Bolivia - Economic Management Strengthening Operation Project

Document of The World Bank FOR OFFICIAL USE ONLY &ZI/Z 1977-73D Report No. 7474-BO STAFF APPRAISAL REPORT REPUBLIC OF BOLIVIA ECONOMIC MANAGEMENT STRENGTHENING OPERATION November 30, 1988 Latin America and Caribbean Region Country Department III Country Operations Division This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY AND EQUIVALENT UNITS Currency Unlt: Boliviano (Bs) Exchange Rate Effective June 1, 1988 US$1.00 - Bs 2.30 Bs 1.00 = US$ 0.435 ABBREVIATIONS DIP - Direccion de Inversion Publica FDR - Regional Development Fund GTZ - Deutsche Gesellschaft fur Technische Zusammenarbeit (German Technical Cooperation Agency) IBRD - International Bank for ReconstLuction and Development IDA - International Development Association IDB - InterAmerican Development Bank IMF - International Monetary Fund INE - Instituto Nacional de Estadisticas (National Institute of Statistics) MACA - Ministerio de Asuntos Campesinos y Agropecuarios MPC - Ministerio de Planeamiento y Coordinacion PCU - Project Coordinating Unit PFMO - Public Financial Management Operation PIP - Public Investment Program PSM - Public Sector Management PSIP - Public Sector Investment Program RDC - Regional Development Corporation SAFCO - Sistema de Administracion Financiera y Control SISFIN - Sistema de Informacion y Seguimiento Financiero SISIN - Sistema de Informacion y Seguimiento de la Inversion SD 21060 - Supreme Decree which inaugurated New Economic Policy SDR - Special Drawing Right UDAPE - Unit for Analysis of Economic Policies in Ministry of Planning UNDP - United Nations Development Program FISCAL YEAR January 1 - December 31  BOLIVIA FOR OMCIL USE ONLY ECONOMIC FI.NAGEMENT STRENGTHENING OPERATION Table of Contents Page No. CREDIT AND PROJECT SUMMARY 1-iji I. INTRODUCTION 1 Background 1 Overview of the Economy 1 II. PUBLIC SECTOR MANAGEMENT - CONSTRAINTS AND REFORMS 2 Public Investment Programming and Implementation 3 Tax Administration 5 Decentralization of Public Services 5 Public Sector Employment 7 Civil Service Policies 7 Salary policy 8 Public Sector Management Strenethening Program 8 Government Statistical Services 9 Bank Country Strategy and Support for Public Sector Management 9 III. THE PROJECT 10 Project Objectives 11 Project Description 11 A. Economic Management 11 1. Public Investment Programming and Implementation 11 2. Training 13 3. Tax Administration 13 B. Regional Planning and Management 14 C. Public Sector Management Strengthening Program 15 1. Program Secretariat 16 2. Civil Service Studies 16 - Staffing and Functional Review 16 - Personnel Policies and Career Development 16 - Administration and Personnel Management 17 D. Strengthening of Statistical Services 17 IV. PROJECT COSTS, FINANCING AND PROCUREMENT 18 Project Costs 18 Financing Plan 19 Procurement 20 Disbursements 21 Accounts and Audit 21 This document has a restricted distribution and may be used by recipients only in the performance of their offAcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (Continued) V. PROJECT IMPLEMENTATION 22 Project Management 22 Annual Work Programs and Reporting 23 VI. BENEFITS AND RISKS 23 VII. AGREEMENTS 24 Agreements Reached 24 Recommenda:ion 25 ANNEXES A. Implementation Schedule B. Project Cost Tables Bl: Project Cost Summary B2t Project Components by Year B3: Summary Accounts Cost Summary C. Summary Disbursement Schedule D. Consultant Services Requirements E. Organization Charts F. Terms of Reference for Decentralization Studies G. Government Employment H. Selected Documents Available in Project File MaP: IBRD No. 16591  REPUBlIC OP BOLIVIA ECONOMIC MANAGEMENT STRENGTHENING OPERATION CREDIT AND PROJECT SUMMARY Borr,wer: Republic of Bolivia lmlnlmentini Agencvt Ministry of Planning and Cooi&ination Credit Amount: SDR 7.14 million (US$9.7 million) Terms. Standard, with 40 years maturity Cofinancing: IDB, US$0.8 million equivalent Government of Switzerland, SWF 4 million (US$2.5 million equivalent) Government of Italy, US$2.4 million Proiect Description: The central project objective is to support institutional development and specific analytical work that will facilitate the sustained implementation and consolidation of the medium term macro-economic policy introduced in August 1985. This operation focuses on strengthening public investment management, statistical information, and public sector management more broadly. Specific project components are designed to: (i.) strengthen economic policy making and management in the areas of public investment programming, sectoral analysis, links between investment and budgeting, implementation of the investment program, and project monitoring and evaluation; (ii) increase tax revenues through the expansion of the on-going work in tax administration financed under a complementary IDA credit; (iii) assist Government in designing a coherent and well-phased strategy for regional planning and management through studies on the financial, fiscal, and institutional implications of decentralization and resources to implement the strategy; (iv) raise public sector productivity by supporting the Government's Public Sector Management (PSM) Strengthening Program in its efforts to rationalize salaries and attract and retain skilled manpower; (v) implement a living standards measurement survey and support the expanded responsibilities of the country's national statistics institute (INE). A Project Coordinating Unit was established in May, 1988 to manage the project and an acting director and technical coordinator were appointed at that time. IDB will cofinance the tax administration component. The Swiss Government agreed to cofinance the public investment, regional planning and public sector management components. The Italian Government expects to finance pre-investment studies.  ^ ii. - Estimated Costs 1 of Foreign Estimated Costs: Local Foreign Total Exchange -_____-- (US$ '000)- A. Economic Management PIP Formulation & Implementation 3,030 2,772 5,802 48 Tax Administration 412 926 1,338 69 B. Regional Planning and Management 899 828 1,727 48 C. Public Sector Management PSM Strengthening 397 498 895 56 Civil Service Studies 175 273 448 61 D. SurDort to Statistical Services 1,800 778 2,578 30 E. Project Management 979 221 1,200 18 Total Base Costs 7,692 6,296 13,988 45 Physical Contingencies 327 127 454 28 Price Contingencies 1,686 461 2,147 21 Total Project Costs 9,705 6,884 16,589 41 Financing Sources: Local Forei2n Total ------- (US$ million) - IDB .3 .5 .8 Government of Switzerland 2.1 .4 2.5 Government of Italy .8 1.6 2.4 Government of Bolivia 1.2' - 1.2 IDA 5.3 4.4 9.7 Total 9.7 6.9 16.6 Estimated Disbursements: IDA Fiscal Year 1988 1989 1990 1991 ----------------11S$ Million---------------- Annual 1.0 4.3 2.3 2.1 Cumulative 1.0 5.3 7.6 9.7  - iii - Proiect Benefits and Risks: The pro4ect benefits would come from better public investmeent programming and implementation, especially important given the magnitude of the undisbursed pipeline, and from increased budgetary revenues due to better tax administration. Overall efficiency of the mnL.nistries and agencies dealing with economic and public sector management would increase because of improved working conditions, higher salaries and training opportunities, permitting Government to attract and keep qualified, motivated civil servants. There are two main risks associated with the project: (a) the broad country risk that the Government, during and following the 1989 presidential elections, cannot or will not sustain its macro-economic program; and (b) the Government's limited capability to manage complex projects proves inadequate. The first risk is mitigated by the fact that project activities address fundamental weaknesses in economic management and entail such basic improvements that the project already enjoys broad-based multi-partisan support. Regarding (b), the Government's appointments to the PCU are strong, experienced managers and the management services contract will lessen the day-to-day responsibilities of the PCU, thus allowing them to concentrate on the substantive issues. In addition, the project will be implemented by annual work programs which permit flexibility and encourage discussion between Government and IDA in order to reach a consensus on priority needs for the coming year. A third risk, that of Government resistance to depoliticizing the public service, is being dealt with by covenants relating to the PSM Strengthening Program. These include the establishment of a Program Secretariat to manage the Program and to ensure consistent application, oversight and monitoring of the rationalized salary scheme, employment conditions, and criteria for selection into the civil service. Economic Rate of Return: Not applicable Staff ADPraisal Report: No. 7474-BO Mans IBRD No. 16591  ECONOMIC