Colombia - First Programmatic Labor Reform and Social Structural Adjustment Loan Project

Documentof The World Bank FOROFFICIAL USE ONLY Report No: 26512-CO PROGRAM DOCUMENT OF THE INTERNATIONAL BANKFOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVEDIRECTORS ON A PROPOSED FIRSTPROGRAMMATICLABOR REFORM AND SOCIAL STRUCTURAL ADJUSTMENT LOAN IN THE AMOUNT OF us$200MILLION TO THEREPUBLICOFCOLOMBIA August 5,2003 Human Development Sector ManagementUnit Colombia-MexicoCountry ManagementUnit Latin America and the Caribbean Region This document has a restricteddistribution and may be usedby recipientsonly in the performanceof their official duties. Its contents may not be otherwisedisclosed without World Bank authorization.  REPUBLIC OF COLOMBIA - FISCAL YEAR January 1 - December 31 CURRENCY EQUIVALENTS (as of July 3,2003) CurrencyUnit =Colombian Peso (COP) US$l=2,816.60 Pesos SELECTEDABBREVIATIONS AND ACRONYMS ARS Administradoras del Regimen Subsidiado (InsuranceEntitiesof SubsidizedRegimes) CAlP Centros de Atencidn Integral a1 Preescolar (Centers o f IntegratedCare for Pre-SchoolChildren) CAS CountryAssistance Strategy CCF Cajas de Compensacidn Familiar (Compensation Associations) CFAA CountryFinancialAccountability Assessment CNSS Consejo Nacional de SeguridadSocial en Salud (NationalCouncilof Social Securityin Health) CPAR CountryProcurementAssessment Report CPI Consumer Price Index DANE DepartamentoAdministrativo Nacional de Estadistica (NationalAdministrativeDepartmentof Statistics DAPRE Departamento Administrativo de la Presidencia de la Repliblica (AdministrativeDepartmentofthe President of the Republic) DNP DepartamentoNacional de Planeacidn (National PlanningDepartment) EPS Empresas Promotoras de Salud (Insurance Entities of Contributory Regimes) FIAL Programmatic Fiscaland InstitutionalAdjustment Program FOSYGA HealthCare Sector Fund FY FiscalYear GDP Gross DomesticProduct GOC Government of Colombia HCB Hogares Comunitarios de Bienestar (CommunityWelfare DaycareCenters) ICBF Instituto Colombiano deBienestar Familiar (ColombianInstitutefor Family Welfare) ICFES lnstituto Colombianopara el Fomento de la Educacidn Superior (Colombian Institute for the Achievement of Higher Education) ICT Informationand CommunicationsTechnology ICR ImplementationCompletionReport IDB Inter-AmericanDevelopmentBank IM Initiating Memorandum IMF InternationalMonetaryFund INS lnstituto Nacional de Sahrd (National Health Institute) IPS HealthCareProviders ISS lnstituto deSecuridad Social (SocialSecurity Institute) LIL Learningand InnovationLoan MC Madres Comunitarias (communitycaregivers) MEN Ministry of Education M&E MonitoringandEvaluation MOH Ministry of Health MSP Ministryof Social Protection PACES Programa de Ampliacidn de la Cobertura de Educacidn Secundaria (Program for ExpandingCoverage of SecondaryEducation) PAHO Pan-AmericanHealthOrganization PA1 Programa Ampliado de Immunizaciones (ExpandedProgramof Immunizations) PLaRSSAL ProgrammaticLabor Reformand Social StructuralAdjustment Loan RAS Red deApoyo Social (Social Safety Net) RSS Red de Solidaridad Social (Social Solidarity Network) SAT Sistema deAprendizaje Tutorial (Systemof Tutorial Learning) SDR SpecialDrawingRights SECAL Social Sector Adjustment Loan SENA Servicio Nacional de Aprendizaje (National TrainingProgram) SISBEN Sistema de Seleccidn de Benejkiarios (System of BeneficiarySelection) SSR Sistema Social de Riesgo (SocialRisk System) UPC Unidad de Pago por Capitacidn (Risk AdjustmentPremium) Vice President: Davidde Ferranti Chief Economist: Guillermo Perry Director, LCSHD: Ana-Maria Aniagada Country Director: Isabel Guerrero Sector Manager, LCSHS: Christopher Chamberlin Sector Leader, LCSHD: Mark Hagerstrom Task Manager: Vicente Paqueo This report was prepared by a team consisting of Wendy Cunningham (deputy T M - LCSHS), Maria Luisa Escobar (LCSHH), Hideki Mori (LCSHD), Harry Patrinos (LCSHE), Manuel Salazar (LCSHS), Vicente Paqueo (TM-LCSHS) Christina Alquinta (LCSHD), and Tarsicio Castaneda(consultant). This operation was undertakenunder the general guidance of Mr. Mark Hagerstrom (Sector Leader, LCSHD), Mr.Christopher Chamberlin (Sector Manager, LCSHS), Ms. Ana-Maria Arriagada (Sector Director, LCSHD), and Ms.Isabel Guerrero (Country Director, LCClC). We acknowledge the valuable contributions of Mauricio Santamaria (LCSPP), Jairo Arboleda (LCCCO), and Martha Laverde (LCSHE).  COLOMBIA FOROFFICIAL USEONLY FIRST PROGRAMMATIC LABORREFORM AND SOCIAL STRUCTURAL ADJUSTMENT LOAN LOAN AND PROGRAMSUMMARY Borrower: Republic o f Colombia Implementing Ministry o f Finance Agencies: Poverty Category: Poverty Targeted Intervention Amount: US$200million Terms: Fixed Spread Loan payable in 16.5 years, including 5.5 years of grace, with commitment linkedand level repayment structure. Commitment Fee: 0.85% on undisbursedloan balances for first four years and 0.75% on undisbursedloanbalancesthereafter. Front-EndFee: 1% o f the loan amount Objective: The proposed Programmatic Labor Reform and Social Structural Adjustment Loan will support the Government o f Colombia's (GOC) objectives: (a) increase employment; (b) raise human capital formation; and (c) strengthen social protection. These objectives would be achieved by: (i)supporting the reform o f GOC's labor regulations; (ii)implementing Law 715 that amends the rules regardingthe decentralization o f education and health services; and (iii)developing an integratedand more efficient social protection system. Description: The Programmatic Labor Reform and Social SAL operation focuses on the approval and the initial operationalization o f the recently passed labor reforms and the acceleration of the implementation o f the education, health, and social protection reforms, in accordance with Laws 789 and 715 respectively. The PLaRSSAL focuses specifically on: (i) Greaterefficiencyinjobskillsformationandthelabormarket. (ii) Increased coverage, efficiency, and targeting of social protection programs, includingthe health sector, ICBF and SENA. (iii)Qualityandcoverageimprovementsintheeducationsector. Benefits: Social Impact. The Loan would increase the access of the poor to the benefits offered by the labor and social reforms. Key expected outcomes from the proposed operation (Annex I) include: This document has a restricted distribution andmay be usedby recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.  Increase employment by 400,000 workers in the next four years due to the labor reform; Increased number o f graduates from publicly funded job training and an increase in the number o f individuals benefiting from apprenticeship experiences due to changes in the labor law; Increase the number o f students trained by SENA by nearly half a million from its givenresources; 3.6-3.7 million additional children vaccinatedin 2006; 800,000 new affiliates in the Subsidized (Health Insurance) Regime over the two years o f the operation; Increased access o f poor children to ICBF services by 400,000; and Increase in net enrollments by 500,000 new students in the mediumterm. Poverty Impact. The social impacts have clear poverty implications since most o f them are investments in the future productivity o f low- income individuals. The increase inthe quantity o f education andjob training, access to health care, immunizations and early childhood development programs will increase the opportunities o f all Colombians to earn the highrates o f return that elude those with less human capital. Additionally, the actions in the loan will lead to the positive non-monetary benefits associated with more human capital, such as: longevity, decreased risk o f poverty, healthier off-spring, etc. In the short-run, the program supports employment for hard-to- employ groups, thus getting them back into the labor market and earning an income. Risks: The primary risk is the overall political context, namely the intemal conflict and violence associated with illegal drug activity, which has been escalating and would negatively impact the continued implementation o f the program. Although Colombia is deeply committed to ending the violence that has plagued the country for decades and i s supported by the international community, the conflict could intensify and thus demand attention and resources from the govemment. Project IdentificationNumber: PO79060  TABLE OF CONTENTS I.THEMACROECONOMIC,LABORMARKET,ANDSOCIALCONTEXT 2 A. MACROECONOMIC ENVIRONMENT ..................................................................................................... 2 B. POVERTY AND LABOR MARKET CHALLENGES.................................. ................................................. 4 C. SOCIAL SECTOR ISSUES ........................................................................................................................ 6 11. LABORAND SOCIALREFORMPROGRAM: STRATEGYAND RECENTACTIONS 9 111. THE PROPOSEDPROGRAMAND OPERATIONS 18 A. LINKSWITHTHE BANK'SASSISTANCESTRATEGY............................ ....................................................... ............................................... 18 B. PROGRAM OBJECTIVES AND DESCRIPTION THE PROGRAM OF 21 C. THEPROPOSED OPERATION .............................................................................................................. 24 D. SUBSEQUENT OPERATIONS ................................................................................................................. 25 E. LOAN AMOUNT, CONDITIONS, AND FIDUCIARYAND SAFEGUARDPOLICIES ................................. 26 F. BENEFITS ............................................................................................................................................. 29 G. RISKS........................ ............................................................................................................................ 30 ANNEX I:PLARSSALPOLICY MATRIX 32 ANNEX 11: LETTEROF DEVELOPMENTPOLICY FROMTHE GOVERNMENT 36 ANNEX 111: SOCIAL ISSUES AND CHALLENGES 65 ANNEX IV:INNOVATIVE EDUCATIONAL MODELSAND SERVICEDELIVERY SCHEMES 74 ANNEX V: FISCAL IMPACT OF IMPLEMENTING THE REFORMS 76 ANNEX VI: FUNDRELATIONSNOTE 77 ANNEX VII: COLOMBIA AT A GLANCE 78 ANNEX VIII: ADDITIONAL ANNEXES 80 ANNEX IX :MAP OF COLOMBIA  TABLES TABLE1: POVERTY RATES INCOLOMBIA. 1978-1999 .......................................................................................... 4 TABLE2: GOVERNMENT COLOMBIA EDUCATION OF 12 TABLE3: EXPANDED IMMUNIZATIONPROGRAM: .............................................................................................. INDICATORSAND GOALS .............................................. 15 TABLE4: SOMEOFTHE ASSUMPTIONSMADEFORCALCULATINGTHE FUNDSFOR INCREASINGAFFILIATION ................................................................................................................ TABLE5: 2002 ACTIONSTO RESTRUCTUREIssAND FINANCING IMPACT (MILLIONOF 2002 COPS) INTHE SUBSIDIZEDREGIME 18 TABLE6: PROGRAMMEDIUM-TERMOBJECTIVESANDPERFORMANCEINDICATORS .................................... ...........17 23 TABLE7: BENEFICIARYCHILDRENFROM ICBFSELECTEDPROGRAMS(THOUSANDS) ................................... 72  FIRST PROGRAMMATIC LABORREFORMAND SOCIAL STRUCTURAL ADJUSTMENT LOAN PROGRAM DOCUMENT 1. This Program Document proposes the first of two Programmatic Labor Reform and Social Structural Adjustment Loans (PLaRSSAL) to support the Government o f Colombia's (GOC) objectives in the labor and social sectors to increase employment, raise human capital formation, and strengthen social protection. These objectives would be achieved by: (i) supporting the reform o f Colombia's labor regulations; (ii)implementingLaw 715 that amends the rules regarding the decentralization o f education and health services; and (iii)developing an integrated and more efficient social protection system. Buildingonthe US$155 million Social Sector Adjustment Loan (SECAL; 7134-CO) implemented during FY 2003, which was rated "Satisfactory" in its Implementation Completion Report (ICR), this Programmatic Structural Adjustment Loan would consist o f two loans (PLaRSSAL Iand PLaRSSAL 11). These operations would be proposedfor Boardpresentation inFY 2004 and FY 2005, respectively. 2. The Bank has proposed this programmatic structural adjustment loan (PSAL) to support the GOC's reform program for the following reasons. First, the GOC needs, and has requested, continued assistance from the Bank to establish more solid conditions inthe country for the sustained expansion o f employment, faster human capital accumulation, and better social protection o f the population, particularly the poor and vulnerable. The GOC has requested.thisloan to help meet a projected financing gap. Beyond this need, the proposed operation would address medium- and long-term issues related to employment, human development, and povertyreduction challenges. 3. With slow economic growth, high and rising income inequality, and widespread unemploymenthnderemployment, Colombia continues to suffer high levels o f poverty. Many children remain vulnerable to malnutrition and illhealth. Despite substantial resources spent on health, a high proportiono f families still do not have adequate protection against financial losses from illness nor access to good quality basic health services. Moreover, Colombia lags behind other competitor countries interms o f the level and quality o f education and training, undermining its prospects for greater long-term competitiveness and growth. In addition to this difficult economic situation, violent conflicts due to guerrilla warfare and narco-trafficking remain unabated. All o f these issues have combined to create more widespread economic and social insecurity, increasing the burden on the country's still inadequate social protection system. 4. Second, the current Country Assistance Strategy (CAS) considers the proposed operations a priority. The GOC has a sound labor and social reform program that the Bank must support to succeed (see GOC's Letter o f Development Policy in Annex 11). The implementation o f these reforms is expected to increase employment, improve education and training, and strengthen human capital accumulation. Since employment and education have been shown to be key pathways through which poor families are able to raise their incomes and exit poverty, the programi s also expected to reduce poverty. 5. Third, the current President Uribe administration (2002-2006) has the political will and capacity to undertake this reform program. Clearly, the above-mentioned challenges are largely the same as those that confronted previous administrations, despite the notable progress they achieved. What i s new in the current environment, which has created hope among Colombians, is that the current administration i s strong and reformist-and i s led by an authoritative and popular President with an electoral mandate to pursue further social and economic reforms and take more aggressive measures against violent lawlessness. The political commitment and capacity o f the Uribe government are evident from the various measures it has already implemented, including, among others: the robust implementation o f key 1  provisions o f Law 715 increasing the efficiency o f the basic education system; the passage of labor and pension reform laws (Law 789 and Law 797, respectively) lowering the cost o f employment while strengthening social protection; and tax and other measures taken early in its term to improve macroeconomic andfiscal stability. 6. Finally, the Bank is well-positioned to encourage and help Colombia complete the reform o f its health, education, training, labor, and social protection systems. Since 1998, the GOC, the Bank, and the Inter-American Bank (IDB) have been closely and fruitfully collaborating on labor and social sector reform issues. This collaboration, which has been sustained by the current administration, has taken various forms, including two World Bank investment loans' to support the Red de Apoyo Social (Social Safety Net, RAS) program, the social sector SECAL, and a series o f analytical studies on poverty, social protection, health, labor market, training, and education issues. The GOC appreciates the value o f the Bank's continuous support, as expressed in the Letter o f Development Policy and in the government's favorable views expressedinthe SECAL's ICR. 7. Continuation o f support through this PSAL and the ongoing program o f analytical activities i s a key factor in ensuring full implementation of a more effective labor and social reform agenda. Such support i s critical since the reform agenda i s quite complicated politically and economically, requiring many years o f persistentand consistent reform efforts that are necessary to buildthe economic and social foundations for a peaceful society. 8. The risks involved in the proposed operation appear moderate. These risks are manageable and measures have beentaken to reduce them. These issues are discussed in Section 111. 9. Section Ipresents the macroeconomic environment, a key condition o f this operation, and the challenges Colombia faces regarding labor and social issues. Section I1 presents the GOC's reform agenda and discusses the measures it has already taken to meet those challenges. The final section details the specific objectives o fthe program, the policy matrix, impact andriskanalysis, and other aspects o fthe lending operations. I. TheMacroeconomic,LaborMarket,andSocialContext A. Macroeconomic Environment 10. Colombia has a tradition o f stable economic growth, created and enabled by responsible fiscal management. However, extemal and internal conditions in the late 1990s disrupted this prosperity, leading to the current crisis o f fiscal constraints in an environment o f economic uncertainty. Despite recent gains, including declining inflation rates, increased private sector activity, and greater financial stability, the government i s still struggling with the aftermath o f the 1999 recession-which exposed an estimated three million people to poverty-and searching for a means to rise above this situation and protect itself from future negative shocks. This task i s particularly difficult given the tight fiscal constraints. The Pastrana administration (1998-2002) aggressively worked to lower the financial imbalance o f the public sector through a macroeconomic policy supported by the International Monetary Fund (IMF). Despite the imposition o f fiscal discipline among sub-national governments, curtailed expenditures, lower public service wages, and an increased VAT base, among other efforts, further expenditure reduction and tax collection are necessary to revive growth. Thus, the quest for a manageable deficit overshadows policy initiatives inthe current administration. ' Community Works and Employment Project (7017-CO); Human Capital Protection Project (7050-CO). 2  11. Macroeconomic Performance. Colombia's economic performance began to deteriorate in the early 199Os, reaching its low point at the end o f the 1990s, but recent events indicate that it may be improving. Although the economy grew by 1.4 percent in 2001 and about 2.0 percent in 2002, this still corresponds to a decline inper capita terms. Major domestic obstacles to a robust recovery include weak domestic demand associated with high unemployment, currently at almost 16.7 percent in urban areas, and historically low private investment levels. In addition, exports, which had led the recovery in 2000, have languished more recently due to a combination o f domestic and intemational factors. This has in turn affected the performance of manufacturing, since much of manufacturing production is directed towards exports, as a result o f weak demand at home. Sluggish domestic demand and worsening internal security conditions are reflected in the continued weakness o f private investment. In the first quarter o f 2003, however, Colombia's GDP grew by 3.8 percent, the biggest growth in GDP infive years, signaling that Colombia's growth might be at a turningpoint. 12. Private GDP has grown little since the mid-l990s, and private investment has deteriorated from its peak o f nearly 12 percent o f GDP in 1994 to under six percent at present. Total investment is now about 13 percent o f GDP, incompatible with what the resumption o f significant growth would require. While government consumption grew by two-thirds between 1994 and 2002, household consumption remained basically unchanged. 13. Colombia's exports (GNFS) fell from 20 percent o f GDP in 2000 to 18 percent of GDP in 2002 because o f declining petroleum production (despite the recent rise o f world oil prices), historically low intemational coffee prices, difficulties in the important Venezuelan market, and the real appreciation o f the peso in2001 and early 2002. While the country's non-traditional exports, mainly manufactured goods and cut flowers, performed well inrecent years and now amount to over halfo ftotal merchandise exports, the appreciation o f the peso in early 2002 and the economic slowdown in the United States, Venezuela, and other Andean countries affected them negatively in 2002. The total extemal current account had a deficit o f about 2.9 percent o f GDP in2002. 14. Inflation declined in2002, assistedby sluggish demand, and was about six percent, and i s expectd to be the same for 2003. 15. Fiscal Performance. Over the past half-decade, new realities have emerged in Colombia's fiscal domain, including significant deficits and large future fiscal liabilities. The rapid expansion o f the public sector over the previous decade, from spending one fourth o f GDP in 1990 to over one-third o f GDP at present, combined with growing liabilities, particularly on the pensions front, have led to significant and persistent deficits o f a structural nature. As public spending rapidly outstripped the sector's revenue- generating capacity, much o f the fiscal deficit was financed with debt, both domestic and external. At present, total public sector debt in Colombia i s over 50 percent o f GDP. The estimated deficit o f the consolidated public sector for 2002 was about 4 percent o f GDP, largely due to election year spending, higher military outlays, and a weakening o f the social security institutions. On security spending alone, the administration estimates that it will needan additional one percent of GDP per year. 16. The Uribe administrationhas stressed its commitment to continue the fiscal adjustment efforts of the previous administration. In December 2002, Congress approved a strong tax package estimated to increase tax collections by close to one percent o f GDP in 2003 and by even a higher amount in the following two years. Also in that month, two key structural reforms were approved by Congress: a strengthenedpensionreformto address the looming deficits ofthe social security sector, Colombia's most pressingfuture fiscal liability; and a labor reform intendedto increase flexibility inColombia's rigid labor market. An overhaul o f the public administration sector i s well underway. Additionally, Telecom was liquidated and Cajanal and Carpecom were massively reformed. In June 2003, the GOC was finally successful in passing through Congress a reform o f the Instituto de Seguridad Social (Social Security 3  Institute, ISS), which includes the separation o f service provision and financing. The fiscal deficit for the Non-Financial Public Sector is expected to come down to 2.5 percent o f GDP in 2003 and 2004. In late June, Congress approved a fiscal responsibility law. The government signed an agreement with the IMF in January 2003 for a two-year SDR 1.5 billion (US$2.1 billion equivalent) Stand-By Agreement to support its economic program through 2004. The first review o f the Stand-By Arrangement was satisfactorily completed on June 11, 2003. All performance criteria and structural benchmarks for end 2002 and end-March 2003 have been observed (Annex VI). 17. The Political and InternationalEnvironment.Colombia's vulnerability to extemal shocks has risen in recent months as a result o f several factors: (i) increased violence domestically and uncertainty about the future path o f the internal conflict; (ii)the sharp deterioration in sovereign debt spreads (although some recovery has been seen inrecent months); (iii) the recent worsening o f market sentiment toward Latin America; (iv) problems in Venezuela, the largest market for Colombia's non-traditional exports; and (v) an uncertain outlook for the U.S. economy, Colombia's main trading partner. However, exchange rate flexibility, falling inflation, and adequate international reserve levels should facilitate adjustment to extemal shocks, provided that a vigorous adjustment o f the fiscal accounts i s also undertaken. B. Poverty and Labor Market Challenges 18. Poverty. After years o f decreasing poverty rates, the trend has reversed due to the recent economic difficulties (Table 1). Between 1978 and 1995, national poverty rates declined from 80 percent to 60 percent. This was largely accomplished in urban areas, where poverty fell by 22 percentage points, while inrural areas, poverty declined by 15 percentage points. However, between 1995 and 1999, poverty rates increased, thus largely erasing the gains made between 1988 and 1995; by 1999, urban poverty was seven percentage points higher than it had been in 1995. Incontrast, in rural areas, the poverty rate did not increase with the 1999 recession, but the poverty gap increased by four percentage points, indicating that the difference between the poor and the rich inrural areas increased over the period. Table 1: PovertyRates in Colombia, 1978-1999 1978 1988 1995 1999 National 80 65 60 64 Urban 70 55 48 55 Rural 94 80 79 79 National 45 29 21 23 Urban 27 17 10 14 Rural 68 48 37 37 19. ' Extreme poverty rates decreased faster than poverty rates in the period 1978-1995, but they slightly increased in the 1999 recession. Nationally, extreme poverty rates declined from 45 percent in 1978 to 21 percent by 1995, but the recession led to an increase in the extreme poverty rate by 2 percentage points. This is due to increased impoverishment in urban areas, as extreme poverty rates in rural areas did not change between 1995 and 1999. However, it should be noted that extreme poverty rates inrural areas are more than double those inurban areas (37 percent compared to 14 percent). 20. Income inequality has increased in Colombia since 1978. The Gini coefficient was 0.53 in 1978, but reached 0.57 by 1999. Most o f the increase was due to a larger dispersion o f wages within regions, 4  rather than an increase in the wage gap between regions. The increased wage dispersion is attributed to the increased dispersion in educational attainment and returns to education and to greater informal sector employment, where remunerations have a higher variance than inthe formal sectore2 21. Labor Market. After years o f good performance, the Colombian labor market has stalled. Key indicators o f crisis include: Persistently high unemployment rates. Since 1995, the national unemployment rate has increased from 7 percent to above 15 percent-double the historical rate-and only recently declined to 12 percent. The rates are particularly high in urban areas where they reached 20 percent in 2000. Youth and women experience the highest unemployment rates; over 60 percent o f poor urban youth report being unemployed and women report rates that are more than a third higher than those o f men. Unemploymentrates o f household heads-typically the primary income earners in the household-have also rapidly increased, leading to an acceleration o f poverty. The majority o f the unemployed were previously employed in the informal sector, thus making them ineligible for severance pay or other types o f separation compensation. Increasing rates of underemployment. The percentage o f workers employed fewer than 35 hours weekly has also been increasing since the mid-1990s. Among men, this i s likely due to demand side factors, where firms decrease hours worked, rather than supply side factors that would lead workers to prefer shorter work weeks. Women are disproportionately engaged inpart-time work, but the data do not reveal ifthis pattern offemale employment i s demand drivensimilar to menor supply driven since women's labor market activity is often constrained by household responsibilities. Over 70 percent o f the underemployedholdjobs inthe informal ~ e c t o r . ~ A rise in informal sector employment. Since the mid-l990s, the propation o f workers who own their firms or are employed infirms that do not pay worker benefits has increased. By June 2000, over 60 percent o f jobs in urban Colombia and 91 percent in rural areas were in the informal sector, the highest proportion ever. Among urban informal sector workers, 60 percent are self- employed, 40 percent are informal employees, and a small proportion i s unpaid.' The increased informality reflects the dualistic nature o f the post-1995 labor market where relative formal sector wage increases have occurred simultaneously with a growth in the relative size o f the informal sector.6 Stagnant wages. Although average wages increased throughout the 199Os, this trend hides the fact that wages o f low- and semi-skilledworkers stagnated over the same period. Instead, wages o f the most skilled workers, who were also the most highly paid, have increased rapidly throughout the 1990s, reflecting increasingreturns to higher ed~cation.~ 22. Certain groups are more vulnerable to poverty through unemployment and low wages. Multiple worker households are replacing the traditional model o f a single worker in the household where the * Colombia Poverty Assessment (2002) (World Bank: Washington, DC). Hugo Lopez Castafio(May 2001) "Mercado LaboralColombiano: Funcionamiento y BarrerasInstitucionales", WorldBanWLCSPR,unpublished manuscript. Ibid. Ibid. Wendy V. Cunninghamand William F. Maloney(forthcoming)"An AlternativeView ofthe Informal Sector" in FranciscoCarneiro, IndermitGill, RicardoPaesde Barros,andAndreas Blom(eds.) Making Brazil s Labor Market 'Workfor Everyone. LopezCastafio(2001). 5  income o f many i s required to maintain an acceptable standard o f living. Thus, youth (age 18-25) and women are entering the labor market at a faster rate, particularly as economic uncertainty increases. While youth and (married) female unemployment is higher than male adult unemployment throughout the world and across time, and their wages are lower than those o f men, the employment gaps have become particularly wide in recent times. Wage gaps, though declining, do persist.' Additionally, the growing situation o f the internally displaced populations-individuals who have abandoned their assets in conflict regions and moved to new labor markets in which they have few skills and networks-has led to a group o f economically vulnerable Colombians who do not have the skills to integrate into the urban labor markets in their new homes.' Finally, the low-skilled workers are being left behind both interms o f employment and wages. 23. The source o f the troubling labor market trends varies. In general, however, the increased unemployment is due to both the decreasein demand and the continued growth and changing composition o f the labor force. The size o f the labor force continues to grow as youth and women enter the labor force as a source o f "social safety nets" for their families duringuncertain economic periods. These groups tend to have difficulty finding employment due to their scarce or intermittent job experience and competing demands on their time, whether from school or family. 24. Onthe demand side, the specific causes may be related to increased rigidities inthe labor market including the real increase in the minimum wage in 1999;" higher total wage bills as the payroll taxes that add an additional 50 percent to wage bills increased as real incomes increase;" firm down-sizing and cost-cutting to remain competitive in the global economy;'2 a decrease in aggregate demand that was exacerbated by the external shocks, fiscal imbalance, and the growing incidence o f violence, that were the basis o f the 1999 recession; and/or obsolescence o f skills as technological advances and information transform the global economy.I3 Economic analysis points particularly to the notable increase in real minimumwage, which hasbeenincreased generously following the inflationaryperiod. C. Social Sector Issues 25. This section briefly reviews the issues facing Colombia in the social sectors: education, job training, healthcare, social protection, early childhood care (Instituto Colombiano de Bienestar Familiar, Colombian Institutefor Family Welfare, ICBF), and social oversight. Details o f each sector are provided inAnnex 111. 