Colombia - Public Sector Reform Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14882 IMPLEMENTATION COMPLETION REPORT COLOMBIA PUBLIC SECTOR REFORM LOAN (LOAN 3278-CO) JULY 24, 1995 Public Sector Modernization and Private Sector Development Division Country Department III Latin America and the Caribbean Region This document has a restricted distribution and may be used bv recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS (As of December 31, 1994) Currency Unit: Pesos (Col$) US$1: Col$831.27 FISCAL YEAR OF BORROWER January I to December 31 ABBREVIATIONS AND ACRONYALM, Apertura Economic and Trade Liberalization Program CONFIS National Council for Economic and Fiscal Policy (Consejo Nacional de Politica Econ6mica y Fiscal) CONPES National Council for Economic and Social Policy (Consejo Nacional de Politica Econ6mica y Social) CORELCA Atlantic Coast Power Corporation (Corporaci6n Electrica de la Costa Atlantica) CVC Regional Corporation of the Cauca Valley (Corporaci6n Regional del Valle del Cauca) DNP National Planning Department (Departamento Nacional de Planeaci6n) EMP Economic Modernization Program FERROVIAS National Railroad Company (Empresa Nacional de Vias Ferreas) FVN National Roads Fund (Fondo Vial Nacional) ICEL Colombian Institute of Power (Instituto Colombiano de Energia Electrica) ICR Implementation Completion Report ICT National Construction and Mortgage Institute INV National Roads Institute (Instituto Nacional de Vias) IDB Interamenrcan Development Bank IDEMA Institute for Agricultural Marketing (Instituto de Mercadeo Agropecuario) INURBE National Institute for Urban Reform and Low-income Housing (Instituto Nacional de Vivienda de Interes Social y Reforma Urbana) ISA Electric Interconnection S.A (Interconexi6n Electrica S.A.) HIMAT Colombian Institute of Hydrology, Metereology and Land Preparation (Instituto Colombiano de Hidrologia, Metereologia y Adecuaci6n de Tierras. Currently Instituto Nacional de Adecuaci6n de Tierras -INAT-) PPES Performance Plan and Evaluation System POs Private Operators PSRL Public Sector Reform Loan PSRP Public Sector Refonn Program RPSs Regional Port Societies (Sociedades Portuarias Regionales) SP Superintendency of Ports (Superintendencia de Puertos) TELECOM National Company of Telecommunications (Empresa Nacional de Telecomunicaciones)  FOR OFFICIAL USE ONLY Table of Contents Page Preface.i Evaluation Summary . .............................................................. ii Part I. Project Implementation Assessment.1 Statement/Evaluation Objectives ...............................................................1 PSRL Objectives . ..............................................................1 Background ..............................................................1 Macroeconomic framework ............................................................ 2 Economic Modernization Program (EMP) ..................................2.... Statement of Objectives .............................................................. 2 PSRL Amendments and Modifications . ......................................... 3 Achievement of Objectives .............................................................. 3 Ports Sector Reform ................................... ........................... 3 Shipping Sector Reform .............................................................. 4 Low-income Housing Reform ......................................................... 4 Agricultural Marketing Reform ....................................................... 5 The Performance Planning and Evaluation System (PPES) .............. 5 Privatization of Public Banks 5 Macroeconomic Performance. 5 Major Factors Affecting the Project ....................................................... 6 Project Sustainability ........................................................ 6 Bank Performance. 7 Borrower Performance. 8 Assessment of Outcome. 8 Key Lessons Learned ........................................................ 9 Future Operation ........................................................ 10 Ths docunent has a restricted distribution and may be used by recipients only in the perfornance of their |[offcial duties. Its contents may not otherwise be disclosed wiLhout World Bank authorization.  Part I1. Statistical Annexes .................................................................................... Table 1.Summary of Assessments .................................................1...... 1 Table 2. Related Bank Loans ......................... .............................. 13 Table 3. Project Timetable .................... ................................... 13 Table 4. Loan Disbursements: Cumulative Estimated and Actual ................. 14 Table 5. Key Indicators for Project Implementation ..................................... 14 Table 6. Key Indicator for Project Operation ............................................... 14 Table 7. Studies Included in Project ....................................................... 15 Table 8A. Project Costs ....................................................... 19 Table 8B. Project Financing ...................................................... 19 Table 9. Economic Costs and Benefits ...................................................... 19 Table 10. Status of Legal Covenants ...................................................... 20 Table 11. Compliance with Operational Manual Statements ........... ............. 21 Table 12. Bank Resources: Staff Inputs ....................................................... 21 Table 13. Bank Resources: Missions ....................................................... 21 Annexes 1. Economic Modernization Program Macroeconomic Targets ......... .......... 22 2. Government Revenues from Privatization and Concessions ..................... 23 3. Macroeconomic Results .............................. .............................. 24 4. Performance Plan Briefings ........................................................... 25 Appendices Memorandum on progress in implementing the project for the release second tranche ...................................................... Appendix A Memorandum on progress in implementing the project. for the release of the third tranche ...................................................... Appendix B Borrower contribution to the ICR * Final Evaluation Report prepared by the Ministry of Finance .................... Appendix C(i) * Final Evaluation Report on the Technical Assistance ComponentC prepared by the National Planning Department ........................ ............... Appendix C(ii)  i Preface This is the Implementation Completion Report (ICR) for the Colombia Public Sector Reform Loan (3278-CO). The US$304 million equivalent Colombia Public Sector Reform Loan (PSRL) was approved on December 28, 1990, and made effective on March 28, 1991 Of the total Loan amount of US$304 million, disbursements in the amount of US$303,793,307.06 had been made as of June 30, 1995. The Loan has not been closed as of the issuance of this TCR. The last disbursement, corresponding to a single previously authorized expenditure of approximately US$205,000, is expected to take place and the Loan is expected to be fully disbursed not later than August 31, 1995. At that time, any remaining balance will be canceled and the loan closed. The first tranche, released upon effectiveness, was fully disbursed 3/4/91. Subsequent tranches were released on 5/28/92 (second tranche) and on 12/23/93 (third tranche). Cofinancing for the project was provided by IDB in an amount of US$305 million and by a US$1 million equivalent Japanese Grant Facility. The ICR was prepared by Felipe Saez and Natalia G6mez of the Colombia Resident Mission, with statistical annexes by Adrienne Taptich, and was reviewed by Krishna Challa, LA3PS Chief, and Robert Crown, LA3 Project Advisor. The Borrower provided comments that are included as appendices to the ICR. The Borrower contributed to preparation of the ICR by contributing views reflected in the mission's aide-memoires, preparing its own evaluation of the project's execution, and commenting on the draft ICR.  I  i. PUBLIC SECTOR REFORM LOAN (Loan 3278 - CO) COLOMBIA Evaluation summary 1. Despite growth performance of about 3.41% during the 80's, the Colombian economy experienced low and frequently negative productivity growth in most sectors. In 1988, the economy showed signs of downturn, due to reduced international coffee prices and a deterioration in the domestic investment climate. While the Government undertook significant adjustment measures to respond to these negative developments, it also recognized the need to address longer term structural problems to move beyond stabilization and accelerate growth through structural reforms in the public, trade, and financial sectors aimed at improving efficiency of resource allocation. The Colombian Government consequently launched a medium term Economic Modernization Program (EMP) aimed at increasing long term productivity and accelerate growth of the economy in 1990. 2. The objective of the Public Sector Reform Loan (PSRL) was to support both the macroeconomic framework of the EMP and the public sector reforms envisaged under the program. The concentration of the Bank's conditionality on the public sector was deemed strategic to ensure the sustainability of the EMP, to enable the Government to meet its macroeconomic objectives, and to promote a supply response by the private sector to the new incentive framework. In addition to the assistance provided through the PSRL, the Bank supported the implementation of the EMP through investment lending operations, technical ?.--t^ance, and economic and sector work in the trade, agricultural, and financial sectors. Project Obiectives 3. The main objectives of the Public Sector Reform Program (PSRP) were twofold. The PSRP sought to improve productivity in the use of public sector assets through: (a) the establishment of a performance planning and evaluation system aimed at modernizing the management of decentralized public sector entities, and (b) the privatization of public assets in the financial and industrial sector whose continued holding by the public sector was no longer justified on strategic or policy grounds. The program also aimed to improve efficiency in resource allocation and use in sectors traditionally dominated by the public sector to promote a supply response to the Economic Modernization Program (EMP) through (a) the elimination of public or quasi-public monopolies in the railways, ports, shipping, low-income housing and agricultural marketing sectors, and (b) their replacement with incentive structures promoting freedom of entry and a competitive sector environment. 4. The $304 million PSRL had two components: (i) a policy-based, quick-disbursing component divided into three tranches of US$100 million each; and (ii) a technical assistance component with an original allocation of $4 million. A US$300 million parallel IDB loan also  iii supported the policy-based component. The technical assistance component was cofinanced by a US$5 million IDB T.A. Cooperation Facility and a US$1 million equivalent Japanese Grant Facility. The loan has not been closed as of the issuance of this report. As of June 30, 1995, US$303.8 million out of an originally approved amount of US$ 304 million had been disbursed. The loan was not closed in response to a request by the Colombian Government to accommodate an investment banking contract for an innovative Build/Operate/Transfer (BOT) infrastructure scheme. After a US$205,000 disbursement for this contract expected not later than August 31, 1995, any remaining balance would be canceled and the loan closed. Implementation ExDerience and Results 5. The objectives of the PSRP were fully met, and, in many areas -- i.e. ports, shipping and banking -- the Government exceeded the originally envisaged reform objectives. As a result of the PSRP, there has been improvement in productivity in the use of public sector assets and gains in efficiency in sectors formerly dominated by the public sector. In ports, for instance, there has been a 52% reduction in tariffs and an overall productivity increase of 60%. In shipping, the increase in participating shipping companies has resulted in a substantial increase in the quality and quantity of services available to users --operating companies in Colombia increased from 45 to 200--. In low-income housing, Inurbe tripled the annual average of housing provision as compared with ICT's performance during the last decade. These results were obtained with an increase in private and public investment in the sector of only 68% during the period 1991-94, compared with the previous 4-year period. The actions taken by the Government in the area of bank privatization radically modified the ownership structure and improved the competitive environment in the financial sector. Banco de Los Trabajadores, Banco Tequendama and Banco del Comercio were brought to the point of sale and their divestment completed between June and December 1991. The program of privatizations and concessions to the private sector contributed towards generating a fiscal surplus in 1994. In that year, the total Government intake was about US$1,800 million equivalent through public sector assets divestiture and privatization in the financial, power, gas, telecommunications, industry, tourism and coffee sectors -- and on cellular telephone, television and airport concessions, respectively (Annex 2). 