Document of The World Bank OFFICIAL USE ONLY Report No: 71447-CO INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT OF US$150 MILLION TO THE REPUBLIC OF COLOMBIA FOR A FIRST PROGRAMMATIC PRODUCTIVE AND SUSTAINABLE CITIES DEVELOPMENT POLICY LOAN November 8, 2012 Sustainable Development Sector Colombia and Mexico Country Management Unit Latin America and Caribbean Region 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. COLOMBIA - GOVERNMENT FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of November 8, 2012) Currency Unit Colombian Pesos US$1.00 COP 1,816 Weights and Measures: Metric System ABBREVIATION AND ACRONYMS ANI National Infrastructure Agency (Agencia Nacional de Infraestructura) (formerly Instituto Nacional de Concesiones- INCO) BRT Bus Rapid Transit CAMACOL Chamber of Construction Firms CAN Centro Administrativo Nacional CAT DDO Catastrophe Deferred Drawdown CCDRMA Country Disaster Risk Management Analysis CINCO Inter-sectoral Commission of Public Procurement CONPES National Economic and Social Policy Council (Consejo Nacional de Política Económica y Social) CPS Country Partnership Strategy CRA Comisión Reguladora de Agua CREMA Road Maintenance Contracts (Contratos de Recuperación y Mantenimiento) DSA Debt Sustainability Analysis DNP National Planning Department (Departamento Nacional de Planeación) DPL Development Policy Loan EMBI Emerging Market Bond Index EPM Empresas Públicas de Medellin FDI Foreign Direct Investment FINDETER Financial Support for Territorial Development S.A. (Financiadora del Desarollo Territorial S.A.) FNA National Savings Fund (Fondo Nacional de Ahorros) GDP Gross Domestic Product GFDRR Global Facility for Disaster Reduction and Recovery GoC Government of Colombia HOI Human Opportunity Index IBRD International Bank for Reconstruction and Development IDB Inter-American Development Bank IFC International Finance Corporation IMF International Monetary Fund IMTS Integrated Mass Transit System INCO National Concessions Institute (Instituto Nacional de Concesiones) LOOT Territorial Land Use Planning Law (Ley Orgánica de Ordenamiento Territorial) MAVDT Ministry of Environment, Housing and Territorial Development (Ministerio del Ambiente, Vivienda y Desarollo Territorial) MHCP Ministry of Finance and Public Credit (Ministerio de Hacienda y Crédito Público) MI Ministry of Interior (Ministerio del Interior) MT Ministry of Transport (Ministerio de Transporte) MVCT Ministry of Housing, Cities and Territories (Ministerio de Vivienda, Ciudad y Territorio) NBI Number of Deprived Households (Necesidades Básicas Insatisfechas) NDP National Development Plan NUTP National Urban Transport Program PDA Departamental Water Plans (Planes Departamentales de Agua) PFM Public Financial Management PKS Programmatic Knowledge Services PME Corporate Modernization Program (Programa de Modernización Empresarial) POT Territorial Ordering Plans (Plan de Ordenamiento Territorial) PPIAF Public-Private Infrastructure Advisory Facility PPP Public-Private Partnership PSIA Poverty and Social Impact Assessment RUNT Registro Unico Nacional de Tránsito SECO State Secretariat for Economic Affairs of the Swiss Confederation SETP Strategic Public Transport Systems (Sistemas Estratégicos de Transporte Público) SFLAC Spanish Fund for Latin America and the Caribbean SGP National Transfer System (Sistema General de Participaciones) SISMEG Government Performance Monitoring System (Sistema de Seguimiento a Metas de Gobierno) SPTSs Strategic Public Transit Systems SSPD Superintendencia de Servicios Públicos Domiciliarios TDM Travel Demand Management TEs Territorial Entities VIS Social Interest Housing (Vivienda de Interés Social) WSS Water Supply and Sanitation Vice President: Hasan A. Tuluy Country Director: Gloria M. Grandolini Sector Manager: Anna Wellenstein/Aurelio Menendez Task Team Leader: Taimur Samad Co-Task Team Leader: Shomik Raj Mehndiratta COLOMBIA FIRST PROGRAMMATIC PRODUCTIVE AND SUSTAINABLE CITIES DEVELOPMENT POLICY LOAN TABLE OF CONTENTS I. INTRODUCTION .............................................................................................................................1 II. COUNTRY CONTEXT ....................................................................................................................3 A. RECENT ECONOMIC DEVELOPMENTS IN COLOMBIA ....................................................3 B. KEY SECTOR CHALLENGES ..................................................................................................5 III. THE GOVERNMENT’S PROGRAM ............................................................................................6 IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ......................................................7 A. COLLABORATION WITH THE IMF AND OTHER DONORS...............................................7 B. RELATIONSHIP TO OTHER BANK OPERATIONS ...............................................................8 C. LESSONS LEARNED .................................................................................................................9 D. ANALYTICAL UNDERPINNINGS ...........................................................................................10 V. THE PROPOSED PRODUCTIVE AND SUSTAINABLE CITIES DPL ....................................11 A. OPERATION DESCRIPTION ....................................................................................................11 B. POLICY AREAS .........................................................................................................................12 VI. OPERATION IMPLEMENTATION ..............................................................................................23 A. POVERTY AND SOCIAL IMPACTS ........................................................................................23 B. ENVIRONMENTAL ASPECTS .................................................................................................25 C. IMPLEMENTATION, MONITORING AND EVALUATION ..................................................27 D. FIDUCIARY ASPECTS ..............................................................................................................28 E. DISBURSEMENT AND AUDITING .........................................................................................29 F. RISKS AND RISK MITIGATION ..............................................................................................29 ANNEXES ANNEX 1: LETTER OF SECTOR DEVELOPMENT POLICY ...............................................................31 ANNEX 2: FUND RELATIONS NOTE ........................................................................................................38 ANNEX 3: RECENT ECONOMIC DEVELOPMENTS IN COLOMBIA ................................................39 ANNEX 4: KEY SECTOR CHALLENGES AND GOVERNMENT PROGRAM ...................................48 ANNEX 5: DETAILED OPERATION DESCRIPTION .............................................................................55 ANNEX 6: RISKS AND MITIGATION .......................................................................................................62 ANNEX 7: RELATIONSHIP TO OTHER BANK OPERATIONS ...........................................................67 ANNEX 8: ANALYTICAL UNDERPINNINGS ..........................................................................................70 ANNEX 9: POVERTY AND SOCIAL IMPACT ASSESSMENT ..............................................................73 ANNEX 10: COLOMBIA AT A GLANCE ...................................................................................................94 This Development Policy Loan was prepared by an IBRD team consisting of Taimur Samad (Sr. Urban Specialist, LCSDU), Shomik Raj Mehndiratta (Lead Urban Transport Specialist, LCSTR), Angelica Nunez del Campo (Sr. Urban Specialist, LCSDU), Nancy Lozano-Gracia (Economist, FEUUR), Alexandra Panman (JPA, LCSDU), Mauricio Cuellar (Sr. Transport Specialist, LCSTR), Camila Rodriguez (Infrastructure