26. Education and Training. The interaction betweeneducation, job training, and technology is the key to economic growth, but Colombia is unlikely to fully benefit from technological innovations in the global economy due to its inefficient and under-performing education andjob training systems. Lopez Castaiio (2001). World Bank (2002) "Program Document for aProposedSocial Sector Adjustment Loan", Report No. 24489. lo Jairo Nuiiez and William F. Maloney (2001) Measuring the Impact of Minimum Wages: Evidencefrom Latin America. Policy ResearchWorking Paper 2597, (World Bank: Washington DC). Vicente Fretes-Cibils and Vicente Paqueo (2003) "Enhancing Opportunities through the Labor Markets" in Marcelo Guigale, Connie Luff(eds.) Colombia: The Economic Foundations of Peace (World Bank: Washington, DC). I* Non-wagebenefits increase the cost of labor by approximately 62 percent. Although some of this may be offset by lower wages, firms absorb the other part, which will not be sustainable in some industries(Lopez Castaiio 2001), particularly ifthey are subject to competition,whether global or local. 13 David de Ferranti,Guillermo Perry, Indermit Gill, Jose Luis Guasch, William Maloney, Carolina Sanchez-Parma, andNorbert Schady (2003) Closing the Gap in Education and Technology (World Bank: Washington, DC). 6  27. Coverage. Although the average education level o f adults increased 11percent between 1996 and 2001, recent trends among children suggest that achievement could be higher, particularly in rural areas. Colombian adults have an average o f 5.3 years o f education, compared to 8.8 years in Argentina, 8.6 years inPanama, and 7.6 years inChile, Peru, and Uruguay. Net enrollment rates for primary, secondary, and higher education are 82 percent (down from 84 percent), 63 percent, and 15 percent, respectively. While promotion rates from the first to second grade have increased over time, they are still only 73 percent and repetition rates at the first grade are nearly ten percent, an increase from previous years. These average numbers mask the large disparity between the rural and urban outcomes. While Colombia's publicjob training programs are large-educating more than one million students annually in the Sewicio Nacional de Aprendizaje (National Training Program, SENA) alone-the programi s not well targeted to the poor, who most lack humancapital. 28. Quality. Achievement tests show that Colombian students may be on par with other Latin American countries, but they lag relative to the global labor force. Colombia ranked second to last among the 40 countries that participated in the TIMSS (Third International Math and Science Study) in 1995. A similar low ranking was achieved by Colombian students on the P I E S (Progress in International Reading Literacy Study) in 2001. Even more worrisome i s that these numbers represent a decline in the quality o f education in public schools since the 1980s. The low quality o f training programs has also become an issue, as rates o f return to job training have declined over timei4 and employers and workers argue that publicly provided job training programs are increasingly unable to provide competencies in emerging ind~stries.'~ 29. Low Efficiency. Low coverage and poor quality o f education services are particularly disappointing since Colombia spends a substantial amount o f resources on education and training. Education spending accounts for 4.1 percent o f GDP, which i s similar to average spending by middle income countries, such as Argentina (4.5 percent), Chile (4.2 percent), and Mexico (4.4 percent), but still below the OECD average of five percent. Interms o f training, two percent o f all payroll tax, equal to 0.3 percent o f GDP i s spentjust on one public training program (SENA), which only i s responsible for 20 percent o f alljob training inColombia. 30. Health Reform. The Uribe administration faces the continuing challenge o f completing the implementation o f the envisioned health system reform o f 1993 (Law 100/93), which seeks to separate health care finance from provision of services. In addition, the administration needs to ensure that it will achieve close to universal immunizationo f children by the end o f its term. 31. Universal vaccination. By 1995, Colombia achieved immunization coverage levels o f 90 percent or more for all routine vaccines. However, since 1997, coverage levels for all vaccines have declined below 80 percent. Both financial and institutional factors appear to be the underlying causes for the decline. Since 2001, budgetary resources have been allocated to address the problem, but continuous efforts through 2006 and beyond are neededto reach the target vaccination rates. 32. Universal health care insurance and efficiency in service provision. The health system reform called for a transformation o f the health care financing scheme from supply side financing-where public hospitals are directly funded by the government-to demand side financing where all individuals hold health insurance and are free to select their healthcare providers, and hospitals receive their resources through the insurance (EPSs-Contributory Regime-and ARSs-Subsidized Regime). The poor are eligible l4Barrera, Felipeand Alejandra Corchuela(inprogress) "SENA Retums: A Re-evaluation," LCSHSIWB. Alejandro Vivas (inprocess) "Capacitacion Vocacional en Colombia: Percepcionessobre el SENA por Parte de Trabajadores, Empresarios, Gremios e Institucionesde Capacitacion Privadas," LCSHSiWorld Bank; Fedesarrollo (inprocess) "Firms' Perceptionson SENA: A Survey," LCSHSiWorld Bank. 7  for the Subsidized Regime (Regimen Subsidiado), which is paid by the government, while the non-poor pay into the Contributory Regime (Regimen Contributivo). This system has two benefits. First, poor individuals are fully covered by a public subsidy to their insurance. Second, the quality and efficiency o f hospital services will likely increase as providers compete for clients. 33. Although the transformation i s in process, several issues remain to be worked out. First, the number of affiliates of the SubsidizedRegime needs to be increased by another five million to reach the target o f 33 percent coverage o f the whole population (the remaining two-thirds o f the population will be covered by the Contributory Regime). Second, acquisition o f funding for the remaining subsidies is difficult since public hospitals are using those resources to provide services to individuals not yet affiliated with the Subsidized Regime. These hospitals have no incentive to efficiently provide services, so resources are particularly scarce. Third, for the new system to be effective, collection o f accurate information about the insurers and providers and dissemination o f the information to users is crucial; no such system exists. 34. Social Protection. The administration views social protection as the efficient and equitable management o f all social risks and their consequences. An integrated social risk management system i s the key to more efficient and wider reaching social protection. 35. Unijied social protection strategy. The Ministry o f Social Protection (MSP) was created to oversee the efficient delivery o f risk management services to the population. Colombia's diverse set o f social protection programs emerged in an ad hoc manner, leading to a duplication o f programs, poor targeting o f services, competing incentives, and general inefficiency. To organize and streamline the social protection system, the MSP i s charged with developing a risk management strategy that encompasses the existing institutions (SENA, ICBF) and programs and consolidating the many social protection programs under this umbrella. The strategy and process i s yet to be developed. 36. Counter-cyclical social protection expenditures. Colombia lacks a good system for protecting the poor and most vulnerable during crisis and addressing the needs o f the chronically poor during normal times. Most social insurance and assistanceprograms are financed by payroll contributions (parafiscales), which are very pro-cyclical and some (such as Cajas de Compensacih) only serve families o f formal sector workers-who tend to be less exposed to risk. Inresponse, a Social Safety Net Program (Red de Apoyo Social) was created to cope with the recent recession, but the question on how to institutionalize the safety nets remains. 37. ICBF Reform. The ICBF serves, among others, one o fthe most vulnerable groups inColombia- children younger than age seven from poor families-but structural problems with ICBF and a decreasing budget require deep program reforms. In 2002, ICBF programs benefited nearly one million children younger than age 7-85 percent o f whom attended community childcare centers (Hogares Comunitarias de Bienestar, HCB)-and distributed food supplements to 2.3 million children on a regular basis. The impressive coverage rates mask the fact that: (i) targeting o f ICBF programs to poor families has been decreasing since 1991;16 (ii) ten percent fewer children received services in 2002 than in 1998; and (iii) the quality of inputs, and thus the quality o f services, is low.l7 Additionally, the scheme to finance the HCBs is not well monitored, leading to potential leakage in funds. In a period o f decreasing resource l6Between 1992 and 1997, childcare coverage of children belonging to urban families in the first income quintile decreased by 20 percent. World Bank (2002) Colombia Poverty Report. Report No. 24524-CO (World Bank: Washington, DC). "EvaluacidndeImpact0de10sHogaresComunitariosdeBientestar (ICBF, 1997). 8  constraints18and increased demand on social services due to the economic volatility and the violence that adds to the displaced population, a focused strategy for quality service delivery to the poorest clients and transparency in program outputs (impact evaluation and cost-effectiveness analysis) and expenditures i s crucial. 38. Transparency and Social Control. To increase the efficiency o f social expenditures, monitoring and evaluation and transparency in public spending are necessary. Colombia lacks a culture o f evaluation and no social program i s subject to periodic impact evaluations. This leads to inefficient social spending and difficulties inidentifying and designingprogram improvements, which is particularly important inthe current fiscally constrained environment. The public has also perceived that the lack o f monitoring and evaluation, transparency, and internal controls are the principle causes o f misallocated federal resources, whether due to waste or corruption. The poor particularly do not have access to information regarding resource allocation criteria and mechanisms to feed their concems into the decision-making system are weak. 39. The achievement o f better transparency and evaluation i s difficult. Evaluationand dissemination o f results can be costly and Colombia i s resource constrained. Also, implementation o f such a system, and culture, i s a complicated and politically sensitive undertaking that will require consultation with stakeholders. Nonetheless, recent achievements in monitoring and evaluation have demonstrated the importance o f confronting the challenges. 11. Labor and Social Reform Program: Strategy and Recent Actions 40. Labor and Training Reform. The GOC i s addressing the labor market conditions that expose individuals to poverty, most notably through the Labor Reform Law (789/02) approved by Congress in December 2002. By identifyingthe cost o f labor as a major constraint to new hiring," the labor reform bill creates incentives for employers to increase employment through: (0 The reduction of non-wage labor costs to employers. This provision includes a less perverse schedule for severance payments; limited retroactivity o f severance payments; and a waiver o f parafzscales (payroll taxes) for students, the young, older workers, and others who are difficult to employ; (ii) Thereductionof structural ineflciencies toemployers.Theperiodoftheregularworkday was extended to allow for two full-time shifts, thus encouraging the hiring o f additional employees to fillthe second shift; and (iii) The reduction of wage labor costs to employers. Through the apprenticeship program, employers can hire low-skilled apprentices and pay them below the minimum wage. Additionally, the premiumto work overtime on holidays and Sundays was decreased. 41. At the programmatic level, the GOC, with the support o f the World Bank, is seeking to alleviate the unemployment problem through the development of the workfare program, Empleo en Accidn. This program provides temporary employment to low skilled, SISBEN 1 or 2 (System o f Beneficiary Selection, based on poverty status), mostly unemployed individuals in urban areas. It is estimated that 90,000 jobs were directly created in 2002 and another 40,000 - 60,000 were indirectly created. To '* Three percent of payroll tax is earmarked to fund ICBF programs. The total value ofthese taxes has decreased in recent years due to: (i)the recession,which decreased the size of the payroll; and (ii) exemptions in the new labor bill that waive the paymentof this tax (among others) for certaingroups ofworkers. l 9Vicente Fretes-Cibilsand Vicente Paqueo(2003). 9  complement this program, the Labor Reform Law stipulates a short-term employment subsidy for new hiring by small and medium sized firms, but an enabling regulationhas yet to be established. Inaddition, to protect the unemployed, the Law provides for the creation o f an unemployment insurance program. Similarly, this program needs an enabling decree. Initially, this program would be funded by a reallocation o f a fraction o f the revenues earmarked for the Cajas de Compensacidn (Compulsory Workers' CompensationFund2'). 42. The GOC is addressing the unsatisfactory targeting o f Colombia's training programs and i s working to improve the efficiency o f the SENA. Regarding the targeting, the GOC has recognized the special circumstances o f youth. Two primary initiatives are underway: (a) Reform of the Apprenticeship program. To improve the quality and relevance o f vocational education and training and to provide opportunities for matching young workers with firms, the Labor Reform Law includes a provision that gives incentives to firms to employ apprentices. In particular, firms are permitted to employ apprentices at a sub-minimum wage and to waive payment o f the paraJscales. The program has been expanded to provide incentives for firms usingprivate sector training services, thus creating some competition in the government's public training programs; and (b) Institutionalization of Jovenes en Accidn. SENA has adopted this RAS youth training program, which is in its third year. This program could provide the institution with valuable experience to develop a more generalized use o f vouchers as method for funding competitively provided training services involving the private sector. The program is designedto provide three months o f training and three months o f apprenticeship to unemployed SISBEN 1 and 2 youth. The training courses are provided by private firms, but are certified and supervised by the GOC. The program pays for the training costs andpays a stipend to the trainees. 43. The National Development Plan 2002-20062' outlines a new role for SENA as the leader in skills formation in a (National) Comprehensive Job Training Strategy that would include both the public and private sectors. Inthis role, SENA's responsibilities would be expanded to include serving as a regulator and certifier to ensure the quality o f the training courses offered. Additionally, SENA's existing program would be improved by: (i) increasing the quality and pertinence o f SENA training courses; (ii) its using installed capacity more effectively; (iii) decentralizing its operations; and (iv) increasing use o f and training ininformationand communications technology (ICT). 44. However, since the Development Planwas written, the strategy o f the GOC has evolved, with the Bank's support in bringing together the Departamento Nacional de Planeacidn (National Planning Department, DNP), the Ministry o f Social Protection (MSP), and SENA to redefine SENA's mission within the strategy o f the MSP and within the broader national development strategy, which is the responsibility o f the DNP. While the DNP, MSP, and SENA agree that a CONPES (Consejo Nacional de Politica Econdmicay Social, an authoritative statement o f government policy and guidelines issues by the Legislature's National Council o f Social and Economic Policy) would be written that defines the modern mission o f SENA as a regulator, financier, certifier, and promoter o f knowledge inthe global information society and that the CONPES would address the topics o f decentralization, division between the provision o f financing and services, downsizing, training vouchers, types o f courses offered by the SENA, and 2oThe Cajas de Compensacibn are private sector entities that are publicly fundedby payroll tax. Individuals select the Cajathat they want to be affiliated with. The entity administersthe hnds for family subsidies, income support, and in-kind subsidies such as recreationfacilities. 2`Bases del Plan Nacional de Desarrollo 2002-2006: Hacia un Estado Comunitario (Bogoti: Presidencia de la Republica-DepartamentoNacional de Plantacibn). 10  targeting o f services, the process to prepare and win buy-in for the CONPES faces two challenges: information and public support. 45. An absence of information about the demand and supply o f job skills and the market for job training services makes it difficult to design the model and transition process so that SENA becomes a regulator, financer, and promoter o f knowledge while the private sector handles the bulk o f the actual service provision. Thus, two actions are beingundertakenby the GOC, with Bank support. First, the late Minister of Social Protection and the World Bank co-hosted a workshop in Colombia where individuals from countries with demand-driven job training systems shared their experiences with SENA. Second, SENA, MSP, DNP, and the World Bank are collaborating on a study to identifythe vocational education and training needs o f Colombia's citizens and how to best meet those needs. This report (expected by December 2003) will form the basis o f the CONPES and the Action Plan for implementation o f the CONPES . 46. Previous attempts at reforming SENA have not succeeded due to the failure to take into account the public support for the maintenance o f the institution and its existing programs. Thus, the report mentioned above will also be used as a tool for public discussions and consultations to gain support for the CONPES and the Action Plan. This step i s crucial to any successful reforms. 47. Inthe meantime, SENA is making efforts to increase the efficiency of its services by downsizing staff. While the types o f services offered by SENA may change as a result o f the study and the CONPES, it is likely that the reforms will be gradual and costly, requiring increased efficiency in activities that are likely to persist after the reform or be one of the last to be restructured, such as the provision of short duration training courses. 48. EducationReformImplementation.The GOC is committed to sustained implementation o f the country's education reform agenda and has made education development a high priority. The main elements o f Colombia's Revolucidn Educativa (Educational Revolution) are summarized in the National Development Plan. The primary strategic results, listed inTable 2, include: 0 Greater coverage. The goal of the GOC i s to increase coverage by 1.5 million places in preschool, primary, and secondary education, and by 400,000 places in higher education. This goal will be achieved through strategies that promote greater efficiency and access to education, especially for disadvantaged children and youth. As shown inTable 2, out o f the 1.5 million new places, 800,000 will be achieved through efficiency gains from the reorganization o f regional education systems and the rationalization o f the way resources are used. Improved student learning and teachers ' performance. The GOC aims to improve education quality so that the students develop basic competencies, and labor market and citizenship skills. The Ministry o f Education (MEN) will regularly test students in all schools to measure their learning achievement, monitor its trend, and promote social accountability. Moreover, following the mandate of Law 715, a regulatory decree enabling systematic and regular measurement o f teachers' performance will be issued. The MEN will develop and pilot ways o f measuring teachers' performance. Furthermore, it will test performance-based incentive schemes to motivate teachers to teach more effectively. Regarding post basic education, the goals are to increase the quality o f low ranking higher education institutions as measured by ICFES (Instituto Colombiano para el Foment0 de la Educacidn Superior) tests and to provide opportunities for people to achieve formal education credits through a certification process based on equivalency tests. 0 Better use of education resources. Unlike in the past when the transfer o f education resources to the territorial entities was based on the number o f teachers, Law 715 mandates that the 11  distributionbe based on the number o f students attending, coverage gaps, and poverty indicators. A CONPES was approved to define the implementation rules for the distribution o f educational transfers pursuant to Law 715. Regulations were enacted for the implementation o f the law regarding the information system. These regulations strengthen the capacity o f the MENto assist territorial entities to develop their education information systems. Moreover, a decree has also been issued providing guidelines for public education institutions on contracting private providers for the deliveryo f educational services. Table 2: Government of Colombia Education Indicators and Goals with the national tests (grades 5 evaluated/total and 9 j municipalities (2) Proportionofpublic % increaseinstitutions 0 0 4.0% institutionsincategoriesmedium incategoriesmedium andhigh andhigh (3) Programs applying quality Number of programs 3 14 69 examsin higher education (nzicleos bhicosj departmentsimunicipalitieswith informationsystems innetwork with Ministry-ofEducation (2) Secretariatsin departments/ Numberof secretariats 0 78 100 municipalitiescertified (3) Municipalitiescertified Numberof 2 42 60 municipalities 49. The funding formula has started to create pressure on the territorial entities and their schools to enroll more children, fearing that otherwise they would lose money. To ensure that the incentive effect is maintained over time, good information and verification systems need to be established to support the correct and honest application o f the distribution formula. The MENhas made considerable progress in this area. Furtheradvances are expected toward completion o fthe system. Complementing this effort, the MENis providingtechnical assistanceto territorial Secretaries of Educationto develop reliable databases for monitoring and evaluation purposes. 50. The MEN has also entered into agreements with Secretaries o f Education to motivate and help them to restructure their education system and make it more productive-concentrating rationalization efforts in 42 decentralized municipalities with over 10,000 residents (over 70 percent o f the student 12  population). Many o f these agreements relate to the process o f certification o f municipalities, whereby Secretaries, once certified, will receive their education transfers in a form that allows them to have discretionary authority over those resources. 51. Regarding contracting private sector providers, the Development Plan indicates that a large number of student places inprimary and secondary education (about 640,000) would be created through contract service agreements and scholarships. 52. In addition to this new approach, the MENplans to expand rural education by 60,000 places during 2002-2006 through innovative models such Escuela Nueva (approach to primary education designed for multi-grade schools in rural areas); Telesecundaria (distance education); and Sistema de Aprendizaje Tutorial (System of Tutorial Learning, SAT). A description o f these and other innovations is providedinAnnex IV. 53. Finally, the administration has now firmly adopted the Familias en Accidn program as a social protection instrument that can be used to promote universal basic education. The program awards cash transfers to poor families in return for keepingtheir children in school. A recent impact evaluation o f the program shows that one year after implementation, school attendance among 14-17 year olds increased by 13 percent inurban areas and five percent inrural areas, as compared to the control group. 54. Social Risk Management System Development. In 2002, the previous Pastrana administration issued a CONPES outlining a Social Risk Management Framework (SSR) and social protection strategy for Colombia. This document articulated measuresto be undertaken by the R A S programs, ICBF, SENA, and other agencies to better and more efficiently respond to crisis periods and to help the chronically poor and the displaced populations. Subsequently, the new administration, recognizing the desirability o f a more integrated and comprehensive approach to social protection-an issue highlighted in the Bank's Securing our Future and Colombia Social Safety Net reports-set out to develop a comprehensive social riskmanagement system. 55. Several significant advances have been made on this strategy. First, the Ministry o f Social Protection (MSP) was established in February 2003 through a merger o f the Ministries o f Labor and Health. This new ministry i s intended to form the institutional backbone o f Colombia's evolving social risk management system. It is charged with consolidation of the existing social protection programs by designing coordinated strategies and policies through public health, early childhood (ICBF), skills training (SENA), health and unemployment insurance, pension, and other labor-related initiatives. Consequently, the MSP will oversee a variety o f previously uncoordinated agencies that provide the bulk o f social assistance and insurance protection in Colombia, including ICBF, SENA, and other agencies in health, labor, and Cajas de Compensacion Familiar. This effort i s expected to increase efficiency by eliminating duplication o f functions and through appropriate division o f labor. 56. The MSP is in the process o f developing its mission, strategy, and operating procedures, while bringing in line the various programs and institutions for which it is responsible. Although it remains to be seen how effective the MSP will be in coordinating powerful institutions such as ISS, ICBF, SENA, and Cajas, which have their own earmarked funding, the establishment o f the MSP represents a very important step forward in creating an integratedsocial riskmanagement system. 57. Second, the Tax Reform Law enacted in December 2002 created the Social Protection Fund (Fondo de Equilibrio y Proteccidn Social) to provide financing for social assistance. The objective o f the Fund is to safeguard social spending and maintain and extend social protection interventions during economic crises and fiscal adjustments. It will receive resources during good economic periods and only disburse payments when negative economic shocks increase social protection needs. Although the fund 13  will be subject to cyclical changes since it is partly based on payroll taxes, it can nevertheless be used potentially for counter-cyclical purposes, since the Fundwill manage all R A S funds and others not tied to payroll contributions. The GOC will issue neededregulations to establish a functioning Social Protection Fund. 58. Third, as part of the reform effort to better coordinate social insurance and assistance programs, all three Social Safety Net (RAS) programs are planned to be transferred from the Presidency to the MSP. The R A S program, supported by the Bank and IDB, was implemented to meet the needs o f Colombians who were particularly vulnerable to poverty as a result o f the recession. The objective o f the programwas to provide cash transfers in exchange for actions that were an "investment" in the individuals' human capital. Thus, three programs were developed: Familias en Accidn, which exchanges cash transfers for school and health center attendance o f children, Jdvenes en Accidn, which funds scholarship grants to poor youth for skills training, and Empleo en Accidn, a community-based temporary employment program for the needy. The GOC has started the institutionalization process o f the RAS. 59. Fourth, a renewed effort to target the poor populations has emerged with the nationwide implementation o f the Sistema de Seleccion de Benejkiarios (System o f Beneficiaries Selection, SISBEN) surveys to update municipal databases (started in 2003). This effort is expected to make the SISBEN Index significantly more accurate as a poverty status indicator and to improve its administration, auditing, and regulatory framework. Sanctions for false information and mismanagement o f the system are beingcontemplated. 60. With respect to ICBF, initial steps were taken in conjunction with the S E C K operation to address some o f the problems regarding the efficiency, equity, and quality o f its child care services (see Annex 111). These steps include: (i)a pilot program to separate financing from provision through decentralization and local government participation; (ii) a cost-recovery policy to be implemented in the Centros de Atencidn Integral a1Preescolar (Centers o f Integrated Care for Pre-School Children, CAIPs) based on sliding-scale fees graduated by income from users; (iii)a monitoring scheme based on a citizen's oversight plan in each ICBF regional office; and (iv) a technical review o f the management information system. 61. During President Uribe's administration, ICBF plans to undertake three noteworthy measures. First, it will establish quantitative targets increasing the share o f ICBF expenditures going to SISBEN 1 or 2 and, to complement this policy measure, monitor their achievement. Second, it will evaluate the impact and cost o f its major assistance and prevention programs. Third, based on the results o f the evaluation, the Institute will focus the use o f its resources on strategic, high value-added, and pro-poor programs. It i s noteworthy that ICBF has decided that its nutrition programs for under seven year olds will be limitedto poor children. 62. Health Services: Increased Immunization Coverage and Nutrition. The GOC has committed itself to strengthening public health. It has established the achievement o f 95 percent immunization coverage rate by 2006 as a national priority goal (see Table 3 for cost estimates). A strategy for achieving this goal hasbeenworked out, basedon a detailed evaluation ofthe entire national immunizationprogram conducted by the pertinent national authorities in collaboration with the Pan-American Health Organization (PAHO). In addition, a five-year Action Plan, including short and medium-term activities, was developed by the MSP and the National Institute o f Health (INS) to strengthen the Programa Ampliado de Immunizaciones (Expanded Program o f Immunizations PAI). In line with this strategy and action plan, the national authorities increased PA1 funding for the purchase o f vaccines and syringes to cover immunization needs for 2002. Law 715 o f 2001 also clarified the roles and responsibilities o f concerned government agencies regarding the funding and implementation o f the PAI. Under this new 14  law, the central government i s responsible for the purchase o f vaccines and syringes through the PA1 program, while the municipalities are responsible for the immunizationitself. Table 3: ExpandedImmunizationProgram: Cost projectionsfor the period2003-2006. Millionsof Pesos Total cost 2003 2004 2005 2006 2003-2006 Vaccines 70,668 64,324 63,637 64,446 263,076 Consumables' 10,848 8,857 8,788 8,869 37,364 Total cost 81,517 73,181 72,425 73,315 300,440 Source: Ministry of Social Protection, 2003. Note: 1. Consumablescosts include costs for administration, technical assistance, vocational training, transportation, information systems, the cold chain etc. 63. The GOC gave a considerable boost to its public health agenda by continuing to provide strong support to the Familias en Accibn program. This program has provided health subsidies to 269,000 children (age 0-6) inpoor families and i s expected to benefit a total o f one million children. The subsidies were provided to poor families in cash, conditional on their children's attendance at the Programa de Crecimiento y Desarrollo (Growth and Development Program), which includes vaccination and nutrition monitoring. 