MANAGEMENT STRENGTHENING OPERATION I. INTRODUCTION Background 1. The project originated from a Government request in 1985 for assistance in implementing its Economic Reactivation Program. The first phase of IDA assistance concentrated on resource mobilization and financial management, financed under the Public Financial Management Operation (Cr. 1809-BO), but did not touch on either investment planning or management of statistics. An identification mission visited La Paz in late 1986 to discuss the main components of the proposed project, the outline of which was further refined by pre-appraisal missions in December 1987 and February 1988. The project was appraised in May, 1988. A Project Preparation Advance (PPF 495 BO) was approved in May, 1988 for US$0.75 million. PPF funding was designed to help prepare the public investment programming component, define the regional management and public sector management strengthening components, establish the Financing/Disbursement Unit in the Ministry of Plan and Coordination (MPC), develop a sector strategy in one sector ministry, initiate survey work on poverty monitoring, and help prepare specific institutional development action plans. A second PPP request for an additional US$0.25 million is under review. In May, 1988 Government appointed an acting project director and a technical coordinator to assume overall responsibility for project preparation. Overview of the Economy 2. Bolivia faces a particularly difficult set of development challenges. Its 6.7 million inhabitants are among the poorest in Latin America, with social indicators among the worst in the hemisphere. Bolivia's lari-locked position and mountainous terrain make transport costs high and access difficult. Subsistence 'arming in the inhospitable highlands of the altiplano employs almost half of the labor force. Despite considerable mineral resources, lack of exploration and investment have limited production, while the existing mining industry has suffered from the severe decline in tin prices. All of these problems have been compounded by political instability and economic mismanagement, which culminated in economic crisis and hyperinflation in 1984-85. 3. The Government of Paz Estenssoro, which took office in August of 1985, undertook a far-reaching stabilization and adjustment policy. Inflation was brought under control by drastically reducing the budget deficit. A new trade regime was adopted, which aimed at maintaining a competitive exchange rate and established a virtually uniform tariff. The Government eliminated restrictions on financial transactions, eased labor-market regulations, lifted price controls, and raised public sector prices from unrealistically low levels. This report was based on the findings of a World Bank mission consisting of Messrs./Mmes. J. Albert (Mission Leader), E. Talero, S. Chaudhry, (Bank) and Ms. K. Baer (consultant) which visited Bolivia during May/June 1988 to appraise the Project. Ms. E. Rodriguez provided secretarial support.  -2- Negotiations were begun with both official and private external creditors, resulting in an IMF Stand-by approved in December 1986, a Paris Club agreement and, in 1987, a program to repurchase the country's commercial bank debt thiough repurchases and debt-equity swaps. These efforts have continued during the past year, with the Government having obtained a loan under an IMF Enhanced Structural Adjustment Facility, repurchased half of its commerical bank debt, and concluded a second Paris Club agreement in November, 1988. At the same time, longer-term measures were initiated to raise public revenues through reforming the tax system, to reorganize the more inefficiently-run State Enterprises and Government ministries, L.ad to overhaul the public sector investment program by eliminating the larger and more risky proposals and strengthening the review and control of investment projects. 4. Despite the considerable improvements in policies under the present Government, the economy continues to face serious difficulties. While GDP rose in 1987, compared to six successive years of decline between 1981 and 1986, the rate of growth of output remains below that of the population. Terms of trade declines and delays in payments for Bolivian gas shipments have severely reduced Government revenues and lowered international reserves. High real interest rates have discouraged investment and threatened the solvency of many businesses, with grave implications for banks' balance sheets. Over the longer term, Bolivia must generate the savings (both external and internal, public and private) necessary to reorient production to the new structure of relative prices resulting from the radical changes in the econiomy discussed above. Continued macroeconomic stability, commitment Lo a liberal economic policy framework, greater efforts at resource mobilization, improved public sector management and enhanced support from the international donor community are all essential elements of Bolivia's development strategy. -I. PUBLIC SECTOR MANAGEMENT - CONSTRAINTS AND REFORMS 5. Fundamental reasons for the economic crisis were both the size of and excessive interference by a large public sector, and total deterioration of the institutions responsible for economic management. Because of the severity of the years of economic crisis facing the country, virtually all Government agencies have suffered major declines in productivity and effectiveness. Poor organization and management, and complic&ted processes limit the Government's administrative capacity, especially with regard to project implementation. Deterioration of salaries for the civil service has severely eroded the human resource base for proper functioning of Government. As a result, policies of key economic agencies have been determined and executed by a very small group of political and technocratic figures, who have orchestrated economic policy in an atmosphere of continuous crisis management. The top level of administration has received only limited assistance from career civil servants and from externally- financed technical assistance. 6. In response to this crisis, Government decided to address the severe institutional constraints which threatened to undermine implementation of its ambitious economic reform program. A central goal of Government is to reduce considerably the size and costliness of the public sector while building up the capacity to manage more efficiently a smaller public sector. Government chose to concentrate first on improving the financial management of its economy. Supported by the IDA-financed Public Financial Management Operation  -3- (Cr. 1809-BO), Government initiated major changes in its fiscal and financial systemss in early 1986, the Ministry of Tax Collection was created with a mandate to broaden the tax base; a comprehensive programi was formulated to improve basic financial management systems--accounting, cash management, budget programming--in key ministries and public entities; the Central Bank of Bolivia was fundamentally restructured with the goal of strengthening the Bank's management of the monetary system, eliminating from its portfolio commercial and development banking activities, establishing accounting systems and strengthening economic research. With major reform of the financ.al system well under way, Government has turned to other pressing problems facing economic management. Public Investment Programming and Implementation 7. Formulation of the public investment program (PIP) is the responsibility of the Ministry of Planning and Coordination (MPC). MPC is also in charge of coordination of national and regional development planning; project monitoring and evaluation; coordination and monitoring of international cooperation agreements; establishment of the basic organizational structure for the public sector; and application of rules governing salaries and employment conditions. 