Specialist, LCSTR), Ana Campos Garcia (Sr. Disaster Management Specialist, LCSDU), Diana Rubiano (Disaster Management Specialist, LCSDU), Eric Dickson (Urban Economist, LCSDU), Alejandro Rodriguez (Consultant, LCSDU), Juliana Gomez Arango (Consultant, LCSEN), Joao Pedro Azevedo (Senior Economist, LCSPP), Carlos Rodriguez Castelan (Economist, LCSPP), Viviane Sanfelice (JPA, LCSPP), Carlos Alberto Castañeda Castrillion (consultant, LCSPP), Bernadette Baird-Zars (Consultant, LCSDU), Rodrigo Serrano-Berthet (Sr. Social Development Specialist, LCSSO), Carlos Alberto Molina (Social Specialist, LCSSO), Juan C. Belausteguigoitia (Lead Environmental Economist, LCSEN), Pedro Arizti (Senior Public Sector Specialist, LCSPS), Margarita Puerto Gomez (Consultant, LCSSO), Greg Browder (Lead Water and Sanitation Specialist, LCSWS), Carlos Uribe (Water and Sanitation Engineer-Consultant, LCSWS) Monica Ospina (Consultant, LCSDU), Lars Christian Moller (Senior Economist, LCSPE), Xiomara A. Morel (LCSFM), Jeannette Estupinian (LCSFM), Victor Ordonez (Sr. Finance Officer, CTRLN), German Galindo (JPA, LSCPE) and Karina M. Kashiwamoto (Language Program Assistant, LCC1C). LOAN AND PROGRAM SUMMARY COLOMBIA FIRST PROGRAMMATIC PRODUCTIVE AND SUSTAINABLE CITIES DEVELOPMENT POLICY LOAN Borrower Republic of Colombia Implementing Agency Ministry of Finance and Public Credit and the National Planning Department Financing Data Total World Bank financing: US$150 million. Terms: IBRD Flexible Loan denominated in US dollars, with a Fixed Spread, commitment linked, bullet repayment on August 15, 2030, and all conversion options (currency, interest rate and caps/collars). The Payment dates are February 15 and August 15 of each year. The Front-end Fee will be paid up-front with Borrower's own resources. Operation Type First in a series of two programmatic Development Policy Loans (DPLs). The second Loan is tentatively proposed for FY15. Main Policy Areas In line with priorities set by the Government, this First Programmatic Productive and Sustainable Cities Development Policy Loan would support the implementation of reforms in four key areas: (a) sustainable and inclusive cities; (b) access to affordable housing; (c) institutional strengthening and regional coordination; and (d) connectivity across urban system and regional infrastructure financing. Key Outcome Key outcome indicators include: Indicators (a) sustainable and inclusive cities • Number of poor households in cities with population greater than 100,000 residents that have connected to neighborhood water and sanitation networks. • Establishment of an institutional and monitoring framework consistent with international good practice to address urban traffic safety issues. • Increase in availability of public spaces in cities with population greater than 100,000 residents as measured by square meters of public space per capita. (b) access to affordable housing • Number of low income families with access to affordable and safe housing solutions as a result of the 2012 Public Housing Law. i (c) institutional strengthening and regional coordination • Number of regional Contract Plans signed between territorial entities with development objectives that benefit lower-income segments. (d) urban connectivity and regional infrastructure finance • Number of urban Public-Private Partnerships (PPPs) structured with signed contracts and financing frameworks in place. • Kilometers of principal road network under integral maintenance contracts. Program Development The objective of the program is to support the strengthening of Objective(s) and the Government of Colombia’s policy framework on productive Contribution to CPS and sustainable cities. Specifically, the program will support policy and regulatory reforms that aim to: (a) improve access to basic water and sanitation and urban transport, and mitigate vulnerability to natural disasters for the urban poor; (b) promote the provision of affordable and safe low-income housing solutions; (c) strengthen the ability of subnational entities to coordinate and finance the structuring and implementation of regional and metropolitan development initiatives; and (d) improve the productivity of the system of cities through improved connectivity within the network of cities and between cities and ports to external markets. Risks and Risk The proposed operation is subject to three types of risk: (a) Mitigation macroeconomic; (b) political, institutional and technical; and (c) social and environmental. Key macroeconomic risks include Colombia’s exposure to three different types of external shocks, including: a slowdown in economic activity in the US, a decline in oil prices, and global financial market turmoil. The country’s macro resilience is based on solid initial conditions and policy buffers to respond. Economic growth is strong and the absence of significant domestic or external imbalances help shore up stability. Substantial foreign direct investment inflows, ample accumulation of foreign reserves, and a Flexible Credit Line with the International Monetary Fund (IMF) protect the external position. Colombia also enjoys a flexible exchange rate and has room for monetary and fiscal policy easing. Key political, institutional and technical risks include those related to appropriate targeting of beneficiaries, uptake of reforms by beneficiaries and institutional capacity and implementation challenges. Targeting risk is mitigated by the ii use of objective eligibility criteria (e.g. SISBEN and Unidos) and linkages to complementary World Bank engagement to support improvement in the management of targeting systems. The risks that beneficiaries will not access benefits related to water sector reforms are mitigated by specific requirements in the decree for municipalities to dedicate resources to social outreach and communication, existing cross-subsidies in the water sector that lessen the tariff burden for lowest income households, tariff regulatory restrictions on maximum annual increases to water tariffs, amongst other measures. Institutional and implementation risk was mitigated by prioritizing reforms where institutional capacity is considered greatest, focusing on reforms that have been demonstrated to occupy a central importance to the targets and objectives of implementing agencies and focusing on reforms where the Bank has in place active complementary engagements that include support for strengthening institutional capacity. Key environmental and social risks include the risk that certain policies supported by the DPL may have some negative social and environmental impacts. The overarching environmental policy and regulating framework is strong. The Government of Colombia – with World Bank lending and knowledge services support – has made significant strides towards strengthening the national environmental regulatory and institutional framework. This umbrella engagement has strengthened the environmental regulatory framework, increased capacity of environmental authorities to enforce regulations and mainstreamed environmental assessment and management practices in sector programs. A risk that adequate frameworks for the environmental and social management are not incorporated into Public-Private Partnerships and concessions frameworks supported under the Program. Agencia Nacional de Infraestructura (ANI) guidelines on social impact studies, consultations, and potential appropriation and redevelopment – developed through technical support from the Internacional Finance Corporation (IFC) – are strong and in large part migrate from those utilized under Instituto Nacional de Concesiones (INCO). These included regulatory reforms on land acquisition and management practices. Significant increases in staffing levels and capacity in the section which handles social issues will enable more thorough consideration of poverty and distributional risks. Operation ID P130972 iii IBRD PROGRAM DOCUMENT FOR A PRODUCTIVE AND SUSTAINABLE CITIES DEVELOPMENT POLICY LOAN TO COLOMBIA I. INTRODUCTION 1. The Government of Colombia has requested a Productive and Sustainable Cities Development Policy Loan for US$150 million. This Program Document proposes a programmatic series of two loans, which aims to support the strengthening of the Government of Colombia’s policy framework on productive and sustainable cities. The operation is prepared in the context of clearly defined urban policy priorities defined in successive National Development Plans, as well as a high level policy initiative called the Misión Ciudades. The request underscores the Government’s continued interest in engaging with the World Bank to support its efforts in improving the efficiency of the system of cities. 