64. Recently completed impact evaluations show that DPT (diphtheria, pertussis, tetanus) vaccinations were 12 percent higher among children whose families received the cash subsidy than among the control group. The health subsidy has also been shown to have considerable impact on the level and composition o f children's diets. Inparticular, children whose families received the subsidy were 17 percent more likely to consume vegetables, nine percent more likely to consume eggs, and ten percent more likely to consume meat relative to comparable children whose families did not receive the subsidy. Moreover, anthropometricalmeasures o f severe malnutritionhave beenlowered significantly. 65. Improved quality of services. One o f the main goals o f Law 100 o f 1993, which reformed the Colombian health sector, was to improve the quality o f health services. To attain this goal, the GOC passed Decree 2309 o f 2002, "Quality Guarantee" (Garantia de Calidad), which seeks to ensure the quality o f health services. The decree defines the National Health Superintendent as the entity responsible for providing licenses to EPSs and the state (departamento) and district health directorates for providing licenses to the IPSs and for establishing the standards for acquiring these licenses. The MSP defines the standards, mechanisms and procedures for the licensing and accreditation. 66. In the case of health care providers (ISPs), the MSP has defined the quality standards through Resolution 1439 o f October 2002. The standards are set by activity typehospital ward (e.g. cardiology, orthopedics etc.). The Ministryo f Health's strategy has beento call on all health care providers to survey their services, using its standardized questionnaire, and to report the results to the MSP. Based on the report, ifthe services comply with the above-mentioned standards, IPSs will be licensed. Otherwise, they will not be allowed to operate until the standard has been met. Ina second stage, the Health Secretariats (Secretarias de Salud) will randomly visit a sample o f all providers to verify the information provided. In this process, the Secretariats will licensethose units that have improvedtheir services and have complied with the standards. They will close down those providers that have reported wrong information. The MSP is currently preparing a regulatory decree to establish the quality standards for insurers. 67. The implementation o f this quality assurance system will be completed by a more adequate client-oriented health information system to allow people to make informed choices regarding insurers 15  and health care providers. One o f the actions supported by the SECAL was the dissemination o f information regarding the performance o f EPSs, Administradoras del Regimen Subsidiado (Insurance Entities o f Subsidized Regimes, ARSs), public hospitals and Health Secretariats by the Health Superintendent. Such dissemination mainly occurs via the Intemet (using the web page o f the Superintendent) and uses financial indices regarding the above-mentioned institutions. Going a step further, the MSP plans to introduce a more widely accessible information system and to measure other indicators. The extended system will rank insurers, hospitals, and Health Secretariats using consumer- friendly criteria (waiting time to be servedtreated, politeness o f individuals attending the cliendpatient, availability o f supplies, overall responsiveness, etc.). Such informationwould be made easily available to the general public. 68. Further transformation of supply to demand subsidies. Law 715 o f 2001 mandates the re- initiation o f the transformation o f supply to demand subsidies in 2003. The law stipulates that the distribution o f the national transfers to the territorial entities for the health sector between Subsidized Regime membership and direct financing o f public hospital budgets will remain the same for two years after the law has been approved. By December 2003, the National Council o f Social Security in Health (ConsejoNacional de Seguridad Social en Salud, CNSSS) is expected to define the level and pace o f the transformation from supply to demand subsidy.22 69. Expansion of Subsidized Regime aflliation. As clearly indicated above, completion o f the health reform will depend on the expansion o f membership in the Subsidized Regime. The government plans to continue expansion to the extent feasible, financially and p ~ l i t i c a l l y .Early in 2003, the MSP estimated ~ ~ the number o f potential new affiliates inthe Subsidized Regime, based on highly optimistic assumptions including rapid GDP growth, especially for the year 2006, and a seven percent increase inthe number o f affiliates inthe Contributory Regime for 2003, which depends on highemployment growth (see Table 4). 70. NoJinancial bailout policy for public hospitals. The GOC and the MSP have adopted a policy that no additional resources will be allocatedto bail out public hospitals infinancial deficit. As discussed, public hospitals under the health reform program are supposed to finance themselves with payments from contracts with health insurers and from contracts signed between public hospitals and departments/municipalitiesfor the provision of specific services for the poor who are eligible but not yet actually covered by the Subsidized Regime (Vinculados). Law 715 stipulates that Departments are responsible for the financing o f public hospitals. These service providers however, are supposed to be ''Departments are responsible for financing hospitals, while municipalities are responsible for increasing health insurance coverage by the Subsidized Regime. The distribution of resources between health insurance affiliation subsidy and direct public hospital financing is based on the number of affiliates and of Vinculados. The allocation for healthinsurancecoverage is expectedto cover the Unidad de Pagopor Capitacidn (Risk Adjustment Premium, UPCs) of the currently affiliated population and of a predeterminednumber of new affiliates. On the other hand, resources destined for the financing of public hospitals are calculated basedon the estimatednumber of Vinculados ineach department. 23 There are a number of sources through which the MSP receives resources for increasing affiliation in the Subsidized Regime. As can be seen in Table 4, additional affiliation can be financed through the increase of the Sistema General de Participaciones (General System of Participations, SGP), the transformation of `supply' to `demand subsidies', the reduction of evasion and illusion in the Contributory Regime and the adjustment of the health care benefit package of the SubsidizedRegime. Additionally, the MSP would like to use existing resources accumulatedinthe Solidarityaccount of FOSYGA (HealthCare Sector Fund) that havebeen frozen by the Ministry of Finance. This account forms part of the national budget and thus i s subject to its rules and ceilings limiting the amount ofresourcesthat couldbe usedto increase affiliation inthe SubsidizedRegimeevery fiscal year. At present, the Solidarityaccount appears to have accumulatedreserves of COPs$852.000million, while by the end of 2003 it i s expected to reach COPs$l.OOO.OOO million. 16  paid based on contracts signed with those territorial entities.24 The "no bailout policy" should pushpublic hospitals to be efficient and to compete for signed health service provision contracts with the EPSs, ARSs, and regional governments. Table 4: Some ofthe assumptionsmadefor calculatingthe funds for increasing affiliationinthe subsidizedregime Assumptions 2002 2003 2004 2005 2006 IncreaseofGDP (real) 2.0% 2.5% 3.5% 3.5% 3.9% Inflation 6.2% 6.0% 5.0% 4.0% 4.0% Increaseof SGP resourcesfor health 2.0% 2.0% 2.0% 2.0% 2.5% Increaseofaffiliatesof Contributory Regimeby 7.0% 2.0% 2.0% 2.0% increase in employment Increaseofaffiliatesof Contributory Regimeby 6.0% 3.0% 3.0% 3.0% controlofevasionand illusion Source: Ministryof Social Protection, 2003. 71. Reform of the Social Security Institute (ISS). Steps have been taken to control ISS's huge and chronic financial deficit, but much more needs to be done. The GOC intends to further reform the ISS, realizing that its deficit is crowding out funds that otherwise could be used for the expansion o f the affiliation o f poor families into the ARSs or some other more worthy programs. The administration i s seeking feasible ways o f avoiding further bailouts of ISS.25 72. The ISS has established five main reform objectives: (i)finding a financial equilibrium; (ii) increasing the number of its affiliates; (iii) developing an information system; (iv) improving its hospital network; and (v) using its resources efficiently. A number o f actions that occurred in 2002 are expected to yield a total savings o f COPs$147,265 million (2002 pesos). These actions include: closing 22 ambulatory health care centers (CAA); the transfer o f specific units from more to less expensive areas; and the termination o f 2,200 contracts o f ISS employees as o f the end o f August 2002 (Table 5). The Institute is also undertaking several activities besides those mentioned, including: (a) Collaboration in the development o f a CONPES document offering alternatives to the Institute's structural problems; (b) Decrease o f the Sectional Management's Offices (Gerencias Seccionales) from 61 to 28; (c) Selection by merit o f 17 out of the 28 managers o f the Sectional Offices; (d) Signinga contract for the evaluation o f the viability o f aprivate management scheme in the hospital Misael PastranainBogoti; and (e) Diagnostic o f ISS health issues. 24The only exceptionto this rule is some decentralizedmunicipalities,where the municipalityreceivesthe resources to finance first-levelhospitals. *'The Government has transferred a total of COPs$1,000,000 million to ISS. The first part was given to the Institute in December 2001 and the secondpart in December2002. The ISS has usedthis money to pay salaries and pensions for its employees; to pay for services provided by others to ISS affiliates in the past; and to fund emergencies,medicines,hospitalconsumablesandother expenditures. 17  Table 5: 2002 Actions to restructureISS and financingimpact (million of 2002 COPS) Type of Action Financingimpact(2003) Closingof 22 ambulatoryhealthcare centers 3,3 84 Transfer of services to less expensive areasibuildings 3,035 Elimination of medicinenot includedin POS 3 1,405 Terminationof 2,200 contractsof ISS employeesby August 30,2002 31,541 Savings in expenditure andcontract bidding procedures 61,000 Reductionofother expenditures 16,900 Total 147,265 Source: ISS presentationto the World Bank mission on February 19,2003. 73. Transparency and Social Control. The DNP has made progress in the evaluation of several social programs, including Familias en Accidn, Empleo en Accidn and Jdvenes en Accidn. These evaluations have been important not only for estimating the impacts o f the interventions, but also for demonstratingthe value o f undertaking such evaluations to the government. A presentation givenby DNP to the President o f the Republic regarding impact evaluation was met with such enthusiasm that the MSP i s planning to institutionalize an evaluation system, where impact evaluations are conducted every few years on the MSP programs. 74. Partly as a result o f this experience, the GOC intends to implement mechanisms to enforce systemic evaluations o f program impact and cost. Following up on the CONPES on evaluation, the GOC plans to make such evaluation obligatory, at least for all major social programs and possibly for all public investments. International experience indicates that a law making it obligatory to evaluate the results and costs o f public programs is a key factor in the development o f results-based management, a culture o f transparency, and social accountability. 75. To complement the above measure, the DNP has decided to encourage citizens' oversight and monitoring. This i s consistent with the GOC's goal o f promoting social audits, recognizing that when carried out by citizens, these are the most effective instruments against corruption, and for improving efficiency, coverage, and quality o f public service delivery. Social audit mechanisms would be organized at the national level, and would involve participation by chambers o f commerce, universities and other education institutions, trade unions, and communities. An existing example o f a social audit, which will be used to guide efforts in this area, is the Como Vamos model, Bogoth's participatory monitoring and evaluation system. 111. The ProposedProgramand Operations A. Linkswith the Bank's AssistanceStrategy 76. As described inthe 2003 Country Assistance Strategy (CAS) discussed by the Board of Directors on January 19, 2003 the Bank's strategy focuses on three goals: (i)fast and sustainable growth; (ii) quality government institutions; and (iii) sharing the fruits o f growth. Achievement o f these goals will strengthenthe foundation for peace and the possibility for conflict resolution. As noted, violent conflict is Colombia's greatest challenge at present. To support this strategy, the Bank lendingprogram envisioned inthe CAS focuses on operations that would: (i) the most tangible impact onpoverty alleviation; (ii) have achieve fast and sustainable growth while protecting the poor; (iii) incorporate the lessons learned from the Bank's operations, particularly from on-going Learning and Innovative Loans; and (iv) pilot innovative interventions with important demonstration effects. 18  77. The PLaRSSAL will directly contribute to achieving the CAS objectives ina variety o fways: a. Economic growth. For faster and sustained economic growth, Colombia needs to increase employment o f workers and total factor productivity growth. The labor reforms supported by the PLaRSSAL would contribute to increased employment. Moreover, the education and training reforms advanced by the government and nurtured by these operations would increase the pace o f the country's human capital accumulation and push the private sector productivity towards the technological frontier. In the Bank's report, Closing the Gap in Education and Technology (2003), these two conditions are deemed necessary for sustained and rapideconomic growth inthe technologically changing global economy. b. Building quality government. The PLaRSSAL would contribute to the development of quality govemment by supporting reforms intended to promote the transparency, social accountability, coordination, and rationalization o f key social programs and institutions (e.g. MSP, ICBF, SENA, and MEN). In addition, the operations would enhance the participation o f Colombia's citizens and the ability o f beneficiaries to make choices and informed decisions. Such actions are expected to reduce inefficiencies and improve relations between the Colombians andtheir govemment. c. Sharing the fruits of growth. The labor, education, training, social assistance, and health reforms supported by PLaRSSAL would obviously enhance the ability o f all people, especially the poor, to share inthe fruits o f economic growth. Employment is the single most important source o f income for poor people. Hence, reforms that would reduce unemployment and underemployment as well as raise employment in the formal sector are likely to lower poverty and improve income equality. It can also be argued that improved cost-effectiveness and targeting o f ICBF and SENA programs to low-income people (called for by PLaRSSAL) would reduce welfare inequality. Moreover, a movement towards universal access to good quality basic education and health services promoted by PLaRSSAL would, o f course, favor lower income children. 78. Linkage Between the PLaRSSAL and other Bank Operations. The PLaRSSAL would continue, deepen, and expand the reform agenda supported by the recently-completed SECAL operation. The proposed operations are a key part o f the Bank's Country Assistance Strategy in support o f the GOC's efforts to raise the rate o f human capital accumulation, expand employment, and strengthen Colombia's social protection system. Bank operations that complement the PLaRSSAL include, among others: SECAL Implementation Completion Report (ICR). The ICR, which gives a "Satisfactory" overall performance rating for the loan, firmly laid the ground-work for the new administration to continue, strengthen, and extend reforms aimed at increasing the pace o f human capital accumulation and the development o f a more comprehensive and efficient social protection system. The following lessons leamed from the ICR have been taken into account in the preparation o f this operation: (i)focusing on high priority loan conditions; (ii) the value o f ensuring solid analytical foundation for the operation; (iii)govemment ownership or buy-in o f the policy matrix; (iv) strong sectoral collaboration; and (v) consultations with experts and stakeholders outside the government. Education investment loans. These operations include the recently approved Higher Education- Improving Access Project and the Cundinamarca Education Quality Improvement Project scheduled for Board presentation this fiscal year. The former aims to increase 19  enrollment in higher education; while the latter intends to reform Cundinamarca's education system to increase its efficiency, basic education coverage, and quality. Cundinamarca, it is hoped, would be a model o f how a territorial entity can better use its resources and authority underthe amended decentralizationlaw (Law 715). Programmatic Fiscal and Institutional Adjustment Program (FIAL). This program seeks to: (i)promote reforms addressing fiscal rigidities necessary to attain the substantial fiscal adjustment underlying sustainable macroeconomic stability; (ii)improve the provision o f public services; and (iii)establish the institutional basis for higher efficiency and accountability in public expenditure. The emphasis o f the reform program, as described in the recently approved FIAL I,i s initially on tax and fiscal responsibility; gradually, it will shift to expenditure and public sector reform during the second and third years of the program. These objectives are the backbone o f the government's broad program o f reforms, which includes significant policy actions to increase the mobilization o f resources to the public sector, improve critical public administration processes, and enhance the efficiency and effectiveness o f key government institutions. The FIAL I1will focus on, among other issues, incentives for efficiency gains in education and increasing transparency in management contracts within the MSP, namely in ICBF and SENA. Part o f the govemment's commitment under FIAL i s the reallocation o f part o f the income from royalties to education and resources under Law 21. Actions to increase transparency in management contracts are proposed to begin with a concept proposal o f the approach and the scope o f this action. Investments in Social Safety Net (RAS) program. The Bank currently finances the Human Capital Protection Project and Community Works and Employment Project. As mentioned, the latter is a workfare program that supports community projects to create opportunities for temporary employment for the poor unemployed workers. The former provides cash transfers to extremely poor families conditional on their children's enrollment in basic education and visits to health centers for basic care. Other related investment operations. An innovative lending operation currently under preparation that would complement the PLaRSSAL i s the Peace and Development Project. This project would assist communities inplanning and implementing their own strategies for development in the context o f violence and conflict. Moreover, for the next and following years, the CAS includes preparation o f the Health Investment Project. Analytical and Advisory Assistance. In consultation with the GOC, several analytical pieces were prepared by the Bank which have informed its lending operations and GOC strategy, including: (i)Colombia Poverty Assessment (Report # 12673-C0), (ii) Social Safety Net Assessment (Report # 22255-C0), (iii)Colombia: the Economic Foundation of Peace (2003), (iv) Skills Development in Colombia (on-going), and (v) Social Sector Efficiency programmatic analytical work on education and hospitals (on-going). 79. Complementarities with Other Institutions' Operations. The GOC i s working closely with the IMF, IDB, and the World Bank in the preparation o f operations, and carefully coordinating the activities inorder to avoid duplication and inconsistencies inthe institutions' programs. The IMFsigneda Stand-by Agreement with the GOC in January 2003. The GOC i s monitoring this closely and to ensure that proposed Bank and IDBprograms meet the IMF criteria. 80. The GOC has and continues to carefully coordinate the IDB and the Bank programs that support the reform o f the social sectors, while the Bank and IDB teams themselves have developed a close 20  working relationship on labor and social sector reform issues. Collaboration inthe implementation o f the R A S program, which i s financed in parallel by both banks, remains strong. A single monitoring and evaluation model o f the R A S program is being utilized by the GOC regardless o f the financier o f the program. Moreover, the teams regularly consult each other regarding the current administration's social sector reformprogram, which boththe Bank and the IDB support. At this time, the IDB is assisting inthe implementation o f the social sector reform program through its recently approved Social Emergency Program (US$1.25 billion) and its on-going Fiscal Sustainability Loan (US$400 million), which focuses on: (i) macroeconomic stability, (ii) protection o f key social programs in education, health, and budget social assistance, and (iii) social sector efficiency and equity in several key programs. The Bank's PLaRSSAL puts less emphasis on items (i) instead and (ii), supporting other areas o f the administration's labor and social sector reform agenda. B. ProgramObjectivesandDescriptionof the Program 81, Objectives. The PLaRSSAL supports the general govemment objective o f promoting higher employment, increased human capital formation, and strengthened social protection, especially o f the poor and vulnerable. This objective would be achieved through more efficient and equitable use o f social sector resources, improvedregulatory environment andbetter institutionalpractices. 82. The specific objectives, that the current administration seeks to attain with PLaRSSAL assistance, are detailed in Table 6, which also presents corresponding performance indicators. These have been selected to be as close as possible to outcome measures. Monitoring o f these indicators will be used to track progress and provide data for the Implementation Completion Reports. The expected outcomes o f the program, usingthese indicators, are giveninthe last column ofAnnex I. 83. The strategy to attain those objectives consists of, among others: (a) Reduction in the cost o f employment and training, especially o f the poor and young workers, through the implementation o f labor reforms under Law 789; (b) Development o f a comprehensive and integrated skills development strategy and modernization o f SENA functions, responsibilities, and use o f resources; (c) Increased efficiency in the use o f education resources through the sustained and full application o f a system for education resource transfers based on enrollment, as provided for inLaw 715; (d) Establishment o f information systems and reorganization o f the educational systems o f territorial entities, necessary to support the implementation o f the educationprovisions o f Law 715 intendedto improve efficiency and equity; (e) Greater transparency and better social control o f publicly funded social services, including: o Regular measurement o f student learning achievement in all schools and public dissemination o f results; o Strengthening the application o f current regulations regarding the licensing of health providers and insurersto inform clients about the quality o f their services; 21  o Promotion o f results-based management and periodic, rigorous evaluation o f the major social programs; and systematic measurement o f costs; and citizens' monitoringand oversight o f these programs; and o Development of a system o f evaluation o f teachers' performance, as provided for in Law 715; (0 Development and pilot testing o f incentive schemes to improve teachers' performance; (g) Advance towards the completion o f the healthcare reform, Le., o Expansion o f the population affiliated with the Subsidized Regime (health insurance); and o Measures to deepen the hospital restructuring to facilitate the transition towards demand-based financing o f public hospitals and expansion o f the Subsidized Regime coverage; (h) Advancement of the development o f a comprehensive Social Risk Management System for Colombia that i s efficient and ready to assist the vulnerable intimes o f crisis and help the structural poor innormal times, including o The development o f the Ministryo f Social Protection into an effective backbone o f an integrated social protection system, able to shape, coordinate and oversee the various social protection policies, programs, and their implementation; o Better targeting and streamlining o f ICBF, SENA and other social assistance programs; and o Increasedvaccination towarduniversal coverage (i) Encouragement o f the use o f private providers through competitive contracts, vouchers, and other innovative schemes to improve efficiency and effectiveness in education, training, and social assistance. 22  Objectives PerformanceIndicators A. Institution of an effective authority in charge of Effectively functioning MSP developing a comprehensive social risk management system to provide efficient and timely protection o f the poor and vulnerable against the threats and consequences o f illness, unemployment, poverty, and economic volatility. B.Greater accessofpoor children to ICBF Assistance and Number o f SISBEN 1 and 2 children benefiting from ICBF Prevention programs through the establishement o f an Assistance and Prevention Programs, by program explicit targeting policy and practices to ensuretheir cost- Studies showing positive impact o f said programs on child effectiveness. nutrition and development C. Achievement o f at least 95 percent Expanded Program PAI immunizationrate o f 0-5 year olds o f Immunization (PAI) coverage rate o f 0-5 year old Number o f children with immunization cards children by 2006. D. More advancesin the implementation of health system Number o f newly affiliated poor persons in the subsidized reform, fkrther expanding health insurance coverage o f health insurance regime in 2002-2006 the poor, reducing direct subsidy to public hospitals, and Decline in direct public hospital subsidy as a percentage o f ensuring quality of services o f health insurers and care health budget providers. Percentage o f health care providers and insurers in compliance with MSP quality o f service standards E. Implementation of labor and training reforms to reduce Reduction in the cost o f labor regulations (possibly, expressed the wedge between employers' hiringitraining cost and inestimated number ofjobs created) workers' acceptable wage, while improving the social Number o f hard-to-employ workers hired under the protection o f vulnerable workers. "parafiscales waiver" provision o f Article 13 o f Law 789 Increase in the number o f apprentices and workers trained due to the provisiono f Articles 30-38 o f Law 789 Number o f firms approved by SENA to provide their own training Number o f workers trained in said firms Number o f training program graduates subsidized by SENA per payroll tax Percentageo f SENA payroll tax resources devoted to training of the unemployed F. Acceleration of education reforms to provide accessto Net education enrollment rate: by level good quality education, especially to basic and secondary secondary) schools. Increase in basic and secondary education enrollment Increase in studentiteacher ratio Increase inbasic education quality a. Application o f student learning achievement testing b. Teacher performance indicators (to be developed) C. Rate o f adoption o f innovative and effective pedagogical methods G. Greater transparency and social control o f social Number o f major social programs with impact and cost programs through their periodic evaluation and greater evaluation participatory oversight by citizens. Number o f national social programs with Como Vumos? monitoring and social control 23  C. The ProposedOperation 84. Two programmatic structural adjustment loans are being proposed to support the above- mentioned labor and social sector reform program. Annex Ipresents an overview o f the medium-term program. 85. Buildingon the SECAL, the first PLaRSSAL operation -henceforthreferredto as "PLaRSSAL I - focuses on the approval and the initial operationalization o f the recently passed labor reforms and the acceleration o f the implementation o f the education, health, and social protection reforms, in accordance with Laws 789 and 715 respectively. The full policy matrix i s provided inAnnex I. 86. The PLaRSSAL Ifocuses specifically on: (i) Greater efficiency in job skills formation and the labor market. The operation would support the development o f regulatory decrees enabling the implementation o f Law 789. These regulations will provide incentives to employment for vulnerable groups (the young, the elderly, disabled individuals, and unemployed household heads), re-allocate tied funds (from the Cajas de Compensacion) to employment creation and unemployment protection programs, and increase coverage and privatization o f the apprenticeship system. Moreover, the PLaRSSAL Iwould promote the modernization o f SENA, starting with increasing its internal efficiency (e.g. reductiono f overhead costs) and improving the impact o f its courses on workers' wages. The expected outcomes is a greater employment and wages o f workers in"vulnerable" groups andanincrease inthe number of SENA graduates. (ii) Quality and coverage improvements in the education sector. Implementation o f the regulatory and budgetary frameworks encouraged by the SECAL would be promoted by the proposed operation. The PLaRSSAL Iwould support these specific outcomes: (i) an increase in enrollments from betteruse of educationresources and, hence, a rise inthe student-to-teacher ratio; and (ii) improvement in student learning achievement. These improvements will be achieved through a more efficient deployment o f the teaching staff and better targeting o f educational resources resultingfrom the testing o f all students ingrades 5 and9.26 (iii) Increased coverage, efficiency, and targeting of social protection programs, including the health sector and ICBF. The concept o f a comprehensive social risk management system was introduced in the SECAL. The next step, which is supported by this operation, is to: (a) improve targeting o f health and early childhood (ICBF) services-both o f which have large budgets and wide coverage, but do not effectively reach the most vulnerable populations; and (b) evaluate ICBF programs credibly, laying the groundwork for a more efficient and strategic use o f its resources. The outputs to be measured are budget allocations, regulatory decrees, and evidence o f increased coverage, specifically in the Subsidized Regime program. 