6. The Government also met the loan objective of introducing the Performance Planning and Evaluation System (PPES) as an instrument to rationalize relations between the Central Government and decentralized entities. Performance plans were used to ensure adherence of public entities to sector objectives and to evaluate public sector managers performance. The performance plans were oriented to (a) pricing of sector goods and services based on economic efficiency criteria and cost effectiveness in the operation of public entities (i.e. Ecopetrol and Telecom); (b) limiting the role of the public sector to cases in which there were strong policy considerations or market failures (i.e. Inurbe, Himat, and Ferrovias), and (c) allowing free entry of the private sector in a competitive environment in those sectors where the Government decided to maintain a presence (i.e.- petroleum, telecommunications, railways and ports). About 36 public entities entered into the PPES (three times the initial target set forth under the loan). The Government's decision to expand the use of performance plans throughout the public sector required some institutional adjustments  iv 7. The loan component for providing technical assistance for the formulation and implementation of public sector reforms, was also successful. The Government's request for augmenting the amount originally assigned for technical assistance constitutes an indication of the Government's satisfaction with the demand-driven technical assistance component provided under the loan. 8. The high degree of ownership of the Gaviria administration to the PSRP led it to assign a high priority to the Program's legislative agenda and obtain its expeditious approval. Thereafter, the Government had the field relatively clear to implement the specific sector reforms. However, delivering the reforms in terms of actual institutional and regulatory changes implied a sustained and coordinated effort at all government levels. Challenges related to reform implementation should not be underestimated. For instance, the process of liquidating Colpuertos was arduous due to pressure from the unions and lack of coordination between the sector Ministry and Finance in defining the severance and pension costs, and the process of opening of the telecommunications sector to competition was aborted as a result of a one week strike by the workers of the long distance public monopoly, Telecom 9. The Bank played a very active role in the process of defining the components and reform objectives for the program. During implementation, the Bank provided periodic inputs through discussions on the various technical assistance initiatives proposed for financing both to the Bank and IDB. There was a cooperative and highly constructive relationship with the IDB. Summary of Findin2s, Future Operations and Key Lessons Learned 10. An assessment of the results derived from the various reform initiatives show that there were substantial positive results on the ground that have had a significant impact in the performance of the public sector and have benefited the private sector in Colombia. The performance planning and evaluation system has led to a culture of improved planning and accountability in the main public sector enterprises. The reforms in ports and shipping have eliminated highly inefficient monopolies and generated a new field for private sector participation, resulting in improved supply and quality of services at lower prices that have benefited the Colombian economy as a whole. The changes in low income housing led to a more transparent and equitable method for distributing government subsidies, improved leveraging of public resources through contributions of beneficiaries and the private financial sector, and allowing participation by the private sector in the provision of housing in a market segment that had been closed to competition. In the area of agricultural marketing, despite partial backtracking, there were significant benefits derived from the opening of the import market of selected commodities to the private sector and the attempts to rationalize public sector intervention in the sector. 11. The main lessons learned from the Colombia Public Sector Reform Project are: * The key ingredient for the success of an adjustment program as ambitious as the PSRP is a high degree of ownership and priority assigned to it by the authorities and their willingness to invest their political capital and technical capability in pursuing the program's initiatives. * The Bank should minimize rigidities in loan conditionality by emphasizing subtance over specific modalities and being open to loan restructuring if needed. Policy objectives pursued  v by the loan were defined in substantive terms with few prescriptions on means of implementation, and flexibility was built into the timing of reforms through floating conditions and identification of entities for performance plans by defining selection criteria. Providing a mechanism in the project design for countries to take advantage of regional expertise is a useful tool for implementation. A key analytical basis for the design of the reforms was expertise derived from similar reform experiences that were taking place or had been carried out in other Latin American countries. * Access to demand-based technical assistance funds facilitated Government success in exceeding expectations in terms of scope and depth of reforms in most sectors. Under the PSRL, the Bank defined a very general scope for the activities eligible for financing and defined on a case by case basis the suitability of the Government's requests based on their relevance to the PSRP. This demand-based approach proved highly effective in filling the technical gaps faced by the authorities in the formulation and implementation of the PSRP.  