8. In theory, MPC, and specifically the Public Investments Division (DIP) evaluates each proposed investment submitted to it by the sect'r ministries in terms of its economic viability, social effects, and its impo;.tance to the overall country development strategy and objectives. The projects wb4ch meet HPC's criteria then move to the Council for Economic Affairs and Pla,ning (CONEPLAN), an interministerial group which gives the project its final approval. In reality,the sector ministries as well as MPC lack the technical capability to identify, prepare, appraise and select investment projects. Hence, most externally funded investment projects are largely prepared by donors. As well, MPC's links with the Ministry of Finance in managing the public investment program are weak. Recurrent and capital expenditures are not well calculated and investment planning does not sufficiently take account of the implications for external debt management and macroeconomic policy. Links with the strategy and development planning divisions of MPC are also weak. When added to the problem of incomplete data on investment plans from both the sector ministries as well as the Regional Development Corporations (RDC), the usefulness of the PIP as a government-wide planning document is far from what it should be. 9. The Government has taken steps to try to strengthen the public investment and planning system. During the 1974-78 period, the Government took several actions in an effort to strengthen planning mechanisms an" establish a medium-term development strategy. These actions included the creation of (a) planning offices in all ministries and regional corporations to perform planning and supervisory tasks at the sectoral and regional levels; (b) a specialized pre-investment agency to identify, promote, finance, and follow-up the preparation of adequate feasibility studies in priority sectors; and (c) a follow-up system of plans, programs and projects involving the entire public sector. In addition, the Ministry of Planning and Coordination was accorded a higher position within the Cabinet, and the Planning Minister designated head of  -4- the economic team and chairman of CONEPLAN, tc.!. economic nlanning council. The challenge now facing the Goverment, that the roles of the various entities involved in the planning process are defined, is to make the system work. 10. Implementation of the public investment program continues to be a major problem facing Bolivia; its ability to contract additional assistance has been somewhat hindered by the existence of up to US$1 billion in early 1988 in undisbursed external commitments. Almost 50Z of this amount consists of loans committed in the first half of the 1980s. During this period, political instability, hyperinflation and exchange rate overvaluation resulted in administrative disorganization, huge cost overruns and frequent renegotiations of contracts. Lack of budgetary resources limited the availability of counterpart funds, while Government's inability to service outstanding loans resulted in suspensions of assistance from several donors. More recently, delays in disbursements stem from institutional weaknesses: slowness in obtaining the necessary Congressional approval for entering into foreign loans (which can take up to two years); lack of provision of counterpart funds owing to concern over violating overall credit limits; and lack of qualified staff, resulting in overburdened seniior officials and slow decision making, along with an extreme degree of disorganization in many sectoral ministries. However, loans to Government increased sharply after 1986 (US$560 million of new commitments were received by Government in 1986-87). The disbursement pace did begin to pick up in 1987 so that nearly half of the total disbursements for the 1980-1987 period (approximately US$360 million) was disbursed during this year. 11. Cognizant of the vital importance of the eff.i.ient use of scarce resotrces, Government has taken a number of bold steps to address some of the institutional weaknesses and constraints to program implementation. These include: (a) overhaul of the Central Bank Department administering the private credit lines and the simplification of the subloan processing procedures; (b) hir'ng of procurement agents as an interim solution to the cumbersome procurement procedures; (c) initiation of a more systematic programming of the annual internal and external financing requirements of public investment projects; and (d) establishment of an interministerial committee supported by a Financing/Disbursement Unit within MPC to follow up disbursement progress and help resolve bottlenecks. Although these measures bode well for the future, they are in the early stages of implementation and have only slowly demonstrated their impact on the improvement of disbursements. 12. To improve the basic data needed by MPC to better formulate &nd implement the investment program, Government has installed a financial information and monitoring system in MPC, called SISIN. The SISIN is a full- function registration and life cycle tracking tool for all public investment projects in Bolivia. It has been developed during the past two years with financial support and technical assistance from the Interamerican Development Bank (IDB). The purpose of the system is to organize information on investient projects to facilitate dissemination and analysis according to sector, geographical location and financing source. Under a second phase of the IDB- financed Technical Cooperation Agreement, the scope of the SISIN is to be expanded functionally and implemented in the sector ministries and the main executing agencies within them. The Ministries of Transportation, Mining, Health and Agriculture have already been integrated into the System. What remains to be done is to expand the system to the RDCs and to consolidate the operation of the System where it is installed.  Tax Administration 13. In May 1986, Government passed a Tax Reform Law which aimed at broadening the country's fiscal revenue base, reducing the incidence of deficit financing through monetary emission--a practice which had contributed to hyperinriation in the previous years. The tax reform introduced a simpler tax system based on value added and wealth taxes instead of income taxes. A newly formed Ministry of Tax Collection became responsible for implementing the legislation, with oversight responsibility over the t&x collection offices in the Ministry of Finance, the Internal Revenue Service, and Customs Administration. The Ministry of Tax Collection was merged with the Ministry of Finance ii September, 1988. With financial assistance provided by IDB, UNDP and the World Bank (PFMO, para 6), Government has established systems for taxpayer registration, collection, and compilation of computerized tax data through the private banking system; work is also progressing well on restructuring of the Internal Revenue Service and on the design of tax auditing procedures. Considering its fairly recent establishment and the major innovations in tax administration which have been implemented in a short period, the new tax collection system has been successful in increasing tax revenues. Whereas tax collections (through Internal Revenue) represented only 12 of GDP in 1984, they rose to 42 of GDP in 1986, to 6.62 of GDP in 1987, and are expected to reach 92 of GDP for 1988. 14. While in the first two years the tax reform program has achieved impressive results, efforts need to be made to consolidate progress to date, expand the tax administration system to Customs and to the regions, and to institutionalize the system by training staff in the Ministry of Finance's Tax Directorate. The expansion of the system to Customs could result in significant revenue increases, considering that during 1987 alone, import tax evasion resulted in an estimated Bs loo million in foregone revenue, about a fourth of all taxes collected that year. In view of the Government's recent proposa'ls to decentralize the provision of several basic services, assistance to the regions in tax collection and administration will be a crucial determinant of their ability to finance future expenditures from their own fiscal resources. Decentralization of Public Services 15. The Government has announced its intentions to further decentralize and delegate many of the central administration's economic management responsibili- ties to the RDCs, municipalities, and other local authorities. This decentrali- zation is implicit in the 1986 tax reform which decentr3lized substantial revenues; and given Bolivia's geography, it is seen as essential to effective development of services. Far ranging decentralization legislation was proposed to the Congress in 1988, but failed to pass. Government intends to present a modified, more clearly analyzed and modest version in the 1989 session, and decentralization is a central part of the platform of all three political parties. In fact, there is a strong tradition of regional government in Bolivia; the RDCs are successors to the Public Works Committees formed in the 1970's. The RDC's, which come under the aegis of the MPC, were established as decentralized public entities with administrative, technical and financial autonomy in 1972 by the Law for the Administrative Organization of the Executive Sector. Bolivia's nine regions--La Paz, Chuquisaca, Cochabamba, Potosi, Oruro, Santa Cruz, Tarija, Ben! and Pando--are administered by these RDCs; their objectives are to promote the economic and social development of the regions  -6- through planning, research, and the identification and implementation of investment programs. In 1986, Government decided to decentralize some public enterprise operations by first dismantling the Bolivian Development Corporation and traneferring the enterprises under its jurisdiction to the RDCs. Thus, the RDCs now provide public services and operate their own enterprises, including agrobusinesse;, cement and textile plants. Some of the public enterprises have operated with substantial losses, and constitute a major drain on the Government's financial resources, leading Government to consider selling or liquidating several of these enterprises. 