Colombia - Public Financial Management Project

Document of The World Bank FOn OMCIL USE ONLY Report No. P-6107-Co MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$30 MILLION TC THE REPUBLIC OF COLOMBIA FOR A PUBLIC FINANCIAL MANAGEMENT PROJECT OCTOBER 21, 1993 MICROGRAPHICS Report No: P- 6107 CO Type: MOP This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not oterwise be disclosed without World Bank authorization. Currency Equivalent Currency Unit = Colombian Peso (Col $) Col$1.00 0.0012674 (May 1993) US$1.00 = Col$ 789 (May 1993) List of Acronyms and Abbreviations TUsed CGR Comptroller of the Republic DIAN Internal Revenue and Custom Directorate DNP National Planning Department GOC Government of Colombia ID Institutional Development MSA Management Service Agreement MOF Ministry of Finance POA Annual Work Program TA Technical Assistance FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY REPUBLIC OF COLOMBIA PUBLIC FINANCIAL MANAGEMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Colombia flneficiaries: Ministry of Finance National Planning Department Comptroller General's Office Executing Agencies: Ministry of Finance Comptroller General of the Republic National Planning Department Amount: US$30.0 million Terms: 20 years, including 5-year grace period, at the Bank's standard variable interest rate US$ millions Financing Plan: Local Foreign ']tal IBRD 0 30.0 30.0 Government 2.H J 2.LQ Total 0 . 0 Environmental Classification: C Economic Rate of Return: N/A Project Classification: Public Sector Management Staff Appraisal Report: 12167-CO No. IBRD 18370RI This document has a restricted distribution and may be used by r3cipieruts only in the performance of their ofilcial duties. Its contents may not otherwise be disclosed -4y ut World Bank authorization. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOP1MENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA FOR A PUBLIC FINANCIAL MANAGEMENT PROJECT 1. The following memorandum and recommendation on a proposed loan to the Republic of Colombia for US$30.0 million equivalent is submitted for your approval. The proposed loan would be repayable over 20 years, including 5 years of grace, at the Bank's standard variable interest rate and charges. The Government of Colombia would be the Borrower and the Ministry of Finance, the Comptroller General of the Republic, and the National Planning Department would be the Executing Agencies. 2. Background. In 1992, economic growth accelerated to 3.6 % and inflation dropped slightly to 25%, despite a stagnant agricultural sector, a crisis in the power sector, and increased insecurity due to political and drug-related violence. In the medium term, by maintaining prudent macroeconomic policies, continuing the pace of structural reform and efficiently allocating and using public resources -- with significant foreign exchange earnings to be generated by the newly discovered Cusiana oil fields -- the Government should be able to achieve its goal of 5% growth and keep inflation under 20%. 3. Overall public sector management in Colombia, however, has not kept up with policy reform and modernization of the economy. Accountability and transparency remain weak in much of the public sector. Mechanisms for financial management of the network of public agencies require fundamental change. Furthermore, significant earmarking has led to inefficiency and inequity that prevent distributing more evenly the benefits from recent adjustment policies as well as those contemplated by the current Administration. Reforms now affected by this bottleneck include health, education, privatization, and decentralization. 4. Complicating the above public management problems have been widespread inefficiencies in several key bureaus that neeu to be addressed to meet new 1991 Constitutional requirements as well as to facilitate decentralization initiatives. The Government of Colombia (GOC) needs to: (a) define and implement the required global tax administration strategy in the short term, to achieve a modern and efficient administration; (b) establish, within the Treasury, norms and procedures to help determine daily cash amounts to be transferred to banks where public sector entities maintain accounts; (c) design a system for controlling fund transfers; (d) solve the problem created by the absence of an integrated information system at the macro and sectoral level that complicates decision-making processes in the Ministry of Finance (MOF), the National Planning Department (DNP), and the Central Bank, including the use of information generated at the subnational level with local participation; and (e) create or improve internal control mechanisms and procedures within most public entities to supply the central levels with basic data (an adequate information system providing up-to-date information about projects at the national or subnational levels and a corresponding evaluation system would be especially beneficial). This would lead to the type of information required to improve the decision-making process, including an aggregated information flow to the Presidency of the Republic on how policies are being implemented and whether they are beneficial. 