PUBLIC SECTOR REFORM LOAN (Loan 3278-CO) IMPLEMENTATION COMPLETION REPORT Statement/Evaluation of Objectives 1. PSRL Objectives. The Public Sector Reform Loan (PSRL) was an adjustment operation aimed at supporting the Govemment's Public Sector Reform Program (PSRP). The main objectives of the PSRP were: (a) to improve productivity in the use of public sector assets through: (i) the establishment of a performance planning and evaluation system aimed at modernizing the management of decentralized public sector entities, and (ii) the privatization of public assets in the financial and industrial sector whose continued holding by the public sector was no longer justified on strategic or policy grounds; and (b) to improve efficiency in resource allocation and use in sectors traditionally dominated by the public sector to promote a supply response to the Economic Modernization Program (EMP) through (i) the elimination of public or quasi-public monopolies in the railways, ports, shipping, low-income housing and agricultural marketing sectors, and (ii) their replacement with incentive structures promoting freedom of entry and a competitive sector environment. 2. The US$304 million PSRL had two components: a policy-based quick disbursing component divided into three tranches of US$100 million each; and a technical assistance component with an original allocation of US$4 million. A US$300 million parallel IDB loan also supported the policy-based component. The technical assistance component was cofinanced by a US$5 million IDB T.A. Cooperation Facility and a US$1 million equivalent Japanese Grant Facility. 3. The loan has not been closed as of issuance of this report. It is expected to be closed August 31, 1995. As of June 30, 1995, US$303.8 million had been disbursed. The loan amount originally approved was US$304 million. It was not closed in response to a request by the Colombian Government in order to accomodate an investment banking contract to assist the Government in developing and marketing a Build/Operate/Transfer (BOT) scheme for the second runway of the Bogota airport. Upon signing of the BOT contract, a success fee of US$205,000 is to be paid the firm. After the US$205,000 disbursement expected not later than August 31, 1995, any remaining balance would be cancelled and the loan closed. The authorization of the LAC Vice President for retention payment was given based on the good progress and performance on the contract, the innovativeness of the scheme and potential to serve as a useful model internationally, the strong interest of Colombian authorities in gaining extension of the deadline of the success fee payment as the loan was the only available source of financing, and the desire for the Bank to be responsive to the needs of the Government on a highly successful venture with the private sector. The authorization was consistent with OP 13.30 (para. 4). 4. Background. The Colombian Government launched the medium term Economic Modemization Program (EMP) to increase long term productivity and accelerate growth of the economy. Despite growth performance of about 3.41% during the last decade, the Colombian economy experienced low and frequently negative productivity growth in most sectors. In 1988,  2 the economy showed signs of a downturn, with growth slowing to 3.7%, inflation increasing to 28% per annum, and the current account and fiscal deficits increasing to I and 2 per cent, respectively. The underlying difficulties faced by the economy were further accentuated in mid 1989 by two adverse developments. First, the demise of the International Coffee Agreement reduced international coffee prices by half Second, the assassination of the leading presidential candidate by the drug Mafia triggered a generalized conflict with negative effects on the investment climate and on fiscal balances due to expenditures on increased security. While the Government undertook significant adjustment measures to respond to the shocks, it also recognized the need to address the longer term structural problems to move beyond stabilization and seek accelerated growth through improved efficiency of resource allocation and use. The EMP was approved by the highest policy making body in Colombia in February 1990. The Gaviria administration, which took office in August 1990, reaffirmed the Government's commitment to the objectives of the EMP, publicly announcing its intention to implement reforms more aggressively. 5. Macroeconomic Framework. The EMP included macroeconomic policies designed to increase productivity, raise economic growth to about 5-6% annually, slow inflation to below 20%, and reduce poverty. The structural reforms were underpinned by a medium term macroeconomic framework based on continued pursuit of prudent macroeconomic policies and implementation of an active foreign exchange policy. (Annexes I and IA). The objectives and targets pursued under the framework were communicated by the Government to the Bank and monitored jointly by the Bank and INMF under semi-annual enhanced Article IV Consultations. 6. Economic Modernization Program. In addition to the macroeconomic objectives and targets referred above, the EMP proposed a set of structural reforms in the public, trade and financial sectors. The centerpiece of the EMP was the trade policy reform program which, in the first phase, would seek elimination of quantitative restrictions and their replacement with equivalent tariff protection and, in the second phase, would reduce the level and dispersion of tariffs. In addition, the EMIP included the PSRP and complementary financial sector and industrial restructuring policies.. 7. Bank Strategy. In addition to the assistance provided through the PSRL, the Bank supported the implementation of the EMP through investment lending operations, technical assistance and economic and sector work in the trade, agricultural and financial sectors. An industrial restructuring and development project and a project to support privatization and restructuring of the industrial development bank (IFI), were approved to assist in guaranteeing an adequate private sector supply response. Proposed lending operations and sector work in the infrastructure sector, i.e. power, transport, water supply sanitation, were targeted at improving efficiency in public investments in these sectors. 