16. The municipalities (alcaldias) also provide public services, such as road maintenance and water supply and sanitation. These are financed through property and vehicle taxes, user fees, plus transfers from the central Government. The division of responsibility for some services between the municipalities and the RDCs varies according to the financial resources of each entity. For example, the municipalities of La Paz and Cochabamba have considerable resources and responsibilities and thus, the RDCs are relatively weak. In the rural areas, the inverse is true. Santa Cruz is the exception with both a strong municipality and RDC. 17. By further decentralizing the provision of basic services--beginning in 1989 with the health and education sectors--to the RDCs and municipalities, the Government expects to improve the delivery of services (or at least render the regional and municipal governments more accountable for the quality of services provided), increase local participation in regional development and alleviate the budgetary and administrative burdens on central Government. However, there are no legal or procedural norms established for the decentralization process in which the respective powers, responsibilities and budgetary resources of central and regional authorities are defined. Implications of decentralization in taxation and revenue have proven to be especially difficult to assess and require thorough analysis. For example, Government has proposed to establish a National Fund for Regional Development (Fondo Nacional de Desarrollo Regional, FDR). The FDR is expected to provide financing for the small and medium sized investors from municipalities, RDCs and other local entities which, because of their size, are not currently included under the Government's public investment program. The FDR is seen as a mechanism to distribute financial resources to some of the departments which lack their own resources. Its role and functions within the public investment system require further definition, especially its relationships with the RDCs. 18. Other problem areas which require further analysis include the need for clear delineation of responsibilities between local authorities and the regions. Also, the technical capacity of the RDC's--with the partial exception of Santa Cruz and the municipalities--to formulate regional development strategies, to identify, appraise, and execute investment projects, and to interact with the private sector is severely limited by lack of an adequate data base, trained personnel, and in some cases, of financial resources. The weak capacity of the RDCs and municipalities to manage basic services to ensure adequate service provisions for local populations including managing a large technical staff, counterpart staff needed for logistical support, and a complex aupply system must be strengthened. The complexity of managing a decentralization process as envisioned now by Government will require the strong leadership of the MPC,  -7- given its responsibility for designing and overseeing the decentralization process. Considerable resources will be needed to strengthen the regional and local governeents' capacity to successfully fulfill their new roles. Public Sector Employment 19. Public service employment in Bolivia has traditionally been highly politicized, accounting in part for the frequent turnover in personnel and for the rapid increase in the size of public sector employment. From 1971 to 1985, the total Government workforce more than doubled, from 115,000 employees to over 245,000. Growth was most rapid in the Central Government. However, during the 1970's, public sector employment was accompanied by general economic growth. From 1980 to 1985, employment continued growing at its previous pace while the economy declined. The swelling Government wage bill, accounting for approximately 80Z of total public expenditure in 1986, and high inflation rates led to a real decrease in public sector wages. This, in turn, has caused many of the most qualified civil servants to leave public service in search of higher paying jobs in the private sector. 20. In an effort to deal with the high wage bill and the poor performance of many of the Government entities, Government introduced a series of measures in 1985 to redress the situation. In addition to introducing voluntary incentives for retirement, agencies were asked to prepare and implement programs for staff reductions. As a result, the central government reduced its labor force by 33,000 persons between 1985 and 1987, with the bulk of these reductions (about 18,000) taking place in the public corporations (from 58,000 to 39,000). The State Mining Company, COMIBOL, had its employment pared down from 20,000 to about 7,000 employees. The overall effect of these reductions is that the p-lic corporations have leaner work forces but pay their employees relatively well. Total public sector employment now numbers about 212,000. About 129,000 employees work for the central government administration, 66,000 for public enterprises, development corporations and other public institutions, and the remainder for local government and the universities. Government has avoided awarding a sizeable wage increase because of its acute financial situation (the last general wage increase was about 15Z--two to three percent in real terms--in May 1988, roughly the same percentage as in the previous year). Civil Service Policies 21. Personnel administration, management and salary policy are the responsibility of the individual ministries so that no two agencies have identical policies or salary scales. Staff are recruited by a particular agency or ministry and must resign from one agency to be recruited by another. Personnel administrative policy is encoded in a law (Ley de Carrera Administrativa) which sets out in considerable detail the rules governing recruitment, promotion, performance evaluation, sanctions and compensation in the public service. This law is rarely applied, however, and its provisions are frequently ignored since the government office responsible for its application (located within the MPC) lacks staff and other resources required to fulfill these responsibilities. This has resulted in a further politicization of the civil service.  -8- 22. There is no central government office which has current information on numbers and deployment of civil servants; this means that there is no central agency capable of redeploying skilled personnel as required. In addition, there are no programs aimed at developing professional skills within the ministries through in-service training and little emphasis is placed on performance evaluation and career advancement. Salary Policy 23. Salary policy is by far the most contentious issue facing public sector management today. Real wages in the public sector plummeted during the 1980s and have fallen to well below wages received for comparable, competing jobs in the private sector. Central government salaries range between US$31/month for a messenger to US$210/month for a director-general position, US$480 for a Sub- Secretary and US$960 for a Minister. These salaries are roughly half that paid by the state enterprises (which also add on other benefits) and the private sector. In order to attract competent people, government paid salary supplements to roughly 500 people (about 110 in the economic ministries) through a special arrangement with UNDP. However, the scheme has become the subject of much controversy lately, and as a result the Government is looking for alternative ways to address the salary issue. Salary supplements are also paid by aid agencies to personnel in their projects who occupy critical positions and who receive inadequate remuneration under the government's pay policies (see civil service working paper in project file for more detailed information on salary supplements). Because there is currently no rational, equitable system for awarding bonuses, in.ernational donors Eind themselves competing for the scarce human resources available _n Bolivia, while the local consultancy market flourishes with consultants frequently jumping from assignment to assignment, depending on the salaries donors are willing to pay. 24. Analytical studies relating to salary levels and salary supplements, especially with regard to the 1989 budget, will be undertaken