2. Specifically, the program will support a comprehensive set of policy and regulatory reforms that aim to: (i) improve access to basic water and sanitation and urban transport services, and mitigate vulnerability to natural disasters for the urban poor; (ii) promote the provision of affordable and safe low-income housing solutions; (iii) strengthen the ability of subnational entities to coordinate and finance the structuring and implementation of regional and metropolitan development initiatives; and (iv) improve the productivity of the system of cities through improved connectivity within the network of cities and between cities and ports to external markets. These reforms are vital to support the system of cities in Colombia, in which cities are able to grow to their highest potential, and be engines for sustainable growth in the country. 3. The proposed DPL program is part of a broader World Bank engagement on sustainable, productive and inclusive cities (see Figure 1). This programmatic engagement covers a range of financial, knowledge and convening services across multiple sectors including urban development and housing, urban transport, logistics and connectivity, water and sanitation and disaster risk management. The proposed DPL program aims to reflect the multi-sectoral priorities of this programmatic engagement with an organizing focus on improving the sustainability, productivity and inclusiveness of Colombia’s urban system. Additionally, the proposed DPL program reinforces linkages with additional areas of World Bank Group engagement in Colombia, including IBRD support for public sector management and subnational capacity building and advisory support from the IFC towards that structuring of connective and logistics infrastructure concessions. 1 Figure 1: Colombia Productive and Sustainable Cities Programmatic Engagement Completed Ongoing Planned • Cartagena Water • Bogotá Urban Services (P074726, FY03) • CTF Urban Transport (P127615, Supply, Sewerage, • Integrated Mass Transit (P082466, FY10) FY14) and Environmental • Support to National Urban Transport • Barranquilla Flood Management Financial Services Management Program Project (P117947, FY12) (FY13) (FY00) • Low Income Land and Housing – • Disaster Vulnerability APL2 • Bogotá Urban Macroproyectos (P110671, FY10) (P085727, FY14) Transport (FY96) • Solid Waste Management (P101279, FY10) • Productive and Sustainable Cities • CAT DDO I • La Guajira Water & Sanitation (P096965, DPL (P130972, FY13) (P113084) FY07) • Disaster • Rio Bogotá Environmental Infrastructure VulnerabilityAPL1 (FY11) (P082429) • CAT DDO II (P126583, FY13) • INCO Concession • Public Transport Regulatory Framework • Support for the implementation of a Unit TA (PPIAF) (TF010017, SFLAC) Road Safety Agency in Colombia • Bus Rapid Transit • Tradable Air Rights Instruments (TF012056, (GRSF) Accessibility PPIAF) • Pro-poor targeting scheme for Guidelines • Travel Demand Management Strategies for public transport (GPOBA) (TFESSD) Bogotá (P130806, BB) • Bogotá Transit Oriented • REDI. Balancing • Design Targeted Subsidy Scheme for Public Development (Korea GG) Social and Transit (Korean ICT) • Regulatory Framework for Knowledge Services productive Needs • Urbanization Review ESW (P121640, BB, Congestion Pricing (Korean GG) for Infrastructure SFLAC and SECO) • Travel Demand Management (SFLAC) • Financing Infrastructure for Urban Re- Strategies for Bogotá (Korean GG) development (P126501, PPIAF) • Mainstreaming continuous • Macroproyectos: Policy and Program participative consultation in World Framework (P125690, Cities Alliance) Bank Projects using ICT • Private Financing Window for Low-Income (Innovation Fund) Housing Projects (P131011, PPIAF) • Mainstreaming Gender Equality in • Green Growth & Regional Economic National Urban Transport Program Development Cartagena-Barranquilla-Santa • Smart & green design toolkit for Marta Corridor (P110671, Korean ICT) low income housing projects (Korea • Familias en Acccion and the impact of GG TF) natural disasters on the poor (P129859) • Support to Misión Ciudades • Risk Modeling Bogota (TF091242, GFDRR) • FNA Contractual Savers Program (FIRST) • Infrastructure • Partnership with ITDP on Non-Motorized • South-South Partnership with IE Convening Workshop (FY11) Transport Singapore on Congestion Pricing • Knowledge • FBS workshop, forum an strategic planning Schemes for Bogotá Platform (P126884, on Urban Renovation (P132933) FY11) 2 II. COUNTRY CONTEXT A. RECENT ECONOMIC DEVELOPMENTS IN COLOMBIA Political Situation 4. The Santos Administration has registered several significant achievements since entering office in August 2010. On the international front, Colombia has restored diplomatic and trade relations with neighboring countries and the long-awaited US-Colombia Free Trade Agreement has become effective. Domestically, the Government has initiated negotiations for peace and is carrying forward an ambitious fiscal and economic reform agenda. Recent Macroeconomic Developments 5. Colombia’s economic performance has been impressive in recent years – the combined result of good luck and good policy. Favorable international oil prices played an important role with positive effects on foreign direct investment, exports, growth, and fiscal outcomes. At the same time, good policies have supported positive outcomes. Fiscal consolidation strengthened the resilience of the economy to external shocks. Colombia currently has the lowest EMBI (Emerging Market Bond Index) interest rate spread in the region. Sovereign debt is rated investment grade with a recent increase to a positive outlook, according to Standard and Poor’s. 6. The economy expanded by a solid 5.9 percent in 2011 – one of the best growth performances in the region. Private domestic demand, supported by high consumer and investor confidence and access to cheap credit, led the growth process. On the supply side the expansion was spear-headed by the oil/mining, financial services, and commerce sectors. The growth process was accompanied by employment creation as reflected in the decline in the unemployment rate from 11.8 to 10.8 percent in 2011. 7. The ongoing oil boom reached an all-time high in 2011, as production, exports, and foreign direct investment set new records. The country came closer to reaching the target of producing 1 million barrels per day. This, combined with record high prices, resulted in a 70 percent expansion in oil exports. Foreign direct investment– most of which originated in the oil and mining sector – almost doubled in 2011. Despite the export boom, the external current account deficit remained unchanged owing to an equally substantial increase in imports. 8. Colombia exhibited a relatively strong fiscal performance in 2011 thanks to strong growth, favorable oil prices, and tax reforms. The deficit of the combined public sector was reduced from 3.3 percent in 2010 to 1.9 percent in 2011 while the public debt ratio declined from 36.9 to 34.2 percent of GDP. 9. The authorities recently stepped up their efforts to reduce the pace of currency appreciation, which remains a substantial policy concern. In August 2012, following a sustained Peso rally, the Central Bank increased average daily purchases from US$20 million to US$28 million while the Government engaged in open market operations worth US$700 million. More broadly, the Government is also working to strengthen competitiveness through increased infrastructure investments and tax reforms. 