were prepared by the Public Sector Modernization and Private Sector Development Division, Country Department III, Latin America and the Caribbean Region (LA3PS). These Parts were sent to Government of Bolivia (GOB) for their review and comments. Part II has been prepared by GOB. The Government used local funds, amounting to about US$ 3.2 million, generated from the USAID Economic Support Fund, to finance incremental local costs related to the Financial Administration and Control component of the project. The IDB/IUNDP provided parallel financing of US$ 1.47 million for the Tax Administration component. The IMF provided technical assistance in design and supervision of the Tax Administration and Banking System components. The draft PCR, including Part II was also sent to USAID/IDB/IUNDP/IMF for their comments. 3. The PCR is based on the Staff Appraisal Report (SAR) and the Memorandum of the President, dated Mav 6,1987; the Development Credit Agreement, dated July 31, 1987; supervision reports; internal IDA memoranda; correspondence between IDA and the Borrower; the Final Report, dated December 1990, regarding the Financial Administration and Control component produced by the concerned consultants; the Final Report regarding the Tax Administration component produced by IDBIUNDP; and interviews conducted by the IDA Mission to Bolivia in June 1994.   iii BOLIVIA PUBLIC FINANCIAL MANAGEMENT OPERATION -I CREDIT: 1809-BO PROJECT COMPLETION REPORT EVALUATION SUMMARY Background 1. In August 1985, when a new Government took office, the economy of Bolivia was in a chaotic state. Inflation in the preceding twelve months exceeded 24,000%; the official exchange rate was grossly overvalued; accumulated arrears of public external debt had reached US$1 billion (over 20% of GDP); from 1980 to 1984, GDP fell by 16% and imports, exports and investment also experienced a steady decline; on account of high inflation and weak tax administration, central tax and customs revenues fell to about 3% of GDP in 1984 and 1985. The public sector operated without budgets from 1983 to 1985 and spending was uncontrolled. The new government effectively implemented a bold macro-economic reform program. At the same time, it undertook to revamp public financial management through the Public Financial Management Operation - I (PFMO-I). Project Objectives and Description 2. The objectives of the project were to (a) improve financial administration and control of ministries and public entities; (b) enable the implementation of tax reforms and improve tax administration; and (c) improve the national banking system, strengthen the Central Bank and restructure the main development banks. The Financial Administration and Control component included the establishment of a high level Council (CONSAFCO) and its Executive Secretariat for the overall management of the financial administration and control system (SAFCO); and the design, development and implementation of effective systems for operational programmlling, budgeting, budget execution, cash and debt management, accounting, internal control, financial reporting and auditing. An important activity of this component was the "Emergency Program" that sought to provide reliable budgetary and cash flow data pertaining to the major non-financial public entities to the Central Government. The Tax Administration component sought to facilitate the implementation of tax reforms enacted in 1986 through organizational strengthening of the Internal Revenue Department and establishment of systems for taxpayer registration, tax collection, monitoring and control of non-compliance, selection of cases for audit, and preparation of tax statistics. The Banking System Reform component aimed to improve the organization, systems and capabilities of the Central Bank, especially in banking inspection, accounting and internal controls, economic research, policy, operational procedures and debt monitoring; and to restructure and strengthen two major development banks - Banco Agricola de Bolivia (BAB) and Banco del Estado (BANEST). Project Design and Organization 3. The project covered a wide spectrum of activities that were developed after detailed diagnosis of institutional constraints. It was designed to enhance accountability, transparency and efficiency; separate incompatible functions; and integrate connected activities. Although the project involved a number of government entities and international donors, suitable coordinating mechanisms were created to ensure smooth implementation. Project Implementation 4. On the whole, project implementation was satisfactory. Some bottlenecks were, however, encountered. In the Financial Administration and Control component, delays were experienced in  iv appointmenet of consultants, passage of the SAFCO law and establishment of the office of the Accountant General. In the Tax Administration component there were delays in creating a separate Ministry of Tax Collections. In the Banking System Reform component, the main deficiency was the inability to carry out the reorganization of the two development banks due to a lack of consensus on the restructuring plan. Project Results 5. Under the Financial Administration and Control component, the Emergency Program greatly enhanced the treasury's ability to manage public finances by providing valuable income, expenditure and cash flow data. The program covered almost 95% of resource flows in the non-financial public sector, by the end of the project. The SAFCO law created a modem normative framework for effective public financial management . The Ministry of Finance (MOF) and the Office of the Controller General of the Republic (CGR) were re-organized and the office of the Accountant General was created. Norms and procedures were established for budgeting, budget execution, public credit, accounting, internal control and auditing. Four finanicial managemenit computer systems were commissioned. Finally, about 3000 officials were trained in financial managemenit. In Tax Administration, the Internal Revenue Department was reorganized: divisions to monitor large taxpayers were created; tax collections were transferred to commercial banks; and systems for taxpayer registration. control of delinquents and statistical reporting were developed. Domestic tax collections increased from about 1% of GDP in 1984 to 7.8% in 1992. Under the Banking ,yslem Reform componient, the Central Bank was reorganized, its core divisions were strengthened and accounting systems were computerized. An autonomous Superintendency of Banks was created. Technlical assistance was provided for the supervision of audits of commercial banks. Sustainability 6. The conceptual foundation of the reforms supported by the project is strong and is backed by legislative and administrative authority. Therefore, the formal structure created by reforms appears to be sustainable. The project's impact on day to day financial management ma' be adversely affected by dimiiinished govermiuent commitment to the principles underlying the project: lax enforcement of the relevant laws and regulations: and deterioration in staff skills due to attrition, transfers and the inability to recruit qualified new staff due to low salaries. Some slackening of high level involvement in the successor project, PFMO-II, was observed in the recent past, possibly due to other pressing priorities. Remedial measures have since been instituted. The successful implementation of PFMO- II, which seeks to improve upon the systems developed by PFMO-I and extend these to other public sector entities, is the key to the sustainabilitv of the latter's achieveiimenits. Findings and Lessons Learned 7. The project was successful in achieving most of its objectives. Its success was the result of thorough1 preparation: strong political support by the government; effective implementation and supervision-: and positive project relationships. The major lessons learnt may be summarized thus: (a) Complex institutionl building projects require long-term govemment commitment at the highest level, at least until the refomis are fimnly rooted. (b) When institutional changes depend on changes in the legal framework. it wvould be preferable to enact the requisite legislation before the project starts. Delays, such as those observed in the passage of the SAFCO law, create ambiguity and confusion amongst the agencies and officials likely to be affected by the legal changes. This has an adverse impact on project implementationi. (c) Staff turnover adve.sely affects the sustainability of reforms. Suitable human resource policies should, therefore, be devised to ensure staff continuity in important positions, and the ability to attract and retain qualified staff. (d) Given the rapid rate of obsolescence of computer technology, it is necessary to devise sustainable financing arrangements for the regular upgrading of systems developed under a project in the post-project period. (e) In attempting tax administration reform, it would be preferable to reform both tax and customs departments simultaneously, especially when the latter collects VAT oii imports.  