as part of the program to improve Government-wide financial administration (Sistema de Administracion Financiera y Control, SAFCO) financed under PFMO. The first study will survey actual salaries, including benefits received by Government officials and a sample of comparators from the private and parastatal sectors and propose a salary rationalization policy in time for inclusion in the 1989 budget. The second study will examine the budgetary implications of the salary rationalization scheme. Public Sector Management Strengthening Program 25. In response to the public sector management (PSM) crisis described above, Government, with the assistance of a team of consultants fielded by the UNDP and the World Bank, prepared the broad outline and structure of a PSM Strengthening Program in June, 1988. The Program was discussed at the Consultative Group meeting in July; details are to be worked out by December 30, 1988. The Program's main objectives are (a) to rationalize the existing uneven wage structure; and (b) to create conditions of stability in the public sector which would attract qualified personnel to the public sector, eventually leading to the establishment of a stable technical and professional cadre of public servants. Government recognizes that it will take at least ten to fifteen years to reach these objectives for the central Government, the decentralized agencies, the RDCs, the major public and mixed enterprises, and the large and  -9- medium-sized municipalities. In the first three to five years, the Program would focus on the core central Government agencies, initially encompassing roughly 500 core staff positions at the level of directors to mid-level managers (chiefs, advisors, economists). UNDP and the international donor community have expressed an interest in providing non-project assistance to the Program under certain conditions. Although an advisory board composed of Government and donor representatives would set an overall policy governing the use of the pool, specific staffing decisions would be the sole prerogative of Government. Government Statistical Services 26. The lack of adequate statistics makes it difficult to assess the performance of various sectors and the economy as a whole, and represents a major impediment to effective economic management. Data collection and analysis is the responsibility of the National Institute of Statistics (INE), a decentralized institution which falls under the tutelage of MPC. Its main function is to generate economic and social statistics ani then present these statistics in a standard and consistent format for the entire public sector. INE has two main departments: the Department of Social Statistics, which collects data on demography, housing, health, education, employment, and other social indicators; and the Department of Economic Statistics, which gathers basic economic information to be used in formulating the national income accounts. TLis latter responsibility originally belonged to the Central Bank but was transferred to INE in January, 1987 during the major restructuring of the Bank. In addition, INE has five support departments concerned with data processing, analysis, public information, administration and cartography. 27. INE is a relatively young and seriously underfunded agency. Much of the present data collection efforts are limited to the major cities which represents only 35 percent of the country's population. Surveys on health, nutrition, literacy, education, and fertility are either non-existent or collected so that information is not easily analyzed. With regard to national income accounts, prices and output data are available, but have not been updated for years (the current consumer price index is based on a 1967 consumer survey). Data collection is limited by the lack of data processing equipment, inadequate office facilities, lack of vehicles and operating furnds to reach rural areas, difficulties in attracting and keeping qualified personnel because of the low salary levels, and insufficient resources to process the data collected. Bank C.untry Strategy and Support for Public Sector Management 28. IDA's broad country program objectives represent an intensive effort to continue supporting Bolivia's economic program, and could be su,marized as follows: (a) to assist Government to implement its medium term economic program for achieving increases in productivity and employment; (b) to continue to provide strong analytical support and maintain an effective policy dialogue on the macro-economic framework; (c) to provide further assistance to Government to develop social policies and programs, building upon the successful experience with the Emergency Social Fund. This will focus on developing a strategy for  -10- dealing with poverty, measures to improve the management and quality of health services and education, and defining the appropriate fiture institutional arrangements to continue the activities of the ESF; (d) to assist Bolivia in resolving its debt problems; and (e) to strengthen aid coordination for Bolivia, through the Consultative Group and other vehicles, including mobilizing increased cofinancing to supplement the limited IDA resources available to Bolivia (i.e., through the Public Sector Management Strengthening Program). 29. The major focus of the Bank program for PY89 will be on deepening understanding of the medium term economic perspectives through analysis focussed on resource mobilization and management issues, policy reform and investment in the major productive sectors, and launching sustainable programs for social sector development. Implementation will remain the watchword at all levels from macroeconomic policy to individual project operations. A key factor affecting the Bank's work throughout this period will be the elections which take place in May 1989. 30. The status of Bank operations in Bolivia is summarized as follows: total lending to date stands at US$645.9 million, consisting of 14 loans for US$275 million and 24 credits totalling US$371 million. The Financial Sector Adjustment Credit, equivalent to US$70 million, has been approved by the Executive Board and became effective on September 30, 1988. As of June 30, 1988, thirteen of the 14 loans and 14 of the 24 credits have been fully disbursed for a total of US$442.5 million. The remaining ten credits consisting primarily of new operations essentially make up the current portfolio, and have US$203 million undisbursed. Bolivia has repaid the Bank US$102.8 million, and thus has a total estimated outstanding of US$543.1 million. 31. In addition to the broad objectives described above, the Bank's country program in Bolivia has also focussed on supporting improvements in public sector management through rebuilding the institutions and tra!.ning of managers and staff in the public sector. While other donors, especially UNDP with its salary support program, have also been involved in limited aspects of public sector management reform, the Bank has taken the lead role in this area, through the ongoing Public Financial Management Operation (Cr. 1809-BO), which seeks to improve basic financial management systems--accounting, cash management, budget programming--and broaden the tax base (see also paras. 6, 14, 24). The proposed Economic Management Strengthening Operation focuses on complementary economic management and public service reform issues. Both Government and the donor community are looking to the Bank to continue coordination of reforms in these areas. III. THE PROJECT Project Objectives 32. Economic management requires skilled individuals and strong institutions capable of formulating and implementing the far-reaching policy changes proposed in the Government's program. The project would  -11- support the Government's commitment and on-going efforts to improve economic and public sector management and would help lay the foundation for longer-term, sustainable administrative reform. 