8. Statement of Objectives. The objectives of the PSRL were to support both the macroeconomic framework of the EMP and the reforms envisaged under it for the public sector. Although the PSRL did not contain specific conditionality on trade policy, the Bank monitored progress in the trade reform under a parallel track. By the time of Board approval of the PSRL, the Gaviria administration had accelerated the implementation of the original trade reform targets envisaged under the EMP. The concentration of the Bank's conditionality on the public sector was deemed strategic to ensure the sustainability of the EMP, both in terms of enabling the  3 Government to meet its macroeconomic objectives as well as ensuring an adequate supply response by the private sector to the new incentive framework. The involvement in public sector reforn -at the time, the least developed component of the EMP- enabled the Bank to assist effectively in designing the priority objectives of the PSRP. 9. PSRL Amendments and Modifications. There were no changes introduced to the policy-based conditionality included in the PSRP. The technical assistance component was amended in the early stages of project implementation to ensure its responsiveness to the demands by the Government in the formulation and implementation of public sector reforms. The amendment expanded the scope of activities financed under the Loan by making eligible for inclusion any activity which, in the Bank's reasonable opinion, would further the overall objectives of the PSRP. The closing date was extended twice. The first extension up to December 31, 1993 was required to meet delays related to the fulfillment of policy conditionality. The loan was extended a second time until December 31, 1994, to enable the government to complete technical assistance disbursements that were deemed critical to conclude public sector related reforms. This second extension was derived from a request by the government to increase by US$3 million the technical assistance component, leading to reassignment of the amount from the third tranche of the quick disbursing component of the Loan. Achievement of Obeectives 10. The objectives of the PSRP were fully met, and, in many areas, i.e. ports, shipping and banking, the Government exceeded the originally envisaged reform objectives. As a result of the PSRP, there has been substantial improvement in productivity in the use of public sector assets and gains in efficiency in sectors which were formerly dominated by the public sector. In ports, for instance, there has been a 52% reduction in tariffs and an overall productivity increase of 60%. In shipping, the increase in participating shipping companies has resulted in a substantial increase in the quality and quantity of services available to users --operating companies in Colombia increased from 45 to 200. In low-income housing, the National Institute for Urban Reform and Low-Income Housing (TNURBE) tripled the annual average of housing provision as compared with ICT's performance during the last decade. These results were obtained with an increase in private and public investment in the sector of only 68% during the period 1991-94, compared with the previous 4-year period. The program of privatizations and concessions to the private sector contributed towards generating a fiscal surplus in 1994. In that year, the total Government intake was about US$1,800 million equivalent through public sector assets divestiture and privatization in the financial, power, gas, telecommunications, industry, tourism and coffee sectors -- and on cellular telephone, television and airport concessions, respectively (Annex 2). 11. A secondary objective of the loan, providing assistance for the formulation and implementation of public sector reforms, was also fully successful. The Government's request for augmenting the amount originally assigned for technical assistance constitutes a clear indication of the Government's satisfaction with the demand driven technical assistance component provided under the loan. 12. Port Sector Reform The Government carried out a far reaching restructuring of its port sector, more ambitious than the policy objectives under the loan. An institutional and regulatory  4 framework for the port sector was established that allows free competition among public and private operators, including a uniform tariff regime for private sector operators, a uniform compensation scheme for the use of public resources and facilities, and a transparent system to grant licenses to port investors and operators. The new regulatory framework permitted a clear division of responsibilities and functions between the (a) Superintendency of Ports (SPs), responsible for sector planning and regulation, granting concessions and rights of use to private investors/operators, setting infrastructure use tariffs, and ensuring a competitive environment; (b) Regional Port Societies (RPSs), responsible for the administration and maintenance of public port facilities, and (c) Private Operators (POs), responsible for the stevedoring, loading, unloading, transferring, pilotage, tugging and vessel handling functions. The new port institutional framework was fully operational in the four main public port terminals (Cartagena, Barranquilla, Santa Marta and Buenaventura) by third tranche review. 13. The success in setting and implementing the port reform stems from the decisive liquidation of Colpuertos. Colpuertos' performance plan focused on inter-governmental coordination to ensure the timely liquidation of the company. The process of liquidating Colpuertos was more costly and arduous than expected, due to difficulties in dealing with labor unions and lack of coordination among the authorities involved in the process. Even so, the replacement of Colpuertos' operators did not generate major disruptions in the handling of import/export traffic. By now, there are clear indications of significant improvements in efficiency and cost savings in port operations. 14. Shipping Sector Reform. The Government undertook major reforms towards the liberalization of its shipping market that exceeded the tranche conditionality. The reserve quota system was fully eliminated and the free access of foreign vessels to Colombian ports was permitted, by virtue of Decree 2327 of October 1991. This liberalization process brought substantial improvements in the supply and quality of shipping services. The number of companies operating in Colombia increased from 45 to 200. The pricing of shipping services in the Mexico/USA corridor decreased between 30-35%, while rates to Europe remained constant, and a slight increase was shown in the routes to Japan. This result was explained by the continued dominant role of shipping alliances on the routes to Europe and Japan. Finally, all freight remittance ceilings for foreign shipping companies were eliminated through Law 49 of 1990; a tax withholding rate of 12% of freight receipts was established as the sole tax liability for these companies. 