3 10. The economy slowed down in 2012, mainly as a result of a deteriorating external environment. Economic growth is expected to fall to 4.3 percent in 2012 owing to the continued meager economic performance in the US combined with stagnation in oil and coal production which have been hampered by a recent rise in insecurity. 11. In response to slower domestic economic activity, the Central Bank has initiated a process of monetary loosening. Since August 2012, the policy interest rate has been reduced by 50 basis points to 4.75 percent. 12. The financial sector remains sound and credit growth is decelerating. The banking system is well-capitalized, nonperforming loans are manageable and Colombia’s banks are among the most profitable in the region. Credit to the private sector has slowed down from 22 percent y/y in October 2011 to 18 percent y/y in May 2012. Macroeconomic Outlook and Debt Sustainability 13. Colombia has a robust macroeconomic framework, which rests on three mutually re-enforcing pillars: (a) a responsible fiscal policy based on a credible medium-term fiscal framework, anchored in a structural balance rule, (b) a monetary policy based on an inflation targeting regime complemented by a floating exchange rate with moderate interventions, and (c) sound macro and micro prudential policies combined with a solid financial system. 14. Global and domestic assumptions and medium-term outlook: The global scenario follows the October 2012 IMF World Economic Outlook, including a gradual recovery of US economic activity, a short-lived recession in the Euro area and continued elevated oil prices. The domestic policy mix is expected to be tight on the fiscal side and accommodative on the monetary side. In this context, Colombia’s GDP growth is projected to converge to its potential rate of 4.4 percent in the medium term while inflation will stay on target of around 3 percent. The Government is expected to meet the fiscal rule interim target for the central government structural deficit of 2.3 percent of GDP by 2014. The external current account deficit will narrow again and will be financed by continued high inflows of foreign direct investment. 15. Colombia is not immune to a global economic crisis, but the country is very well prepared to respond. Colombia’s chief vulnerabilities relate to three types of external shocks: a slowdown in economic activity in the US, a decline in oil prices, and global financial market turmoil. By way of mitigation, the country has a high capacity and room to respond to shocks through counter-cyclical fiscal and monetary policies. Debt Sustainability 16. A Debt Sustainability Analysis (DSA) indicates a declining trajectory of public debt in the baseline scenario with limited sensitivity to a range of simulated shocks. In the baseline scenario, the public debt-to-GDP ratio is projected to decline from 34.2 percent in 2011 to 30.7 percent in 2014 (of the Combined Public Sector, gross). 17. In summary, the analysis presented in this Section (II) concludes that Colombia’s macroeconomic policy framework is deemed adequate. Please see Annex 3 for further details. 4 B. KEY SECTOR CHALLENGES 18. The efficiency and productivity of Colombia’s urban system – along with continued sound macroeconomic performance and strategic investments in human capital, infrastructure, and innovation and productive systems – will be key determinants in the ability of the country to transition from a middle- to a higher-income economy. The urban system in Colombia will play a critical role in supporting growth in three principal forms. 19. First, urban activities are important contributors to economic growth. While economic growth is strongly driven by commodities in Colombia and other Latin American countries, urban activities in the manufacturing, services and retail sectors also account for an important part of economic growth. Urban activities combined 1 have contributed to more than 50 percent of GDP’s growth rate 2 in the last four decades. Second, strengthening the roles of cities may contribute to mitigating the risks inherent to commodity intensive economies. Recent work by the World Bank points at the risks of commodity led growth. 3 An efficient urban system will be necessary to support the move from a commodity-driven economic system to a stronger resource-based manufacturing structure and then to more knowledge intensive industries. It is in and around urban agglomerations where manufacturing activities take place. As such, it is important that cities enable this transition through improved connective infrastructure, sound land management and proactive policies that ensure urban livability. Third, 75 percent of Colombians live in urban areas, where unemployment rates are above 12 percent, among the highest in the region. The cities of Bogotá, Cali, Medellin and Barranquilla account for 30 percent of the country’s 46 million population and a high proportion of its jobs. Promoting a well-functioning urban system may foster growth and improve the quality of life of a largely urban population. 20. The efficient management of cities and urban areas will be the key determinants of whether Colombia will be able to cash in on a potential growth dividend to reduce poverty and inequality. Historically, urbanization is highly correlated with reductions in poverty and inequality and improvements in access to basic services. 4 In Colombia, lower poverty rates are highly correlated with levels of urbanization in departments, 5 and urbanization has been accompanied by improved living conditions across the country. In 1964, only 50 percent of people in today’s largest cities had access to electricity, water, and sanitation. In smaller cities the coverage rates approximated 40 percent for water and electricity and 20 percent for sanitation. Today, there is almost universal access to basic services in cities of all sizes. 21. Nonetheless, challenges persist to secure sustainable, productive and inclusive cities in Colombia. In particular, safe and more efficient public transportation is vital to secure 1 Urban activities include commerce, restaurants, hotels, manufacturing, finance and other related services. 2 Urbanization Review calculations based on a moving average of the component of the economy’s growth rate contributed by purely urban activities. 3 While there is no evidence of a commodity curse in Colombia, the report identifies several commodity related risks that can adversely affect a country’s prospects for economic and institutional development if they are not managed properly, see World Bank (2010) Natural Resources in Latin America and the Caribbean beyond Booms and Busts? World Bank. Office of the Chief Economist, Latin America and the Caribbean Region. 4 See World Bank (2009) World Development Report – Reshaping Economic Geography and the Bank’s new Urban and Local Government Strategy System of Cities: Harnessing Urbanization for Growth and Poverty Reduction. 5 See the Colombia Urbanization Review (World Bank, 2012). 