87. Category of agreed actions: definitions. There is a set o f "prior actions'' for PLaRSSAL Iand another set o f "prior actions" for PLaRSSAL 11; each set o f prior actions must be complied for approval and disbursement o f each loan. The "prior actions" for the PLaRSSAL I1consists o f two categories: First, "triggers" are those actions necessary for the Bank to proceed with the preparation o f PLaRSSAL 11. Second, "non-trigger" actions complement the triggers and will be included in the final "prior actions" matrix for the PLaRSSAL I1loan. The "prior actions" for the each loan are legally bindingconditions for Board approval and disbursement, and are written into each operations' respective Loan Agreement. The "triggers," on the other hand, are essential actions to determine whether or not to proceedwith the second 26The matrix specifies coverage oftesting at 90 percent. One hundredpercent coverage was deemed unrealistic by the Ministry of Education(MEN)due to the inabilityofthe MENto reach students living inconflict areas. 24  operation but only become bindingupon their inclusion inthe Loan Agreement for PLaRSSAL 11. Since waiver o f these "trigger" commitments would require validjustification and explanation to the Board, the triggers have been selected for their importance, feasibility and ownership by the GOC and the sectors responsible for their implementation. D. SubsequentOperations 88. The Second PLaRSSAL.The second operation-henceforth referredto as the PLaRSSAL I1-is envisioned as an extension o f the PLaRSSAL actions and the GOC's reform agenda by deepening and widening o f the implementation o f the labor and social sector reform agenda described previously. The conditions in the second operation are designed to be more output/outcome oriented. The same broad themes that would be addressedinthe PLaRSSAL Iwould againbe the focus o f the second operation (see Annex Ifor details): (a) ICBF Furtheringthe ICBF objectives of the PLaRSSAL I,the second operation would require achievement o f quantitative targets regarding the use o f ICBF services by poor families and impact and cost evaluation studies to provide recommendations on the consolidation and streamlining o f ICBF programs. (b) Health. The second operation continues the immunization program with specific targets; implements the decree (agreed in PLaRSSAL r>requiring an immunization card for children enrolling in schools; and extends the Subsidized Regime to even more poor people. In addition, the PLaRSSAL I1 would include actions in two new areas: enhanced credibility o f health reform-by licensing hospitals and EPSs, and capping the public resources allocated directly to public hospitals (to further advance the transform o f supply-side subsidies to the demand-side). (c) Labor and SENA. Continuing the efforts from the PLaRSSAL I,the second PLaRSSAL would support more complete implementation o f the labor law. Regarding SENA, efficiency improvements in short courses would continue and the implementation o f the Action Plan for the modernization o f SENA would be initiated. This would be supported by updating SENA's information systems for impact evaluation, managerial accounting, andjob search. Indeveloping the Action Plan based on the a CONPES, the GOC will consider the use of private training providers for publicly financed skills development programs, as mandated by the regulations implementedinthe Labor ReformLaw 789/02,which is supportedbythe PLaRSSAL I. (d) Education. The expansion o f coverage in basic and secondary schools continues in the second operation. The MENcommits to enrolling 200,000 new students, a further increase inthe student-to-teacher ratio, and the expansion o f innovative methods to expand coverage to hard-to- reach students. Quality enhancements are again supported, with the enactment o f the teacher re- organization plan, further expansion o f testing students ingrades 5 and 9 to allow better targeting o f educational resources to improve student leaming, and implementation o f teacher performance evaluations. (e) Transparency and citizens ' oversight. Two important triggers would be included at this stage. First, the operation would encourage the establishment o f enforceable government mechanisms requiringperiodic impact evaluations o f major social programs. Second, a system for public feedback on social programs, similar to Bogoti's Como Vamos model, would be implementedfor national programs. 89. To ensure the programmatic nature o f the operation, eight actions in the policy matrix for the PLaRSSAL I1were identifiedas triggers for preparation o f the second operation. Compliance with these 25  triggers allows for the preparation of the second operation. These triggers, which become pre-Board conditions once the operationi s underpreparation, are given inAnnex I. 90. Fiscal Commitments. As mentioned, within its macroeconomic framework, the GOC signed a new Stand-By loan agreement with the IMF in the amount o f SDR1.5 billion for the next two years. Achieving the structural benchmarks o f the agreement will constitute an overarching policy trigger for the PLaRSSAL I.Some o f the targets o f the IMF-backed program for 2003 are a consolidated non-financial public sector deficit o f 2.5 percent o f GDP, a current account deficit o f 0.8 percent o f GDP, and an inflationrate between five and six percent. E. LoanAmount, Conditions, and Fiduciaryand SafeguardPolicies 91. Loan Amount and Disbursements.The two PLaRSSAL operations are proposed for a total of $350 million. The first (US$200 million), which would be in the form o f a fixed spread, U.S.-dollar- denominated loan, would be made to the Republic o f Colombia. Disbursements under the proposed loan would be made to an account (Deposit Account) o f the Republic o f Colombia, established at the Banco de la Republica for this purpose. As mentioned, the loan will be disbursed in one tranche upon Board approval. This tranche arrangement has been designed with the government and reflects its and the Bank's assessment o f the necessary timing for implementing the proposed conditions. Aside from financial pressures due to an urgent financing gap, the timing o f the loan is calibrated to support the government in its efforts to continue the momentum o f the SECAL and the momentum o f the social sector reform. The current administration i s pushing vigorously this reform with the newly created Ministry o f Social Protectionand Ministry o f Education as catalysts. 92. Prior Actions (Conditions). Nine actions were identified for the first operation (detailed in Annex I): d. Establishment o f the Ministry o f Social Protection (MSP) by merging the Labor and Health Ministries and putting under its responsibility autonomous agencies funded by earmarked payroll taxes including SENA, ISS and ICBF; e. ICBF Board Agreement: (i) establishing a policy targeting ICBF Assistance and Prevention programs' benefits to SISBEN 1 and 2 children; and (ii) mandating ICBF management to (a) develop methodologies by March 2004 to estimate the share o f those benefits going to such children; (b) establish by September 2004 quantitative targets to increase said share (based on agreed methodology) for 2004-2006; and (c) establish by March 2004 a system for monitoring the above-mentioned share and disseminating such information to the public; f. Signed Memorandum of understanding committing ICBF and DNP to the evaluation of impact and cost o f its nutrition and other selected major programs, in accordance with the agreed time line for the period 2003-2006; g. Sustained government support of Expanded Immunization Program (PAI) recovery, as evidenced by: (i)a certification by both the Ministry o f Social Protection and Ministry o f Finance that the budget allocation for the PA1for the year 2003 i s sufficient for achieving the 95% coverage target in 2006; and (ii) Presidential decree requiringan immunization card for enrolled children in public and private schools and child-care centers, including hogares comunitarios; 26  h. Additional progress inthe implementation of the healthreform (Law 100/93), as evidenced by the extension o f the Subsidized Regime coverage in a 12 month period (July 2002-July 2003) by 300,000 new affiliates; i. Approval of Law 789 and issuance of appropriate regulatory decrees27 to permit implementation of: (a) Article 13 o f Law 789 o f 2002, which waives the payment o f parafiscales (SENA, ICBF, Cujus de Compensucion) for hard to employ groups, including those age 16-25, older than age 50, household heads who are unemployed, and disabled workers, (b) Articles 6-11 o f Law 789 o f 2002 which regulate the reform o f the Cujus de Compensacion, and (c) Articles 12,30-38 o f Law 789 o f 2002, which expands the number o f services providers to include private firms, flexibilizes the training system by allowing firms to fund their own training rather than going through SENA, and expands the pool o f apprentices that firms may hire by allowing firms to hire individuals from any (post) secondary school or training program; j. Improved SENA efficiency, as evidencedby an increase inthe number o f SENA short-course graduates by 50% (in the period August 2002-July 2003 as compared to August 2001-July 2002) withinthe resource envelope providedby 2003 General Budget Law; k. Increasedbasic and secondary net enrollments by at least 300,000 new students (July 2002 to June 2003) and inthe student-to-teacher ratio by one student per teacher from 2002 to 2003; and 1. Continued progress in the implementation o f the education provisions o f Law 715, as evidenced by: (i)approved and signed Presidential Decree enabling the reorganization o f Iteachers and education system (accounting o f teachers, sanctions against absenteeism, etc.); and (ii) testing o f student leaming achievement in grades 5 and 9 applied in at least 90% o f municipalities (all students) inmath and languages, verified by an official document issues by MEN. 93. Triggers. Eight actions are identifiedas triggers for preparation o f the second operation. These actions are listed inbold inthe column "Second PLaRSSAL I1Prior Actions" inAnnex I,since they will be among the prior actions for the second operation. The triggers are: m. Increased number of new children younger than 6 years old from families of SISBEN 1 and 2 benefitingfrom ICBF nutritionalprograms by 300,000 inthe period 2003-2004; n. Evidence that evaluation of at least two of the major programs inthe policy document is in progress; 0. Achievement o f coverage o f at least 90% DPT, 95% Triple Viral, and 90% polio (levels as o f 2003); p. Extension o f the Subsidized Regime coverage in a 12 month period (August 2003 - August 2004) by 500,000 new affiliates; q. Approved CONPE,Sand Planof Action for the Comprehensive Job Training Strategy; 21 The law supports employment, expands social protection, and modifies articles in the labor code with the purpose of creating incentives for firms to employ additional workers and providing safety nets for the unemployed. Only a subset of the Articles listed inthe law needto be regulated; those that need specific regulationsare Articles 6, 7, 10-13,30, and32. 27  r. Increasedbasic andsecondary net enrollmentsby at least 500,000 new students; s. Application o f the regulatory decree in accordance with Law 715, Article 5, Section 5.8 regarding the evaluation o f teacher performance and testing o f student learning achievement in grade 9 covering competency in citizenship and science, in at least 90% of the municipalities; and t. Implementation o f the "Bogotb Como Vamos" model intwo national programs inaccordance with agreed list to be providedby DNP. 94. Procurement and FinancialAdministration. A Country Financial Accountability Assessment (CFAA) was carried out in September 1998. As a result o f its recommendations, the Office o f the Accountant General and public accounting institutions have been strengthened. Currently, the Public Sector financial management is under review. A new CFAA is in process and is expected to be completed in the first half o f FY 2004. This new CFAA will raise the questions of: (ii) the current how state o f public financial management in Colombia affects the country's efforts to stimulate economic growth; and (ii) what measures should be taken to improve the current state o f financial management in the country. The CFAA team is working closely with the Financial and Institutional Adjustment Loan (FIAL) team, which will incorporate several relevant policy actions within the policy matrix of that program. With regard to the PLaRSSAL, the regional financial management team (LCOAA) will advise with regard to the audit o f the depository account at the Central Bank, and on any other issues relevantto the PLaRSSAL that come to their attention during the CFAA pr0cess.A Country Procurement Assessment Report (CPAR) was prepared in March 2001. The report found that for Bank-assisted projects, with few exceptions, procurement was carried out in accordance with Bank policies and procedures, and procurement performance under these projects has generally been satisfactory and free o f major problems. Two procurement audits and four agency procurement capacity assessments carried out inthe last two years have found no major problems and determined that the procurement risk inBank projects was lower than average. However, the CPAR found that public procurement and contract management had deficiencies that could be a source o f corruption. The findings and recommendations o f the CPAR to strengthen public procurement were discussed and agreed inprinciple. 95. The Bank is currently financing the implementation o fthe MAFPIIproject, which is ajoint effort o f MHCP, DNP, and DIAN. Among its key objectives are the modernization o f the public procurement process (including legal reform), review and reform o f the budget process, implementation o f financial management informationsystems, and support to government accounting. Moreover, the policy matrices o f the FIAL programmatic operations include measures designed to improve Colombia's public sector procurement and financial management practices over time. All o f these efforts indicate the interest o f the Bank in ensuring that the public sector in Colombia has adequate fiduciary practices in place to manage adjustment loans and other government resources. 96. Environmental and Other Safeguard Policies. As a structural adjustment program, the proposed operation does not trigger OP 4.01, and, as a consequence, does not require an environmental rating. The Quality Assurance Team (QAT) reviewed the Program Document for the operation and determinedthat it didnot have a direct effect on safeguard issues. 97. Fiscal Impact. The program i s within the CAS mandated FY 2004 limit for lending to Colombia. The reform program is intended to increase coverage and quality o f social expenditures without increasing the total budget envelope. Its objective will be achieved through better allocation and use o f resources. 28  98. The fiscal cost to the GOC o f implementing the reforms in the program is estimated to be US$995.6 million over the period 2002-2006 (Annex VI summarizes the costs, by sector), consisting o f two types o f costs: transition costs and new annual costs.28 The transition costs, 64 percent o f the total, are incurred only in the short run, and primarily are due to the financing o f the existingprogram while a new program is being developed and piloted. Once the transition is complete, the resources spent on the old program will fully fund the new program, having no net impact on the GOC's finances. This i s expected to be the case for the transition from supply-side financing o f public hospitals to the new insurance regimes (Regimen Subsidiario andRegimen Contribuitivo) and the transition from SENA as the supplier o fjob training services to SENA as the manager o f a comprehensivejob training systemwith the private sector playing a larger role in the provision o f training services. The remaining portion o f the costs is new fiscal responsibilities that will continue indefinitely. These are high in the short run as the systems are implemented, but the costs will stabilize at a lower Ievel once the system is in place. The reforms that incur the new, annual, recurrent expenditures include the PAI, teacher performance evaluations, student achievement testing, and impact evaluations o f social programs. Although these expenses will appear in government finances indefinitely, they will have positiverates o f return due to the long-term impacts o f higher human capital and more efficient social programs. F. Benefits 99. Social Impact. The social impact is anticipated to be quite positive and substantial. Key expected outcomes from the proposedoperation (Annex I)include: 0 Increased access o f poor children to ICBF services by 400,000 0 Increase innet enrollments by 500,000 new students inthe mediumterm; 0 Increase employment by 400,000 workers inthe next four years due to the labor reform; 0 Increased number o f graduates from publicly fundedjob training and an increase in the number of individuals benefitingfrom apprenticeship experiences due to changes inthe labor law; 0 Increase the number o f students trained by SENA by nearly half a million from its given resources; 0 3.6-3.7 million children vaccinated in2006; and 0 800,000 new affiliates inthe Subsidized (Health Insurance) Regime over the two years o f the operation. 100. The figures given above are rough estimates and should neither be taken as a prediction o f the impact o f these operations nor a promise that they will be achieved in reality, considering the overwhelming influence o f the other determinants. ** The cost estimates were derived separatelyfor each "prior action" inthe policy matrix, and then summedto give the sector total. For eachprior action, the estimates were basedon (i) observedcosts of on-goingreforms- such the as the per unit costs of immunizations, student testing, nutritional supplements, Subsidized Regime, training vouchers, severance pay, and training courses - and best guesses of the number of beneficiaries, (ii)international experience of such reforms (reform of the job training system and impact evaluation programs), or (iii) GOC estimates (such as the hospitalrestructuring) 29  101. Poverty Impact. The social impacts have clear poverty implications since most o f them are investments in the future productivity o f low-income individuals. The increase in the quantity o f education and job training will increase the opportunities o f all Colombians to eam the high rates of return that elude the less educated while the higher quality o f education andjob training will be rewarded not only by even higher rates o f return, but also by the positive non-monetary benefits associated with education, such as: longevity, decreased risk o f poverty, healthier off-spring, etc. The expanded immunization program would reduce mortality and illness among poor children, while the other health measures are expected to protect their precious human capital and alleviate the financial consequences o f health risks. Moreover, the poor would receive a greater share o f the ICBF and SENA benefits as a consequence o f better targeting and greater efficiency o f social assistance programs (e.g. ICBF). Finally, the poor would benefit from the implementation o f Law 789, which waives the payments ofparafiscales for hard-to-employ groups and, therefore, provides incentives to employment o f these individuals- getting them back inthe labor market, eaming an income, and enhancing their labor market skills for the future. G. Risks 102. The proposedprogramcarries some risk,although onthe whole it appears moderate. With regard to the intemal risks, the first is the overall political context, including the intemal conflict and violence associated with illegal drug activity, which has been escalating and would negatively impact the continued implementation o f the program. Although Colombia is deeply committed to ending the violence that has plagued the country for decades and i s supported by the international community, the conflict could intensify and thus demand attention and resources from the government. The Bank's overall country strategy supports the development o f a stronger foundation for peace and encourages reforms that will help liberate resources to address the transition to a post-conflict situation. The PLaRSSAL inparticular promotes reduction insocial inequity that may be fueling some o f the dissent. 103. Although Congress has already passed the Labor Reform Law, the regulation o f the law will require significant political negotiation. If the regulations are poorly written, the law could fail in its well-intentioned efforts to increase the efficiency o f the labor market and decreaseunemployment rates. 104. Strong special-interest groups have blocked government-supported reforms o f ICBF and SENA. To address this, a process i s being developed inwhich the special-interest groups are invitedto participate inthe process of reform. However, when the reforms progress to the point ofjob loss or provision of services to a different group o f beneficiaries, the special-interest groups may again block the process. Another risk is the possibility o f government failure to get the proposed referendum approved, which would mean that one o f the triggers would not be met. Moreover, the referendum poses a high risk to the fiscal stance o f Colombia. However, this risk is mitigated by contingency measures that the authorities will take incase the referendum is not approved or further delayed. 105. Through external or intemal shocks, the fiscal situation may deteriorate, jeopardizing the macroeconomic situation. Greater volatility and negative shocks in external markets will increase the social protection burden. Since the mid-l99Os, Colombia has been more susceptible to regional (Brazil devaluation, Argentina default) and global (Russian crisis, East Asian Crisis) shock than ever before. The political and economic conflicts in the region are not decreasing, thus increasing the risk o f contagion to Colombia's markets. The various fiscal, pension, financial and institutional reforms supported by the IMF,the Bank andIDBare expectedto mitigate the above risks andtheir consequences. 106. Finally, there is the risk that, although the Colombians are known for their expertise, there may not be enough trained and experienced people in government who can carry forward the implementation o f the various reforms. This concem has arisen because o f the numerous, large, and complex reforms the 30  GOC is simultaneously implementing. To reduce this risk, the Bank is recommending a Technical Assistance Loan(TAL)to complementthese proposedoperations. 31  4 i cl m  m m  U h W   ANNEX 11:Letter of DevelopmentPolicy from the Government Ministry of Finance and PublicCredit Republic of Colombia Department of National Planning DNP libertody Orden Bogota, Wednesday, August 6,2003 Mr.JAMESD.WOLFENSON President THEWORLD BANK Washington, D.C. Dear Mr.Wolfenson, Since the start of the Uribe VClez Administration in August of 2002, the definition of a wide-ranging program of World Bank loans for the period 2003-2006 has been one of the most convincing demonstrations of support that this country has received. The announcements regarding these programs made by the multilateral development agencies, particularly the World Bank and the Inter-American Development Bank, helped to restore confidence in the stability of the Colombian economy and to reestablish access to markets. This exhibit of confidence has been of fundamental importance for carrying out an ambitious program of reforms, a good many of which have already been approved by the Congress of the Republic. Since the economic crisis of 1998-1999, Colombia has reduced the imbalances that threatened to wreck its economic growth and social progress. Inflation has been reduced, financial stability has been restored and private activity has recovered, although with certain ups and downs. Poverty, however, has increased concurrently with the worsening of employment indicators. Internal security, the building of an equitable society and economic recovery are the Government's highest priorities. The new administration i s totally committed to fiscal stability, implementation of certain structural reforms that would allow all Colombians to benefit from the opportunities that a healthy economy will provide them and, in this context of adjustments and reforms, the provision of basic social services and protection for the country's most vulnerable population groups. Within this context, the Colombian Government i s working to obtain and mobilize resources under conditions favorable to this country, with the goal of supporting adjustments in sectorial public policies along with the implementation of institutional changes and lessening the immediate adverse effects of the fiscal adjustment it is currently carrying out. Withinthe framework of mediumand long-term economic and social policy, the Government is designing a set of reforms in the social sector. On behalf of these reforms, it requests financial support from the 36  Ministryof Financeand Public Credit Republic of Colombia Departmentof NationalPlanning DNP Ubertady Orden Bank in order to carry them out successfully, as well its ongoing accompaniment and technical support in designing mechanisms to provide a basis for these reforms. During 2002, The World Bank supported the Government in the development of programs for social adjustment. This made possible the implementation both of structural reforms (and some which were not immediate ones) of the social sector as well as formation of a social protectionnetwork, thanks to ongoing technical and financial support on the part of the Bank. The Government believes the credit has been successfulfor various reasons: i)adequatepreparation, given the short time from the first mission until approval by the Bank's Board of Directors; ii)the risks established in the memorandum of the President of the Bank to the Board of Directors didnot materialize; iii)giventheshorttimeforpreparationandparticipationonthepartofvariousgovernmentalentities,the leadership of the National Department of Planning (DNP, from its initials in Spanish), as the agency responsible for the credit, was important both with regard to coordination and with respect to the technical support provided to these entities; iv) constant communication between the National Department of Planning and the Bank, and v) continuity in the actions agreed upon in the policy matrix, in that they were supported by the new administration. The Government recognizes that there are risks that could threaten adequate implementation of this new program, including an unforeseen increment in security costs, insufficient support for economic initiatives included in the referendum and greater volatility in external markets. Knowing this, the Government has identified contingency measures designed to safeguard its program. These include additional taxes and early implementation of some of the measures discussedin this document. In the attached document, the precedents and context in which the Programmatic Credit for Labor and Social Adjustment of the World Bank for Colombia were conceptualized and developed are described. The policies incorporated into this operation arose from a wide-ranging exchange of ideas between teams from the Bank and the Government, including those from the Ministry of Finance and Public Credit, the National Department of Planning (DNP), The Ministries of Social Protection and Education and the institutions in charge of carrying out the social protection programs already inprogress. As a result of this dialogue, a program was drawn up that will permit the Government to mitigate eventual negative effects resultingfrom the adjustment processes and reforms on the poorest population segment. Finally, the Government i s committed to the program presented in this document and looks with approval upon the accompaniment and financial support of the World Bank. The Government expresses its gratitude for prompt consideration on the part of the Bank's Board of Directors of a Programmatic Credit for Labor and Social Adjustment inthe amount of US$200 million for the 2003 period. Cordially, 37  REPUBLIC OF COLOMBIA MINISTRY OF FINANCE AND PUBLIC CREDIT AND NATIONAL DEPARTMENT OF PLANNING POLICY LETTER PROGRAMMATICLABOR REFORMAND SOCIAL SECTOR ADJUSTMENT LOAN Bogota,August 6,2003 38  TABLE OF CONTENTS I.ENSURINGMACROECONOMICSTABILITY 40 11. LABOR REFORM STRATEGY 42 111. SOCIAL PROTECTIONSYSTEM 44 A. CONCEPTUALIZATIONOF THESOCIALPROTECTIONAND SECURITYSYSTEM 44 B. STRUCTUREAND OPERATIONOFTHESOCIALPROTECTIONAND SECURITY SYSTEM 45 NATIONAL TRAININGPROGRAM- (SERVICIONACIONAL APRENDIZAJE) S E " DE - 51 COLOMBIANINSTITUTE OFFAMILYWELFARE(INSTITUTO DE BIENESTAR COLOMBIAN0 FAMILIAR) - ICBF 52 COMPENSATIONASSOCIATIONS 56 IV. SUPPORTFORONGOINGREFORMSINTHE SOCIAL SECTOR 56 A. EDUCATION 57 B. HEALTHCARE 59 C. TARGETING 61 D.POLICY ONTHEINTERXALLY DISPLACED 61 V. TRANSPARENCY, EVALUATIONAND SOCIAL CONTROL 63 39  I. ENSURINGMACROECONOMICSTABILITY 1. Duringthe 1998-1999 period, Colombia experienced its most severe recession in 70 years. Gross Domestic Product (GDP) grew by just 0.5% in 1998 and decreased by 4.25% in 1999. The recession period was characterized by deteriorationinfiscal accounts for the non-financial public sector, whose deficit that year reached the record figure o f 4% o f GDP. This situation originated to a great extent from excessive spending that began in 1994, both at the central and territorial levels, which led to unsustainable public finances. The worldwide crisis that began at the end o f 1997 was another factor. 2. This crisis situationthat has been having an effect on Colombia i s associated to four main causes: i)the fiscalimbalance, which, inspite ofefforts andreformspresentedbythe Government, nonetheless translates into a deficit of 2.5%, almost three percent o f GDP. The level o f the deficit for the years 1996-1999, combined with the financing strategy, brought about an unprecedented escalation in the cost o f money. This in turn obviously reduced private investment to the lowest levels in its history (falling from 25% to 10%o f GDP between 1994 and 1999). The interest rate has fallen during the last two years, but private investment has not yet recovered to the levels observed before the recession; (ii)the difficult situation o f public order, which appears to be negatively affecting the expectations o f agents, thus preventing greater growth in investment. Additionally, attacks on the transportation system for hydrocarbons have burdened the country with a fall o f almost 33% in the petroleum sector; (iii)significant reduction in the value o f the a assets in Colombian homes and companies from which they are still recovering and which, combined with unfavorable expectations, has caused a contraction in internal demand; and (iv) unfavorable behavior o fthe prices o f some o fthe principal export products. 3. Colombia has been experiencing a recovery since the 1998-1999 crisis, in spite o f intensification of violence and the existence o f an unfavorable international environment. There has been progress in fiscal consolidation, inflation has been reduced and the financial system has been restructured. Until the beginning o f 2002, these achievements permitted access to international credit markets and guaranteed a stable exchange rate. 4. However, in mid 2002 the country suffered from the consequences o f regional instability: the spreads on sovereign bonds widened considerably and the peso was devaluated as a result. This situation was aggravated by an increase inthe fiscal deficit and by an intensification o f the armed conflict without recent precedents as a result o f developments inthe peace process at that time. 5. Confronted with an adverse regional environment and enormous fiscal problems, the new Government acted rapidly. First, it proposed (and gained approval of) significant budget cuts for 2003 to the point at which spending, other than for interest payments, will grow at a rate below the expected rate o f inflation this year. Secondly, it established a one-time tax on assets and presented Congress with an unprecedented package o f tax measures and controls on spending. And thirdly, it issued decrees to cut costs, benefits or subsidies: the rate for reimbursement o f the Certificate o f Tax Reimbursement (CERT, from its initials in Spanish) was reduced to zero, extra-legal benefits at the territorial level were reduced to zero and vacancies that had not been filled since July o f 2002 were abolished. Ina parallel manner, the Government began the design and implementation o f an ambitious program to reduce and restructure public administration. 