15. Low Income Housing Reform. In early 1991, the Government obtained legislative approval (Law 3) for the liquidation of the National Construction and Mortgage Institute (ICT), the public monopoly for the provision and financing of low-income housing. INURBE, ICT's legal successor, was stripped of ICT's direct building and financing functions. INURBE was assigned the sole responsibility of administering the housing subsidy and the provision of technical assistance to municipal and housing associations. Under the new sector framework, the Government replaced the subsidized housing loans with up-front cash grants to eligible low- income beneficiaries (31.217 subsidies were awarded during 1991). The housing subsidy was adequately targeted (66% of subsidies were awarded to family groups with an aggregate monthly income less than US$200 to finance housing units costing less than US$2.000). The financial sector's response in providing the matching financing was positive. During the first eight months of implementation of this policy, 398 housing projects with a total of 40,000 units were registered  5 at INURBE. The previous financing scheme for low-income housing based on forced investments by the private sector was completely dismantled. The housing subsidy was mainly financed from fiscal revenues. 16. Agricultural Marketing Reform. The Government undertook a far reaching reform in agricultural trade, aimed at enabling market forces to play a more determinant role in the pricing of agricultural products. In early 1991, through Law 7, the import monopoly of the Institute for Agricultural Marketing (IDEMA) on key agricultural products, as well as the system of import quotas managed by the Ministry of Agriculture, were terminated. A tariff-based protection system replaced the highly discretionary protection system, combining (a) a free-import regime based on price bands for some primary products (i.e. wheat, barley, rice, maize), their substitutes or derived products (about 60 customs positions), and (b) a free-import regime with fixed ad valorem tariffs ranging from 0 to 35% on all other agricultural products. The private sector rapidly assumed an active role in agricultural marketing. Faced with demands from domestic producers for protection for their products, the Government sought to respond in a way that did not undermine the core of the reforms. Nevertheless, the Government issued Law 101 at end-1993, which increased IDEMA's intervention in agricultural trade. 17. The Performance Planning and Evaluation System (PPES).Preparing, negotiating and monitoring performance plans absorbed most of the staff and resources of the Consejo Nacional de Politica Economica y Fiscal (CONFIS), severly limiting its fiscal policy formulation role. In addition, CONFIS's role in formulating performance plans undermined the control of the Ministries in setting sector policies. As a result, in March 1993 CONFIS transferred responsibility in the preparation and monitoring of performance plans to the Ministries, retaining authority to define policies applicable to performance plans, to oversee their implementation and evaluation, and to directly manage performance plans with entities that had special fiscal or policy significance , such as Ecopetrol, Telecom, Idema and Colpuertos (For detail on performance plans by instituion, see Annex 4). 18. Privatization of Public Banks. Government actions in this area went beyond loan condition requirements. The actions taken by the Government in the area of bank privatization radically modified the ownership structure and improved the competitive environment in the financial sector. Banco de Los Trabajadores, Banco Tequendama and Banco del Comercio were brought to the point of sale and their divestment completed between June and December 1991. The first two Banks were sold to foreign investors following a competitive bidding process, at a price 50% above the estimated commercial value, and 1.6 and 3 times their book value, respectively. In the case of Banco del Comercio, 71% was sold to a domestic investor through a competitive bidding process, and the remaining shares sold through private offerings and the stock market. This Bank was sold at 161% its estimated commercial value and 2.9 times its book value. Banco de Colombia and Banco del Estado were the only two nationalized banks remaining under state control by third tranche release. Banco de Colombia has been fully privatized. The Government also initiated the process of divestment of Banco Cafetero, which has been partially transferred to the private sector. The total private sector share of commercial bank assets had increased to 77% by end 1993. 19. Macroeconomic performance. The macroeconomic situation was jointly assessed in collaboration with the IMF, through semi-annual monitoring missions. Overall macroeconomic  6 performance was consistent with the objectives of the EMP, enabling the country to sustain economic growth while reducing inflation and improving its balance of payments position. The strong capital inflows experienced by Colombia during the period 1992-1994 changed the nature of the macroeconomic adjustment originally envisaged in the program and presented the authorities with a new set of challenges. The medium-term macroeconomic framework contemplated at the appraisal of the PSRL envisaged a declining fiscal deficit, a strengthening of the balance of payments, maintenance of a high level of international reserves, and an improvement in external indebtedness indicators. The fiscal deficit declined more rapidly than projected. Developments in the external sector were substantially more favorable than expected, with international reserves targets well exceeded and external indebtedness ratios falling more rapidly than projected (Annexes 3, 3A and 3B). Despite the stronger than expected balance of payment performance, the Government decided to draw on the loan proceeds to finance fiscal requirements in part related to the cost of the PSRP reforms. Maior Factors Affecting the Project 20. At the time of approval of the PSRL, it was indicated that the major risk related to the implementation of the sector reforms was the need to obtain legislative approval of the changes proposed in the ports, housing, agricultural marketing and shipping sectors. Although, in case of failure to obtain legislative approval, the Government had defined alternative strategies, these were considered second best solutions since they would imply compromising some of the reform objectives and undermining the Government's political initiative to push the reforms. The high degree of ownership of the Government to the program led it to assign high priority to the PSRP- related legislative agenda. In fact, by January 1991, the Gaviria administration had obtained passage of all the legislation related to the PSRP reforms, overcoming a critical hurdle for the implementation of the reforms. 