2 5. Government efforts to deal with many of these constraints are underway but much more remains to be done. In the early 1990s, a comprehensive structural reform program was launched to improve resource allocation and use. In support of its adjustment program, in 1991 the GOC formulated a four-year Development Plan based on the assumption that governance will also be improved as a consequence of decentralization and community participation. The new Constitution (1991) has also provided a framework for reform aimed at improving the management of public resources, establishing the basis for a modern financial administration based on principles of efficiency and effectiveness, and including equity and environmental protection considerations. Other major efforts include establishing: (a) the Office of the General Accountant within MOF, responsible for consolidating the national budget and developing financial statements based on accounting plans for every government entity (formerly carried out by the Comptroller General of the Republic (CGR); and (b) internal control units under the responsibility of the sectoral entities themselves with the responsibility of scrutinizing the effective use of public funds in every public entity. In 1992, the current Administration initiated the citical process of streamlining the complex organizational structure endemic to all public sector entities. 6. To accommodate all of the above efforts into a single, integrated information system, all of the corresponding subsystems must be self-contained and, additionally, their flows or outputs must be interconnected so that all macroeconomic and public financial agents can access information at the level of aggregation they need. The Government has asked the Bank to assist in a government-wide effort to facilitate the integration of the public financial management subsystems, and put in place procedures to help ensure that information flows are accurate, timely, and increasingly credible and useful. The resulting software network envisaged would service subsystems within MOF and DNP as well as sectors where functions are interrelated. MOF's Informatics Unit would contribute to the strengthening of its counterpart units in every MOF Directorate involved in project implementation. Interinstitutional relationships would be defined and enforced to establish that this central unit would have a quality control function. 7. Proiect Objective. The project objective is to improve the management of public finances in Colombia, including the spectrum of functions from revenue generation to the evaluation of public policies. This includes defining, institutionalizing, and implementing accountability principles and procedures in key national entities and in pilot departmental and municipal entities in the medium term (a seven-year period). The intention is to replicate improvements under the project throughout the public administration in the longer-term, including a possible subsequent Bank-supported operation. 8. Project Description. The project comprises five components: (a) Resource Mobilization (US$34.8 million); (b) Macroprogramming (US$1.3 million); (c) Expenditures Control Management (US$9.3 million); (d) Government Management Control and Public Policy Evaluation (US$4.5 million); and (e) Institutional Strengthening (US$5.2 million). Within these five components, the proposed project would help design the architecture of the integrated information system to modernize the above functions and help prepare the corresponding norms, regulations, procedures, and related manuals. In addition, the project would help install these procedures with the required physical and intellectual capabilities in key selected national entities. 3 9. Cost and Financing. The total cost of the project is US$58.0 million. The Bank would finance 100% of foreign exchange expenditures (US$30.0 million or 52% of total project cost) and the GOC would firance the balance or 100% of local costs (US$28.0 m dion equivalent). 10. Implementation Arrangements. The proposed project would be organized into three separate subprojects with complementary objectives but independent implementing arrangements and budgets. MOF would be responsible for the Resource Mobilization, Expenditures Management, and part of the Macromodelling and Institutional Development components. DNP would be responsible for Macroeconomic Modelling and Public Management Control and Evaluation of Public Policies. External Control would be the responsibility of CGR. Every entity would have a small implementation unit staffed with an organization specialist and an executive secretary. A coordination committee would be set up to ensure coordination and supervision of overall implementation. A Management Service Agreement (MSA) will be signed with a specialized organization to be selected. However, the direct payment option would be used by the authorities for about one-third of total project proceeds. 11. Sustainability. Bank experience with institutional development (ID) has shown that sustainability requires a clear commitment by the government to the project's objectives. In this case, the best long-term guarantee of that commitment is the Colombian public's growing demand for honest and responsive government, as illustrated by the increasing importance given to accountability in the new Constitution, and in the subsequent legislation under preparation. Recently, there has been a series of criminal suits involving public officials accused of nismanaging public funds. Elected officials now wish to be perceived as effective in delivering key public services. Finally, the project represents the first integrated approach to public sector management in Colombia. These developments, together with GOC's strong commitment of the project, would favor its sustainability. 