BOLIVIA PUBLIC FINANCIAL MANAGEMENT OPERATION I CREDIT: 1809-BO PROJECT COMPLETION REPORT PART - I PROJECT REVIEW FROM BANK'S PERSPECTIVE Proiect Identity 1. Project Name: Public Financial Management Operation-I (PFMO-I) Credit Number 1809-BO RVP Ullit: Latin America and the Caribbean Region Countrv: Bolivia Sector: Public Sector Management Sub-Sector: Public Financial Management Backaround 2. In August 1985, when a new Govenmment took office, the economy of Bolivia was in a chaotic state. Inflationi in the preceding twelve months exceeded 24.000%; the official exchange rate was grossly overvalued: accuLmlulated arrears of public external debt had reached US$1 billion (over 20% of GDP): from 1980 to 1984. GDP fell by 16% and imports, exports and investment also experienced a steady decline; on accoullt of highi inflationi and weak tax administration, central tax and customs revenues fell to about 3% of GDP in 1984 and 1985. The public sector operated without budgets from 1983 to 1985 and spending was unlcontrolled. 3. The new government effectively implemented a bold economic refonn program. the New Economic Policy (NEP), to conitrol inflation, cut fiscal deficit, restore external balances, improve the efficiency of a reduced public sector and create conditions for private sector growth. Further, it undertook to revamp public finanicial managemiienit. 4. IDA had helped GOB initiate major changes in its fiscal and financial systems as early as 1984 when it assisted in the diagniosis of weaknesses in public accounting and auditing. In order to support the NEP, IDA collaborated with the Controller General of the Republic (CGR) in designing a program to improve financial m1anlagement. This developed into the present project which addressed institutional constraints in three important areas: public financial management: tax administration: and banking. Proiect Obiectives and Description. 5. The objectives of the project were to (a) improve financial administration and control of ministries and public entities; (b) enable the implementation of tax reforms and improve tax administration; and (c) improve the nationial banking system, strengthen the Central Bank and restructure the main development banks. 6. Accordingly'. the project consisted of three components. The Financial Administration and Control (hereafter also referred to as SAFCO) component, which accounted for 57% of total project costs, included the establishment of a high level Council (CONSAFCO) and its Executive Secretariat for the overall management of the financial administration and control system (SAFCO); and the design. development and implementation of effective systems for operational programming, budgeting. budget execution, cash and debt management, accounting, internal control, financial reporting and auditing. An important activity of this component was the so called "Emergency Program" that sought to address the  2 problems caused by poor financial management and reporting systems in the core ministries and state enterprises by providing a continuous stream of reliable budgetary and cash flow data pertaining to the major non-financial public entities to the Central Government. In addition to IDA financing. the government used local funds generated from the USAID Economic Support Fund to finance incremental local costs to the extent of about US$3.2 million. 7. The Tax Administration component, involving 19% of total project costs, supplemented assistance being provided by the IDB/UNDP. It financed two modules of Phase I of tax administration reform begun in September 1986 and about 40% of Phase II. This component sought to facilitate the implementation of tax reforms enacted in 1986 through organizational strengthening of the Internal Revenue Department (IRD) and establishment of systems for taxpayer registration, tax collection, monitoring and control of non-compliance, selection of cases for audit, and preparation of tax statistics. The IDB/UNDP provided parallel financing of US$1.47 million for consultants for tax collection and compliance monitoring systems. 8. The Banking Syslem Refbrm component, accounting for 16% of total project costs, aimed to improve the organiization. systems and capabilities of the Central Bank, especially in banking inspection, accounting and intemnal controls, economic researclh, policy, operational procedures and debt monitoring; and to restructure and strengtheni two major development banks - Banco Agricola de Bolivia (BAB) and Banco del Estado (BANEST). Project activities were complimentary to assistance provided by the USAID for external audits of commercial banks and improvement in project evaluation and supernision capabilities of commercial banks; and by the IDB for restructuring the Development Credit Department of the Central Bank. 9. Project preparation and adminiistration accounted for 8% of total project costs. Project Desi2n and Or2anization 10. The project covered a wide spectrum of technical activities, ranging from resource mobilization, expenditure management, accounting and auditing to Central Bank operations, supervision of commercial banks and development banking. These activities were designed after a detailed diagnosis of institutional problems. The remedies proposed were based on sound concepts such as accountability, transparency, efficiency, separation of incompatible functions and integration of interconnected activities. Although, some of the concepts were innovative and represented radical departures from past practice, it appears that adequate consensus was built regarding their rationale and usefulness. The project was a very timely intervention coming as it did at a time of acute fiscal and financial distress. It struck a balance between the immediate objective of bringing order to the prevailing chaos in public financial management and the long-term need for sustainable institutional development in this area. 11. The project involved four major agencies: the Ministry of Finance (MOF), the CGR, the Ministry of Tax Collections and the Central Bank. A large number of Divisions and Departments in each of these entities were affected. Also, project inputs and outputs needed to be coordinated with other international agencies, viz. the USAID, the IDB, the UNDP and the IMF who were also assisting the Government in improving financial management. The project design aptly dealt with this complex situation. Each component was designed as an independent sub-project. For the SAFCO component. a high level Council for SAFCO (CONSAFCO), consisting of Ministers of Finance, Planning and Tax Collect ions anid the CGR, was established and competent persons were appointed as Executive Secretary, CONSAFCO, and Teclnical Director. The tax administration and banking components were made the responsibility of the Ministrv of Tax Collections and the Central Bank, respectively. This project structure ensured inter-agency coordination, where it was needed, while allowing independent action in areas that lay exclusively within the domain of one agencv. The nature and extent of the contribution of other donors was also clearly defined. To facilitate project management, UNDP/OPS was engaged to provide administrative support. Specific activities pertaining to each component were delineated at considerable length, along with  3 the nature of inputs required, their estimated duration, timing and cost. Annual action plans and quarterly progress reports were prescribed to control and monitor project implementation. Realizing the complexity of the project, provision was made for extensive supervision in association with specialists. In retrospect, the project appears to have been well designed and organized. Proiect Implementation 12. On the whole, project implementation was satisfactory. Disbursements were faster than expected. By 12/31/91, 94% of the credit had been disbursed and most of the project activities had been completed. The closing date of 06/30/92 was extended first to 06/30/93 and then to 06/30/94 to enable the engagement of consultants in key positions in the Ministry of Finance and the Office of the Controller General of the Republic, so as to facilitate the implementation of the Second Public Financial Management Project (PFMO-II). Legal Covenants were complied with, although there were delays in preparation of annual action plans and audits. No major problems in procurement or availability of parallel financing from other donors were encountered. Thle main variances in project implementation are indicated below. 13. For the Financial Administration and Control component startup activities were affected by delays in appointment of the project management team and in contracting consultants. The passage of the crucial Government Administration and Control Act (hereafter also referred to as the SAFCO Law) was delayed for almost two years. This affected systems development to some extent since both the old laws and regulations as well as the new law had to be taken into account. Also, Government officials at the operational levels could not become fully committed to the philosophy of the new law until it was passed. The establishment of the Accounting Office also experienced delays. The implementation of the auditing sub-component lagged behind others because, in the absence of adequate accounting systems, there was not much to audit. Notwithstanding these difficulties, on the whole, the implementation of the component was satisfactory. 14. In the Tax Administration component all the planned activities were completed successfully. However, there was a significant delay in deciding the new institutional framework for tax administration. Although, the Tax Reform Act was passed in May 1986, a separate Ministry of Tax Collections was created only in January 1987. This affected the pace of implementation of Phase I activities. Some of the other problems experienced during implementation were: less than expected efficiency of commercial banks in handling collections; staffing constraints in the Internal Revenue Department (IRD), primarily due to low salaries, that affected processing of information received from the banks and monitoring of large taxpayers, shortfalls in collection of VAT on imports due to continuing inefficiencies in the Customs tax collection system which was not covered by the project (customs administration reform was, subsequently, undertaken under the Economic Management Strengthening Operation - EMSO, Credit 1977-BO). 