5 mobility, access to opportunities, and productivity in cities. Addressing the negative externalities of rapid motorization such as road safety, pollution and congestion is becoming critical. Deficits in public space and low income housing present serious challenges for security and quality of life. Persistent inequality in the quality of public services such as water and sanitation also constitute a key challenge. Improved inter-jurisdictional coordination can help to spread the benefits and diminish negative externalities associated with urbanization. Improved connectivity is vital to support increased productivity and trade, and help support a more efficient system of cities. The relationship between policies that enhance urban productivity (e.g. structural infrastructure investments) and inclusiveness is often – but not always – complementary. An urban policy and management framework that enables cities to balance these objectives is of critical importance. A detailed assessment of the challenges is included in Annex 4. III. THE GOVERNMENT’S PROGRAM 22. The Government of Colombia has outlined a comprehensive platform to address urban challenges, including a high level policy initiative called the Misión Ciudades which was launched in late-2011. Under this initiative a council of national and international experts has been convened to provide cross-sector policy guidance to ensure that cities are engines of sustainable and inclusive economic growth in Colombia. The initiative is focused on the efficiency of the entire urban system. The creation of the Misión demonstrates the Government of Colombia’s high-level policy commitment to urban development policy and builds upon a broad network of sector specific programs which are outlined in greater depth below. The Misión will support the National Planning Department (DNP) in developing a ‘System of Cities’ framework in Colombia – resulting in a Consejo Nacional de Política Económica y Social (CONPES) National Policy on Cities which will include recommendations for subsequent policy reform and analysis across multiple sectors. This framework will have an outlook through 2035, and will address key issues such as connectivity and mobility, labor markets, innovation, quality of life, environmental sustainability, land and housing market, good governance and regional coordination. 23. Urban policy priorities are clearly identified in successive National Development Plans. The National Development Plan (NDP) 2006-2010 highlighted three key areas for investment and reform: (i) slum upgrading and basic service provision for informal settlements; (ii) low income land and housing development programs; and (iii) urban revitalization and densification. The National Development Plan 2010-14, introduced a framework of three strategic areas – Sustainable Growth and Competitiveness, Equality of Opportunities for Social Prosperity, and Consolidation of Peace – and five key pillars for growth: (i) new sectors for innovation; (ii) agriculture and rural development; (iii) infrastructure for transport; (iv) mining and energy development; and (v) housing. 24. Further analysis of key Government policies and programs in key sectors including urban transport, disaster risk management, water and sanitation, low-income housing, Public-Private Partnerships (PPPs) and infrastructure finance, amongst others, can be found in Annex 4. 6 IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM 25. The Country Partnership Strategy (CPS) for the period 2012-2016 sets out a results- focused package of support grouped under three strategic themes: (a) Expanding Opportunities for Social Prosperity; (b) Sustainable Growth with Enhanced Climate Change Resilience; and (c) Inclusive Growth with Enhanced Productivity. The thematic focus of the CPS outlines a flexible framework to support the National Development Plan through a portfolio of financial, knowledge, and convening services. The operation is fully aligned with the National Development Plan 2010-2014, which explicitly identifies a ‘Livable Cities’ pillar as one of five key drivers of sustainable and inclusive growth supported under the Plan. 26. The Productive and Sustainable Cities Development Policy Loan – while not explicitly identified as a proposed lending operation under the CPS – is fully consistent with in the Bank’s strategy and well positioned to support the Government’s strategic objectives. The CPS explicitly references the challenges of fostering sustainable and productive cities, urban development and affordable housing, disaster risk management, urban transport and intra-urban transport as amongst Colombia’s most pressing development challenges. The CPS aims to support prioritized and high-impact activities around the three strategic themes outlined above. Specifically, the proposed DPL supports core elements of the Sustainable Growth and Enhanced Climate Change Resilience theme. Support under the theme is organized under three key pillars: (i) sustainable urban development; (ii) enhanced disaster risk management; and (iii) improved environmental management and climate change resilience. Policies to enhance access to water and sanitation, urban transport and affordable housing aim to make urban areas increasingly livable for the poor. The DPL also includes measures that improve disaster risk management practices and resilience to climate change for the poor. 27. In addition, the proposed DPL includes a series of measures that support the Inclusive Growth with Enhanced Productivity theme. Policy reforms that aim to enhance the efficiency of Colombia’s intra-urban road network aim to reduce transport costs and enhance the competitiveness of Colombia’s urban system. A. COLLABORATION WITH THE IMF AND OTHER DONORS 28. The Productive and Sustainable Cities Development Policy Loan is well linked to previous knowledge products developed to support the policy priorities of the Government of Colombia. In particular, the request for a DPL stems from the high level policy initiatives adopted with input from the Colombia Urbanization Review, produced with Spanish Fund for Latin America and the Caribbean (SFLAC) and State Secretariat for Economic Affairs of the Swiss Confederation (SECO) support. The report provided concrete policy guidance to the Government of Colombia on how to maximize the efficiency of the country’s system of cities. The diagnostic analysis provided in this report was used as a direct input into the National Development Plan and has directly supported the development of the Misión Ciudades policy initiative. The Bank has continued to have a close dialogue with the IMF on the overall fiscal and macroeconomic program. 7 B. RELATIONSHIP TO OTHER BANK OPERATIONS 29. The proposed programmatic DPL series complements current sustainable development sector lending operations and knowledge services in Colombia. The proposed DPL is part of a strategic and programmatic engagement which includes lending operations, knowledge products, and technical assistance across all the policy areas of the DPL. The engagement is summarized below, and additional information is provided in Annex 7. 30. The DPL complements the World Bank’s engagement on transport, water and sanitation services. The large Bank-financed program in urban mass transit systems in six Colombian cities includes lending of over US$450 million to support the development of bus rapid transit systems in Bogotá, technical assistance and knowledge services to design the Bogotá Metro system, and a Feasibility Study to Develop Tradable Air Rights Instruments. There are three complex ongoing water and sanitation operations 6 – which have encountered serious implementation delays caused by a combination of capacity constraints – and two SFLAC financed assistance to support the Ministry of Housing, Cities and Territories (MVCT) to analyze and coordinate two programs to strengthen water services. 31. Critical linkages exist with urban redevelopment and public space engagement, as well as Disaster Risk Management and environmental policy. On redevelopment, collaboration includes a PPIAF-supported Sub-National Technical Assistance Program (SNTA) to structure and take to market innovative financial instruments for urban redevelopment, and a Reimbursable Advisory Service (formerly named Fee Based Advisory Service) with the Empresa Nacional de Renovacion Urbana. Disaster Risk Management (DRM) engagement aims to strengthen capacity at the national and municipal level, and includes four Global Facility for Disaster Reduction and Recovery (GFDRR) technical assistance projects. The comprehensive engagement on environmental policy – analytical studies, policy lending, and investment lending – is associated regulatory framework strengthening, environmental agency capacity building, and integration of environmental management concerns into sector programs. 