12. Lessons from Previous Bank Involvement. Technical assistance (TA) components have been included in the majority of recent investment loans in Colombia; however, they have received low priority compared to other project components. In some cases, inadequate attention was given to preparation and supervision. And where TA was provided to improve financial management, it often failed to take sufficient account of the overall framework for public financial management, and ultimately proved unsustainable (e.g., the Barranquilla Water Supply Project. Ln. 2637-CO). The Central Operations Department suggests TA design should be preceded by careful analysis of all institutional fa-tors, including Borrower commitment. The proposed project concept was developed jointly by the Bank ard Borrower and objectives enjoy full support of GOC at the highest levels. Other Bank experience shows the need for simplicity in project design, again with full Borrower involvement, with verifiable indicators of performance. All of the above were incorporated in the proposed project. Additionally, lessons from public expenditure reviews suggest that institutional and procedural reforms and the approach taken should be addressed more systematically. A recent operation in Bolivia (Public Financial Management I (completed) and H (under implementation) confirm that well defined and enforceable processes are critical to sustain improvements in public expenditures. Elements of this design were built into the proposed loan as well. 13. Rationale for Bank Involvement. The proposed operation was included in the February 1993 Country Assistance Strategy (CAS) as part of the Bank's program for Colombia and will be reaffirmed in the CAS to be presented to the Board this Calendar Year. The main 4 thrust of Bank assistance to Colombia from the mid-1980s has been to help establish a policy environment supportive of growth led by the private sector. Consolidating the reforms in the trade and financial sectors remains a key objective, but the acceleration of structural reforms in 1990/91 has called for a shift in the Bank's agenda. Restoring confidence in public sector capacity to handle the country's critical issues by better management of public finances-from revenue generation to the evaluation of public policies-is an urgent need and a key ingredient to all future reforms undertaken. GOC has a clear sense of these priorities and has outlined a coherent set of sectoral policies and programs to address them, in line with implementing the public sector reforms embodied in the new 1991 Constitution. Making these changes operational represents a major challenge for GOC. Success will hinge on GOC's ability to overhaul its weak line agencies, manage the ongoing decentralization process, and enlist private participation in the delivery of public services. Improved resource allocation and the abundance of foreign exchange stemming from capital inflows and higher oil revenues offer Colombia the -neans to reach a higher growth path than in the past. In parallel, GOC's development program aims at ensuring that the poor participate in the benefits of a growing economy. 14. Agreements Reached. During Negotiations, agreements were reached with GOC that: (a) a complete POA would be provided to the Bank as a condition of effectiveness; (b) a coordination committee would be created and terms of reference defined, also as a condition of effectiveness; (c) the Accountant General law would be passed by Congress, the Accountant would be designated and his office organized and completely staffed, as conditions of disbursement of the relevant component; (d) a mid-term review will be conducted to assess progress against selected performance indicators ano to make necessary adjustments to complete successfully the remaining phases of the program; (e) a two-step bidding procedure will be used; (f) Resolution from the National Council for Social and Economic Policy would be signed as a condition of disbursement of the corresponding component; and (g) annual reviews will take place before the following year's POA can be approved by the Bank. 15. Environmental Protection. The proposed project should be rated "C." It is expected to enhance the Comptroller General's Office in ensuring that environmental protection norms are enforced while implementing public sector investments. 16. Progmm_Objectives Category. This is a public sector management project. 