21. Thereafter, the Government had the field relatively clear to implement the specific sector reforms. However, the challenges and the difficulties related to reform implementation were significant, greater than anticipated by the Government. The difficult choices faced by the administration led to delays in the implementation of some of the reform programs, reflected in the postponement in the implementation of the PSRP by about one year. The process of liquidating Colpuertos was arduous, as a result of pressure from the unions and lack of coordination between the sector ministry and Ministry of Finance in defining the severance and pension costs, which led to a significant increase in the costs of liquidating Colpuertos. The process of opening the telecommunications sector to competition -an activity financed under the technical assistance component- was aborted as a result of a strike by the workers of the long distance public monopoly, TELECOM, which left the country without external communications for almost one week. The liberalization of the agricultural marketing sector, including the restructuring of IDEMA (the public marketing agency), was subject to significant conflicts within the Government team. Project Sustainabilitv 22. Most of the reforms promoted under the PSRP have shown a high degree of sustainability. The performance planning and evaluation system has been generalized as a management instrument to rationalize the relationships between the Central Government and the public  7 decentralized entities. Although it is difficult to quantify the incremental benefits generated by the use of this instrument, there are cases -such as the power sector- in which the introduction of performance plans has enabled monitoring the performance of companies, ensure their adherence to macro and sector policy objectives and ensure management accountability in public sector companies. 23. The reforms in the ports and shipping sectors have generated savings in transport costs and time, as well as improved service to importers and exporters. All regional ports companies have developed into self-sustaining, profit-generating enterprises competing for the provision of quality port services to traders. This is in contrast with the bloated, deficit-generating bureaucracies that prevailed in the sector only two years ago. Port handling capacity has been expanded through efficiency gains and the responsibility for port expansion investment has been assumed by each of the privatized terminals. Shipping service supply has been expanded through increased participation of both foreign and domestic lines in generating savings and improving service quality and frequency to importers and exporters. 24. The privatized banks have generated increased competition in the financial sector and are operating in a level playing field with the rest of the banking institutions. The reforms in the low income housing sector have also generated improvements in efficiency in the use of public sector assets and have increased private sector participation in the financing and provision of low income housing. 25. The only area in which sustainability has not been reached is in agricultural marketing. The original decision by the Government to remove IDEMA from intervening in the import and marketing of sensitive farm commodities has been modified by a series of decisions aimed to provide price and marketing support to domestic producers, issued in response to protectionist demands. Bank Performance 26. The Bank played a very active role in the process of defining the components and reform objectives for the program with the Government. The policy dialogue during preparation was instrumental in defining priorities and the overall objectives to be pursued in the different fields. During implementation, the Bank provided periodic inputs through discussions on the various technical assistance initiatives proposed for financing both to the Bank and IDB. The flexibility of the technical assistance component and the efforts by the Bank to provide timely response to the Government's demands in this field contributed significantly to develop a fluid and constructive dialogue with the Government in the implementation of the reforms. 27. The PRSP was developed without the benefit of preparatory sector work to help in the identification and design of the various components. The program was consequently developed on the basis of an intensive policy dialogue with the Government and development of consensus regarding the areas of the public sector which were considered strategic to improve the sector's performance and to facilitate a supply response to the Economic Modernization Program. 28. The PSRL was cofinanced with IDB. Given that this was one of IDB's first quick disbursing adjustment loans, the Bank played a leadership role in the design, negotiation, and  8 supervision of this operation. There was a cooperative and constructive relationship throughout the process with the IDB team, who substantially shared the Bank's judgment in the preparation and later supervision of the PRSP. 29. The Bank carried out effective supervision of the reform initiatives undertaken under the PSRP. Assessment of progress in the implementation of the PRSP was carried out jointly with the IDB. Bank recommendations regarding the release of tranches were discussed and agreed with IDB in every case. In the field of macroeconomic management, the Bank's supervision was carried out jointly with the IMF. As a result of difficulties in the implementation of some of the components (i.e. ports and agricultural marketing), there was a delay of about one year in the implementation of the PRSP. Borrower Performance 30. The Government showed a high level of commitment to the implementation of the PRSP at all times. The Government was successful in obtaining legislative approval for the key reform initiatives included in the PSRP, thus eliminating most of the political uncertainties related to the reforms. Thereafter, it was able to put together highly competent technical teams responsible for the day-to-day implementation of the reforms. The Government effectively utilized the advice of foreign and local experts in formulation and implementation of the reforms. The technical assistance components of the Bank and IDB were intensively utilized to finance such consultations. On