32. Engagement on housing, public sector management, and infrastructure connectivity is also well aligned with national government priorities. In housing, the National Macroproyectos Social Interest Program Project loan is accompanied by both Cities Alliance and PPIAF grants, which aim to develop critical technical and management instruments for development of a PPP model and a ‘window’ for private Macroproyectos, respectively. The Macroproyectos Loan aims to pilot an innovative PPP model for low income housing and has experienced challenges in implementation caused by the complexity of the proposed model. The Bank and Government are engaged in close supervision to identify and implement appropriate adjustments to the model to enable implementation. A proposed Bank-financed Subnational Institutional Strengthening Project currently under preparation aims to strengthen the capacity of subnational governments in municipal fiscal and overall public management, amongst other key 6 These are: (i) the La Guajira Water and Sanitation Infrastructure and Service Management Project, which aims to support the development of financial sustainable utilities and improve the quality of basic services in La Guajira; (ii) the Rio Bogotá Environmental Recuperation and Flood Control Project, which aims to transform a highly polluted river into an environmental asset for the District of Bogota; and (iii) a Solid Waste Management project, which aims to support public–private partnerships for the development and management of multi-municipal regional sanitary landfills. 8 reforms. In infrastructure and connectivity, the GoC has requested the Bank’s support in preparing a new ‘Recent Economic Developments in Infrastructure’ (REDI) report (2013). 33. The IFC has also provided high-quality support to infrastructure connectivity and urban development agenda, as, inter alia, a structuring advisor to the Ruta del Sol road concession, and to the newly-formed ANI. In addition, IFC Municipal Simplification program is active in 21 cities focused on reducing ‘red tape’ in business permitting, construction licensing and other related administrative procedures. Past IFC operations have also been critical to strengthen the fundamentals of the housing market. C. LESSONS LEARNED 34. The design of the proposed operation builds upon recent best practice guidance from the Bank’s policy-based lending experience as well as the Bank’s deep collaboration on lending and advisory support to the Government of Colombia. Specifically, key lessons incorporated into the Project’s design include: • Broad cross-sector focus of the proposed series aims to integrate multiple sectors around the core thematic area of sustainable, productive and inclusive cities. The proposed operation chooses to focus on a package of complementary reforms across a range of sectors relevant to cities rather than concentrating deeply on one or two core sector. This multi-sectoral approach aims to identify and build synergy across sectoral ‘silos’. The emphasis on a cross-sector policy agenda both complements the GoC efforts to increase collaboration across sector agencies and ministries and the Bank’s increased focus on building stronger multi-sector engagement to meet client needs. • The operation builds on backward and forward linkages with the Bank’s analytical and advisory services. The proposed programmatic DPL series is closely linked to the Bank’s recent and future knowledge services agenda with the Government of Colombia. While the Colombia Urbanization Review outlines the analytical foundations for the operation, the knowledge services agenda supports core aspects of the Government policy reform program. The wide range of current and planned knowledge services are outlined in Figure 1, where they are presented as part of the consolidated Sustainable, Productive and Inclusive Cities Programmatic Knowledge Services engagement. • Focus on medium-term reform agenda is reflected in choice of a programmatic series of two loans. The ‘medium-term’ focus of proposed operation through the choice of a two- loan programmatic series is aligned with Bank guidance for policy-based lending engagement in middle-income countries that demonstrate a greater commitment to sustain a reform agenda over time. • Demonstrated Government commitment to and ownership of the policy reform agenda is critical to program success. The proposed program is built on a cross-sector policy platform that has strong Government support. The launch of the intra-ministerial policy commission on cities (i.e. Misión Ciudades) and the creation of a Sub-Directorate of the National Planning Agency on Regional and Territorial Planning reflect a demonstrated 9 commitment of the Government of Colombia to emphasize the importance of urban and regional development issues. • Build strong poverty and social impact assessment into program design. The proposed operation includes a thorough poverty and social impact assessment (PSIA) exercise focused on the distributional and gender impacts of the reform program. The PSIA was initiated proactively at the identification stage, developed through cross-sectoral collaboration between the Latin America Poverty, Gender and Equity Group (LCSPP), the Finance, Economics and Urban Department (FEUUR) and the Latin America Disaster Risk Management and Urban Unit (LCSDU), and in strong consultation with the GoC. Annex 9 presents the findings of the PSIA, based on extensive literature review on the potential impacts of each of the Prior Actions, as well as additional primary research in 5 key areas. The PSIA also identifies critical areas for deeper policy analysis, and the PSIA team is supporting the DNP in the design of a medium-term analytical agenda to 'fill analytical gaps' and provide concrete input on future GoC policy development. This is also expected to help ‘bridge’ the first and second proposed programmatic loans. D. ANALYTICAL UNDERPINNINGS 35. The program is grounded in a solid analytical foundation, which includes analysis reflected in a 2012 World Bank report, Colombia Urbanization Review: Amplifying the Gains from the Urban Transition and other economic and sector work relevant to each of the Policy Areas of the DPL. The DPL is well aligned with the World Bank Urban Strategy, ‘Systems of Cities: Harnessing Urbanization for Growth and Poverty Alleviation (2009)’. Additional information on key analytical studies in the areas of water and sanitation services, public transportation and road safety, disaster risk management and urban redevelopment are summarized below. Additional information is provided in Annex 8. 36. The in-depth analysis relevant to water and sanitation is provided by Andres, L. A., D. Sislen, and P. Marin, eds. 2011, Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector (Bogotá: PPIAF/World Bank). The DPL is also informed by findings from Velez, Azevedo and Posso (World Bank, 2010), which indicates that inequality in terms of water and sanitation seems to have increased in urban areas, despite high coverage levels. In public transportation and road safety, the DPL is informed by the joint World Bank- Ministry of Transport publication, ‘Transport on a Human Scale’ (2009), 7 as well as studies indicating the importance of integrating public transportation systems (Ardila, 2006), rising rates of motorization, 8 and potential benefits of integrated transportation in terms of reduction in air pollution. 9 For disaster risk management, a World Bank - GFDRR study10 stresses weaknesses in the land use planning system in the rising costs of disaster events reported in Colombia. 