17. Benefits and-Risks. Improvement of the public financial management is a sine qua non for improving and ultimately modernizing all other aspects of the public administration in Colombia. Public revenues could be increased by as much as 30% by the year 2000 as a result of both better tax collection and enhanced efficiency of public resources programming and spending. Rigor in public financial management would also help create procedures and ultimately a new accountability culture, as well as reestablish public confidence in government and public administration. This project would contribute to creating an overall institutional environment conducive to private sector initiatives and development. Risks include the inherent instability of the civil service, the weak capacity of institutions and human resources, especially at local levels, as well as political changes (August 1994) that could affect current national commitment. These risks would be ameliorated through the envisaged training and capacity building which is an inherent part of the project. Moreover, there are incentive systems, well- trained personnel, as well a competitive salary scale within several of the agencies targeted for assistance under the project (DIAN, DNP, and increasingly in the Ministry of Finance). Also, greater public awareness and pressure indicate that the next administration would find it difficult 5 to reduce significantly the level of commitment that prevailed at the time GOC designed the proposed project. Moreover, all of the interventions are in support of changes in public financial management embodied in the 1991 Constitution and would be vital to the cr4dibility of any subsequent government. 18. Recommendation. I am satisfied that the proposed project would comply with the articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Lewis T. Preston President Attachments October 21, 1993 Schedule A COLOMBIA Public Financial Management Project Estimated Cost and Financing Plan Estimated Cost by Component Local FPg T2tal % Forein % Ba Exchance cos --US$ million-- Resource Mobilization 16.1 18.7 34.8 54 63 Macroeconomic Modelling 0.9 0.4 1.3 33 2 Expenditures Management 4.3 5.0 9.3 54 17 Control/Public Policy Evaluation 2.9 1.6 4.5 35 8 Institutional Development 2.4 2.8 5.2 54 9 Base Costs 26.6 28.5 55.2 52 100 Physical Contingencies 1.3 1.4 2.7 3 5 Total Project Costs 28.0 30.0 58.0 52 Financing Plan Local Foreign Total --(US$ millions) IBRD 0 30.0 30.0 GOC 28.0 0 28.0 Total 28.0 30.0 58.0 Schedule B .0QLOMmiA PUBLIC FINANCIAL MANAGEMENT PROJECT SUMMARY OF PROCUREMENT ARRANGEMENTS (US$ million equivalent) BROJECT INPU PROCUREMENT METHODS ICB LCB OTHER N.B.F. TOTAL COST US$ Millions Consultants Services - - 4.2 20.4 24.6 (4.2) (0.0) (4.2) Training - - 2.5 3.6 6.1 (2.5)* (0.0) (2.5) Equiptent 21.2 - 0.3 - 21.5 (21.2) (0.0) (21.5) Procurement Agent/ Arrangements - - 1.8 3.9 5.7 (1.8) (0.0) (1.8) Tptd- (Including contingencies) 21.2 - 8.8 27.9 57.9 (21.2) (8.8) (0.0) (30.0) INalff: Figures in parenthesis Bank Financing N.B.F.: Not Bank Financed * Scholarship and relevant expenditures (estimated at US$0.96 million) not subject to procurement. ESTIMATED SCHEDULE OF DISBURSEMENTS (US$ million) IBRD FY 1994 1995 1996 1997 1998 1999 Annual 2.9 5.1 6.2 5.8 5.5 4.5 Cummulative 2.9 8.0 14.2 20.0 25.5 30.0 Schedule C CO0IDIMBUIA PULIC FIANCIAL MANAGEMENT PROJECT Timetable of Key Project Processing Events (a) Time taken to prepare: 5 months (b) Prepared by: Government: Ministry of Finance National Department of Planning Comptroller General Office with World Bank assistance (c) First Bank Mission: January 1993 (d) Appraisal Mission: A pre-appraisal mission in May was upgraded to Appraisal (e) Date of negotiations: September 30, 1993 (f) Planned Date of Effectiveness: January 1, 1994 (g) Relevant PCRs and PPARs: Schedule D A. STATEMENT OF BANK LOANS & DA CREDITS IN COLOMBIA (as of March 30, 1993) Amount (less Ln/Cr Fiscal cancellations) Undis- Number Year Borrower Purpose Bank IDA bursed 113 Loans and one IDA Credit fully disbursed 4,822.51 23.48 2449 1984 EPM Rio Grande Multipurp 164.50 29.48 2470 1985 EMC Cucuta Water/Sew 18.80 6.61 2512 1985 EAAS Bogota Water IV *129.00 24.12 2611 1986 Colombia Public Health 17.55 1.40 2634 198 EEE.S Sqgota Dist iI 131.11 23.03 2667 1986 HIMAT Irrtlation II 114.00 52.93 2668 1986 Cavecinales Rural Transport 62.00 0.34 2829 1987 Fondo Vial 2nd Ntl Hwy Sector 180.30 3.03 2909 1988 Caja Agraria Caja Agraria 16.00 8.58 2961 1988 BCH WS & Waste Sector 150.00 112.87 3010 1989 Colombia Ed Sector 100.00 58.07 3025 1989 B. de la Rep. 5th Sm Med Entp 80.00 4.92 3113 1990 Colombia Sm-Scale Irrig 78.20 74.58 3157 1990 Fondo Vial Rural Ads Sector 11 55.00 32.21 3201 .1990 Colombia Comm Child Care & Nu 24.00 18.09 3250 1991 Colombia Rural Dev Invest 75.00 54.84 3278 (Si 1991 Colombia Public Sector Reform 304.00 101.85 3321 1991 Colombia Indust Restruct 200.00 200.00 3336 1991 Colombia Munic Devt 60.00 45.58 3449 1992 Colombia IFI-Restra.&Ovst. 100.00 100.00 3453 1992 Colombia Third National Roads 266.00 266.00 3575 1993 Colombia Agricultural Credit 250.00 250.00 2,574.16 1,468.53 TOTAL 7,398.67 23.48 Of which repaid 3,361.08 10.41 Total held by Bank & IDA 4,035.59 13.07 Amount sold 50.99 Of which repaid 50.99 Total undisbursed _____.__ B STATEMENT OF fFC INVESTMENTS (as of Marc& 1, 1993) Loan Equity Total (in Millions of US Dolars) Total Gross Commitments 394.43 63.90 458.33 Less cancellations, terminations, exchange adjustments, repayments, writeoffs, and sales 268.55 38.11 294.66 Total Commitments now held by IFC 135.88 27.78 163.66 Total Undisbursed IFC 21.13 11.16 32.29 A._IBRO 1837OR A < . COLOMBIA vtNtzUeLA ATLANTlç, CUAO&) <. iBRAZIL ,PANAMA (lGNN ORAE A- - -,NDER%°'"::ß "" SAN ~ ARAUCA E EUL CASANARE , l V C HA DA 4n4 c M E T A G GUA N A G U A V i A R E^ C A QU(E TA vA U P E S 0 E C U A D 0 R 0 50 MLS100 150 Urban Potion of Center Towns, Elevation$ (mtrsþ 5,000.00 Person o 50 100 150 200 250 2,0,003ß0 KILOMETERS M.001 Ao00 AMAZONAS 1WWB R A Z I L * National capital , " o Cities and Towns with Population Over 40,000 Main Highways 7ER Rivers P E Depar~nent oundarles ---- international Boundaries 4* mp17ULY1 & _JULY 1993