40  6. During2002, GDP real growth was nearly 1.7%, inflation was 6.99%, the current account deficit remained at levels near 1.8% o f GDP and Net International Reserves grew by approximately US$220 million. For 2003, a recovery in economic growth with stability i s expected: the rate o f growth will be between 2% and 2.5%, inflation will fluctuate between 5% and 6%, and the current account deficit will be lowered to 0.8% o f GDP. 7. On the fiscal side, at the end o f 2002 the consolidated deficit was 4% o f GDP, 1.4% above the goal initially agreed upon with the International Monetary Fund. This deviation i s largely explained by greater expenditures (partly associated with the election process) and with deceleration o f economic growth in 2001 and the first half o f 2002, which had an adverse effect on tax collection. 8. In2003, it i s predictedthat the deficit inthe consolidatedpublic sector will be reduced to 2.5% o f GDP. With the aim o f reaching this fiscal goal, the Government has put a strategy into effect having two main elements. First, the law on the Referendum that, ifthe voters pass it, will fieeze the Government's nominal operating costs during 2003 and 2004. Direct savings due to this initiative are expected to be 0.7% of GDP (1.5 trillion pesos) in 2003 and 0.5% o f GDP (1.2 trillion pesos) in 2004. And secondly, tax reform, which will increase income by 1% o f GDP in 2003 and 2004 and 1.8% starting in 2005. These resources will be obtained principally through a drastic enlargement o f the taxable base for the VAT, a gradual reduction in deductions on income tax, a surtax on income tax and a number o f improvements in tax administration. 9. The Government's program i s oriented towards guaranteeing fiscal sustainability and, inthe final instance, restoring security, recovering economic growth and increasing social equality. Fiscal adjustment and structural reforms will ensure that these objectives are hlfilled within an environment o f macroeconomic stability supported by prudent monetary policies and strengthening of the financial system. At the same time, social assistance programs will be strengthened, coverage in education and healthcare will be increased and the impact of increases inutilities billsonthe poorest populationgroups will be mitigated. 10. Within this framework o f macroeconomic stabilization, the Colombian Government signed a Stand-By Agreement (SBA) with the IMF for 1.548 billion DEG for the next two years. One o f the program's main goals i s a reduction in the fiscal deficit equal to two percent o f GDP. This reduction will be achieved through increased tax receipts, as a result o f tax reform, and through freezing current expenditures on the part of the Government for a period o f two years. Over the medium term, structural reforms, such as the Pension Reform recently approved by Congress, and the program for modernization o f the State, will contribute towards ensuring sustainability o f the debt and consolidate the adjustment process initiated by the Government. The SBA includes a non-financial public sector deficit o f 2.5% of GDP, a current account deficit o f 0.8% o f GDP and an inflation rate between 5 and 6% as the principal goals for 2003. 11. The strengthening o f public finances is one o f the key strategies for restoring confidence and economic growth. Savings generated by the adjustment in the private sector will finance the gradual adjustment in the excess spending that remains in the public sector. The scope of the structural reforms being undertaken provides credibility for the adjustment in the public sector. A reduction in the consolidated public sector deficit fiom 4.0% o f GDP in 2002 to 2.5% in 2003 and 2.1% in 2004, and so on, i s an explicit objective. The fiscal adjustment will increase the primary surplus inthe non-financial public sector from 0.7% o f GDP to 3% and it i s hoped that it will reduce non-financial public sector debt to below 50 percent o f GDP. 41  12. The Government is aware that sustainability o f the public debt must be based on solid structural reforms and not on optimistic scenarios o f economic growth or on venturesome assumptions based on the behavior o fthe exchange rate or the interest rate. 13. The Government recognizes that there are risks that can threaten adequate implementation o f its programs, such as an unanticipatedincrease in security expenditures, insufficient support for the government's economic initiatives, including those established in the referendum, and volatility in external markets. The Government has thus identified contingency measures designed to safeguard its program against these events. These include additional taxes, a reduction in spending and speeding up such measures as an increase in the VAT rate included with a rate o f 7%. 14. In case o f insufficient financing, the Government will consider the temporary use o f resources from the Petroleum Savings and Stabilization Fund (FAEP, from its initials in Spanish), which currently has assets o f nearly 1.5% o f GDP. With respect to security expenditures, preliminary information indicates that the tax on assets for this purpose i s generating more than was originally foreseen. If the additional resources plus the above mentioned contingency measures turn out not to be sufficient inorder to finance unanticipated military spending, the Government would consider issuinglongterm bonds on concessionary terms. 11.LABORREFORM STRATEGY 15. For some time now, the Government, the academia and other social sectors have been providing evidence o f the need to undertake a reform o f labor regulations in Colombia as a basic element for improving the dynamic o f job creation and as a complement to recuperation o f economic growth. 16. Above all, and increasingly in coming years, this i s because the country faces completely different conditions from those 10 or 20 years ago. Companies and workers face a new economic environment that requires much more flexible mechanisms for adaptation that will not put the country's competitiveness and, as a result job creation, at risk. For this reason, instruments in addition to simple macroeconomic policy are needed so that the country can achieve socially acceptable rates o f unemployment. One such instrument i s the updating o f labor regulations so as to create new types o frelationships between workers and businessmen. 17. The current government was aware o f this need. For this very reason, it took on responsibility from the very beginning for improving conditions o f adaptability in our labor market. This commitment was expressed in the Development Plan entitled "Towards a Communal State," in spite o f a clear understanding o f the difficulty o f getting a legislative project o f this kind through the Congress o f the Republic. Fortunately, the proposed legislation was passed by both chambers and i s today a L a w o f the Republic (Law 789 o f 2002). 18. One reason for the successful passage o f this new law was because it went beyond the vision found in earlier projects which had focused on proposed reforms limited to the field o f labor regulation and had thus overlooked some social costs related to this type o f measure, above all in countries like ours that lack consolidated social protection mechanisms to deal with the risks o f unemployment. From the beginning, the project took into account the need to create an institutional structure that would make it possible to socialize the risks and improve the 42  employability o f the country's workforce. Thus Law 789, along with Law 797 (the Pension Reform Law), make up the legal framework that will support consolidation o f the social protection system inColombia. 19. Our estimates show that, thanks to the measures contemplated in Law 789,486,000 newjobs can be created over the next four years: 133,000 duringthe first year and 184,000,93,000 and 75,000 in the following years as the result ofthe dynamic effects ofthese measures. O fthe total number ofjobs which it is hoped that the reform will generate, 20% will be achieved due to lengthening of the workday and reduction o f other contemplated costs; 19% through the stimulus resulting from harnessing certain social groups as a result o f the decrease in payroll taxes (special regime o f contributions); 29% through reductions in the indemnity table, above all for those with more than ten years on the job. Finally, the largest percentage (32%) will be generated through changes inthe training contract. 20. With respect to this last point, the Law created the legal framework for implementation of changes in the functioning o f the Sena (National Training Program) as contemplated in the National Development Plan. Among other things, the Sena i s allowed to offer its services through other entities for training or universities. The contract for training i s extended to other training entities and universities, and at the same time it i s separated from labor-related obligations. In addition, the National Labor Registryi s beingcreated. We are sure that strategic development o f the law will make it possible to consolidate across the country the National Training System where both private as well as public operators may participate and where the workforce will obtain training in accordance with the country's current needs. 21. Three phases of implementation have been foreseen for the new labor Law (789 o f 2002). At first, and starting from when the law i s enacted, all o f the new articles that update labor relations (Articles 25, 26, 27, 28 and 29) will be applied to new employees hired by the companies. At a later date, these same provisions will also enter into effect for those employees who had already been working for the companies before enactment of this law. Finally, it will be necessary to regulate a considerable number o f the law's other articles. 22. To this end, the Government has already set out an agenda that will allow it to regulate the greater part of Law 789 o f 2002 during the course o f this year. One o f the provisions that constitute a priority for the Government i s the one that regulated article 13, which temporarily exempts companies from payroll taxes when contracting new employees from vulnerable population groups. Similarly, articles 6 to 11, which relate to creation o f a fund for job promotion and protection for the unemployed to come from the assets o f the compensation associations, will be regulated. There is also a need to regulate the new relationship with respect to training (articles 30 to 42) which, as has been already mentioned, lays the foundation for creation o f a market for labor training, an indispensable premise for consolidation o f a true job training system inthis country as well as inorder to endow the market with greater dynamism. 43  III.SOCIALPROTECTIONSYSTEM 23. The National Development Plan has determined that the building o f a more equitable society must be one ofthe foundations of development policies. To this end, three basic challenges have been set out: i)increased efficiency in social spending so that greater resources translate into better results; ii)improvement intargeting resources so that they are receivedby the most needy; and iii)consolidation of a social protection system so that economic crises do not affect the most vulnerable groups. 24. Social protection in Colombia i s in the hands o f a series o f entities that lack common objectives, are without coordination and have a high degree o f fragmentation and overlap in their programs. While the social security system did enlarge mass provision o f traditional services, it failed to create the tools needed for social assistance and protection. This i s especially true o f programs for temporarily dealing with the adverse effects o f economic crises on the most impoverished, such as food programs for young children, mechanisms to fight dropping out o f school among young people, training directed at insertion and reinsertion o f the unemployed into the labor market and mass programs for emergency employment. A. CONCEPTUALIZATIONOF THESOCIALPROTECTIONANDSECURITYSYSTEM 25. With the aim o f tackling these problems, the Government has set inmotion the consolidation o f a strategy that is to protect the poorest and most vulnerable population segment by means o f the development of instruments for prevention and social assistance. To this end, it will implement a System for Protection and Social Security (SPS, from its initials in Spanish) that i s established as the set o f policies aimed at decreasing vulnerability and improving Colombians' quality o f life, especially o f those most vulnerable. 26. The goal o f the creation o f the Social protection system i s to decrease the risk o f the population when faced with economic disruptions and to aid the poor who are confronted by them. The SPS must specifically reduce temporary poverty, prevent the poor from sinking deeper and deliver a means to overcome this condition. In this manner, the SPS seeks i)to improve individual and social welfare (less vulnerability, greater uniformity in consumption and greater social justice); ii)tocontributetoeconomic growthanddevelopment andiii)toreducepovertyinaneffective and long-lasting manner. 27. Similarly, the SPS will seek to coordinate the policies o f the State and confront the harmful effects o f poverty and vulnerability as well as to protect those most vulnerable through coordination and execution o f social programs accompanied by financing mechanisms that will guarantee prompt intervention. 28. The objectives of the SPS will be carried out while taking the following guiding principles into account: i)efficiency, for better utilization of resources; ii)universality, in order to guarantee protection without discrimination at all stages o f life; iii)solidarity, which allows for mutual assistance between people, generations and communities; iv) comprehensiveness in order to extend coverage for all contingencies in health, income and general living conditions; v) unity, which facilitates coordination o f policies, institutions, regimes, procedures and benefits; and vi) community participation in organizing, controlling, managing and supervising the institutions and the system. 44  29. Therefore, under these principles, three strategies for risk management will be implemented: 1) reduction, 2) relief and 3) confrontation. The first strategy o f the system aims at reducing risk through policies that go from macroeconomic management, which can financially weaken social spending when it is incorrect, to regulations and institutional development policies that facilitate its operation. 30. The strategy for mitigating risk has the goal o f anticipating a new economic disruption and thus lessening its impact when it does occur. Within the framework for risk mitigation, programs for work training for the unemployed, subsidies for nutrition and school attendance and micro-credits are contemplated, among others. As a basic aspect, it seeks to protect the worker faced with such contingencies as unemployment by partially and temporarily compensating for his reduced income. Similarly, a program for strengthening the labor market will be designed, aimed at small and medium-sized enterprises that create jobs for heads o f households and employ the beneficiaries o f the unemployment subsidy. 31. Strategies for dealing with risks are applied after the disruption in order to treat impacts not covered by the strategy for mitigation. The aim i s to make sure that the short-term effects o f a crisis do not impedepoverty reduction inthe long term, for example that affected children do not experience irreversible nutritional problems or leave school in order to work. This strategy includes the programs o f the Social Support Network that from now on will be operated by the Ministryfor SocialProtection andthe entities attached to it. 32. In addition to these strategies, two main components have been established for the SPS: i)the Comprehensive Social Security System (SSSI) and ii)Social Assistance. The SSSI i s financed by contributions and based on guarantees. Its main goal is to assist individuals to manage risk in an improved manner. The General System o f Pensions, the General System for Social Security in Healthcare and the General System for Occupational Safety are part o f the SSSI. On the other hand, Social Assistance i s defined as monetary benefits financed by the State. This component must specifically avoid the need for the poor to resort to such mechanisms as taking their children out of school or lowering their food intake so as not to put their future capacity to generate income at risk,thus worsening their impoverishment. B. STRUCTURE OPERATIONOF THE SOCIALPROTECTIONANDSECURITYSYSTEM AND 33. The first step in putting into place the conceptual framework o f the SPS was to create the legal and regulatory framework into which the institutions that make up the system could be fitted. In light o f the above, the legislative agenda at the start o f this administration was aimed at the regulatory area, especially through the labor and pension reforms approved by the Congress in December o f 2002. The Labor Reform Law facilitated reform o f labor regulations, defined the Social Protection System and included regulations in support o f employment as well as increased social protection. 34. At the same time, institutional development began with creation o f the Ministry o f Social Protection - M P S - that came about through fusion o f the Ministries o f Labor and Health and which has responsibility for policy formulation and coordination o f the SPS. This policy includes public health, training, labor standards and policies, interventions for reducing child labor and policies on disability. In this manner, the Ministry i s the decision-making body for establishing 45  guidelines for policies and for inter-institutional coordination among entities that make up the SPS'. 35 The M P S , through the Technical Vice Minister, will be in charge o f putting this system into motion with the aim o f consolidating most o f the institutions providing social services as well as to undertake design o f comprehensive and efficient programs for minimizing duplication o f functions, especially administrative ones. Additionally, this Ministry, in coordination with the National Department o f Planning and the Ministry o f Finance, will ensure the required basic financing. 36. Bearing in mind that social assistance expenditure i s pro-cyclical, it i s proposed that a Social Protection Fundbe put into operation as a complementary mechanism for financing the System. Through it, stability would be guaranteed in terms o f spending and extended coverage for the major social programs when a negative economic shock occurs. Inthis sense, the proposed find would hlfill a counter-cyclical function and would complement public spending on targeted social programs through the Systemo fBeneficiary Selection (SISBEN). 37. The Ministry o f Social Protection will have the basic objectives o f formulation, adoption, direction, coordination, execution, control and follow-up o f the SPS. The SPS's operations are made up of the set o f obligations; public, private and mixed institutions; regulations; public and private procedures and resources aimed at preventing, mitigating and overcoming the risks that affect the quality o f life o f the population. It also incorporates the Comprehensive Social Security System (which helps individuals to better manage their risks) and the National System for Family Welfare (which seeks to foster harmonious development o f the family, protection of children and guarantees for their rights). In this sense, in order to ensure optimum functioning of the SPS, policies will be designedjointly with the M P S and the entities executing the programs o f each system, while mechanisms for evaluatingthe impacts o fprograms will also be designed. 38. It is hoped that the SPS will be fully organized at the end o f this administration. Its principal goal will be overcoming poverty and improving income distribution. Its general principles will be efficiency and solidarity with the goal o f making progress towards universality. This presupposes that the Government will obtain sufficient resources and will have an effective administrative system. 39. The SPS will combine the progress made by the General System for Social Security in Healthcare, the General System o f Occupational Hazards, the General System for Pensions and the NationalFamily Welfare System. There will also be additional strategies for social protection as part o f the Social System for Risk aimed at prevention, mitigation and overcoming o f risks with respect to specific situations. These seek to protect family incomes and human capital and include: - Strategies for job promotion, protection for the unemployed and programs for micro- credit for micro, small and medium sized enterprises (MiSMEs) with participation on the part o f the compensation associations; ' The following institutions make up The Ministry o f Social Protection: The Ministry o f Social Protection, ICBF (Colombian Institute for Family Welfare), SENA (National Training Service), Compensation Associations, the ISS (Social Security Institute), the pension funds, the Social Protection Fund, SUPERSUBSIDIO (the Office o f the Superintendent o f Subsidies), INS, INVIMA, etc.) 46  -- Training programs for labor insertionto be entrusted to the SENA; Programs for subsidies earmarked for nutritional support, for educational support under the coordination o f the ICBF as well as for access to healthcare services under the responsibility o f territorial entities and the Ministryo f Social Protection. 40. The components of the SPS along with the main benefits may be seen in Graph 1. The Ministry o f Social Protectionbecomes the guidingentity for the policies as well as the regulator for each o f the subsystems. It has cooperation and coordination from its affiliated entities (SENA, ICBF, supervisory bodies), from others inthe public, private and cooperative sectors (public and private providers, compensation associations) and from the territorial entities (see graphs by subsystems). -Graph 1. System of Social Protection I *IGeriatncCare 1 + T I * r _II/ Others Natural Risks 41. The form in which this coordination between institutions making up the SPS is to occur i s described below, taking the design o f the policy on adults as an example: in the first place, the MPS conceived the policy by means of Law 797 o f 2002 through the addition of an article that obtained the necessary resources for financing the programs. The MPS then drew up the regulating decree together with the Conpes (National Planning Council) document containing all o f the program's parameters, including the amount o f the subsidy, the tool for targeting it, priorities for beneficiaries, regionalizationand the operational scheme which i s givenbelow: 42. This diagram makes it clear that the program design was entrusted to the MPS, which gathered together the principal actors, and that the ICBF will be the executor for the program. Additionally, the diagram shows that the resources will be managed by the Fund for Pension Solidarity (FSP), an organism that belongs to the M P S and i s managed by the Office for Financing of the Technical Vice-Minister o f the M P S . 47  Graph 2. Coordination of the Social Protection System Designs & coordinates Orders Payment - Agreement Selection - - t Approves Project ICBF Prioritization Regionalization Official Announcement It Awlication Form 43. As may be seen in the following graphs (graphs 3-7), there i s a particular institutional design that exists as a component o f each o f the previously mentioned subsystems and that endeavors to link the sources o f financing with the target populations that are beneficiaries of the goods and services that each one provides. The institutional design recognizes the specialization o f functions o f the agents executing the programs in the different fields: affiliation and collection o f contributions, targeting, concentration o f resources and financial management, program execution, policy formulation and direction, among others. The short-term challenge will be to energize the financing structure and generate effective mechanisms for targeting and integrating the benefits for the target population in accordance with the conditions foreseen in each o f them. To this end, the Sisben will be o f fundamental importance as an instrument for targeting the programs along with the designing o f monitoringand evaluation tools. 48  Graph 3. Institutional Design of the General System for Social Security in Healthcare iObligatory(SOAT) InsuranceAutomobile r 10 5%- I erritorial HealthcareFund - Supply General System for Social I 1 lnwme I SecurityinHealth SOURCES FUNDS AGENTS POPULATION Graph 4. Institutional Design of the General System for OccupationalHazards GeneraligystemforOccupationalHazards '' I Sources - Funds ! Agents Population z F B 1 LIJ Occup?bonalHazard Adminishators II"b"(Y .ARP PrmdlalardPreuentlal I L.... B 1 49  Graph5. InstitutionalDesignofthe GeneralSystemof Pensions General!4ustem of Pensions Sources - Funds Agents I Population I Graph6. InstitutionalDesignof the GeneralSystemof FamilyWelfare NATIONAL SYSTEM OF FAMILY WELFARE I f 50  Graph 7. Institutional Design of the Social System for Risks SoclalSys"for Rlsks 44. Taking into account all o f the above, a series o f complementary actions for institutionally restructuring the existing entities for social protection (SENA, compensation associations, ICBF) as well as in order to create the legal and conceptual framework o f the SPS are being designed and put into practice. These are as follows: National TrainingProgram - (Sewicio Nacional deAprendizaje) -SENA 45. With respect to redesigning the entities, transcendental changes are being proposed within the SENA in terms of its nature as an institution, its way of relating to its users (workers and employers) and with respect to its priorities. The principal proposed changes refer to: i) implantation of the meritocracy in fillingjobs in order to decrease pressures for patronage as well as to control excesses on the part o f administrative personnel having to do with the number of instructors; ii)increased use o f already installed capacity in its training centers; iii)creation o f a system to provide greater autonomy for the operational units by combining the existing regional branches into 10 or 12, with the aim o f decreasing the administrative burdenwhile givingpriority to providing attention for the final user by means of the training centers; iv) to stimulate the type o f training demanded by the productive sector while abolishing those having little relevance to the market; v) to train the unemployedpopulation for work by investing 25% o f total income; vi) to allow for competition on the part o f other training organizations in order to strengthen the offering o f public and private training programs. All o f the above will make it possible for the SENA to double its impact on the population over the next four years, which means that it will go from training its current load o f 280,000 students a year to benefiting between 560,000 and 600,000 a year, targeting the unemployedpopulation that i s most inneed o f training. 51  46. The SENA's programs point towards creation o f new jobs over the short and long terms, the strengthening o f social cooperation and facilitating o f conditions for reinsertion o f the unemployed through training. 47. Law 789 o f 2002 (Labor Reform Law) exempts companies from payment o f contributions to the SENA ifthey create newjobs and fill them with people who have been incarcerated or released, the disabled, reinserted former guerrillas or paramilitaries, young people between the ages o f 18 and 25, people above the age of 50 and heads o f households. This will stimulate harnessing o f the most vulnerable population segments and will permit job creation during this four-year period. As a result o f the same law, the SENA will allocate 25% o f its income from payroll tax contributions towards training for the unemployed population and 0.1% to the Construction o f the National System o f Labor Registry, with which it will enlarge its registry o f unemployed persons and companies looking to hire employees. 48. With respect to strengthening training, the SENA will double the number of people to whom it provides training and will implement measures aimed at improving the quality and relevance o f its courses. The increase in the quantity and quality o f training will be based on incorporation o f new technologies, with an emphasis on intensive use o f information and communication technologies. 49. The entity's new operational system will permit other training entities, bothpublic and private, to combine with it for the purpose of buildingthe National System o f Training for Work. Within this framework, the SENA will be the regulator and certifier o f labor competencies. 50. The SENA will provide training for labor insertion and reinsertion o f population segments that are acutely facing the adverse effects of the economic crises or that have special personal characteristics, such as the poorest households and unemployed youths between the ages o f 18 and 25. The SENA will also take on operationo f the Youth inAction Program. 51. With respect to the SENA, the Government intends to carry out an agenda that signifies fundamental changes, not just in the institution's internal structure and operation but also in the market for training itself. This i s because, as has been previously stated, it i s high time that the country consolidates a true system for vocational training that responds to the new economic and social challenges. To this end, a series o f tasks have been laid out that will make this aspiration a reality. In the first place, it proposes to undertake a comprehensive diagnosis o f the SENA's situation and o f the vocational training set-up currently in place. This process will serve as an input for a Conpes plan that i s to contain the principal measures to be carried out in order to put the new system into operation. Finally, it will expedite the puttinginto operation o f the National System of Training for Work, which must consider creation o f a market for training. This means the possibility that many actors, bothpublic and private, can participate as operators, at the same time that greater possibilities for choice amongusers are opened up. Colombian institute of Family Welfare (Instituto Colombiano de Bienestar Familiar) ICBF - 52. The ICBF, in turn, will implement a public policy on childhood, understood as a commitment in favor o f children and expressed in the principles o f responsibility and co-responsibility on the 52  part o f the family, the society and the State, that i s to protect and strengthen human capital during infancy while guaranteeing its basic rights.The hndamental changes are: 1) The Ministry o f Social Protection will be charged with formulation and direction o f policies for children and the family. The ICBF, in coordination with the Ministry, will work on the design, execution and supervision o f the programs. The Zonal Centers o f the ICBF are to administer the programs in combination with the municipalities (decentralization). Execution will be gradually entrusted to the territorial entities and community organizations, in accordance with their institutional development. 2) The making o f agreements with the territorial entities, in order to combine resources and make operational a proposal for decentralization, will be encouraged. A pilot project for decentralization will be undertaken in 3 to 5 departments with respect to the field o f assistance and prevention. The impact and results of these pilot projects will then be evaluated in order to replicate the experience thus acquired. 