7 Transporte a la Escala Humana, World Bank 2009. ISBN: 978-958-98712-8-7 8 According to the Secretaria Distrital de Movilidad, 2010, In Bogota alone, the vehicle fleet has dramatically increased by 105% between 2002 and 2010, reaching a total of 1.3 million vehicles in 2010. http://www.movilidadbogota.gov.co/hiwebx_archivos/ideofolio/mayo-12-de-2011---boletn-movilidad-en-cifras-2010_2299.pdf 9 World Bank 2012. Colombia: Low Carbon Study. 10 Campos, A. N. Holm-Nielsen, C. Díaz G, D. M. Rubiano, C.R. Costa, F. Ramírez, and E. Dickson Eds, Análisis de la gestión del riesgo de desastres en Colombia: Un aporte para la construcción de Políticas públicas’ World Bank 2012. 10 37. In terms of public space and urban redevelopment, analysis undertaken to accompany the PPIAF funded Infrastructure Finance for Urban Redevelopment highlights that at the current rate of household formation, available land for expansion in Colombia’s main cities will be consumed in less than 6 years. 11 Studies related to access to affordable housing in association with the Macroproyectos Social Interest Program Project (P110671), point to both supply and demand side constraints contributing the pressing housing deficit in Colombian cities. These findings were echoed in background studies during the first phase of the Colombia Urbanization Review. The engagement on environmental policy and management is informed by: the Colombia Country Environmental Analysis (2007), the associated analytical program that supported the Sustainable Development DPL series, and the recent ‘Colombia: Strengthening Environmental and Natural Resources Institutions’ (2012) sector work. 38. On institutional strengthening and regional coordination, analysis undertaken with leading international experts for the Colombia Urbanization Review highlights the potential gains from improved coordination, as well as the importance of taking the opportunity provided by the legal reform currently underway for the new law regulating spatial planning - Ley Orgánica de Ordenamiento Territorial (LOOT). In the policy area of urban connectivity and regional infrastructure finance, 2005 and 2006 World Bank studies, as well as recent joint work by the World Bank and the Inter-American Development Bank (IDB), and the Colombia Urbanization Review stress the link between connectivity and poverty reduction in LAC, through their impact on food prices (Schwartz et al., 2009), as well as weaknesses in municipal financing that may lead to inadequate infrastructure investment, and uncoordinated service delivery (with associated inefficiencies and negative externalities). V. THE PROPOSED PRODUCTIVE AND SUSTAINABLE CITIES DPL A. OPERATION DESCRIPTION 39. The operation is designed as a programmatic series of two Development Policy Loans which aim to support the strengthening of the Government of Colombia’s policy framework on productive and sustainable cities. Specifically, the program will support policy and regulatory reforms that aim to: (i) improve access to basic water and sanitation, urban transport and environmental services for the urban poor; (ii) mitigate the vulnerability of the urban poor to natural disasters and promote the provision of affordable and safe low-income housing solutions; (iii) strengthen the ability of subnational entities to coordinate and finance the structuring and implementation of regional and metropolitan development initiatives; and (iv) improve the productivity of the system of cities through improved connectivity within the network of cities and between cities and ports to external markets. 40. The matrix in Table 1 below offers an integrated presentation of the Policy Actions for DPL I, proposed Indicative Triggers for DPL II and the results indicators for the programmatic DPL series. The DPL I Policy Actions, DPL II Indicative Triggers and results framework are discussed in greater detail below. 11 Departamento Nacional de Planeación DNP. Construir Ciudades Amables. Bogotá, 2006, –p. 30. 11 B. POLICY AREAS Key Policy Area 1: Sustainable and Inclusive Cities 41. Government Policy Objectives: The Government’s objective is to ensure that cities in Colombia effectively manage urban growth in an environmentally sustainable manner while also ensuring equitable access to basic urban services. Specifically, the Government aims to deepen its policy reform agenda on issues of hazard risk management in informal urban settlements, access to water and sanitation services for the poorest urban households, the improved performance, coverage and safety of affordable urban public transportation services and the renovation of urban space and the creation of public spaces. The Government has also demonstrated a clear commitment to identifying cross-sectoral policy linkages to meet the challenges of sustainable and inclusive urban development. 42. Government Policies Supported by the Program: Within the policy priorities articulated above, the proposed program aims to support three complementary policy areas: (i) establishing a multi-sector policy framework based on the ‘system of cities’ approach; (ii) improve access to basic urban services for the poor; and (iii) and enhance urban environmental sustainability. These priorities and the associated prior actions supported by the program are further discussed below. 1.1 Multi-Sector Policy Framework on System of Cities • Prior Action 1: The Borrower, through DNP, has created a sub-directorate unit, within DNP, responsible for, inter alia, coordinating regional planning and investment, as evidenced by the Borrower’s Decree No. 1832 of August 31, 2012, duly published in the Borrower’s Official Gazette on August 31, 2012: Colombia stands out from many other developing countries given its complex geography, uneven levels of local development and its diverse social and cultural conditions. The National Development Plan 2010-14 identifies, under the framework of ‘Prosperity for All’, subnational regions and cities to serve a critical role as engines of sustainable and inclusive growth. The Plan recognizes the need for a medium- and long-term policy focus on Colombia’s system of cities and regions. The launch of the intra-ministerial policy commission, Misión Ciudades, is consistent with this strategy. DNP has created, through Presidential Decree, a Sub-Directorate for Regional Planning and Investment. The sub-directorate will manage key policy areas that are concerned with subnational and regional development including: (i) Sistema General de Participaciones (SGP) – the national transfer system; (ii) Sistema de Regalias – the national royalties system; (iii) cross-sector policy on infrastructure development and finance. The Bank will support the consolidation and strengthening of the sub-directorate through the ‘Sustainable, Productive and Inclusive Cities’ programmatic knowledge services engagement. Improved Access to Basic Services for the Poor • Prior Action 2: The Borrower, through MVCT, has issued a regulation for the provision of subsidies for household water and sanitation connections for low-income families (strata 1 and 2), as evidenced by the Borrower’s Decree No. 1350 of June 25, 2012, duly published 12 in the Borrower’s Official Gazette on June 25, 2012. : Low income households often cannot afford to connect to municipal water supply and sewerage networks. The connection typically involves modifying internal water and sanitation plumbing from back-yard shallow wells and latrines to connect with utility lines that run along streets. Traditionally, the Colombian public utility legal regime has allowed the government to provide subsidies to water companies, but the subsidies could not be used to pay for works past the connection point with the municipal system. The MVCT issued Decree 1350 of June 2012, and accompanying Ministerial Resolution 494 of June 2012, which provide the legal basis for the government to provide subsidies to low-income households for intra-household connections to water and sanitation networks. The policy and associated program target existing systems where neighborhood water and sanitation networks are in place