occasion, there was lack of coordination among the various parties within the administration involved in reform implementation, stemming sometimes from legitimate policy divergence's and others, from lack of a clear policy direction. This led to implementation delays and increased costs in some of the sector reforms involved. However, overall, the Government was able to provide a clear vision and leadership and maintain an adequate pace of reform. Assessment of Outcome 31. Substantial positive results from the PSRP on the ground have had a significant impact on the performance of the public sector and benefited the private sector in Colombia. The performance planning and evaluation system has led to a culture of improved planning and accountability in the main public sector enterprises. The reforms in ports and shipping have eliminated highly inefficient monopolies and generated a whole new field for private sector participation that has resulted in improved supply and quality of services at lower prices which have benefited the Colombian economy as a whole. The changes in low income housing provision led to a more transparent and equitable method for distributing government subsidies, the leveraging of public resources with the contributions of beneficiaries and the private financial sector, and participation by the private sector in a market segment of housing provision that had been closed to competition. In the area of agricultural marketing, despite partial backtracking, there were significant benefits derived from the opening of the import market of selected commodities to the private sector and attempts to rationalize public sector intervention in the sector. 32. The introduction of floating conditions for sector reforms and some flexibility in defining the entities that would be subjected to performance plans was effective in accommodating the dynamics of the reform process in Colombia. In some cases, reform dynamics led to deeper reforms than had originally been envisaged. In the case of shipping, the Bank had required as a  9 condition of third tranche that an action plan be prepared to improve sector competition which in the minimum would require a f-urther reduction of the reserved quota to 30%. The Gaviria administration decided to fully eliminate the reserve quota system. In the performance plan component, the initial understanding was that the signing of performance plans with IDEMA and Colpuertos -which were the subject of broader sector reforms also included under the loan- would be conditions of second tranche release. It turned out that there were some delays in implementing the reforms for the ports and agricultural marketing sectors while the reform plans for the power sector had been advanced. It was agreed with the Government to include as part of the second tranche the signing of performance plans with the main power sector companies and move to the third tranche the signing of the IDEMA and Colpuertos plans. The flexibility built into the conditionality enabled the Bank to adjust the assessment of progress in the PSRP based on actual developments without compromising the overall reform objectives. Key Lessons Learned. 33. The main lessons learned from the Colombia Public Sector Reform Project are: * The key ingredient for the success of an ambitious adjustment program such as the PSRP is the high degree of ownership and priority assigned to it by the authorities and their willingness to invest their political capital and technical capability in pursuing the program's initiatives. There is no substitute for this. * The Bank should minimize rigidities in loan conditionality by emphasizing substance over specific modalities and being open to loan restructuring if needed. The policy objectives pursued by the loan were defined in substantive terms with few prescriptions on the means of implementation of the commitments, i.e., whether legislative approvals or administrative fiat, etc. Flexibility was also built in the definition of the timing for meeting the proposed sector reforms through the introduction of floating conditions that could be met either as second or third tranche and in providing flexibility regarding the entities that would be subjected to the performance plans, provided they would meet some basic relevance criteria. The result was a productive dialogue on the policy objectives of the reforms at negotiations and on the specific reform strategies during the implementation of the PSRP, which contributed to success in the implementation of the policy reforms included in the loan. * Providing a mechanism in the project design for countries to take advantage of regional expertise is useful in implementation. A key analytical basis for the design of the reforms was expertise derived from similar reform experiences that were taking place or had been carried out in other Latin American countries. The reform designs were the product of dialogue between Colombian officials or their technical teams with experts from the region which had or were in the process of implementing reforms in their respective countries. + Access to demand-based technical assistance funds facilitated Government success in exceeding the expectations in terms of the scope and depth of the reforms in most of the sectors. The initial intention of defining in specific terms the areas eligible for technical assistance was abandoned at an early stage of preparation. Instead, the Bank defined a very broad scope for the activities eligible for financing and defined on a case-by-case basis the suitability of the Governments requests based on their relevance to the PSRP. This demand- based approach proved effective in filling the technical gaps faced by the authorities in the formulation and implementation of the PSRP.  10 Future Operation 34. There are no future adjustment operations foreseen in Colombia. The Bank has, however, continued supporting public sector reform on a sectoral basis. It has recently approved an energy sector technical assistance operation to further develop the regulatory framework for the power and gas sectors and strengthen the regulatory and planning institutions in the sector. Discussions are on-going regarding possible Bank assistance in other sectors such as water supply and telecommunications. Discussions regarding development of mechanisms to facilitate private provision of infrastructure are also under way.  11 Statistical Tables Table 1: Summary of Assessments A. Achievement of objectives Substantial Parial Neyligibl& Not applicabil V') (V) )() Macro policies L/