3) The set-up for co-financing the programs with resources from payroll taxes, resources from the territorial entities and other resources (compensation associations, NGOs) will be extended. These agreements will include both physical and financial goals for evaluating resource management and demonstrating results to the population. 4) Co-financing is to be used to promote this strategy for programs for infancy and the family being developed in this country. In order to achieve this, the following strategies are to be developed: i)stimulate creation and operation of the Social Policy Councils (CPS) in 100%o f the municipalities inthis country by 2005; ii)encourage the CPS to make the local situational diagnoses with social participation so that they will be of use in the process for programming ICBF resources in order for the 2006 budget allocated to the municipalities to be in accordance with the recommendations of the CPS; and iii)encourage agreementswith the territorial entities so as to ensure combined resources. 5) Allocation o f resources from payroll taxes for co-financing will be done according to the needs and risks to be covered in the different regions and in light of the results o f the undertaking. These will be evaluated usingindicators for coverage, efficiency and quality. Efforts on the part o f municipalities to achieve better coverage and quality o f attention will be recognized in the annual allocations. 6) New modalities for attention will be created with technical standards as well as standards for effectiveness that will make it possible to extend coverage. In line with this, the ICBF will develop a program for evaluation o f the efficiency and impact o f its programs as a necessity for adjusting and improving them. Legal standing will be conferred on institutions providing the Public Service o f Family Welfare. To this end, institutions will be registered and a system will be designed for fitting out and accrediting so as to motivate the efficiency and quality o f these services. Associative modes of a pre-cooperative nature made 53  up exclusively of communal mothers will be encouraged and they will be offered training and access to micro-credit lines. With the aim of creating larger spaces for child development, a modality of multiple homes will be adopted as a mechanism for communal attention. The compensation associations,territorial govemments, the National Government, the communities and other private sources will combine resources for their construction and maintenance. The targeting strategy o f the Colombian Institute o f Family Welfare i s based on the National Development Plan for 2002-2006. I t proposes targeting the beneficiaries o f the programs for assistance and prevention for the family (especially those for food and care) through the targeting tool "System o f Identification and Classification of Potential Beneficiaries o f Social Programs" (SISBEN). It emphasizes giving priority attention to the most vulnerable population segment, such as children from families categorized as being in level 1 o f the SISBEN. It is based on three basic principles o f State action on behalf o f society, these being equality, efficiency and quality. It emphasizes the need to allocate resources from the policy for attention for the family and children inan efficient and fair manner betweenthe different territorial levels, as well as to provide efficient and quality programs relevant to management of social risk. Actions aimed at optimizing equality in targeting and allocation Definition of the target population for ICBF preventive programs according to Social Management o f Risk; establishment o f the intensity o f ICBF investment in accordance with age groups. Development o f a targeting tool for ICBF preventive programs through the SISBENthat is to join together the supply and demand for services according to Social Management of Risk and define types o f intervention in accordance with the level o frisk requiredby age groups. Targeting o f beneficiaries o f nutritional and care programs for 2004 based on the SISBENconsolidatedmunicipal databases o f 2003 Allocation o f 2004 municipal resources based on the total SISBEN 1 and 2 child population according to the consolidated national database in accordance with the target population Programming o f social and financial goals for 2004 based on targeting tools in accordance with the Social Management o f Risk Methodological development of estimation o f the number o f beneficiaries o f the nutritional and care programs executed by the ICBF and classified in SISBEN levels 1 and 2 (March 2004) Definition o f the ,increase in coverage o f the nutritional and care programs executed by the ICBF classified in SISBEN levels 1 and 2 valid for 2005 (September 2004) Development o f a system for monitoring and follow-up for estimating the number of beneficiaries o f nutritional and care programs executed by the ICBF classified inSISBENlevels 1and2 for 2005 (March 2004) 54  Actions aimed at optimizing the efficiency of targeting and allocation: Design a database o f beneficiaries o f first phase ICBF programs; pilot test in 3 municipalities Design a methodology for reference prices and standard costs for some o f the nutritional and care programs executed by the ICBF Review protocols and standards for attention for the nutritional and care programs executed by the ICBF (Communal Welfare Homes, Nutritional Assistance for Schoolchildren and Adolescents) Application o f a reference price methodology for Communal Welfare Homes and for Nutritional Assistance for School Age Children and Adolescents Design a system o f incentives for municipal investment and development o f agendas for the Social Policy Councils Actions aimed at optimizing the quality of actions for targeting and allocation: Design o f a methodology for establishing essential minimum requirements for ICBF service program providers according to the type of service by risk level Design of an instrument for follow-up and analysis of the execution of social and financial goals Application o f the 2004 instrument for follow-up and analysis o f the execution o f social and financial goals A pilot project will be carriedout in 2003 in order to target the populationbelow the age o f 7 that i s the beneficiary o f the nutritional programs o f the Public System for Family Welfare. This will be done through the System of Beneficiary Selection (SISBEN),giving priority to the child population under 5 years of age belonging to families in levels 1 and 2 o f the SISBEN. In 2004, the targeting strategy using the new SISBENwill be appliedbythese programsthroughout the country. The prior actions will be support by an agreementissuedbyICBFBoardofDirectorsin which it will approve the Institute's targeting policy. Furthermore, they will be outlined ina CONPES document onthe Targeting o fthe Institute's Programs. 9) The System o f Information for strategic decision-making and management, for orientation o f programs and resources, for follow-up and evaluation and for consulting the citizenry and reporting results will be strengthened. 10) The ICBF will become a fundamental actor o f the Social protection system as coordinator, executor or supervisor o f programs for prevention, mitigation and overcoming o f risks directed at children, families and vulnerable groups in the areas of nutritional assistance, care and development o f minors, protection o f minors as well as those directed towards prevention o f intra-family violence and the elderly population living inextreme poverty. 55  . CompensationAssociations 53. The System for Family Compensation administered by the Compensation Associations will undergo significant changes with the intention o f making it more re-distributive and endowing it with greater coverage. It is proposedthat: i)they change the current conditions for access on the part o f workers and allow unemployed heads o f households to join; ii)lower the limit for the right to receive the monetary subsidy from four times the minimum wage to three times the minimum wage; iii)unemployed beneficiaries should have the right to a subsidy that would include contributions to the healthcare regime over a period o f time inaccordance with budgetary availability; iv) unemployed persons who had previouslyjoined the associations should have the right to recreational and tourist services in accordance with the length of time duringwhich they have been members; v) unemployed persons who can show that they have been affiliated with the system for more than a year during the period immediately prior to losing their jobs should receive relevant vocational training so as to increase their possibilities for labor reinsertion; vi) the compensation associations should provide credits for micro businesses. 54. Under the new regulations compensation associations have a significant social and economic role to play In the economic sphere, they will be able to invest in the financial sector through banks, financial cooperatives and commercial finance companies as well as in the housing market. They will also be able to form partnerships with and constitute distinct legal entities in order to undertake any activity relatedto their corporate purpose and will be able to affiliate their members with these new entities. In the social field, they are being assigned a transcendental responsibility, in that they are permitted to invest in all o f the regimes o f the Comprehensive Social Security System, innursery schools and in subsidized housing. IV. SUPPORTFOR ONGOING REFORMSINTHE SOCIAL SECTOR 55. This country has initiated reforms in education, healthcare, labor training and targeting. To this end, the current administration has based these initiatives on recent legal developments in order to increase the efficiency o f social spending, improve targeting o f expenditures and consolidate a social protection system so that economic crises do not affect the future possibilities o f the most vulnerable groups. 56. Similarly, protection has been shown in the expenditures for priority social programs that are reflected in the Government's policy for guaranteeing increased coverage. The social spending component for 2003 reflects the Government's policy for ensuring such increases. Its percentage o f the General Budget o f the State has reached 43%. Within social spending, the most important area i s Employment and Social Security (42%) followed by Education (34%) and Healthcare (18%). These significant sums are due to the fact that expenditures in education and healthcare are totally protectedfrom the ups and downs o f the economic cycle. 57. Law 715 guarantees these sectors will have growing and stable resources until 2008. The new organization o f the system makes it possible to correct the inequality among regions, duplication o f functions and the explosion in the costs o f services, which were not reflected in greater coverage or better quality. The new model for distribution o f responsibilities and allocation o f resources awards greater autonomy to the regions and generates a clear system o f incentives in order to raise the quality o f services as well as the efficiency with which they are provided. This 56  brings about transparency inthe process, along with social follow-up and control and facilitates planning o f finances and o fthe investment levels for the territorial entities. 58. The funding for education will be used in order to provide for 7.4 million pre-school, primary and secondary school students and 340 thousand more in higher education as well as to provide for more than 11 million people in the subsidized regimen. In employment and social security, the major share will be directedtowards fulfilling development ofthe pensionsystem. 59. The program for social assistance entrusted to the ICBF will serve 1.4 million childrenunder the age of 7 in communal homes, providing them with 73% o f their daily nutritional requirements and 8 hours o f daycare. At the same time, the school cafeterias will be in charge of providing breakfast, lunch and a fortified snack for 2.5 million children and adolescents. 60. Likewise, the programs that make up the Social Support Network (RAS, from its initials in Spanish) will be subjected to rigorous evaluation o f their impacts and established criteria for entry and exit whose results will be reviewed by the Government in 2004 with the aim of determining whether they are to be part o fpermanent social protection programs. A. EDUCATION 61. Education i s an essential factor in human, social and economic development and a basic instrument for building social justice. It i s therefore worrisome that, in spite of making efforts andundeniable advances, Colombia has not been able to achieve universal access to quality basic education. Indicators for coverage, efficiency and quality show that progress has been slow and insufficient and that, often times, increases in coverage have been obtained at the expense o f quality. Lack o f education constitutes one o f the substantial factors behind the persistent inequality and concentration o f opportunities. 62. Educational coverage and quality are the most important factors for assuring a country's competitiveness. Social and economic development are directly associated with increased productivity and the latter depends on adequate interactionbetween improvements in technology and the growth o f education and of the skills o f the workforce. Experience shows that countries able to develop orderly interactions, with linear, rapid and balanced transitions, achieve more accelerated and sustainable increases in productivity and growth. This implies the need to apply policies that guarantee linear and gradual increases in coverage and quality for the different educational levels. 63. The strategy o fthe Educational Revolution seeks to respondto the needs for coverage and quality requiredby this country in order to attain better conditions o f social and economic development and improve the population's quality o f life. The policy for enlarging coverage at the preschool, basic and intermediate levels i s aimed at raising gross coverage from 82% to 92% through the creation of 1.5 million places for students, giving special attention to the most vulnerable population segments while seeking greater equality inthe provision o f this service. This will be achieved through implementationo fvarious complementary efforts: Strengthening o f the reorganization process o f the departmental and municipal entities with the goal o f attaining a better balance and equity in the distribution o f physical, human and 57  financial resources as well as optimizing utilizationo f existing capacity while giving priority to the number o f children served. The goal is to generate 800,000 new places through development of this mechanism. Additionally, the students to teacher ratio has been augmented by 1.6 students per teacher from 2002 to 2003 in public schools, thus increasing from 26 to 27.6. This i s proof of the efficiency achieved by the educational sector thanks to the process o f reorganizationo f human, physical and financial resources. The creation of 640,000 new places in the educational system by means of the use o f resources resulting from the fiscal savings due to abolition of the territorial comptrollers' offices and representatives in accordance with the Project for Political Reform o f the State and other additional resources. The Constitutional Court's recent decision to approve holding the Referendum, scheduled for late October o f 2003, opens up the possibility o f incrementing resources for the educational sector. However, given the possibility that the Referendum could be voted down, it has beenagreed that the government will continue to allocate 31.59% o f the National Royalty Fund in order to increase coverage in the same manner as was done in2003. Competition for entry into the new system for career teachers will be regulatedin accordance with the process for organizing teaching staffs. Support projects that favor demand, increase retention rates and improve the efficiency o f the educational system will be put inmotion. 64. With respect to higher education, the Government will promote access with equality by implementing three mechanisms for retentionand enrollment o f 400,000 students: i)a program in which new financing plans will be created to benefit lower income students and which will motivate improvement o f educational quality and be supported by credit resources. 65. With the aim of improving educational quality, the Government will provide support for the territorial entities and their educational institutions intheir processeso f institutional improvement and management in order to ensure that those being educated develop basic, professional, vocational and citizenship skills. In line with this, between October 2002 and April 2003 1,037,000 mathematics and language tests were administered to students in grades 5 and 9 in 90% of the country's municipalities. During 2004, additional tests for the same grades will be administered with respect to scientific thought and the duties of citizens in 90% of the municipalities. 66. In this context, modernization o f the sector's administration and management at the national, departmental and municipal levels will be pursued. To this end, four mechanisms oriented towards improving productivity, efficiency and transparency of the sector while ensuring the quality o f investments will be developed: i)institutional modernization o f the Ministry of Education; ii)modernization of the departmental and municipal entities; iii)agreement on Management and Performance Plans; and iv) development of the information system o f the educational sector. The Ministry o f Education i s working on the design and implementation o f an information system that will allow the government to have an instrument for facilitating decision- making and policy design. This system includes modules for: i)enrollment; ii)payroll; iii)staff; and iv) a directory ofpublic schools and will be implemented duringthe first semester o f 2004. 58  67. In the rural sector, extension o f coverage and improvement o f educational quality i s being implemented through the "Education Project for the Rural Sector," or PER, from its initials in Spanish, which i s being financed by an investment loan from the World Bank. This project develops innovative educational models for quality and relevance for the rural sector. Inline with this, 7 educational options have been evaluated and adopted and are currently being . implemented: .. Inbasic primary education: New School andthe Programfor AcceleratedLearning Inbasic secondary education: Tele-Secondary and RuralPost-Primary For young people and adults: the Tutorial learning System (SAT); the Rural Educational Service (SER) and the CAFAM Program 68. The PER at this moment i s operating in 12 departments with diverse levels o f development and has brought about some 1,500 experiences with these models (through demand or supply). It fimctions by means o f Departmental Strategic Alliances and Municipal Operative Units, with a UnitCoordinator inthe MEN. B.HEAL RE THCA 69. The principal objective i s to increase the coverage o f protection and social security policies and provide preferential attention for the needs o f the most vulnerable population groups. Enlargement o f coverage o f the subsidized regime will be obtained through transformation o f subsidies from supply to demand. In this manner, the public hospitals' capacity to finance their expenses through the sale o f services will be increased. As a supplementary issue, greater collection o f resources on the part o f the National Government and the entities will be sought and an adjustment will be made in the structure o f financing sources. 70. With regard to the General System o f Social Security in Healthcare (SGSSS, from its initials in Spanish), mechanisms to guarantee the System's financial stability will be implemented in order to increase coverage and quality in the provision o f healthcare services on the different levels and categories. In particular, in the field o f public health the goal i s to increase coverage for vaccinations, reduce the incidence o f malaria and dengue, decrease child and maternal mortality, prevent adolescent pregnancies and deal with sexually transmitted diseases. Finally, it is sought to apply a pension policy that i s to avoid financial imbalances, improve coverage and implement mechanisms aimed at covering debts in the area o f pensions so as to guarantee intra- and inter- generational equality. 71. Assistance and protection for the most vulnerable groups will be provided by means o f coordination o f programs for social assistance and protection through implementation o f the Social Risk System (SSR), which will be able to count on a reformed Sisben as a principal instrument for targeting. Special attention will be given to the needs o f the displacedpopulation. 72. With respect to public health, the priority goal is to obtain and sustain coverage in usehl vaccination to a level above 95% in children below the age o f 5, in all o f the biological immunizations o f the enlarged vaccination program. To reach this goal, the Government will guarantee the necessary resources in the General Budget o f the State for the purpose o f acquiring the biological vaccines in each category as well as ensuring adequate distribution and conservation. It will also develop strategies needed for achieving useful vaccination coverage. 59  73. One such strategy i s the approval o f the appropriate regulations requiring an immunization card for children enrolled inpublic or private schools or day care centers. 74. Restructuring and transformation o f public hospitals, so as to facilitate self-sustainability and better performance in the market, i s justified by the fact that hospital performance, in addition to having a remarkable effect on current territorial finances, will also, if it continues unchanged, become fiscally unsustainable and generate huge debts, at enormous cost to the country. The reasons for not having greater insurance coverage derive mainly from sustaining hospital expenses that grew more than the public hospitals' capacity to finance them by means o f the sale o f services and from the sector's increased resources. This increase in costs not only affects the financial viability o f the institutions themselves but has also delayed transformation o f the subsidies and the increased coverage on the part o f the subsidized regime while at the same time becoming the principal factor in causing accumulation in the territorial non-financial public sector deficit.2. 75. In this manner, efforts to transform the public hospitals' structure of expenditures and modernize their organizational and managerial set-ups will be reflected over the medium term in a substantial reduction o f the operational deficit and accumulated deficit. However, the magnitude o f the results depends on how aggressive the policy o f modernization i s interms o f the size o f the restructuring and the time that the process takes. Inaccordance with these factors, there could be a savings o f as much as 0.1% o f GNP at the end o f the four-year period. 76. Along with the strategy for adjustment and modernization, the system must modify current incentives that contribute towards growth in hospital spending. Apart from eliminating the demand for additional resources from transfers, public hospitals need to make progress in justifying their income through implementation o f modes o f payment other than direct transfer. These must be consistent with the quantity and value o f services that are actually provided. 77. The country's fiscal situation imposes significant restrictions upon more rapid and consistent progress in extending insurance coverage. In the subsidized regime, resources for co-financing available in the Fosyga solidarity sub-account must assign priority to guaranteeing continuity o f the affiliation achieved as well as co-finance an increase in new places, to the extent possible and inaccordance withbudgetarypossibilities. 78. On the other hand, efforts made in financing healthcare insurance must be accompanied by improvements in access to and quality o f services. Regulation based on quality i s an essential strategy of the system. In this sense, with the issuance o f the new regulatory framework with respect to quality, the system will be able to make progress in developing systems to ensure quality and continuous improvement on the part o f insurers and providers and with the aim o f protectingusers. According to the Bank of the Republic, "the deficit accumulated by the non-financial territorial sector in 2001 is to a large extent explained as resulting from the decentralized entities, which had increased levels of expenditure, especially at the department level. This level of the administration as a whole had a deficit of 656.5 billion pesos. Thepublic hospital institutions accounted for the largest deficit (596 billion pesos)." Bank of the Republic (Banco de la Repliblica). Office o f the Undersecretaryfor Economic Studies-Office of PublicFinance. Medellin, June, 2002. 60  79. In addition, a Licensing System (Sistema de Acreditacibn) will be put in operation to demonstrate and evaluate evidence o f higher quality o f services by IPS and ARS and to generate mechanisms for the recognition of and dissemination o f said evidence. 80. To summarize, by means o f the strategy outlined above, Colombia is taking significant steps towards resolution o f the main problems in its social sector. The Government i s committed to carrying out these policy changes and ensuring continuity o f the process o f rationalization and extension of the social protection network. C. TARGETING 81. With respect to the targeting o f social spending, there are still inefficiencies and inequalities arising from factors such as: lack of information, leaks o f a political nature, mechanisms for control and supervision that are o f little effectiveness, lack o f social control and regulation o f the targeted programs. In spite o f these limitations, it i s absolutely necessary to direct social spending towards the poorest and most vulnerable social groups. To this end, there i s a need to maintain, adjust and consolidate targeting strategies for such social services as healthcare, education, housing and potable water. 82. Incompliance with the legal code, Law 715 o f 2001 and the recommendations o f Conpes Social Document 055, the DNP undertook the task o f updating the system o f individual targeting. To this end, it carried out the design and validation o f this new instrument and o f the mechanisms for quality and software control, as well as for drawing up technical manuals and training support personnel. At the same time, a framework for sanctions inorder to deal with punishable offenses derived from mismanagement of the SISBEN has been designed. 83. The National Government foresees, over a period o f less than a year and a half and starting in January of 2003, carrying out training o f the territorial entities, setting up quality controls and undertaking a new survey in all o f the country's municipalities. This instrument will make public spendingmore efficient and will also target emergency programs for employment, for the Social Support Network and those o f the Social System o f Risk. D.POLICY ONTHEINTERNALLYDISPLACED 84. Forced displacement constitutes the country's principal humanitarian problem and represents one o f the gravest violations o f Colombians' human, civil and political rights. Displacement i s a phenomenon that aggravates the situation o f vulnerability and exclusion o f the persons and families affected. According to the Social Solidarity Network, while 54% of the homes o f those who have not been displaced are in a situation o f vulnerability and exclusion, the figure for the homes o f the displaced i s 85%. 85. From the point o f view o f population segments, according to official statistics, between 1995 and June o f 2002 approximately 890,000 people were displaced and the groups most affected were women and children, in that it i s estimated that 48% are women and 44% are minors, school-age boys and girls. At the same time, 20.5% o f the displaced are members o f ethnic groups, o f which 17.7% are from the Afro-Colombian population and 3.75% are from the indigenous population. 86. Geographically, displacement has been expanding. While 480 municipalities were affected in 2000 by events o f reception or expulsion of the population, 819 were affected in 2001 and 61  approximately 900 in 2002. Thus 87% o f the national territory has been affected by displacement, out o f which 102 municipalities have been identified as critical. 87. In order to deal with this situation, the Government will take action with respect to four basic components: i)prevention and protection; ii)emergency attention; iii)generation of conditions for re-settlement and iv) strengthening o fthe national system for comprehensive assistance. 88. Prevention will seek to opportunely detect and neutralize displacement in areas o f the country where there i s evidence of greater vulnerability o f the population and, equally, will seek to strengthen local response capacity in order to prevent its effects. On the one hand, the current early warning system will be strengthened so as to facilitate opportune evaluation of objective conditions o f risk and thus anticipate displacement events. On the other hand, humanitarian assistance will be provided to victims of the conflict who have suffered the death of a family member, permanent disability, wounds or property loss; aid for educationwill be given to minors and psychosocial attentionwill be provided for emotional recovery o f the victims. Lastly, support will also be provided for rebuilding social infrastructure and housing by means o f plans for subsidy or financing o f replacement or repair o f property. The specific goal for 2006 is reconstruction of more than 5,000 homes destroyed interrorist acts and o f basic structures in 90 municipalities. We also hope to provide assistance for 15,000 families who have suffered the loss o f a family member interrorist acts. 89. In relation to emergency humanitarian assistance, preferential assistance will be provided for vulnerable groups by attempting to give them immediate aid that will make it possible to overcome conditions of vulnerability while providingbasic social services to cover the needs for aid and subsistence. Temporary provision of nutritional assistance, shelter and healthcare along with temporary settlements having basic services and healthcare under minimum quality standards are foreseen. Attention involving emergency humanitarian assistance for 200,000 families has been projected. 90. With respect to re-settlement, the fundamental emphasis will be oriented towards fostering opportunities for return of the displaced population to their places o f origin, while taking into account their wishes, and recognition o f economic, social and cultural rights. In order to achieve this, during the 2002-2006 period the National Government will place special emphasis on generating conditions o f dignity and security for voluntary return o f the population to their places o f origin. This plan will be based upon: a) a plan for subsidized housing; b) promotion o f processes for conferring property titles; c) support for productive projects and income generation, and d) promotion o f productive training plans. Specific goals for 2006 call for the return o f 30,000 displaced families. 91. Finally, the National Council for Assistance for the Displaced Population as the principal instance for coordination and interlocution of the diverse sectors o f the State will meet regularly, having responsibility or capacity to contribute to solving the problem. Within the framework o f the system, the regional and local councils for assistance for displacement will be strengthened and active participation inthem by the affected populations will be encouraged. 