15. Most of the planned activities in the Banking System Reform component were accomplished. However, the reorganization of the two development banks, BAB and BANEST, could not be carried out because of the lack of a consensus in this regard. The presentation of acceptable restructuring plans for the two banks was made a condition for the release of the second tranche of the Financial Sector Adjustment Credit (FSAC), Credit 1925-BO. Weaknesses in the organization and management of the Central Bank; inadequate inter-departmental coordination; and high staff tumover affected the institutionalization of new norms and procedures as well as the development of new systems. Proiect Results FinancialAdministration and Control 16. The Emergency Program was highly successful. Against the original target of 35 entities, it was extended to more than 73 entities, covering almost 95% of resource flows in the Bolivian non-  4 financial public sector. The consolidated reports produced by the Program, on the income, expenditure and cash flow of these entities, became an important tool for managing the Treasury's resources and controlling public expenditures. Most entities started producing the data on their own and using it for their internal financial management as well. The Emergency Program, however, still continues and there is a need to integrate its activities into the mainstream functions of the entities. 17. The passage of the SAFCO Law, which set the normative framework for country-wide public financial management, in July 1990, was an important milestone. Replacing antiquated and conflicting rules and regulations that had accumulated over time, the law provided a coherent, modern framework for achieving accountability, transparency and efficiency in the management of public resources. The law established administrative systems for Planning and Capital Investment; Operations Programming; Budgeting; Treasury and Public Credit; Accounting; Internal Control and Auditing; Administrative Organizationi; and Acquisition, Management and Disposal of Goods and Service. The role and responsibilities of different govenmnent agencies, viz. the MOF, the Ministry of Planning and Coordination, the Central Bank, the Banking Superintendency and the CGR, for development and operation of these systems were clearly defined. Major improvements included the elimination of pre-control of budget execution by the CGR; and the transfer of the judicial functions of CGR to the judiciary, thus ending the former's dual role as prosecutor and judge. The Law, unequivocally, made every public servant accountable for not only achieving the objectives for which public resources were entrusted to him/her, but also for the manner and results of the usage of the resources. Administrative, executive, civil and criminal liabilities were established for official misconduct and the CGR was given extensive powers to initiate actions against erring public servants. 18. Wide-ranging project activities were completed to facilitate the implementation of the SAFCO Law. The MOF and the office of the CGR were reorganized in accordance with the functions assigned to them by the law. Budget execution was transferred from the Budget Office to the Treasury. The Office of Accountanit General of the State (AGS) was created and integrated accounting was established in the central administration. Detailed manuals of norms and procedures for preparation, modification and execution of the budget; administration of public credit; accounting; internal control; and auditing were prepared. Four computer systems were commissioned viz. Cash Operations Information System (SOEC), under the Emergency Program; system for budget formulation; integrated financial information system (SIIF) for budget execution and accounting; and system for administration and control of payroll. Training courses, of varying intensity, were organized for more than 3,000 GOB officials. These courses covered Principles of SAFCO. Operations Programming, Budgeting, Financial Administration, Accounting, Financial Reporting. Government Auditing and Electronic Data Processing. Finally, the project helped in refurbishing and equipping the offices of the CGR, the AGS and the Emergency Program as well as the training school. 19. The outcomes of these activities were positive. The reliability and timeliness of infonnation generated by the Fmergency Program gave the government a better picture of the financial situation in the public sector, thereby enabling it to manage public finances within the parameters of the structural adjustment program. Freeing the Budget Office from the responsibility of administering budget execution allowed it to concentrate on budget formulation and evaluation. This facilitated the integration of budgetary policy with macro-economic and public investment policies. Program-based budgeting was introduced to create a clearer link between objectives and expenditures. The assumption of the responsibility for budget execution by the Treasury upgraded its role from that of a cashier to that of the manager of public resources. The SIIF reduced discretion in expenditure management. This increased transparency and diminished opportunities for corruption. The streamlining of procedures and elimination of prior control by the CGR sharply increased the efficiency of the disbursement process. In a major advance over the past, the project enabled the timely preparation of financial statements of the Government. Norms of internal control and government auditing contributed towards improving the control environment in the public sector.  5 20. The SAFCO component established a strong foundation for sound public financial management in Bolivia. At the time of completion of its major activities, however, much still remained to be done. In the institutions covered by the project, the reforms needed to be deepened. Detailed regulations were still to be developed for operations programming, personnel management, procurement and administrative organization etc.. The information systems needed to be further refined so as to improve their capability and usefulness. These also needed to be integrated with each other and converted to an open architecture. Also, the quality of infonmation generated by the systems needed to be improved and the error rate reduced, in order to build user confidence. Additional systems needed to be developed for budget evaluation, treasury, public credit and auditing. Further, the norms, procedures and systems had to be disseminated to the other public entities at the national and local levels. The CGR still needed to develop a capacity for operational audits. Although, the project carried out extensive training activities, it was able to reach less that 5% of potential trainees. Its efforts in this regard needed to be extensively supplemented. 21. A follow up operation, the Second Public Financial Management Operation (PFMO-II), Credit 2279-BO, was undertaken to deal with the continuing constraints mentioned above. This project, involving an IDA credit of SDR 8.5 million, is currently being implemented. Tax Administration 22. This component contributed towards significant improvements in tax administration in Bolivia. The 1986 Tax Refonn Law introduced a simple tax system based on value added and wealth taxes instead of income taxes. As already mentioned, a separate Ministry of Tax Collections was created for a limited period to focus attention on improvement of domestic tax collections, which had fallen to about 1% of GDP in 1984. and on the reform of tax administration (the Ministry was merged with the Ministry of Finance in September 1988). The IRD was restructured. Large Taxpayer Divisions were created in La Paz, Cochabamba and Santa Cruz to closely monitor compliance by large taxpayers, who contributed about 80% of the tax revenues. A taxpayer registration system was developed and taxpayers liable to be registered were assigned unique registration numbers. The task of tax collection was transferred to commercial banks and related svstems for control of monthly collections, bank reconciliation, adjustments, installments payments etc. were developed. Computer systems for control of non-filing of returns and non-payment of taxes; selection and assignment of cases for tax audit; and preparation of statistical reports for maniagement were developed and implemented. Various manuals and forms were prepared to support the new systems. Regulations to give effect to the Tax Reform Act of 1986; strengthen sanctions against non-compliance; and implement Rural Property Tax were formulated. Training in the operation of the new systems was provided. Finally, a publicity campaign was conducted using different media to educate taxpayers regarding their obligations under the new legal and administrative arrangements. These initiatives contributed towards the increase in domestic tax collections to 7.8% of GDP in 1992. 