33. Specifically, the project would be directed to: (a) strengthening core economic policy making and management processes, especially the formulation and implementation of the public investment program, and revenue mobilization; (b) assisting Government to design its program of decentralization and regional economic management, to establish its Regional Development Fund, and to train regional and local government staff to implement these programs; (c) increasing civil service productivity through the immediate rationalization of the salary structure, and in the medium term, through the establishment of a sound management and personnel system in tht public sector, in order to attract and keep motivated civil servants; and (d) monitoring the impact of economic policies on vulnerable population groups through a living standards measurement survey and generally improving the quality and coverage of national statistics. Project Description A. Economic Management (1) Public Investment Programming and Implementation (USS6.9m) 34. The project would address the major weaknesses of the public investment programming system. It would support on-going efforts within the MPC's Public Investment Division (DIP) to improve its sector strategy formulation, investment analysis, links to the budget, project implementation, project monitoring and evaluation, and overall information management. First, DIP would expand its project analysis unit in order to better evaluate project and sector investment plans prepared by the responsible sector ministries, notably through employment of sector specialists. Terms of reference for the four sector analysts have been agreed to by IDA. Second, DIP would develop systematic and transparent procedures to guide the annual preparation of the rolling PIP, and would be responsible for assuring consistency with overall resource availability, macroeconomic objectives and Government intersectoral investment priorities. Third, DIP would establish clear links with the Ministry of Finance budget divisions to ensure that recurrent expenditures have been accurately estimated and are reflected in the operating budget calculations of the PIP. 35. Improving the sector ministries' capacity to formulate sector strategies, develop an investment program, implement and monitor projects is considered crucial to the success of the Government's PIP. In the first year of the project, Swiss Government financing would be targeted towards improving the capacity of the Ministry of Agriculture to formulate an overall agricultural development strategy and to implement its reorganization plan. Terms of reference for sector analysts and sector economists to begin drafting the  -12- strategy have been approved by IDA. Continued implementation of the Ministry's reorganization plan and an intensive training program in project analysis and evaluation would be supported by the project. 36. In order to remedy the serious bottlenecks which currently impede the implementation of the Goverr,ment's public investment program, the project would support a range of measures, including strengthening of the MPC's Financing and Disbursement Unit through the addition of consultants, including co-financing specialists and support staff. They would be responsible for monitoring the progress of planned investments, especially of those investments receiving donor financing, and for trouble-shooting in case of delays in processing. Terms of reference for the Unit have been agreed to by IDA and the first three consultants are being financed with PPF funds. It was agreed during negotiations that the project director would coordinate the Unit's work program, including that of consultants funded by the U.S. Agency for International Development. In addition, funds have been included in the project to conduct mid-term and final evaluations of the Government's new procurement system (para 11) and to provide support for the management of the procurement system once the current funding is terminated (1990). 37. To improve the management of the Ministry's information system--and especially of its usefulness in the formulation of the public investment program--the project would support the expansion of the recently installed information technology system (SISIN). First, in a joint effort with IDB, the System would be extended to the RDCs and the additional resources necessary to consolidate and fully integrate the system in the sector ministries and RDCs would be provided. During negotiations, arrangements were worked out clearly delineating the respective roles of IDB and the IDA in financing and implementing the SISIN system in the RDCs and sector ministries (para 70). Second, to help alleviate the bottlenecks in the disbursement pipeline, the existing System would be expanded to monitor project financing and disbursement (SISFIN). The SISFIN would be the main working tool to evaluate and monitor the internal and external financing of the investment program, and would help expedite the disbursements on approved loans or lines of credit by providing information on progress of disbursements on a timely basis. Third, to help locate and manage the large numbers of both local and international technical assistance, the project would finance the creation of a new computerized Technical Assistance Monitoring system. 38. Finally, the project would support the undertaking of pre-investment studies (including agriculture and energy sector pre-feasibility studies) in sector ministries and in the RDCs. Studies would be selected in accordance with criteria and procedures defined by the PIP and approved by IDA. Development of guidelines for investments has been funded with PPF financing. These criteria which were reviewed and approved in draft form by IDA during negotiations (para 70) would be applied to funds from other donors as well as to the IDA credit. The Italian Government expects to contribute US$2.4 million for pre- investment activities and IDB is assessing proposals to add US$7 million to their pre-investment fund in 1989. 39. The project would support the Public Investments Division of the MPC by financing long-term consultants including disbursement officers and procurement specialists in the Financing and Disbursement Unit, sectoral analysts in the DIP and in the Ministry of Agriculture, an advisor for pre-investment activities,  -13- information technology specialists to design and operate the expansion of the SISIN, in-country and limited overseas training, office and computer equipment, and special studies monies for DIP to undertake specific studies relating to the public investment program (which would not be appropriate for pre-investment funds) under terms of reference approved by IDA. (2) Training 40. The project would include an exte Lve training program for MPC, sector ministries and regional development corporation staff in economic analysis and planning, national accounts and statistics, regional planning, and tax administration. Government agreed to appoint a training coordinator no later than March 15, 1989 (para 70). The training coordinator, with consultant support, would immediately begin to develop a training plan for the project, including courses which have already been identified and tested in national accounts and statistics, and tax administration, as well as further specific courses in economic analysis, project evaluation and information systems technology. Government would present a detailed project training plan to IDA for review by June 15, 1989 (para 70). MPC would adopt existing methodologies for project economic analysis and evaluation and would hold training courses for personnel in line and sector ministries and RDCs responsible for investment analysis and project evaluation. Training is already underway in preparation for conducting national surveys and calculating the national accounts, and a detailed training plan has been drawn up for tax administration, an area where training has already been conducted under the PFMO. Regional planning will be an area requiring substantial training for personnel from all three levels of government in project and program formulation, analysis and management. The precise courses and timing of training for RDCs are being identified as part of the preparatory work for the regional planning component (training needs assessment), and will be implemented beginning in June, 1989. (3) Tax Administration (US$l.5m) 41. This component would assist the Government to consolidate the critical work in implementing tax reform and increasing tax revenues which is now the responsibility of the Tax Directorate of the Ministry of Finance (paras. 