92. Also, such tools for support o f the system as the National Information Network, particularly the Sole System for Registry ( S U R ) and the System for Estimation o f the Magnitude of the Displacement, as well as the early warning system and the follow-up system, as well as with 62  mechanisms for evaluating the policy for prevention and assistance for forced displacement, will be strengthened. V. TRANSPARENCY,EVALUATIONAND SOCIAL CONTROL 93. In a context o f serious fiscal restrictions, the National Government has proposed to modernize public management and modify the institutional organization in order to achieve the goals o f the National Development Plan with effectiveness, efficiency and transparency. This implies incorporating new practices that would engage the citizens in the different phases of administration o f the State as well as strengthening managerial instruments in order to orient public administration towards the achievement of results that would improve the population's living conditions. 94. At this time, information on operation and impacts o f the principal policies and programs i s meager and, as a result, decisions as to whether to prolong, suspend, substitute or modifi a program, which usually come with a change o f government, disregard the factors for success andor failure o f these programs. This situation leads to policy decision-making based on incomplete information that exaggeratedly increases the costs o f actions on the part o f the State, diminish the Government's impact and credibility and at the same time limits learning and strengthening on the part ofthe entities. 95. At the same time, lack of a widespread and suitable system for dissemination of the results has limited the scope o f the National System for Evaluation o f the Results o f Public Management (SINERGIA, from its initials in Spanish) and has not allowed it to operate as such. This deficiency has also served to deny it ongoing feedback from those entities under evaluation as well as from interventions on the part o f the State while at the same time reducing the system's potential as an instrument for reporting to the citizenry. 96. Therefore, a component for targeted evaluations will be incorporated into the National System for Evaluation o f the Results o f Public Management (SINERGIA) and a system will be put into operation for disseminating the results of the evaluation and o f the fulfillment o f sectorial commitments. 97. The establishment o f institutional conditions to guarantee that evaluations on the impact of social programs are periodically carried out has implications that are determining factors in the policy planning, formulation and adjustment processes and in the budgeting o f public resources. Evaluations of impact make it possible to determine and quantify the effects that the programs have on their beneficiaries as well as to establish whether these interventions are the most efficient as compared to other actions, given the investmentsmade. In this manner, they become tools for ensuring that allocation o f public resources can be made through effective and efficient programs for the fight against poverty and the formation o f human and social capital and so that the results constantly produce feedback for the cycles o f planning, budgeting, formulation and execution o f policies and programs for public investment. The government will therefore seek to establish mechanisms to reinforce the carrying out o f evaluations on a periodical basis. 98. With regardto targeted evaluations, the goal i s to increase knowledge and information in relation to the evolution, use o f resources and actual impact on the beneficiaries o f the principal programs and policies o f the State. The ultimate objective o f these evaluations i s to adjust and/or reorient policies, programs, instruments and institutions in order to ensure that goals are achieved or 63  exceeded as well as to consolidate a result-oriented management model at the service o f the citizenry. 99. The evaluations will be defined through mutual agreement between the entities and the National Department o f Planning. The DNP will also be responsible for coordinating the processes for selection and contracting as well as for defining sources o f funding and costs o f the evaluations. Policies and programs that are the object o f targeted evaluations will be selected in accordance with their importance in the government plan. The main criteria used to define them will be: i) the amount o f public resources involved and the potential savings for the State; ii)the size and characteristics o f the affected population; iii)the expected effect on the country's economic dynamic and the potential for mobilizing private sector resources; iv) its importance ingenerating employment and income among the poorest and most vulnerable part o f the population, v) replicability and expansion and vi) the introduction o f new management models. 100. At the same time, a disseminating plan will be put into operation by means o f which the results o f follow-up on the commitments established by the entities through the Conpes, as well as the results of the evaluations targeted at the various government programs, will be made known. Specifically, the system will make use o f widely circulated printed media, discussion fora involving participation on the part o f the citizenry and academia and electronic distribution o f this information as its principal channels o fdiffusion. 101. In order to achieve the above, the system's design will take into account the experience gained through the program Bogotci Como Vamos (Bogota, H o w Are W e Doing?) as well as other national and international programs o f this type, which have been proved effective in fulfillment o f this objective. Similarly, the Government, through the DNP, will seek to establish partnerships with the private sector and organizations o f the civil society that would guarantee the transparency and credibility that a system o f this nature requires while ensuring its sustainability. Once in operation, this diffusion will place particular emphasis on those entities that have shown themselves to be outstanding due to their excellent progress in achieving results. 102. The government, by means o f the DNP, will hold a forum in early 2004 in commemoration o f the ten years o f Sinergia, in which it will show the system's evolution while emphasizing its current developments. At the same time, it will seek to stimulate demand for the system's products, publicize its catalog o f products and services and generate discussion on the future o f the System o f Evaluation. This forum will include the participation o f Colombian specialists in addition to experts on evaluation systems from other countries. 103. Inconcluding, by means o fjoining together components for follow-up, targeted evaluations and difksion, the National Development Plan seeks to consolidate the National System for Evaluation o f Results while converting it into a tool that will make it possible to increase the effectiveness and transparency o f State management, increase efficiency in its spending, modernize public administration, improve the design o f government policies and programs and involve the citizens inthe diverse phases o f administration. 64  Annex 111: SocialIssues and Challenges 1. This annex lays out ingreater detail the social issues and challenges discussed inSection I1o fthe main text o f the Program Document, starting with concerns regarding the need to develop the skills and knowledge o f Colombian workers to be competitive in a global economy that is rapidly changing technologically. 2. The Closing the Gap in Education and Technology report (World Bank, 2003) demonstrates that the interaction between education, job training, and technology is key for economic growth, suggesting that Colombia cannot benefit from the technological innovations in the world today if skilled labor to complement this technology is not available. Unfortunately, like many other Latin American countries, the report shows that Colombia lags behindits East Asian competitors ineducation coverage and quality, despite the fact that it spends more on education as a percentage o f GDP. 3. The relatively low skills o f the labor force and the small marginal gains to educational investments may be responsible for a "low level technology trap" where the lack o f labor discourages investment in technology, thus limiting economic growth. To break out o f the low-level trap, Colombia needs to increase its secondary education coverage, raise school quality at all levels, and improve complementary skill training programs to encourage investment intechnology and to better benefit from technological progress. This i s a particular challenge since increases in education spending in Colombia seem to have had little impact on attendance rates or quality. Fundamentally, this means that GOC has to increase the efficiency by which existing public resources allocated to education and training are being used. Job Training Issues 4. Formal and informal (on-the-job) vocational training are two o f the primary sources o f labor market skills, which lead to higher wages for workers and greater productivity for firms. Formal job training in Colombia occurs through three primary channels: public training programs, private training programs, and firms. Firms pay a tax to the federal government that i s earmarked to fund the public training programs; the benefits o f these taxes are returned to the firms and the workers through publicly provided human capital accumulation activities, primarily through SENA.30 Although SENA services are enjoyed by nearly one million workers each year (approximately 20 percent o f all job training), the existing vocational training system, includingbothpublic and private entities, faces several shortcomings: The skill level of Colombian workers: a constraint to productivity. Half o f the employers in Colombia believe that the work force is not sufficiently trained. Colombia's increased integration inthe global economy demands higher skill levels of its workers.31 However, there is a shortage o f skilled workers who complement modern productionmethodologies, as evidenced by the rapid increase inthe wages o f highlyskilledworkers and by firmperception surveys.32 0 Mismatch between publicly-provided training courses and skill demands. Publicly-provided training could better meet the skill demands o f the market invarious ways. First, course offerings 30SENA, Colombia's largest public training programwith nearly 900,000 students annually, was developedin 1964 and designed for a closed economy that was mostly comprised of agriculture or manufacturingjobs, slow to technological change, and relatively homogenous. SENA was overhauled in 1991, but it, and public training p;ograms in general, still do not realizetheir fill potential. De Ferranti,et. al. (2003). 32LopezCastario, Hugo (2001); Barreraand Corchuela(inprogress). 65  could match the skill needs in the modem Colombian economy. For example, SENA's market analysis that i s used to select the menu o f vocational training course offerings i s based on historical data, thus reflecting past trends rather than current and future needs o f the market. Second, the provision o f up-to-the-minute vocational training programs is costly. Skill demands are rapidly changing and the technology used inthe most lucrative fields i s expensive and quickly evolving. Since vocational training must be up-to-date, frequent investments in hardware and software are necessary since many specific production methods are obsolete after only a few years. Third, public training courses do not consider differential skill demands across Colombia. The types o f courses offered are largely standardized across the country, which eases course development at the central level, but does not meet the local needs o f workers or firms. These shortcomings are symptomatic o f the limited communication o f the needs o f firms and workers on one side and the course offerings and curriculum on the other side. Financial ineficiencies inpublic trainingprograms. Current public training programs do not use allocated resources efficiently. First, basing budget allocations on historical rather than future training demands necessarily leads to a misallocation o f resources as new initiatives are under- funded while outdated programs are well funded. Second, funding based on historical data does not allow for targeting o f specific populations as economic or social situations change. Third, the per student cost o fpublic sector training is higher than private training programs inColombia.33 Need to utilize private training programs more. Training by the private sector leads to higher rates o f retum than training by the public sector. The rate o f return to training in private institutions is greater than that o f SENA and other public training courses, which have begun to show low, or even negative, returns in recent years.34The challenge for GOC i s how to take advantage o f efficient private providers to deliver publicly-financedtrainingprograms. Poor targeting of trainingprograms. Approximately 20 percent o f each income quintilehas taken training courses, with the exception o f the top wealth quintile, where 15 percent have taken training. Private training programs tend to attract higher skilled students from higher income quintiles. While public training programs attract a larger number o f low skilled workers, the typical student i s 24 years old, more than half have completed secondary school, and 50 percent are from families inthe top 40 percent o f the income distribution-thus missingyouth, the poor, and the unskilledwho are the most vulnerable to ~nemployment.~~ 0 Informality of mostjob matching. Training programs are numerous, but information asymmetries are prohibitive to job search. Most jobs are obtained through informal networks, which are particularlyweak for the young, women, and internally displaced populations who tend to be less tiedto their local labor market.36 5. Overall, a comprehensive skills development strategy i s lacking. Instead, many entities-both public and private-offer similar service with the associated inefficiencies in financing, service delivery, and outputs. 33Jaime Tenjo (inprogress)``Supply andDemandofTraining," LCSHSiWorldBank. 34 Alejandro Gaviria and Jairo Nunez. (2002) "Evaluating the Impact of SENA on Eamings and Employment," World BanWLCSHD, draft and Barrera, Felipe and Alejandra Corchuela (in progress) "SENA Retums: A Re- evaluation." The econometric methodology controls for selection bias by training firms so these results are not likely due to a moreskilledtrainingclass inprivate than in SENA trainingcourses. 35Ibid. 36LopezCastaiio, Hugo(2001). 66  EducationIssues 6. As mentioned above, Colombia lags behind other comparable countries in education coverage and quality, specifically with lags in secondary education coverage and instudent learning a~hievement.~' The private returns to education are highand increa~ing.~~ Giventhe already relatively highpercentage of GDP allocated to education,39the fundamental challenge i s to achieve educational improvements through more effective and efficient use o f existing educational resources. 7. Coverage, illiteracy, and educational attainment. In general, the GOC recognizes the need to address the lack o f universal basic education coverage and to improve the quality and efficiency o f the education system. While the gross enrollment rate at the primary level was over 100 percent in 2001, the net primary enrollment rate was only 82.4 percent, down from 84.2 percent in 1999. The net secondary enrollment rate was only 63.4 percent and only 15.4 percent inhigher education. Enrollment rates among children 7-11 years o f age are high, at 94 percent (slightly higher for females, 95 percent, than for males, 93 percent). However, for 12-17 year-olds, enrollment rates are only 75 percent and have not changed much over the last four years. 8. Worrisome level of promotion rates. While overall promotion rates have been increasing over time, the transition from first to second grade is only 72.5 percent. In urban areas the promotion rate i s almost 86 percent, while inrural areas, it i s only 56 percent. Promotion rates actually declined from 1997- 1998 to 1998-1999. Although the rates improved insubsequentyears, by that time, repetition and dropout took their toll. The first grade repetition rate was 9.7 percent in 1999, up from 8.7 percent in 1998. In rural areas, the repetition rate was 13 percent, versus seven percent inurban schools. In 1998, the dropout rate in the first grade was almost 18 percent (19 percent inpublic schools, 13 percent in private schools, eight percent inurban areas and 31 percent inrural schools). 9. The level of education continues to increase for the adult population, from 6.7 years in 1996 to 7.4 years in 2001, an 11percent increase. Unfortunately, seven years o f schooling compares unfavorably to more advanced countries, transition countries, and many countries with lower levels o f GDP in Latin America.40For age 15 and above, average years o f education in Colombia is only 5.3 years, compared to Argentina with 8.8 years, Panamawith 8.6, and Chile, PeruandUruguay with 7.6. 10. Educational equity remains an important issue, although the equity between men and women i s noteworthy. Inregional capitals, the average level o f schooling i s 8.4 years, but only 4.6 years inthe rest o f the country. Moreover, while the illiteracy rate is only 4.5 percent in regional capitals, it reaches 16 percent in the rest o f the country (the rate o f adult illiteracy continues to decline, from nine percent in 1996 to 7.5 percent in2001). 3'Closingthe Gap in Education and Technoloa, World Bank. 38 The overall rate o f return has increased over time, from eight percent in 1982 to over 11 percent in 2000. The returns to primary education, estimated at 8.6 percent for 2000, have been increasing over time (from 7.4 percent in 1982), while the returns to secondary education have fallen from 8.5 percent in 1982 to 7.7 percent (or five percent according to an alternative analysis); but the highest returns are for tertiary education, estimated to be more than 18 percent per year -this estimate i s high from an historical perspective (up from 9 percent in 1982) and a comparative perspective (returns to higher education range from 11 to 22 percent in some Latin American countries). 39This is reflected inthe fact that education spending accounts for 4.1 percent o f GDP -up from 3.6 percent in 1995 -which compares to an OECD average of five percent andvery similar to average spending by middle-income countries (Argentina, 4.5 percent; Chile, 4.2 percent; and Mexico, 4.4 percent). 40Barro-Lee data set, for the schooling level o f the 15 year old and above population. 67  11. Low quality ofeducation. National achievement test results indicate that quality is decreasing, the quality o f private schools is better than public schools, and the difference i s widening. The percentage o f schools with low achievement has increased from 30 percent inthe 1980s to 50 percent in the 1990s. Of the 186 schools in 1998 in the top decile o f the test, 94 percent were private schools. A majority o f students in primary schools have an academic level below that o f their age level. The performance o f Colombian students on the recent UNESCO/OREALC assessment was broadly on par with their counterparts in Brazil and Mexico, and in a median position when compared with other countries in the region. Also, relative to other countries, Colombian education i s much better in rural areas, mainly in math, due in part to the success o f the Escuela Nueva model. However, when comparing mathematics scores with countries outside the region, the standards o f the region are considerably low. Colombia participated inTIMSS (Third International Math and Science Study) in 1995 and ranked second to last o f 40 countries participating in math. Reading results are not much better. Colombia also scored near the bottom in PIRLS (Progress in International Reading Literacy Study) in 2001. The reasons for low education quality can be summarized as: poor quality o f teachers, inadequate pedagogical supervision, need for curriculum reform, poor quality o f school environment, ineffective assessment system, and teacher absenteeism. 12. InefJicient resource use. Schools in Colombia are inefficient in both the production o f quality services (measured by outcomes such as test scores) and quantity (number of students). Public schools produce lower scores than private schools, even after controlling for socioeconomic characteristics. Teachers' education and infrastructure positively affect scores in private schools, but not in public schools, suggesting inefficiencies in public education. Policy variables at the municipal levels do not influence the efficiency o f schools. After controlling for other factors, rural schools are, on average, more efficient than urban schools. But the largest differences exist betweenprivate and public schools. Public schools are, on average, five percent less efficient than private schools and public school teachers earn 15 percent more than comparable private school teachers. Therefore, much can be gained by increasing efficiency inpublic schools. Health ReformIssues 13. The health reform o f 1993 (Law 100/93), amended recently by Law 715, calls for a transformation o f health services financing and basic services provision. The Uribe administration faces the continuing challenge o f completing the implementation o f the envisioned health systemreform, which seeks to separate health care finance from provision o f services. In addition, the administration needs to ensure that it will achieve close to universal immunizationo f children at the endo f its term. 14. Recovering progress towards universal vaccination. One o f the most important public health issues in Colombia i s the need to further strengthen the country's system o f protection against communicable diseases. In the past, Colombia was a leader in prevention activities, and the Ministry o f Health (MOH) established the Expanded Program o f Immunization (Programa Ampliado de Inmunizaciones, PAI) as a national priority. In1995, Colombia achieved coverage levels o f 90 percent or more for all routine vaccines. However, since 1997, coverage levels for all vaccines have declined to below 80 percent. Both financial and institutional factors appear to be the underlying causes for the decline inthe performance o f the vaccination program. Inadequate funding for the vaccination effort has resulted in shortages in personnel and supplies. At the same time, there was a lack of clarity regarding which entity was responsible (national or territorial) for the implementation o f the vaccination program. Since 2001, funds have been made available to beginto address the problem, and further budget space is sought for future budget years to regainthe highvaccination rates by 2006. 15. Lack ofhealth insurance coveragefor thepoor. The health reform calls for a system where the health care subsidy i s used to finance health insurance coverage for the poor and away from supply 68  subsidies where hospitals receive public resources based on historical budgets. Inthis scheme, the patient has the freedom to select medical services and payment will made by the insurers (EPSs and ARSs). The subsidy to the insurers is provided inaccordance with a predeterminedper capita amount called the UPC (Unidad de Pago por Capitacidn, UPC). The transformation, which i s intended to increase health sector efficiency, is supposed to be budget neutral-a critical point, considering that Colombia already spends a highpercentage o fits GDP on health care. 16. Implementation o f the transformation has moved very slowly, and is nearly stalled, due to pressure to continue financing public hospitals through supply subsidies. This has created a vicious circle since increased affiliation o f the poor to the subsidized health insurance regime has been limited due to lack o f funds, which in turn have been tied to direct hospital subsidies supposedly to provide services to the poor. 17. In1993,itwas estimatedthat about30percent ofthe Colombianpopulation shouldbeeligiblefor affiliation in the Subsidized Regime. The data o f the Ministry o f Social Protection show that currently there are 11.4 million individuals affiliated with the Subsidized Regime, representing around 26 percent o f the total population. The MSP challenge i s to increase the number o f affiliates by an additional five million individuals by 2006. This would bring the number o f affiliates up to 16 million and close to the one third o f the population in2006. 18. The need to improve the efficiency of public hospitals. Public hospitals, in general, are highly inefficient. They cost more than private providers and the quality o f services is not better. To improve the efficiency o fpublic hospitals, the healthreform law (Law 100193) mandates financing operations through the sale o f services to EPSs and ARSs4'-in competition with private providers. During the transition period, public hospitals are responsible for the delivery o f health care services to poor individuals that have yet to affiliate to the ARS. Moreover, public hospitals continue to receive their budgets from the regional entities (departamentos), based on the previous year's expenditures, and expect to be bailed out when they run into deficits. From 1996 to 1999, a total o f Colombian peso $46,500 million (in 2000 pesos) was transferred to public hospitals through supply subsidies. These resources represented 51.4 percent o f the total available resources o f FOSYGA, the health care sector fund, for the year 2000.4*This type o f scheme does not provide any incentives to public hospitals to reduce costs and/or provide better services. Breaking out o f this vicious circle i s a significant challenge that requires the development o f incentives and the capacity to compete with private providers. 19. Needfor client-oriented health information system. Public information is a key factor to support the main principles of the managed competition health care system envisioned by the health reform law. Underthe system, individuals have the ability to choose their insurer and health care provider (among the network of providers offered by their insurer). They should also be empowered with appropriate and timely information to be able to make informed choices. Inpractice, health care consumers frequently do not have the information that would allow them to compare different insurers and providers. This i s an important issue since the Colombian systemi s based on quality rather than price ~ompetition.~~ 4` Empresas Promotoras de Salud or EPSs are the insuranceentities of the Contributory Regime; Administradoras del Rigimen Subsidiado or ARSs are the insurance entities ofthe SubsidizedRegime. 42 `Health' in Colombia, theEconomicFoundation ofpeace, The WorldBank,2003. 43 Insurance contributionsand co-paymentsdo not vary amonginsurersandor providers; they are definedby taking intoaccount the socio-economiccharacteristicsofthe individual. 69  Social Protection in an Environment of Uncertainty 20. The administration appropriately considers social protection as a wider concept than just social assistance and envisions the role o f MSP as the efficient and equitable management o f all social risks and their consequences. Moreover, the optimal management of these risks, which include ill health, unemployment, declining real wages, and dropping out o f school, requires a range o f policy actions to prevent, mitigate, and cope with risk. With this more expansive definition o f social risk management, its implementation i s a challenging task. Nevertheless, the development o f an integrated social risk management systemi s integral to better social protection. 21. Need for a uniJied social protection strategy. There are many social protection programs in Colombia. The main problem is that they do not form one comprehensive and coherent social risk management system. Instead, they have emerged in an ad hoc manner, leading to duplication o f programs, poor targeting o f services, competing incentives, and general inefficiency. Organizing and focusing the programs are necessary to improve social protection services, particularly given the fiscally constrainedenvironment. 22. Whether the risk i s losing one's health, losing one's job, or watching one's real wages erode, the mechanisms to address these risks are highly inter-connected. The result o f treating the labor, health, and social safety net programs as independent from each other, as Colombia has done until recently, i s competing incentives and less efficient programs. For example, payroll taxes @arafiscales) that are used to finance social assistance that do not directly benefit the workers can lead to lower employment. Laws that impose high minimum wages and disproportionate pension benefits to protect workers from exploitation can lead to disemployment o f the unskilled labor. Thus, there is a need to develop an integrated system for managing these social risks and their solutions. 23. For this reason, a new Ministry o f Social Protection has been created by law and its transformation into reality has now become a practical challenge for GOC. The new Ministry,still reeling from the tragic passing o f its first Minister, must: (i) consolidate the numerous health, labor, and social programs under one umbrella; (ii)bring under its purview semi-independent institutions that have been operating with little central control for decades (ICBF, SENA); (iii) develop a risk management strategy that encompasses the different institutions and programs; and (iv) coordinate the development o f institution-specific strategies so they are inline with the overall strategy o f the MSP. 24. Counter-cyclical social protection expenditures. The urgent need for an effective and efficient social protection system was apparent during the 1996-1999 recession. Emergency measures were instituted during the recession, but given the increased volatility o f the Colombian economy due to external and internal pressures, it i s necessary to develop a system that can respond to negative economic shocks efficiently and opportunely. The construction o f such a system under the present constrained fiscal conditions requires focus on increased efficiency and wise use o f resources, although a Bank report44has pointed out that the country i s under-spending insocial assistance. 25. Colombia lacks an effective system for protecting the poor and most vulnerable during a crisis and for addressing the needs of the chronicallypoor duringnormal times. Since most social insurance and assistance programs are financed by payroll contributions (parafiscales), expenditures are highly pro- cyclical. For instance, the budget o f ICBF declined by over ten percent during the recession o f 1999 (a much larger decline than GDP), due to the large increase in unemployment to about 20 percent o f labor force. Furthermore, the system largely serves those who are formally recognized as workers, thus excluding those parts o f the population that are potentially most at risk-informal sector workers and 44WorldBank (2002), ColombiaSocial SafetyNet Assessment. 