23. The project dealt with the initial stages of tax administration reform. It contributed to creating a good base for further improvements in tax administration effectiveness. The Economic Management Strengthening Operation (EMSO) continued IDA assistance, in conjunction with the IDB/UNDP, for consolidation of the reforms; their extension to regional tax offices and the Customs Department; and publicity to enhance taxpayer awareness. As a result of PFMO-I and succeeding projects. the control of routine tax administration operations, based on obligations admitted by the taxpayers, appears to have improved significantly. However, taxpayer auditing and enforcement of tax laws against tax evaders continues to be weak. Also, in some of the regional offices, corruption is understood to be high. These issues need to be addressed by on-going and future reforms. Banking System Reform 24. The SAFCO Law established the Central Bank as the only monetary authority in the country, independent of the MOF. At the same time, commercial and development banking activities were  6 eliminated from its portfolio. The Central Bank was reorganized to emphasize the importance of key central banking functions such as economic research and analysis, balance of payments and external debt operations. Personnel were drastically reduced, a small number of additional qualified professionals were recruited and staff salaries were significantly increased. Substantial technical assistance was provided to the Economic Studies and Research Department, Financial Systems Department and the External Debt Division for defining their respective functions and organizational structure; preparing technical manuals; improving the quality of macro-economic, financial and external debt statistics; building analytical models and information systems. and training staff. The accounting systems for monetarv transactions, foreign exchange, credit, foreign trade, public enterprises and treasury transactions were computerized. To strengthen the monitoring of commercial banks, a Superintendency of Banks was created in November 1987. The Superintendency was endowed with considerable autonomy, a streamlined organizational structure and well qualified personnel. Manuals for evaluation of accounts of banks; banking inspection; and financial analysis wvere produced. Technical assistance was provided for supervision of audits of commercial banks conducted by independent auditors. Legislation defining the respective roles and functions of BAB and BANEST was passed. 25. The measures indicated above improved the Central Bank's capacity to perfonr its core operations and significantlv strengthenied oversight over commercial banks. However, like the reforms introduced through the other componenits of the project, these were, essentiallv, first steps that needed significant follow up action. The Financial Sector Adjustment Credit (FSAC) provided additional support for strengthening the Superintendency of Banks and restructuring of the development banks. In compliance with the conditionalities of FSAC. GOB did submit restructuring plans for the two banks prior to the release of the second tranche, but these plans were never effectively implemented. The role of BAB and BANEST remained uncertain till. in accordance with Board presentation conditions of the subsequent Structural Adjustment Credit (SAC). BAB was closed and the functions of BANEST were redefined. Some actions to reorg,anize BANEST were uLndertaken in 1991 and 1992. Eventually, in December 1993, the government decided to liquidate BANEST as well. Please see FSAC's PCR, dated June 24, 1994. for further details. 26. In sum, the project succeeded in achieving its objective of introducing far-reaching institutional changes in public financial management, tax administration and financial intermediation. The new legal, administrative and procedural frameworks changed the way the concerned entities performed their functions. The new infonnation svstems gave GOB a firmer grip over policy formulation and execution. At the same time, these systems introduced greater efficiency, transparency and accountability into the processes of raising and spending public resources. The level of technological sophistication in govemment operations was also enhdaniced. Project Sustainability 27. The conceptual foundation of the reforms supported by the project is strong and has been buttressed by the requisite legislative and administrative authority. Therefore, the formal structure created by the reforms is likely to remain in force over the long-run. Sustainability of the project's impact on the day-to-day operations of Government could, however, be at risk. The major risks would be diminished government commitment to the underlying principles of the project, before they become firmly rooted in the management culture of public sector entities; lax enforcement of the relevant laws and regulations; and deterioration in staff skills due to attrition, transfers and the inabilitv to recruit qualified new staff due to low salaries. 28. Some slackeninig of high level involvement in the successor project, PFMO-II, was observed in the recent past. possibly due to other pressing goveniment priorities. This affected inter- departmental coordination and systems integration. GOB has, however, expressed its continuing support for the project and remedial measures have since been initiated. The successful implementation of PFMO- II, which seeks to improve upoIn the systems developed by this project and extend these to other public  7 sector entities is the key to the sustainability of the results achieved by PFMO-I. Special attention needs to be given to finalization, approval and implementation of norms and regulations in operations programming, budget evaluation, and treasury functions. To ensure that public servants intemalize the reforms and apply them while performing their official duties, the level of awareness about the new laws and rules amongst senior managers and line staff needs to be raised. This would require periodic seminars, conferences and continuing technical training. Also, the problems caused by frequent staff tumover need to be addressed. Finally, GOB needs to strictly enforce compliance with the new legal and normative framework by all public servants. Deviations would need to be closely monitored and remedial actions envisaged by the SAFCO law, including sanctions against defaultilg public servants, would need to be vigorously pursued. For this purpose, it may be necessary to strengthen the judicial machinery. Bank Performance 29. The project was prepared very thoroughly. High caliber intemational consultants were engaged to design project components. Bank staff involved in task management of the project demonstrated great enthusiasm for the project and a firm grip over its technical aspects. Supervision missions led by LA3C I drew on the expertise of various Divisions of the Bank, especially LA3TF, LATTF, LA3AG, IECIE and PBD. Project activities and supervision were extensively coordinated with the IMF, IDB, UNDP and USAID. Mission members adopted a hands-on approach and dealt with technical and implementation issues in depth. Aide Memoirs and Back to Office Reports provided an exhaustive discussion of project activities undertaken, current status of different components and current issues and constraints. Bank Missions adopted a problem solving approach and tried to find workable solutions to the difficulties encountered. In most cases, concrete remedial actions were agreed to with counterparts. 30. The main lessons leamed from the Bank's experience can be summarized below: (a) Complex institution building projects require long-term govemment commitment at the highest level. This may be difficult to sustain due to changes in govenmment or changes in govenmment priorities. Yet, unless the reforms are perceived as ranking high in the leadership's priorities, it is likely that, after the initial thrust, they would loose their impact. Meclhaniisms, therefore, need to be found to sustain high level involvement in the reforms, at least until they can go ahead on their own steam. (b) When institutional changes are subject to changes in the goveming administrative laws, it would be preferable to enact the requisite legislation before the project starts. Delays, such as those observed in the passage of the SAFCO law, create ambiguity and confusion amongst the agencies and officials likely to be affected by the legal changes. This has an adverse impact on project implementation. (c) Staff tumnover adversely affects the sustainability of reforms, especially, in technical fields such as public financial management. Suitable human resource policies should, therefore, be devised to ensure that (a) staff remain in the positions for which they have been trained for a reasonable period and (b) the compensation system, at least for highly skilled jobs, is such that qualified persons can be attracted and retained in public service. (d) Rapid changes in information technology necessitate continuous upgrading of computer systems. Systems developed under the aegis of a particular project are likely to become out-dated soon after the project ends. To avoid this, it may be useful to devise mechanisms that would enable the borrower to finance the regular upgrading of the systems, without depending on a successor project that may or may not materialize. The PFMO-I had the PFMO-II to finance the enhancement of its systems. Other projects may not have this advantage.  