13-14). The component has four main activities: (i) continued development of the existing tax collection systems and improving the organizational structure of the Internal Revenue Service; this would be undertaken with IDB financing; (ii) development and establishment of a new tax collection system for the consolidated collection and control of all import taxes and tariffs. By establishing this system through the General Customs Directorate, the objective is to improve the system for controlling the payment of import taxes (Value Added and Specific Consumption taxes) at the moment the goods enter the country; (iii) implementation of the new tax collection system in the regions by regional tax administration officials; and (iv) development and implementation of the current account fojr taxpayers, a computerized system used for registering and controlling tax payments and credits. (A complete description of the activities to be financed by IDA and IDB can be found in the tax administration working paper in the project file.) IDA financed inputs include 74 person-months of international technical assistance, the equivalent of 280 person months of incremental local salaries to be financed on a decreasing scale and terminated  -14- by 1989, office equipment and computers, field visits and training. Since this component is a follow-up to work begun under PFMO activities are expected to be completed by end-1989. B. Regional Planning and Management (US$2m) 42. The objective of this component would be to help Government to formulate a coherent regional planning and decentralization strategy and to assist in implementing this strategy according to a politically and financially feasible time horizon. With proposed legislative debate delayed to late 1989, Government proposes to design a decentralization plan which would encompass a broad perspective, taking into a-count not only sectoral concerns but also the institutional and financial limitations that exist at the central, regional and local levels. Work on decentralization will be clearly divided into two stages. In the first phase, the Regional Corporations Unit of MPC would carry out studies which would provide the Government with the basic information and analysis necessary to formulate an overall decentralization strategy. The strategy would address issues of the division of responsibilities between the central, regional and municipal governments, identification of central government functions which can be transferred and the phasing of the devolution of responsibility to the regions and municipalities. The three main studies would focus on (i) an assessment of regional entities' institutional capacity, including a training needs assessment, and resulting ability to formulate and execute regional development plans in the national context; (ii) an assessment of regional entities' fiscal and financial capacity. Special emphasis would be given to the structure and operations of the Regional Development Fund (FDR), which was created as a mechanism for providing additional resources to the regions (para 17); and (iii) an evaluation of the impact of budgetary decentralization on the health, education and transport sectors. These sector studies would be conducted ,ointly by the MPC, the Health and Education Ministries, and the National Roads Service, the national agency responsible for road maintenance. Terms of reference for each study (attached as Annex F) have been agreed to with IDA. During negotiations, IDA and Government agreed to the formal establishment of a working group consisting of representatives from sector ministries, RDCs and local Government, and chaired by MPC to ensure coordination on the sector studies, would be formed by January 15, 1989 (para 70). Project-financed inputs include all foreign and local costs associated with the studies, and word processing equipment. 43. Second phase activities, whose cost is estimated at about US$1.3 million, would be designed based on recommendations contained in the studies. Project activities would likely focus on establJshing systems and procedures for the gradual transfer of responsibility to the regions, and on general strengthening of central, regional and local institutions to enable them to take on the additional technical, financial and managerial tasks associated with decentralization. Training would be provided for personnel from all three levels of government in project and program formulation, analysis, management and evaluation (para 40). Improved systems of financial management in the regions, including the capacity for saving, application of user fees, tax collection, and use of credit to finance development projects would be designed and staff trained to manage the new systems. The credit would finance training, technical assistance, and equipment for the implementation of decentralization activities. As a condition of disbursement against credit funds for implementation of regional decentralization activities, Government would have  -15- issued a Supreme Decree describing its decentralization policy and strategy for implementation (para 72). A working group composed of the ministries and RDCs described above, but also including the Ministry of Finance would be responsible for formulating and reviewing proposals for activities to be funded under the Credit. The Project Coordinating Unit would present these proposals to IDA for its review and approval as part of the annual work program (para 66). C. Public Sector Management Strengthening Program 44. In response to the crisis in public sector management, Government proposed at the July 1988 Consultative Group meetings to begin rationalizing the existing public service system by launching a long-term (10-15 year) Public Sector Management (PSM) Strengthening Program (for more details on the PSM program, see para 25 and aide-memoire dated June 10, 1988 in the project file). The Program does not aim to reform the entire public service, but rather to begin rationalizing the existing structure which is characterized by an uneven and inequitable salary scale, poor or unarticulated employment conditions, and unclear advancement and promotion policies. In the first three to five years, the Program would focus on the core central Government agencies, initially encompassing roughly 500 core staff positions at the level of directors to mid-level managers (chiefs, advisors, economists). Currently, at least 400 senior civil positions receive salary supplements, so that the proposed rationalization scheme would entail a limited number of additional positions to be included in the program, at least in the first year. Depending on the results of the early years of the Program's operation, the number of positions financed might expand to 2000. Consistent salary levels would be proposed for these positions, based on recommendations of the salary policy study to be completed by the SAFCO administrative board by December 1988 (para 24). The SAFCO administrative board would also be responsible for identifying with the sector ministries the key posts to be included in the scheme. 45. The PSM Program would be established and financed with resources from two sources: Government budgetary resources and local currency funds generated by the international donor community. Funding from other donors, which currently supports salaries for many specific civil service positions, would be put into a Government/donor pool. Government's financial contribution to the ponl would increase from its current level of financing of salaries to absorb a larger percentage of the cost of the program as its budgetary resources and the Program's scope expand. The estimated costs for the first year of the program's operation in U.S. dollars would be US$6 million (2.5? of the estimated US$236 million wage bill in 1987). 46. The two main types of activities to be financed under this component are (i) the creation of the PSM Strengthening Program Secretariat; and (ii) studies to provide Government with the data, analysis and recommendations necessary for it to make informed policy decisions on both the PSM Strengthening Program, and, more generally, on the future reform of the public service. The results of the studies would provide crucial information fir the reformulation of a salary rationalization policy and other policies relating to personnel management and administration, career advancement, and staffing levels. The work undertaken here would expand and complement the analytical work on public sector management reform currently being undertaken by the SAFCO administrative  -16- board with PFMO financing (para 44), which includes a comprehensive survey of salary and employment conditions for the central public sector and a number of decentralized public entities. 47. The project costs and proposed activities involve technical support in the final design and preliminary implementation of the PSM Program. Project costs include no salary costs except the incremental costs of staff directly involved in the project. They specifically do not include the financing of incremental salaries for the broader program for which alternative financing from the donor community will be arranged. Considerable interest in program assistance has been expressed by the Swiss, Italian, United States and French Governments. During negotiations, Government agreed to appoint a Director for the Program by March 15, 1989 (para 70). As a condition of disbursement against the PSM Program's implementation activities, the Program's detailed structure and operations would have been established, and Government would have issued an Executive Decree formally establishing the Program (para 72). (1) Program Secretariat (USSlm) 48. The Program Secretariat would be the formal body respons'ble not Dnly for administering the Program, but for also supervising all work on salary policy implementation setting, employment conditions, and other studies discussed below. The Secretariat would work closely with the central ministries participating in the scheme and with the SAFCO administrative board to help identify the key positions and would set up the arrangements to administer payments to the individuals holding these posts. In addition, it would collaborate closely with SAFCO on the salary policy review currently underway. 