70  their families, elderly, children, displaced people, and women (who tend to have intermittent labor force participation). A Social Protection Program (Red de Apoyo Social) was created to cope with the recession, but the remainingchallenge is how to institutionalisethe safety nets. 26. Needfor ICBF Reform. One o f the most vulnerable groups in Colombia is pre-school children younger than seven years o f age belonging to the poorest families.45 Since 1988, this population group has been partially covered by the ICBF mostly through Madres Comunitarias (MC) caregivers at Hogares Comunitarios de Bienestar (community childcare centers, HCB). In 2002, ICBF was the main government instrument to provide services for early childhood development and its major programs benefited nearly 950,000 children under the age o f seven (85 percent o f whom attended more than 64,000 HCBs). Similarly, more than 2.3 million school children received food supplements o n a regular basis. Although these programs achieved considerable coverage (nearly 100 percent o f municipalities), and the number o f beneficiary children is significant, several structural problems limit their impact. The most significant problems to be addressed by ICBF reforms can be summarized as below: (i)Lackof strategicfocus andprioritization.Historically, theICBFstructurehasbeenreformed inan incremental way. As a result, the Institute currently offers dozens of service modalities and interventions without policy focus, a clear strategy, or population-group prioritization. Also, the lack o f an impact evaluation or a cost-effectiveness analysis o f ICBF's programs has prevented government and ICBF from making decisions about groups to be targeted, programs to continued or terminated, and policies to be enforced. The ICBF, which has had a stable budget o f about $400 million annually funded by a three percent payroll tax, is facing a tightening financial situation produced by two developments. First, there was a reduction o f its budget by more than ten percent inreal terms between 1998 and 200246due to the economic recession. Second, to promote employment, the labor reform exempted employers from paying the payroll tax for certain classes o f poor and disadvantaged workers; consequently, ICBF funds from payroll taxes will likely be lower than historical levels. This financial situation gives urgency to the need for more focus and efficiency inthe use o f ICBF's resources. (ii) of targeting. The targeting scheme, based on open access with self-selection and Lack implicit geographical targeting, i s limited. Duringthe 1990s, the increased coverage achieved by HCBs and other modalities concentrated on children from families belonging to the 2nd income quintiles and above.47 (iii) to ensure greater effectiveness, eflciency, and equity. Between 1998 and 2001the Need number o f beneficiary children younger than seven years o f age in HCBs and other modalities fell by more than 130,000 (i.e. more than 12 percent), while beneficiaries from direct food supplements (children o f school age) decreased by more than 270,000 (i.e., more than ten percent) (Table 7). (iv)Local control. The strongly centralized system, grounded in administrative deconcentration (Le., ICBF's field offices directly depend o n central headquarters with little relation with 45See World Bank (2002) Program Document for a Proposed Social Sector Adjustment Loan in The Amount of US$155 Million to the Republic of Colombia, June 18, 2002; World Bank (2002) Colombia Poverty Report; and World Bank (2002) Colombia. Social Safety Net Assessment. 46The decreasingpayroll tax was producedby the increasingunemploymentrate. 47Between 1992 and 1997, in urban areas, childcare coverage of children belonging to families in the first income quintile diminishedby about 20 percent (WorldBank, 2002a). 71  local authorities) led to very limited local government participation in program design, management and, particularly, financing. Quality of inputs. Poor infrastructure and inadequate sanitation and other facilities at HCBs have resulted in a deficient quality of service provision. The quality o f service has also been negatively impactedby MC's low skill profile. Table 7: Beneficiarychildrenfrom ICBF selectedprograms(thousands) Modality 1998 1999 2000 2001 2002 HCB 917 905 907 815 812 Hogares Infantiles 152 149 147 147 127 Jardines Comunitarios 5 5 4 4 3 Total lessthan 7 years of age 1,074 1,059 1,058 966 942 Restaurantes Escolares (food 2,609 2,123 2,227 2,290 2,337 supplement) (vi) Quality of services. The scheme to finance the HCBs program has negative implications. On the one hand, resources allocated through Parent Association (for buying food and all supplies) would be difficult to monitor and the ICBF has very limitedcontrol mechanisms to guarantee total transparency in final resource allo~ation.~~ In addition, such resources are allocated on the assumption that every HCB i s benefiting 12-15 children, though no actual verification mechanism exists. On the other hand, payments for care-giving, based on direct grants, has usually been misunderstood by MCs; they often assume that the relationship between them and the ICBF i s based on a formal labor contract thus leading them to sometimes act as "unions" and demanding a more formal relationship with the ICBF, which constitutes a latent riskfor service provision. Transparency and Social Control 27. The GOC recently estimated that the cost of corruption in Colombia reached as highas US$2.24 billion, equivalent to 80 percent of the fiscal deficit or 2.6 percent o f GDP inyear 2001.49 This highlevel o f corruption i s believedto have contributed to low levels o f investment (12.3 percent o f GDP) and hence to a sub-optimal rate o f growth, a highunemployment rate, and ultimately inefficient use o f resources. 28. The Office of the President of the Republic recently conducted a survey, with support from the Bank, showing that the public believes that interest groups, through corrupt practices, influence high-level government decisions. It also revealed linkages between inefficient (or questionable) use o f national resources and the weakness o f monitoring and evaluation, transparency, internal controls, and autonomy 48An evaluation carried out in 1997 showed that only ten percent of HCBs were able to provide children a proper food supplement (in terms of proteins, calories, etc) using Parents Association's food supply (ICBF (1997) Evaluacidn de Impacto de 10sHogares Comunitarios de Bienestar). 49Bases del Plan Nacional de Desarrollo 2002-2006: Hacia un Estado Comunitario,2002. Presidencia de la Republica- DepartamentoNacional de Planeacibn. 72  at the institutional level. While not all public perceptions o f corruption can be substantiated, it is clear that a significant degree o f inefficiency and misallocation o f resources exists. Furthermore, the general public, especially the poor, do not have adequate access to information regarding resource allocation criteria, the decision-making process, or service coverage and service quality. Mechanisms to feed their concerns and interests back to the system are also weak. As a result, public services provision suffers both interms o f coverage and quality. 29. Inaddition, inspite ofColombia's decentralized political, administrative, and financial systems, it is believed that the degree o f inefficiency and inequity remains at a highlevel, and that social spending is not adequately targeted. For example, although poverty-oriented programs are targeted using the Sistemu de Seleccidn de Benejiciurios (System o f Beneficiary Selection, SISBEN), there have been very few cases of systematic attempts to verify whether resources are indeed channeled towards intended targets. Furthermore, SISBEN itself needs to be updated and adjusted to maintain its relevance as a poverty- targeting instrument. 30. To increase the efficiency of social expenditures, monitoring and evaluation is necessary. Currently, a system o f program and impact evaluation is lacking for all social programs. As a result, information about the effectiveness o f programs is not accessible, producing inefficient social spending and difficulties in identifying and designing modifications o f programs. Although such a monitoring and evaluation system is important at any time, it is particularly necessary in a fiscally constrained environment. 31. The SECAL encouraged the GOC to adopt periodic impact evaluations and citizens' monitoring o f its social programs. The institutionalization o f such a culture is not a trivial process, but it i s an integral part o f a social development strategy with a focus o n efficient resource use. 32. The achievement o f the above-mentioned goals i s a difficult challenge for two reasons. First, as mentioned, little additional money is available due to the extremely constrained fiscal situation. Consequently, to attain the above objectives, it is necessary to carry out reforms that would increase the efficiency o f social sector resource use. Reports indicate that there are considerable wasted resources that can be tapped to achieve the government's human development goals. Second, the envisioned reforms are quite complicated and thus require extensive technical assistance, political sensitivity, and consultations with stakeholders. 73  Annex IV: Innovative Educational Models and Service Delivery Schemes Colombia has successfully experimented with innovative ways o f efficiently increasing coverage and student learning. The govemment plans to encourage the dissemination o f some o f these innovative schemes. Among the interestingschemes that were successfully tested are: 0 School Vouchers. The national voucher program for secondary education (PACES) increased access by underserved populations and increased educational attainment, while maintaining, if not increasing, school effectiveness. The innovative demand-side financing program operated through a lottery system, which provided vouchers to students who would otherwise not have access to secondary schools, who then could then cash inthe vouchers to pay private school tuition. Voucher-recipients completed more years o f schooling than the lottery losers and were less likely to repeat grades (by 5-6 percentage points). Female lottery winners completed more years of schooling (0.14) than boys (0.12).50 Participation in the voucher program raised participants' wages by $36 to $300 per year. These benefits outweigh program costs. Although the Ministry o f Education does not have plans to expand PACES to a national level, it is being adopted in several territorial entities, and the evaluation results continue to be favorable. 0 School concessions. The Ministry o f Education i s instead considering a national program modeled on an innovative system for the private management o f public schools inthe capital city: the Bogota School Concessions Program. In this program, the Government o f Bogota transfers the administration o f new schools to the private sector. The private schools - or concessionaires - have complete autonomy over school management. As o f 2003, there are 23 concession schools; more are expected. The program targets low-income areas in need o f schools and the municipal educationdepartment constructs new, state-of-the-art schools, each able to accommodate between 800 and 1,200 students. The opportunity to manage the school is offered in a public procurement process, where bidders (private educational institutions) are evaluated on their proposed management plans. Concessionaires are obliged to provide educational services to poor children, and inreturnreceive remuneration from the department on a per-student basis. While the contract establishes clear standards that must be upheld, the concessionary has full autonomy over school management and i s evaluated solely on results. Concessionaires have already produced striking results in management improvements: they allocate on average 55 percent o f the per capita remuneration to human resources, well below the 90 percent allocation bypublic schools. Assumingthe government's proposal is approved by the referendum,a part of the revenues from royalties would be allocated to education and would be used to finance this concession schemes. 0 Escuela Nueva. Colombia's Escuela Nueva movement has improved learning outcomes and keeps rural children in school. Escuela Nueva integrates curricular, community, administrative and teacher training strategies in a systematic way. It provides complete primary education in rural areas and improves the quality and effectiveness o f learning, especially in multi-grade environments. Evaluations have constantly shown significant achievement results. Children from Escuela Nueva schools achieve higher scores inlanguage and mathematics in the third and fifth grade than do students in traditional schools. Escuela Nueva also generates significant private sector participation, namely from the National Federation o f Coffee Growers. The Postprimaria Rural program follows closely the The winners were 13-15 percentage points more likely to finish the 8th grade than losers, primarilydue to reduced repetition. This translates into a 25 percent increase in secondary school completion rates. Voucher-recipients performedat least as well as students inpublic schools in bothmathematicsand language tests. Thus, for about two- thirds of the per-pupilcost of public school, the programoffered many poor students secondary educationthat was comparable in quality to public schools. PACES was a cost-effectivemeans of obtaining additional time in school and higher-qualityeducation for participants. 74  principles of Escuela Nueva by including active, flexible pedagogy to accommodate the needs o frural students. 0 Other New Initiatives. Other innovative programs under consideration by the Ministry o f Education include (a) Accelerated Schools, which addressesthe issue of overaged students by developing a pedagogical model characterized by a student-centered approach, with independent work and special educational material; (b) Sistema de Aprendizaje Tutorial (SAT) which expands secondary education in rural areas based on a local curriculum, including improvement o f numeracy and calculation, scientific thinking, communication, technology and community service; and (c) Telesecundaria: this model replicates the Mexican experience, a cost-effective approach to expand access to secondary education in rural areas. 75  Annex V: FiscalImpactofImplementingthe Reforms PLaRSSAL PRIOR FISCAL IMPACT ACTIONS US133 m . Increasing coverage o f i.ThenewbeneficiarieswillrequirehigherexpenditurestotheICBFprogram, but iutritionprograms in the savings will come through lower social sector expenditureson these childrenin 500,000. the future. i.Periodicimpact ii.Periodicimpactevaluationsrequireannualfinancing, whichwillneedtobe :valuation o f selected coveredby ICBF funds. JS$484m . Increase PAI coverage i.ToincreasethePAItouniversallevelsby2006,alargeincreaseinhealth %NDImplementation of expenditures during 2002-2006 will be needed to "catch up" those who were not mmunization card immunized earlier. Afterwards, the marginal cost of immunizations will be higher - xogram due to new births -butnot as high as during the transition period. Similarly with the immunization cards i.IncreasingtheRegimen ii.Inthelongrun,theRegimenSubsidiariowillnotincuradditionalcostsas Yubsidiario by 500,000 resourcesthat are currently allocated to public hospitals will be directed toward the iew beneficiaries AND insurance program. Inthe short run, while the hospital restructuring is on-going, the Hospital restructuring funding o fthe Regimen Subsidiuno is an additional cost to the govemment. Labor and Training 6267m Modernizing SENA by To improve the expandthe provisionofjob training, the current system will xansforming it to a continue while additional systems to enhancethe efficiency o fthe job training regulator, certified, institutions are being developed and implemented. Once the new systems are :valuator, and financier o f implemented, though, they will function within the mandatedbudget envelope. The iemand-based training reforms may require staff downsizing. services, which includes hrther development of the information systemfor impact evaluation, managerial accounting, and iob search. Education 637.6m i.Increasenetenrollments i.Increasingnetenrollmentsislargelycost-neutral, asitwillbeachievedby increasing the number o f studentsper classroom. ii.Studentachievement testing for 100%of ii.Theexpansionofthestudentachievementtestswillhavetobefinancedbythe studentsin 100% of government annually. municipalities iii.Thedesignandimplementationofthepilotoftheteacherevaluationwillincura iii.Design,pilot, and fixed cost in2003. The cost o f operating the program afterwards i s a new expansion o fteacher evaluation program zxpenditure to be financed by the government. 674m i.Workshopsforthe i.Annual"Cbmovamos?"stylenationwideworkshopswill requireannual national implementation of financing by the government. the Bogota Como Vamos? model ii.Theevaluationofallmajorsocialprogramsisarecurrentexpenditure,butthe ii.Regularimpact benefits derived from more efficient and better targeted programs will lead to evaluation Of savings that counter-balance the direct costs programs TOTAL 6995.6 nillion  Annex VI: FundRelations Note International MonetaryFund July 29,2003 700 19thStreet, NW Washington, D.C. 20431USA Colombia: Fund Relations Note On June 11, 2003 the Executive Board of the International Monetary Fund (IMF) completed the first review o f Colombia's performance under a two-year, SDR 1.5 billion (about US$2.1 billion) Stand-By Arrangement, which was approved on January 15,2003 (see Press Release No. 03/04). The completion o f this review enables the release of SDR 193.5 million (about US$274 million) to Colombia, bringingthe total amount available to SDR 580.5 million (about US$822 million). So far the country has not made any drawings under the arrangement. Background Underthe authorities' program, economic performance has beenmostly favorable. The economy grew by 3.8 percent in Q1 2003 led by a pick up in domestic demand that outweighed a decline in net exports. Inflation has remained above program target but stayed within the consultation bands. In late June congress approved the fiscal responsibility law (a structural benchmark for end-June 2003), and the government recently restructured the state petroleum and telecommunications enterprises, going beyond the steps envisaged inthe program. Executive Board Assessment at the Completion of the First Review The government o f Colombia is carrying out a strong economic reform program aimed at encouraging faster economic growth and improving social equity. Inparticular, the government's program focuses on bringing the overall public sector deficit down through a wide range o f initiatives, including several important structural measuressuch as tax, pension, and labor reforms. A lower fiscal deficit is essential to reduce gradually the public debt burden, which in turn will ease pressures on interest rates and stimulate growth. The government i s commended for its strong commitment to economic reform. All performance criteria and structural benchmarks for end-2002 and end-March 2003 have been observed. This strong policy implementation has already helped to improve economic performance. The economy showed signs o f recovery in the first quarter of 2003, with a slight decline in unemployment and renewed access to international capital markets. For 2003, the government is committed to reducing the overall public sector deficit to 2 ?4percent o f GDP, and is prepared to implement contingency measures, if necessary, to achieve this target. At the same time, the government intends to continue with key structural reforms, including further steps to strengthenexpenditure management andmodernize public administration. The central bank already raised its main refinancing rate by 200 basis points so far this year and is committed to taking further measures as necessary to control inflationary pressures. Colombia's economic reform program has helpedreduce the risks to the economic outlook. Nonetheless, the authorities will need to sustain the implementation of the program in order to lay the basis for a durable recovery. For questions please contact Mr.R. Rennhack, DivisionChief, SoutWCentral American I, Western Hemisphere Department, IMF, ext. 37350. 77  Annex VII: Colombia at a Glance tatln Lower- POVERTY and SOC~P~L FBmale 3 3 5 2 3 9 1 3 2 3 8 1 2 2 6 i s J 2 8 19 4.4 o a i9 l ~ i"2z1 s ~ O B (73 6 4 112 78  1991 1991 1 27 3 238 22 6 3 0 14 1 24% 8 1951 1991 3,185 7 . W 1,423 1,358 ma 28 1,rm 2,4m 5,195 4,W 319 2m RE 28d 234 183 1W9 1.m 3,414 4.W 6 El 7 a33 118 'M 128 116 1 19.91 lW 4 B,115 &115 8,853 14 15,640 -1,BT 2,w 1 -953 427 -1,BW -2,513 -2975 243 1,W 1" 2,094 -1.721 2,347 3% -1.783 1,284 .2EB 513 2,855 497 -2,DdQ I 54 s e a 3 %Ob5 10,245 2.0Bp6 2,2998 1951 1931 &716 17,201 1,164 3,rs I1 14 1,120 3,?& 161 m3 1 1 7 tsB P? -1% 1,127 .270 255 4% D 0 0 Q3 251 301 77 4 92 1?4 -191 85 307 89 "495 79  Annex VIII: Additional Annexes Annex VIII-A SelectedIndicators* of Bank PortfolioPerformance and Management As ofJuly 30,2003 Indicator 2001 2002 2003 2004 PovtfolioAssessment NumberofProjectsUnder Implementationa 22 24 22 22 Average ImplementationPeriod(years) 3.2 3.1 3.7 3.8 PercentofProblemProjectsbyNumber '' 4.5 4.2 9.1 9.1 PercentofProblemProjectsby Amounta, 5.5 5.0 10.7 10.7 Percent ofProjectsat RiskbyNumber 4.5 12.5 9.1 9.1 PercentofProjectsat RiskbyAmount 5.5 7.0 10.7 10.7 DisbursementRatio(%) e 24.6 29.5 18.3 0.5 PovtfolioManagement CPPRduringthe year (yesino) SupenisionResources(total US$000's) Average Supervision(US$OOO's/project) MemorandumItem Since N 80 LastFiveN s Proj EvalbyOEDbyNumber 96 12 Proj EvalbyOEDbyAmt (US$ millions) 7,252.3 1,141.8 %ofOEDProjectsRatedUor HUbyNumber 27.4 16.7 %ofOEDProjectsRatedUor HUbyAmt 24.5 7.4 a. As shownintheAnnual ReportonPortfolioPerformance(except for current FY). b. Average age ofprojectsinthe Bank'scountryportfolio. c. Percentofprojects ratedUor HUondevelopment objectives(DO) andor implementationprogress (IP). d. As definedunderthePortfolioImprovementProgram. e. Ratioofdisbursementsduringthe year to the undisbursedbalance ofthe Bank'sportfolio at the beginningofthe year: Investmentprojectsonly. * All indicatorsarefor projectsactiveinthePortfolio,withthe exceptionofDisbursementRatio, whichincludesallactiveprojectsas well asprojectswhichexited duringthefiscalyear. 80  Annex VIII-B: IBRDHighCase ProgramSummary Colombia - As ofJuly 30,2003 ProposedIBRD/IDABase-Case LendngPrograma Fiscal Strategic Rewards Implementation year ProjID us$(M) (HML) Risks (HML) 2004 CO ktional M a nTransport - 120.0 CO1st FSL Labor8 Soc Sect Ref 150.0 CO2nd Rogramtii FSAL 150.0 COAnti-corruptin LIL 5.0 CO AACEANIE V FROJECT 125.0 CORcgFiscaland lnstAdj II 150.0 CO Fhrralbersification 200.0 COTAL SustainableCevelopmnt 12.0 CUNYMRCAE l " Q u A L r r Y I m v m 15.0 Result 927.0 2035 CO JudicialSector Cevelopmnt Roject - 40.0 CO- Water,%nit andWastewater Wgt. 125.0 COLow I mW L" S P O R T FROJECT 50.0 CORcgFiscaland InstitutionalSAL Ill 150.0 COSustainableCev Rogramtic SAL 100.0 CO ~ L I Z B ) K I W N C A F l T A L E V . 30.0 CO- 2nd Rog.Labor &SocialSector Ref 150.0 COmsasterVulnerability Reduction 150.0 CO: l-balth lnvestmnt 150.0 CO: hralmucation(AR) 0.0 M A T EINRASTRUCTLREFIWNC.FACILm 50.0 Resuit 995.0 2006 COBoGoTA"spoRTI 50.0 CORcg FEcaland InstitutionalSAL N 300.0 COBarrioUpgrading8 Land 60.0 Result 410.0 OverallResuit 2,332.0 a. This tablepresentsthe Bank'slendingprogramfor the nexithree fiscal years. b. H=High, M=Modemte,L=Low 81  Annex WI-C (IFC & MIGA) Colombia - W2001-2004 2001 2002 2003 2004 IFCapprovals(US$m)* 176.38 242.00 59.00 Sector (YO)* c0"INvVHIIcLE 11 FINANCE&INSURANCE 79 44 FOOD&BEVERAGES 41 Finance&Insurance 59 NONMETALUCMINERAL 10 OIL, GASANDMINING 14 Utilities 41 Total 100 99 100 0 Investment instrument(o/~)* Loans 4 52 Equity 33 13 Quasi-Equity 6 35 17 Other 57 0 83 Total 100 100 100 0 MIGAguarantees 0 0 0 *IF& accountonly. 82  Annex VIII-D: Summary ofNonlending Services Colombia - As ofNowmber 27,2002 cost FY Product (US$OOO) Audience Objective Recentconpletions SocialSector CEM 88 KGPD Agro-Ecology 60 KG,PD Inprove PublicExpenditureEF 45 KG,PD ColombiaRuralFinance 100 KG,PD,PS Poverty SelectedTopics 100 KG,PD,PS SocialSectorReview 150 KG,PD,PS Enviromnt,Land&Poverty 120 KG,PS PolicyNotes 100 PD Underway TaxpolicyandAdninistration 81 G,B KG,PS SocialSectorEfliciency 88 G,B KG,PS LaborReform 110 G,B,PD KG,PS PublicDebtManagemntAssessmnt 81 G,B KG,PS PublicEqendituresReview 72 G,B,PD KG,PS Country FinancialAccountabilityAssessmnt 130 G,B KG,PS Planned m 4 FinancialSectorReview 41 G,B KG,PS Giowthfor TacklingInequalitiesStudy 83 G,B,PD KG,PS S M U& Micro-EnterprkeDevelopmnt 83 G,B,PD KG,PS EnviromntalInpactAssessmntlhcensmgFramwork 79 G,B,PD KG,PD,PS FinancialSustainabilityofEnvironmnt Managemnt Institutions 79 G,B,PD KG,PD,PS UrbanStrategy 81 G,B,PD KG,PD,PS HealthRestructuring 81 G,B,PD KG,PS lW05 Country EconomicMemrandum((EM) 158 G,B KG,PD DisasterManagemnt 81 G,B KG,PD Indigenous andAfro-Colombian Comnities 81 G,B,PD KG,PD,PS EducationStudy 81 G,B,PD KG,PD,PS CountryProcuremntAssessmnt Report 90 GB KG,PS lWO6 ValuationofNaturalCapitalinthe Basin 158 G,B,PD KG,PD,PS KnowledgeManag.to EnhanceProduct.andConpetitiveness 81 QB,PD KG,PD,PS Social SafetyNet Study II 81 G,B,PD KG,PD,PS a. CFGovemmnt, Wonor, BBank, P-ublic dissenination. b. KCFKnowledgegeneration,PD=public debate, PS==roblemsolvmg. 83  Annex VIII-E: Colombia Social Indicators Latest single year Same regionlincome group Latin Lower- America middle- 1970-75 1980-85 1994-01 8 Carib. income P 0 P U L A T I O N Total population. m id-year (millions) 25.4 31.7 42.3 515.7 2,047.6 Growth rate (% annual average for period) 2.4 2.1 1.9 1.6 1.1 Urban population (% of population) 60.7 67.0 74.9 75.4 42.0 Totalfertilityrate (births per woman) 4 6 3.4 2.6 2.6 2.1 P O V E R T Y (xof population) Povertyrate 80.0 65.0 67.0 Urban poverty rate 70.0 55.0 59.0 Rural poverty rate 94.0 80.0 80.0 I N C O M E GNlpercapita (US$) 560 1,150 2,020 3,670 1,wo Consumer price index (1995=100) 1 11 209 144 146 Food price index(l995=100) 11 I 9 1 I N C O M E l C O N S U M P T I O N D I S T R I B U T I O N Gini index 53.0 54.0 58.0 Lowest quintile (%of income orconsumption) 3.O Highest quintile (%of income orconsumption) 60.9 S O C I A L IN D l C A T O R S P u b l i c expenditure Health(%of GDP) 5.2 2 .8 2.3 Education ( % o f GDP) 2.2 2.8 3.5 3.3 4.6 Social securityand welfare (%of GDP) 2.7 2.3 7.4 N e t p r i m a r y s c h o o l e n r o l l m e n t r a t e ( % o f age group) Total 65 87 97 91 Male 99 91 Female 98 91 A c c e s s t o an I m p r o v e d w a t e r s o u r c e (%of population) Total 91 85 80 Urban 98 93 95 Rural 73 62 69 Im m unlzat i o n r a t e (%underI2 months) M easies 51 75 93 89 DPT 61 74 87 89 Chiidmalnutrition(%under5years) 17 8 9 11 Life e x p e c t a n c y a t b i r t h (years) Total 63 67 72 70 69 M ale 61 64 68 67 67 Female 65 71 75 74 72 M o r t a l i t y Infant (per 1,000 live births) 54 35 20 29 33 Under 5 (per 1,000live births) 113 58 23 37 41 A d u l t (15-59) Male (per 1,000 population) 262 237 203 208 192 Female (per 1,000 population) 209 162 114 121 125 M aternal (per 100,000 live births) 120 Births attended by skilled health staff (a) 85  AnnexVIII-F Colombia KeyEcononicIndicators - Actual Estimate Projected Indicator 1997 1998 1999 2000 2001 2002 2003 2004 2005 Nationalaccounts(as YOofGDP) Gross domestic producta 100 100 100 100 100 100 100 100 100 AgllCultUre 14 14 14 13 13 13 13 13 13 Industry 29 28 28 30 30 30 30 31 31 senices 57 58 58 56 57 57 56 56 56 TotalConsumption 85 86 88 86 85 87 87 86 86 Grossdomestic fixedinvestment 21 20 14 13 13 13 13 14 14 Government investmnt 0 0 0 0 Privateinvestment 13 13 14 14 w r t s (=Ib 15 15 19 20 19 18 20 21 21 Imports(-1 21 21 19 20 19 21 22 23 23 Gross domestic savings 15 14 12 14 15 13 13 14 14 Gross nationalsavings' 13 12 10 12 14 13 13 13 13 Memrandum item Gross domesticproduct 106719 98806 84845 83227 82411 77485 75812 75559 75991 (USmillionatcurrentprices) GNPpercapita (US,Atlasmethod) 2570 2450 2150 2150 1980 1860 1780 1720 1720 Realannualgrowthrates(?/$ calculated om1994prices) Grmsdomesticproductat&et prices 3.4 0.6 4.1 2.6 1.4 2.0 2.5 3.5 3.5 GrmsDomesticIncome 3.6 -1.1 -3.8 3.1 2.7 0.2 2.5 3.7 3.7 Realannualpercapitagrowthrates(%,calculatedfbm 1994prices) Gross domesticproductat market prices 1.5 -1.3 -5.7 0.7 -0.3 0.4 0.9 2.0 2.0 Totalconsumption 3.3 -1.7 4.2 -0.5 -0.3 1.6 0.5 1.8 1.8 Privateconsumption 0.5 -2.7 -6.2 0.7 0.1 2.0 0.3 2.5 2.5 BalanceofPayments(USmillions) Expoas(GNFS)b 14195 13432 13919 15624 14932 13933 14971 16048 17059 MerchandiseFOB 11529 11480 12037 13621 12775 11918 12813 13741 14612 Imports (-Ib 18411 17344 13405 14400 15840 16031 16853 17736 18602 MerchandiseFOB 14371 13930 10262 11090 12267 13005 13671 14388 15090 Resourcebalance -4216 -3913 515 1224 -908 -2099 -1882 -1688 -1543 Netcurrenttransfers 789 446 1435 1662 2094 1973 1810 1873 1939 Cmentaccountbalance -5953 -5225 353 356 -1789 -2259 -2413 -2349 -2201 Netprivate foreign direct investmnt 4830 2032 1353 2031 2287 2333 2391 2475 2561 Long-termloans(net) 2200 1039 357 -1282 -670 -6 565 580 289 Official -452 178 1013 103 986 442 1655 1396 private 2652 -448 -1090 -2309 -1107 1729 Othercapital(net, incl. errors &ommi -1354 3541 -1742 -1974 862 -656 -1386 -1656 -994 -31 -96 -99 -74 Changeinreserves' 277 -1388 -320 869 1166 -37 446 -607 -576 Memorandumitem Resourcebalance(%ofGDP) -4.0 -4.0 0.6 1.5 -1.1 -2.7 -2.5 -2.2 -2.0 Realannualgrowthrates(YR94prices) Merchandiseexports (FOB) 5.7 9.1 7.2 3.0 2.9 -3.8 3.9 3.8 3.5 Manufactures 4.2 19.3 1.1 5.4 5.2 -4.0 4.3 4.2 4.0 Merchandiseimports (CIF) -4.5 0.3 -25.4 -25.6 67.6 2.1 1.7 2.9 3.5 (Continued) 85  Colombia Key EconomicIndicators - (Continued) Actual Estimate Projected Indicator 1997 1998 1999 2000 2001 2002 2003 2004 2005 Publicfinance (as YOof GDP at marketprices)' Currentrevenues 27.4 26.9 27.4 28.2 28.9 28.9 28.9 28.9 30.0 Current expenditures 21.8 22.9 24.5 23.7 24.4 24.3 24.0 23.8 23.4 Current account surplus(f) or deficit (-) 5.6 4.0 2.9 4.5 4.5 4.6 4.9 5.1 6.6 Capitalexpenditure 9.6 8.0 8.7 8.0 8.1 7.9 7.8 7.8 7.9 Foreignfinancing 0.6 2.6 1.3 1.8 2.3 3.1 2.2 2.4 1.8 Monetary indicators M2/GDP 36.0 34.4 36.0 32.3 33.2 33.2 33.2 33.2 33.2 Growthof M2 (%) 25.8 10.9 10.5 4.7 12.0 8.2 7.1 6.9 6.6 Private sector credit growth/ 79.2 76.5 -49.2 20.1 66.2 85.0 66.0 66.0 70.0 total creditgrowth(%) Price indices(YR94 =loo) Merchandiseexportpriceindex 108.4 93.5 92.9 102.2 93.3 93.9 97.2 100.4 102.9 Merchandiseimportpriceindex 86.0 81.5 79.6 115.9 76.9 76.4 79.0 80.8 82.2 Merchandisetermsoftrade index 126.1 114.7 116.6 88.2 121.2 122.9 123.0 124.3 125.1 Realexchangerate (US$ILCU)f 119.1 113.5 102.7 95.6 98.0 91.0 84.0 79.1 75.5 Consumerprice index (% change) 17.7 16.7 9.2 8.8 6.5 6.2 6.0 5.0 4.0 GDP deflator(%change) 16.8 15.2 10.2 13.6 7.6 6.0 6.0 5.0 4.0 a. GDP at factor cost b. "GNFS" denotes "goods andnonfactorservices." c. Includes net unrequitedtransfers excludingofficial capitalgrants. d. Includesuseof IMFresources. e. NFPS f. An increasedenotesappreciation. 86  Annex VIII-G: Colombia Key Exposure Indicators - Actual Estimate Projected Indicator 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total debt outstandingand 28900 31941 33083 34423 33930 38713 38772 39340 39920 40212 disbursed (TDO) (US$m)a Net disbursements(US$m)a 4397 3618 820 1262 -194 2973 59 568 583 292 Total debt service (TDS) 5401 4511 4539 6606 5109 7924 5851 7271 6129 6352 (US$m)a Debtanddebt service indicators (%) TDO/XGS~ 219.9 225.0 246.3 247.3 217.2 259.3 278.3 262.8 248.8 235.7 TDOiGDP 29.7 29.9 33.5 40.6 40.8 47.0 50.0 51.9 52.8 52.9 TDS/XGS 41.1 31.8 33.8 47.5 32.7 53.1 42.0 48.6 38.2 37.2 ConcessionaVTDO 3.3 2.8 2.7 2.8 2.8 2.3 2.3 2.3 2.2 2.2 IBRDexposureindicators(%) IBRDDS/public DS 18.2 21.1 11.9 8.2 10.6 7.9 7.5 6.0 8.3 9.4 Preferredcreditor DSipublic 34.2 42.2 24.8 21.1 26.2 19.4 32.5 30.8 35.3 39.8 DS (%)' IBRDDSiXGS 4.0 4.0 2.6 2.8 2.4 2.4 2.3 2.2 2.2 2.5 IBRD TDO (US$m)d 2177 1723 1740 1960 1920 2006 2147 2521 3097 3597 Share of IBRDportfolio (%) 2.0 1.6 1.5 1.6 1.6 1.6 1.8 2.1 2.7 3.1 IDA TDO (US$mld 10 10 9 8 7 7 6 5 5 5 IFC (US$m)c3e Loans 118 72 61 41 29 29 Equity and quasi-equityf 18 21 17 43 43 56 MIGA MIGA guarantees(US$m) a. Includespublic andpubliclyguaranteeddebt, private nonguaranteed, use of IMFcredits andnet short-termcapital. b. "XGS" denotesexports ofgoods and services, includingworkers' remittances. c. Preferredcreditorsare definedas IBRD, IDA, IFC, the regionalmultilateral developmentbanks, the IMF, andthe Bank for InternationalSettlements. d. Includespresent value of guarantees. e. Excludesparticipants'account. Excludesguaranteesand risk managementproducts. 2002 i s actual. f. Includesbothloanandequitytypes ofquasi-equityinstruments. 87   3 o o o o o o o o o m o o o o o o ~ 5 k 0 0 ~ 0 0 0 0 0 d 0 0 0 0 0 0 3 I 3 0 0 0 0 0 0 0 0 0 0 0 0 0 m 0 0 . 5 0 0 0 0 0 hl 0 k 0 0 0 0 0 d 0 0 m k G I 3 0 0 0. 0 0 0 0 0 0 0 0 0 0 0. - - 5 0 0 o + d ~ 0 ~ 0 k o 0 0 k o o P hl 3 o o o o o o o o o m o o o o o P 5 k 0 0 ~ 0 0 0 0 0 d 0 0 0 0 0 ~ 9 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ~ m 0 0 0 0 k 0 k 0 0 0 0 0 ~ 0 0 0 m 0 0 0 0 - 0 - 0 0 0 0 0 0 0 0 0 ~ 0 P 0 0 + d m o ~ o m o o omm o m 0 &  90