8 (e) In countries where VAT on imports is a significant part of tax revenues, but is collected by the customs department and not the tax department. it would be preferable to broaden the scope of tax administration reforn to simultaneously cover the customs department as well. Restricting reforms only to the tax department, as was done in this project, leads to sub-optimal results as a major part of tax revenues continues to be collected in an inefficient manner. Borrower Performance 31. The project enjoyed strong political support from GOB. This was one of the major reasons for the project's success in implementing far-reaching institutional reforms. CONSAFCO met frequently and effectively guided project implementation. The executive secretary of CONSAFCO and the Technical Director provided excellenit leadership to the project at the operational level and enjoyed the confidence of the Govenunient. Counterpart staff demonstrated enthusiasm for the reforms and the project was implemented with considerable speed and dispatch. Pr-oiect Relationships 32. Project relationshlips were generally very positive. The Bank enjoyed a close rapport with GOB officials at tlle political and administrative levels. The project received continued support and cooperation from other inteniationial agencies mentioned above. Conflicts of interest appear to have been avoided by a clear demarcationi of the respective areas of activity and extensive coordination at the implementation stage. Counterpart staff had good relations with consultants working on different project segments. This contributed to the high quality of outputs and timely project completion. Consultin2 Services 33. Since project activities were basically of a technical nature. international and national consultants played a major role in its success. The quality of consultants deployed and their outputs was very high. The foreign firm engaged to develop the financial management systems did a good job. The success of the tax refonr and increase in tax collections was largely due to the consultant team working on the tax administration component. The Banking System Reform component was designed by top latin- american consultants with successful experience in designing and implementing institutional reforms in central banks. Pro ject Documentation 34. The Staff Appraisal Report (SAR) provided a useful framework for the project. Besides a good diagnosis of the prevailing situation and design of proposed remedies, it clearly identified the respective roles of implemeniting agencies within GOB and of the international donors involved. Detailed implementation schedules. tenns of reference and cost tables helped in monitoring and coordination of project activities. The Credit Agreement also was well-drafted and contained legal covenants for crucial activities. Not much difficulty was experienced in gathering data for the Project Completion Report, except for data on counterpart expenditures and on the break up of total costs between local and foreign costs.  9 PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE 1. On July 31, 1987, the Republic of Bolivia and the World Bank's International Development Association signed Credit Agreement 1809-BO to fund the Public Financial Management Project. The operation consisted of three separate components: Component A: Financial Administration and Control System (SAFCO) Component B: Tax Administration Component C: Banking System Reforms 2. This report will review and assess project performance for each of these components separately. 1. COMPONENTA: FINANCIAL ADMINISTRATIONAND CONTROL (SAFCO) Main Obiectives 3. The primary objectives of the SAFCO component were (1) to set in place a series of systems, namely: an integrated financial management and control system for government; accounting, internal control, and financial information systems and associated administrative systems; cash management and public debt systems; and systems for programming operations, budgeting, and execution, and (2) to strengthen audit and systems development functions in the Office of the Controller General of the Republic. These objectives were devised to tailor the project directly to Bolivia's economic circumstances. bearing in mind a number of specific realities: * The demise of a growth model based on state capitalism and protection, which favored inward-looking development. Inconsistent and contradictory rules for financial management and state fiscal control. * Political instability and the ensuing weakness of basic democratic institutions. * The state of administrative and financial chaos inherited by the democratic administration from a period of institutional instability. 4. The chief risk identified for implementation of the project was its vulnerability to changes in government. For this reason, it was assigned a relatively short time-frame for completion. 5. The attainment of these objectives was considered to be imperative if the country was to have sound fiscal controls in place as the government implemented its New Economic Policy, launched in August 1985. Achievement of Project Activities 6. The project's main objectives were substantially achieved. Its most important achievements on the legislative front were the Government Administration and Control Act (Law 1,178) passed on July 10, 1990, which did away with the profusion of contradictory laws and regulations and established a basic framework of rules for developing systems and apportioning responsibilities and authority among central government administrative bodies. Pursuant to a number of other legal directives (supreme decrees and ministerial orders), the Ministry of Finance was reorganized, regulations governing the budget system were issued, and an Integrated Accounting Manual was put into effect. The government control system was revamped, the Office of the Controller General was restructured, and rules for organizing public-sector audit units and government audit standards were issued.  10 7. Significant among the practical accomplishments of this component was the start-up of the following systems: Cash Operations Information System (SOEC), operated by the emergency program and developed for decentralized agencies and public enterprises; the Budgeting System, for use throughout the public sector and monitored by the Budget Office; the Integrated Financial Information System, operated jointly by the Treasury Office and the General Accounting Office; and the Wage Bill and Payroll Management and Control System. 8. Some 3,000 persons received training in sessions organized by the Training Center of the Office of the Controller General. Training was provided on the features of Law 1,178 and implementation of administrative systems, and courses were given in basic, intermediate, and advanced accounting. Main Activities Completed 9. The following main activities were completed: a. Government Administration and Control Act: The draft legislation was reviewed and reworked with parliamentary committees, to come up with a final version that became law on July 10, 1990. b. A series of administrative systems: * Emergency Program: Methodological guidelines were devised for gathering and processing financial data from public entities to produce fiscal statistics, including consolidated operations of the non-financial public sector (NFPS). Since 1988 monthly reports have been produced showing actual revenues, expenditures, and financing of the NFPS, along with the pertinent analyses. * Reorganization of the Ministry of Finance: Supreme Decree 22,106 of December 29, 1988, revamped the organizational structure of the Ministry to develop its policy-setting and operational responsibilities, with due segregation and coordination of its functions. * Budgeting System: Basic regulations were devised (Ministry of Finance Order 704) to govem the budgeting, budget execution and evaluation process. * Cash Management and Public Debt System: The Integrated Financial Information System (SIIF) was designed and put into practice in 1990. It simplifies expenditure processing through the exercise of programming and quota control for expense accruals and disbursements. * Integrated Accounting System: Manuals were produced to set out integrated accounting procedures for the central govermnent, non- commercial public institutions, and regional development corporations. Working in concert with the Ministry of Finance, the Government Accounting Office was set up in September 1989, with an accounts processing office and computer center. * Non-financial Management Systems: A system was put in place to track changes in wage bills, work force, and salary scales for the entire public sector. A survey was done of central government positions, with financial  11 support from international organizations to the EMSO project as a prelude to the Public Sector Management Project. c. Government control: A team of advisors for the Controller General's Office (CGR) was set up to address the areas of regulations, external audit, and internal oversight. Internal oversight standards were prepared for the organization and administrative procedures for all public-sector entities. d. Training: Instructors were selected and trained in teaching techniques. They delivered a series of basic training courses for professional-level staff, to ensure that government administrators, accountants, attomeys, and auditors would be fully capable of implementing and operating the SAFCO systems. Six workshops were held on programming of budget execution, and four workshops on financial statement and management report preparation and presentation. e. Physical plant and equipment: Construction work on CGR facilities and the installation of fumiture were completed in 1990. Contracts were awarded for the purchase of computer hardware and document reproduction equipment which were installed along with other items needed for the following project components: technical oversight, emergency program, Budget Office, Treasury Office, General Accounting Office, and National