49. If the recommendations of the personnel administration study (para 52) strongly endorse that the Secretariat become a permanent structure responsible for civil service matters, the Government has indicated that it would seek IDA support in designing a financing plan and in mobilizing additional resources required to sustain the program over the medium-term implementation period. Project costs include financing requirements for establishing and administering the Program for its first three years. This would include the salaries of local staff and of at least one internationally-recruited advisor, as well as operating costs, office furniture, computers, and staff training. (2) Civil Service Studies (US$0.5m) 50. Staffing and Functional Review. Given the lack of reliable data regarding public sector employment, an accurate baseline estimate of the numbers and deployment of civil servants, and an indication of under or overstaffing by ministry and skill category are needed. Using generally accepted norms for staffing coefficients, the staffing and functional review would identify gaps and surpluses in the existing staffing structure and would recommend actions Government might take to modify the situation. The study would limit itself to ten central Government ministries and agencies and three regional development corporations. 51. Personnel Policies and Career Development. This study would examine recruitment and staffing policies, benefit packages and pension policies, in- service training opportunities and their links with pay and promotion. Thle objective is to assess the existing situation and to recommend policy changes in  -17- order to attract and keep well-qualified, motivated career staff. Especially important would be the design of a transparent and fair personnel performance evaluation system which would provide added incentives to career civil servants. The study would focus initially on establishing the necessary conditions for the creation of a senior executive service composed of staff occupying key positions in each central ministry. 52. Administration end Personnel Management. A sound, professional civil service management system must be able to monitor public service manpower levels, salary levels, and deployment. The study would explore the possibility of consolidating the currently fragmented and ministry-based personnel administration system into a central Office of Personnel Management or Civil Service Administration. This office would be responsible for relating the staffing levels of ministries to functions on an on-going basis, and would also be responsible for job grading, staffing policies, and manpower development. Any personnel system should also be closely dovetailed with the payroll so as to reinforce the internal checks of the payroll. The study would propose an organizational structure, staffing plan, and terms of reference for this office, and would identify the investment and recurrent expenditures necessary to operate the office. Specifically, the study would investigate the possibility of expanding the PSM Program Secretariat to become a permanent structure responsible for civil service matters. 53. Project costs include both local (78 person months) and international consultants (24 person months) to refine draft terms of reference, undertake the studies, field visits, equipment, and vehicles. D. Strengthening of Statistical Services (US$3.lm) 54. In order to improve the economic and social data the Government needs to formulate and monitor the effects of policy changes, the project would help expand the scope and geographical cove:age of existing socio-economic survey work. Secondly, the project would assist INE in its efforts to regionalize the national income accounts, a responsibility shifted tu INE from the Central Bank in early 1987. The first phase of the socio-economic survey work includes a household income and expenditure survey to analyze the impact of the Emergency Social Fund. The survey designs are based on a household survey developed by the World Bank's Living Standard Measurement Study (LSMS). Information from the surveys will include data on employment, education and job training, use of health facilities, housing conditions, net and gross household income, food and non-food consumption, agricultural production at both the household and commercial level, migration, fertility, anthropomorphic measurement, and lending and savings. In addition, INE would conduct a year-long income and expenditure survey during 1989 in La Paz, Santa Cruz, and Cochabamba with the results being used to calculate new weights for the consumer price index. This work would be supported by the World Bank LSMS staff and consultants. 55. Project supported work on national accounts includes: (i) disaggregating the accounts to the department and regional levels; (ii) changing the base year for national account calculations from 1980 to a more recent year made necessary by the serious structural changes in the economy since 1980; (iii) calculating the non-factor service account of the balance of  -18- payments statistics; (iv) broadening the accounts to include the fiscal accounts; (v) issuing the national accounts on a quarterly basis in nominal terms; and (vi) improving the quality of the fiscal accounts. 56. Project costs include foreign and local technical assistance, equipment, and costs of survey work, including data processing and analysis. IV. PROJECT COSTS. FINANCING AND PROCUREMENT Project Costs 57. Total project tosts are estimated at US$16.59 million (Sb 53.9 million), including taxes and duties of US$0.8 million (Sb 2.6 milliol). The estimated foreign exchange component is US$6.88 million, or 41Z of total costs. Details by project component are provided below: ESTIMATED COSTS 3 of Foreign Estimated Costs Local Foreign Total Exchange -_______ (US$ '000)---- A. Economic Management PIP Formulation & Implementation 3,030 2,772 5,802 48 Tax Administration 412 926 1,338 69 B. Regional Planning and Management 899 828 1,727 48 C. Public Sector Management PSM Strengthening 397 498 895 56 Civil Service Studies 175 273 448 61 D. Support to Statistical Services 1,800 778 2,578 30 E. Proiect Management 979 221 1,200 18 Total Base Costs 7,692 6,296 13,988 45 Physical Contingencies 327 127 454 28 Price Contingencies 1,686 461 2,147 21 Total Project Costs 9.705 6.884 16,589 41 58. Base cost estimates are in mid-1988 prices. Physical contingen- cies amounting to 31 of base costs are included. Price contingencies have been estimated at 151 of base costs. Annual rates of inflation used are those projected in the June 1988 Bolivia Updating Economic Memorandum.  -19- Assumed Inflation Rates (percent per annum): 1988 1989 1990 1991 Local 17 10 10 10 Foreign 8.3 3.7 3.7 3.7 Financing Plan 59. The proposed IDA credit of US$9.7 million equivalent would finance approximately 61Z of total project costs net of duties and taxes; this would cover approximately US$4.4 million of foreign costs and US$5.3 mil- lion of local costs. A PPF in the amount of US$0.75, approved in May 1988, has supported (i) preparation of the public investment program comsonent; (ii) expansion of the SISIN; (iii) expanding the Financing/Disbursement Unit in the DIP; (iv) initial studies on decentralization and the Public Sector Management Strengthening Program; (v) prtliminary survey work for INE's household surveys; and (vi) consultant services to help prepare detailed project action plans. A second PPF request for an additional US$0.25 million to complete preparation work is currently being reviewed by IDA and up to SDR .5 million of retroactive financing could be required and is reflected in the legal documents. The Government's contribution of US$1.2 million would finance all duties and taxes, a small number of incremental salaries and some survey costs for INE. Cofinancing estimated at US$0.775 million by IDB would finance the extension of ongoing work in the Tax Directorate. During negotiations, the Swiss Government committeC SWF 4 million (US$2.5 million equivalent) to cofinance public investment programming, regional planning and public sector management strengthening activities. The Government of Italy expects to provide US$2.4 million in parallel financing earmarked for pre-investment studies. The financing plan is set out belowt PROPOSED PROJECT FINANCING Swiss Italian Govt. of X IDA IDA IDB Cooperation Govt. Bolivia Total Contribution