Training Center (CENCAP). Sustainability 10. The SAFCO program has improved budgeting, operating programs, and other organizational areas in the Ministry of Finance. It has also led to changes in budget execution and spending procedures in the Treasury Department. Other benefits are an improvement in government accounting, cash reporting svstems in the larger public entities, tighter internal oversight procedures and auditing standards in the wake of the reorganization of the Controller General's Office, and training in principles of financial management. These accomplishments indicate a strong motivation and ongoing commitment on the part of the state and its institutions to move ahead, in future, with programs targeting financial management and improved control systems. In brief, it appears very likely that the project's successes can be sustained and, indeed, built upon in future operating plans. Bank Performance 11. The Bank's performance was highly satisfactory at the project identification stage and through the assistance it afforded. The technical support furnished by the Bank's project officers was an important element in its success; their continual monitoring of project activities helped the government to secure effective execution of the measures needed to implement the various systems developed. Borrower Performance 12. The government's performance throughout the project identification and implementation phases can be termed highly satisfactory, in light of the political will demonstrated in putting into practice the systems developed to strengthen government financial management and control. The restructuring of the Ministry of Finance and Office of the Controller General attests to the importance that the government accorded to the project.  12 Results 3 . The main benefits that have ensued from the new systems described above, and which can be considered permanent gains, are: Reliable, timely, and relevant financial information generated by the Cash Operations Information System (SOEC) and the Integrated Financial Information System (SIIF), which afford the government a clear overall picture of the fiscal situation and developments in the non-financial public sector. These systems have also enabled the government to (a) bolster its negotiating position with international organizations and (b) manage the consolidated liquidity of the non-financial public sector and adopt measures to keep financial variables within IMF program targets. Transparency in the workings of government, thanks to the paring of the discretionary element in the management of public moneys. Less corruption and more efficient administration as a result of simplified procedures for paying amounts owed to the Treasury. Use of a quota system to allocate resources to public entities. Adoption of a program budgeting system. * 'The most salient achievement on the legislative front is the enactment of the Government Administration and Control Law. Its provisions have been publicized and analyzed in a number of quarters, and the objectives it seeks are generally acknowledged to be coherent and ambitious. 14. The results attained by virtue of the government control system are evident in the legislation issued to tighten internal and external controls, and in the success of the training component. Thie latter is also considered as a permanent gain because training is now an institutionalized activity. 15. The training school, CENCAP, has offered training to 3,007 people, most of it centering on implementation of the budgeting system and new cash management procedures. These were not formal training events but rather a limited on-the-job training activity, which was nevertheless essential for instituting and carrying through the reforms. Future Operations 16. In the short term, regulations under the Government Administration and Control Act will need to be issued and its provisions brought into force. The efforts that this will entail in terms of resources, activities, and decision-making will be even greater than those deployed to produce the gains described in this report. To that end, the Bolivian Government is currently executing a project for implementation of the Government Administration and Control Act (ILACO)l . 17. In the years ahead there will be a need to generate savings in public finances so the country can increase social and infrastructure outlays. To do so, it will need to consolidate and build upon the gains achieved with this project. ILACO is the same as PFMO-1I.  13 II. COMPONENT B: TAX ADMINISTRATION Main Objectives 18. The first stage of this project was carried out by the Ministry of Tax Collections and the remainder by the Ministry of Finance. The general objective of this component was to devise a new tax administration model that would incorporate all of the reforms and taxation systems needed for efficient operation. 19. In pursuit of that central aim. specific objectives were set for the Internal Revenue Department (DGRI) and Customs Department'. to bring in changes in three stages. which were embodied in a series of agreemenits entered into by the Bolivian Government and the implementing agencies. 20. The following are the principal objectives achieved at each stage. Stage I Design development, and implementation of systems of taxpayer registration, automiiated data collection and capture through the banking system, and tax regulations. First phase of the reorganizatioin of the DGRI. (the Spanish name of this office has chaniged from IDireccion General de la Renta Interna DGRI to Direcci6n General de Iimpuestos Internos DGII). Stage 2 Designi of audit procedures: creation of a Large Taxpayer unit in La Paz; systems for tracking collections. Stage 3 lDevelopment of supplemenitarv collection systems; systems to select taxpayers for audits: development of part of the taxpayer current-account system and implementation of same; assistance in the operation and consolidation of systems developed in Stages I and 2 and in implementing the new organizational structure. A further objective of this stage was to develop and implement a revenue collection svstem for the Customs Department. 21. The objectives of this project were devised to address the economic difficulties Bolivia had been experiencing ulp to 1986. as deteriorating terms of trade left the country at a severe disadvantage and ultimately witlh a balance-of-payments deficit, and to attempt to reverse the sharp downturn in economic activity wlichi had cut into government revenues notably tax receipts. 22. Thle aim was to help the economy recover by bringing in a taxation system that would boost tax revenues. 23. Specific objectives were set for each stage; minor adjustments were made as needed in the course of the operation. 2 Editorial Note: The Customs Departmenit was not directly covered under the PFMO-I.  14 Achievement of Proiect Activities 24. The project made considerable gains in implementing the proposed systems and consolidating reforms of the country's tax administration. Its success is evident in the various performance indicators (increase in the tax burden, simpler procedures, fewer taxes, streamlined tax administration, etc.). Nevertheless, a number of objectives proved too complex to be achieved in full in the time-frame envisaged; the remaining elements will need to be addressed in future programs. 25. The following are noteworthy among the specific accomplishments of this component: In the Internal Revenue Department: Support for each of the national areas and regional offices, to help them reshape and complete their organizational structures and perform their assigned functions. Training of employees in the main operations areas. The design, in the Department itself, of strategies to monitor the reforms instituted. At Headquarters, assistance in devising operating timetables for boosting tax receipts, and coordination between the Department and the regional offices. In the Audit Office, development of audit systems, drafting and release of a number of operations directives and institution of controls. Creation of Large Taxpayer Units at the three main regional offices. In the collections area, setting up of a taxpayer register, development of a system for payment of taxes at banks, and follow-up and supplementary systems. In the Technical and Legal Affairs Office, preparation of procedural directives to strengthen this area. In the External Affairs Office, publications and other information activities to familiarize the public with the new taxes being levied as part of the tax reform, and plans for further taxpayer education programs. In the Data-Processing Office, development and installation of computer systems to track tax receipts. Gradual implementation of planned systems that had never been brought into service, and adjustment of other systems (follow-up on tax notices, register, etc.). In the regional offices, specialized technical support in the areas of collection, auditing, and technical and legal matters. Partial development of the taxpayer current-account system and implementation thereof. In the Customs Department: Design of a system for collection and control of customs duties and other levies on all imports, including value added and specific consumption taxes. Signing of an agreement with the banking system. Design of customs clearance forms and receipts and contracting out of same. Writing of instructions for completing new forms and procedures for inward customs clearance of goods. Design and implementation of a new structure for the Data-Processing Department, and planning and control of an import levy system. Development and implementation of a control system for delivery of goods. Training of staff in customs administration operations.  15 Main Activities Completed 26. A reasonable portion of the tax reforms sought has been achieved. A number of problems, none of them readilv surmountable, stood in the way of full implementation: persistently high inflation rates. a plethora of tax laws and regulations, a large number of taxes, and revenue earmarking. Other problem areas over wlich the govenmment had a somewhat greater measure of control were the shortage of experienced maniagers and a hlighly politicized tax administration, which meant frequent turnover of employees with needed skills. Suistainability 27. Because this project is so important and can have a definitive impact on the process of overhauling thie country's tax administration. there is every likelihood that it will continue in the future. The current political clinate (a stable democracy) and stable economy, underpinned by the commitments made and decisions taken in political quarters and by public institutions and international organizations, suggest that the needed teclnical resources and funding will be forthcoming in order to preserve the gains achieved to date and expand the project's activities in the future. Bank Performance 28. The World Bank played a satisfactory part in achieving the project's aims. Borrower Performance 29. Given the constraints within which they had to work, the performance of the Government and the implemeneting agencies was highly satisfactory at the project identification and preparation stages. However. their achievements on the implementation side can only be termed satisfactory. Results 30. The original objectives, as subsequently modified, were achieved on schedule and relatively successfullv, so the project can be said to have been satisfactory. 31. The invigorated tax collection system brought in as part of the overhaul of the country's tax administration has proved to be highly efficient, leaving taxpayers with a new image of this government service. 32. The computerized audit systems now in place have yielded optimum results, given the precarious state of this area before their implementation. Future Operations 33. There is a need to plan future activities to ensure that tax administration reforms will be firmly entrenclhed and to devise new systems to keep pace with an active financial sector and changing economy. 34. The following are some of the general tasks that will need to be tackled in the years ahead: Optimization of the systems now in place, to use them to full advantage. Development of new systems, with due regard to technology and resource constraints. Building up of DGRI management capacity and institution of management control systems and tools.  16 Consolidation and fine-tuning of the DGRI's organizational structure. Organization of an efficient, merit-based human resources management system. Restructuring of the Customs Department, to make the sweeping changes needed and bring in automated systems and management controls, with the ultimate ain of boosting customs revenues. 35. To this end, the Government of Bolivia and the World Bank should remain in close communication, as part of their normal arrangements, to maximize the benefits of the project. 11. COMPONENT C: BANKING SYSTEMREFORM Main Objectives 36. The main objectives of the Banking System Reforms project were to improve the organization of the Central Bank, the bank inspection system, monetary policy, and debt management, and to implement a program to reorganize two state-owned development banks. Achievement of Probect Obiectives 37. The project's main objectives were achieved, with considerable gains made in the following areas: a) External debt b) Internal audit c) Money and credit d) Banco Agricola and Banco del Estado e) Creation of the Superintendency of Banks External debt 38. The groundwork was laid for design of a debt reporting system, through training of staff in a single operating system for report production, and administrative rules and projection systems. These systems have bolstered Central Bank supervision capabilities. Internal audit 39. A Financial Audit Manual was designed and management personnel were trained. Money and credit 40. An accounting subsystem was instituted for open-market operations, to integrate with the Central Bank's accounting system and set up a teamn of systems analysts and programmers. Banco Agricola and Banco del Estado 41. A diagnostic study was completed of these two banks to address areas requiring action, such as a review of personnel and assessment of the viability of the provincial offices. Work began on a loan grading system. The Government adopted a political decision on the role of these institutions.  17 Superintendent of Banks 42. Assistance was given to set up a Superintendency of Banks to regulate the nation's banking system. Main Activities Completed 43. Any problems that arose in the course of the project were rminor ones, and did not affect its outcome. Employees and consultants worked out uniform approaches that established a solid base for project activities and helped achieve most of the project's aims. Sustainability 44. The technical support received by the Central Bank of Bolivia under the Public Financial Management Project yielded gains in the areas mentioned above, tightening administrative and systems controls. Bank Performance 45. The technical assistance furnished by the Bank was a major factor in the achievement of the primary objectives noted above. Borrower Performance 46. The Govenuient's performance can be termed satisfactory, inasmuch as it assigned high priority to financial refonms in its economic policy. Results 47. The main aims of this component of the Public Financial Management Project were achieved satisfactorily, making as it did for more efficient and more transparent administration of the banking system. Future Operations 48. Future activities in the area of banking system reform should include human resources development and new systems for the nation's banks.   19 PART 111. STATISTICAL TABLES 1. Table 1: Related Bank Loanis/Credits 2. Table 2: Project Timetable 3. Table 3: Credit Disbursemiienits 4. Table 4: Project Implemiienitation 5 Table 5: Project Costs 6. Table 6: Project Financing 7. Table 7 Project Results 8. Table 8: Studies Included in Project 9. Table 9: Status of Legal Covenants 10. Table 10: Use of Bank Resources: Staff Inputs 11. Table I 1: Use of Bank ResouLces: Missions Table 1: Related Bank Loans/Credits Loan/Credit Title Purpose Year of approval Status Preceding operations None applicable Following operations 1. La Paz Municipal Related componenits: Financial 1987 Disbursing Development Project managemenit computerization (includes budgeting, accouniting, investment planning). 2. Economic Management Related components: Public investment 1988 Disbursing Strengthening programming, tax administration, regional Operation and public sector management strengthening. 3. Financial Sector Related components: Strengthening of 1989 Fully Adjustment Credit banking system including banking Disbursed supervision/regulation. 4. Public Financial Related component: Project is continuation 1991 Disbursing Management Operation of PFMO 1, with more emphasis on 11 implementation of computerized IFMS. 5. Structural Adjustment Related components: Budget transfer 1991 Disbursing Credit mechanisms from central to local govenuments.  20 Table2: Project Timetable Item Date planned Date actual Identification (Executive Project Summary) Feb. 86 Preparation May 86 Appraisal Mission Feb. 87 Credit Negotiations April 87 Board Approval 5-28-87 Credit Signing 7-31-87 Credit Effectiveness Sept. 87 12-15-87 Credit Closing 6-30-92 6-30-94 Credit Completion Dec. 91 6-30-94 Table 3: Credit Disbursements: Cumulative Estimated and Actual Disbursements (US$ thousands) FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 Appraisal estimate 3,400 4,800 3,300 - - - - Actual 3,510 4,790 1,950 850 380 170 140 70 Actual as % of estimate 103 100 59 - - - - Date of final disbursement: 8/05/94  21 Table 4: Project Implementation Indicators Appraisal Actual Estimate (or PCR Estimate) Financial Administration and Control 1. Financial Monitoring of major 1. Establish Emergency Program to 1. The Emergency Program covered public sector entities. collect financial statistics of 34 73 entities. About 95% of major non-financial public sector resource flows in the non-financial entities. public sector monitored. 2. Development of norms and 2. Enact SAFCO Law and prepare 2. SAFCO Law enacted, although procedures for effective public norms and procedures for after a delay of about 2 years. financial management. operational programming, Manuals of nonms for and budgeting, budget execution, proceduies for budgeting, budget public credit, accounting, execution, public credit, auditing, procurement and accounting and auditing personnel management. developed. 3. Organizational restructuring. 3. Establish Office of the 3. Office of the Accountant General Accountant General and created. Ministry of Finance and reorganize the Ministry of Office of the Controller General Finance and the Office of the of the Republic reorganized in line Controller General of the with the SAFCO Law. Republic. 4. Develop and commission 4. Install computerized systems for 4. Computer systems for cash automated systems for financial financial administration and management, budget formulation, administration and control. control in public entities. budget execution and accounting, and control of payroll commissioned. 5. Train staff in financial management 5. Train 300 officials through 5. About 3000 officials provided and control. fonmal and on-the-job training. training of varying intensity in public financial management. T ax Administration 1. Restructure the Tax Administration I. Create a Ministry of Tax 1. A temporary Ministry of Tax to improve its effectiveness. Collections and strengthen the Collections created. IRD organization and management of restructured and revamped. the Internal Revenue Deptt.. 2. Strengthen tax administration 2. Transfer tax collection to 2. Tax collections transferred to through reorganization of commercial banks, develop commercial banks. Divisions for operations, development of nonns systems for control of control of large taxpayers created. and procedures, installation of compliance, registration of Computerized systems for computerized systems and training taxpayers, auditing a:d statistics. taxpayer registration, selection of cases for audits, monitoring of non-compliance and generation of reliable tax statistics installed.  22 Indicators Appraisal Actual Estimate (or PCR Estimate) Banking System Reform I. Reorganize and strengthen the 1. Reorganize the Central Bank to 1. The Central Bank made the sole Central Bank. emphasize the key central monetary authority in the country banking functions. and reorganized. Economic Research, Financial Systems, Debt Management & Accounting Divisions strengthened. Accounting systems computerized. 2. Improve banking supervision. 2. Separate central banking 2. An autonomous Superintendency functions and banking of Banks created. Manuals for supervision; and strengthen evaluation of accounts of banks. banking inspection. banking inspections and financial analysis produced. Technical assistance in supervision of bank audits provided. 3. Restructure two Development 3. Restructure Banco Agricola de 3. Legislation defining the roles of Banks. Bolivia (BAB) and Banco del BAB and BANEST passed. Estado (BANEST). However, the banks could not be restructured due to a lack of consensus on the restructuring plan.  23 Table 5: Project Costs (US$ Thousands) Appraisal estimate Actual/latest estimate Local Foreign Local Foreign costs costs Total costs costs Total3 Item l 1. Financial 8,100 5,910 14,010 8,237 6,010 14,247 administration and control 2. Tax 2,530 2,120 4,650 2,573 2,156 4,729 administration. 3. Banking 2,620 1,330 3,950 2,664 1,353 4,017 system reforms 4. Project 350 1,150 1,500 352 1,156 1,508 preparation . 5. UNDP/PIU 450 450 481 481 administration . TOTAL 13,600 10,960 24,560 13,826 11,156 24,982 Table 6: Project Financing (US$ Thousands) Planned (Credit Agreement) Actual Local Foreign Local Foreign costs costs Total costs costs Total Source l IDA 2,050 9,450 11,500 1,837 10,020 11,857 [DB/UNDP 90 1,510 1,600 337 1,136 1,473 USAID 3,060 - 3,060 3,252 3,252 Government of Bolivia 8,400 - 8,400 8,400 8,4004 Total 13,600 10,960 24,560 13,826 11,156 24,982 3 Distribution of total costs between local and foreign costs estimated due to insufficient data. 4 GOB did not maintain separate accounts of counterpart contributions made by it. Therefore the actual contribution has been assumed to be same as that originally planned at appraisal.  24 Table 7: Project Results Indicators Estimated Actual FinancialAdministration and Control 1. Availability of reliable financial 1. Financial data of 35 public sector 1. Emergency Program provided statistics regarding public sector entities to be available through data covering 73 public entities entities to facilitate financial Emergency Program. and 95% of resource flows in the management and policy formulation. non-financial public sector. The program needs to be incorporated into mainstream functions of the entities. 2. Improved financial management 2. Preparation of budgets and 2. A modem normative framework characterized by greater control of budgetary for public financial management transparency, efficiency and expenditures using the new and accountability established. accountability. systems, preparation of timely Reorganization of the MOF and and accurate accounts of the computerized financial systems Central Government, and increased efficiency, reduced enhanced accountability. discretion and enabled timely preparation of government financial statements. Budgets prepared using new norms and systems. The internalization and enforcement of the norms needs further strengthening. Also computer systems needed to be integrated and further refined. This is being done by PFMO-II. 3. Strengthened internal and external 3. Improved external auditing and 3. CGR's role modified to focus on control environment in the internal controls. ex-post auditing and prior control government. eliminated. CGR given extensive powers to initiate action against erring officials, but its judicial powers transferred to the Judiciary. Norms for internal control and auditing developed. External auditing strengthened. Tax Administration 1. Tax Reform Act of 1986 1. Improved tax collections, 1. Domestic tax collections improved implemented and tax administration increased efficiency and reduced from about 1% of GDP in 1984 effectiveness increased. corruption in tax administration. to 7.8% of GDP in 1992. Tax administration's ability to monitor compliance increased. Computerization increased efficiency and reduced corruption to some extent. However, tax auditing and investigation still need improvement.  25 Indicators Esfimated Actual Banking System Reform 1. Capacity of Central Bank to perform 1. Increased efficiency and 1. Central Bank capacity and its core functions enhanced. effectiveness of the Central performance significantly Bank. improved. 2.Banking supervision strengthened. 2. Improved supervision of 2. Supervision of commercial banks commercial banks. tightened. 3. Two major development banks 3. Strengthened development banks. 3. The targeted development banks restructured. could not be restructured.  26 Table 8: Studies Included in Project Purpose as defined Study at appraisal/redefined Status Impact of study 1. Various studies To put in place norms and Completed. The studies helped in conducted to principles with which to setting up the framework establish/define norms implement for public financial for different aspects of integrated/computerized management. public financial financial & administrative management. systems. 2. Analysis of the To reorganize and Completed. Reorganization of the IRD organizational structure strengthen tax helped improve its of the tax administration and effectiveness. Transfer of administration and the facilitate tax collection tax collection to tax collection system. through commercial banks. commercial banks improved collections and enabled IRD to focus on monitoring non- compliance. 3. Various studies To reorganize the Central Completed. Central bank reorganized conducted to implement Bank and the two and strengthened. different aspects of the development banks, Autonomous Banking Reform strengthen central banking Superintendency of Banks component. functions and create the created. Restructuring new Superintendency of plans for the development Banks. banks could not be put into effect due to a lack of consensus.  27 Table9: Status of Legal Covenants Deadline for Reference Subject Compliance Status Comments Section 3.01 Distribution of Continuous C responsibility between Implementing Agencies and ensuring that relevant public entities participate and assist in project implementation. Section 3.02 Procurement of goods and Continuous C consulting services to be in accordance with Schedule 3 of the Development Credit Agreement. Section 3.03 Arrangements with Banco Continuous C Central de Bolivia for implementation of Part C of the project. Section 3.04 and 3.05 Project monitoring and July, 1987 C implementation arrangement Section 3.06 and 3.07 Preparation of Component Annually/ CD Annual Action Implementation Programs, quarterly Plans delayed. Annual Action Plans and quarterly reports. Section 3.08 Alternative funding 12/87 C IDB funds arrangements to be made were available. by GOB if IDB Grant funds not available Section 4.01 Accounts and Audits Accounting CD Audit Reports continuous. delayed Auditing significantly. Annual Schedule I Non-financing of tax out Continuous CD Tax on foreign read with General of the credit. consultants Conditions initially paid out of credit, but subsequently reversed Status: C= covenant complied with CD= complied with after delay  28 TablelO: Bank Resources: Staff Inputs Stage of Planned Revised Actual project cycle Weeks US$ Weeks US$ Weeks US$ Through appraisal 20.0 30,769 40.0 61,538 53.6 82,462 Appraisal through 16.0 24,615 16.0 24,615 13.1 20,154 Board approval Board approval 6.0 9,231 3.0 4,615 0.6 923 through effectiveness Supervision 65.0 100,000 75.0 115,385 88.4 136,000 Completion 14.0 21,538 18.0 27,692 15.0 23,000 Tablel 1: Bank Resources: Missions Stage of project MonW Number of Days Specialized staff TPerformance[ Types of problems cycle year persons in field J skills represented rating Through appraisal 3/84; 10 29 Task management, n/a 5/86; audit; accounting; 10/86 central banking; tax administration; legal. Appraisal through 4/87 4 3 Task management n/a Board approval Board approval I 0 Task management n/a Managerial through effectiveness Supervision 10/87; 16 77 Task management, I to 2 Managerial, 4/88; budgeting; Technical 11/88; accounting; 3/90; treasury; public 1/91; credit; auditing.; 2/92; institutional 6/94 development; - central banking; tax administration Completion 6/94 1 10 Task management; 1 tax administration I   IMAGING Report No: 15159 Type: PCR