to which low-income households have yet to connect. MVCT is responsible for formulating the overall subsidy program and also for entering into implementation agreements with municipal governments. The policy enables MVCT to subsidize up to 9.8 SMMLV to finance the intra-household costs to connect to the WSS network. The Decree is linked to an ambitious program to roll-out of the subsidy with a target of reaching 90,000 low-income households in four years, with an initial phase under implementation in collaboration with FONADE targeting 30,000 households. The program will use the existing and well-functioning Unidos program to identify target beneficiaries. Local utilities and municipalities are responsible for social outreach, communication and socio-economic monitoring and evaluation of program implementation. The program will have beneficial economic and public health impacts on the lowest income households who currently cannot afford to connect to formal water and sewerage networks. The public health benefits of improved sanitation will also be transmitted to the broader community through reductions in infectious diseases and an improved environmental health. In addition, by broadening its customer base through new household connections, water companies will increase revenues and enhance financial sustainability. Water companies typically make large investments to extend water and sewer pipe networks to poor neighborhoods, but often not all households are connected to the networks and the companies cannot charge for their service. By facilitating connections, water companies can increase their revenues and earn greater returns on their fixed investments. Regional and Colombian experience show that households are reliable customers when they receive good water and sanitation services. • Prior Action 3: The Borrower, through MT, has adopted its national road safety plan for years 2011-2016 to increase urban and inter-urban road safety in its territory, as evidenced by the Borrower’s Resolution No. 1282 of March 30, 2012, duly published in the Borrower’s Official Gazette on March 30, 2012. : In Colombia, road traffic fatalities have decreased over the last decade from 6,551 to 5,502 12, but continued urbanization 13, and more importantly, an accelerated rate of motorization, represents enormous challenge as 12 Presentación Fondo de Prevención Vial, 2011. 13 It is estimated that 36 million (78.5% of total population) live in urban centers in 2010, and this number is forecasted to climb to 48 million (83.5% of the total) in 2030 (ECLAC, 2009. Statistical Yearbook for Latin America and the Caribbean 2009, tiny.cc/sylac9. See also: Ideam, Indicadores socio-económicos, www.ideam.gov.co. 13 road accidents and fatalities are expected to increase. While the current motorization rate (130 vehicles per 1,000 people) in Colombia is low compared to similar middle-income countries in the region, trends indicate that the country’s motorization rate will more than triple by 2030, consistent with the worldwide trend in vehicle ownership and use which is highly correlated with increases in per capita income, declines in the inflation-adjusted cost of vehicles, and easier access to credit. 14 Furthermore, Colombia presents a particular challenge, as road safety fatalities are more prevalent in urban areas 15 - 31 percent of those killed are pedestrians, and 39 percent are motorcycle users 16 - and are the leading cause of death amongst children and early youth (5 to 14 year cohort). Against this backdrop, and in tandem with Colombia’s commitment to the Decade of Action for Road Safety, the GoC included road safety as a key priority in the National Development Plan 2010-2014, and affirmed a committed to cutting in half road fatalities in by 2016. 17 To respond to the commitments laid out in the National Development Plan, the Ministry of Transport issued the 2011-2016 National Road Safety Plan (Ministerial Resolution 1282 of March 2012) that defines a set of strategic principles and actions to be taken over the next four years in the following areas: (i) institutional and coordination arrangements, particularly the creation of an office that will lead the Road Safety Agenda of the country, creation of an inter-ministerial committee to better coordinate policies, and efforts to improve road safety initiatives at the subnational level; (ii) strategies to change driving behavior, including adoption of a point-based driving license systems, public outreach campaigns and heightened traffic enforcement in the use of seat belts, helmets, speed limits and drunk driving; (iii) strategies to improve vehicle safety standards; (iv) infrastructure guidelines and infrastructure audits; and (v) implementation of a timely emergency response system for road accident injuries and victims. While all of these actions are important, international experience as well as evidence from best practice in Latin America suggests that the first and most important action countries can take to address road safety concerns is to create a strong institutional framework that provides the right incentives, authority and information. In that context, a priority consequence of this Plan should be to detail institutional roles and responsibilities for addressing road safety in Colombia. Good practice in this context is to designate a lead agency that has authority and accountability for Road Safety outcomes. This needs to be complemented by the establishment of a systematic, structured and continuous monitoring framework to track safety outcomes, prevalence of risk factors and behaviors (such as helmet use, alcohol use while driving and use of seat-belts), and safety awareness. Establishment of a national road safety lead agency as well as establishment of a permanent ‘safety data observatory’ will be project performance indicators. 14 Colombia Clean Technology Fund Investment Plan, April 12, 2010. 15 65 percent of deaths occur in urban area. Presentación Fondo de Prevención Vial, 2011. 16 Presentación Fondo de Prevención Vial, 2011. 17 2011-2016 National Road Safety Plan, http://www.mintransporte.gov.co/descargar.php?idFile=5817 14 1.3 Urban Environmental Sustainability • Prior Action 4: The Borrower, through CONPES, has approved its national public space policy guidelines in order to promote the creation of public spaces in urban areas, as evidenced by the Borrower’s CONPES document No. 3718 of January 31, 2012: The availability of safe and accessible public spaces has wide-reaching impacts on urban livability and quality of life. As cities evolve to greater ‘knowledge-based’ economic agglomerations, the ability to attract and retain a high skilled work force will in part be determined by the quality of life that cities can offer. An integrated network of green public space assets forms a key a sustainable urban environmental strategy. The Government approved a CONPES National Policy on Public Spaces through Decree 3718 of January 2012. The national policy provides a framework to increase the provision of public space in Colombian cities – with an explicit focus on increasing public spaces in low-income neighborhoods. The policy provides regulatory clarity on the use of fiscal instruments to generate revenues from the use of public spaces. These revenues would be used to maintain and enhance the quality of public space assets as well as for the generation of new spaces. The policy also provides a framework to coordinate investment planning across transport, housing and cultural heritage sectors at the national level with the aim of better focusing investment resources around public space maintenance and generation. The policy aims to increase public space per capita from the current average of 3.3 to 5 square meters in 2014 in cities above 100,000 people. The Government has prioritized under the policy 20 cities where ‘secure public spaces’ pilots will be implemented. Finally, the CONPES also provides guidelines for municipalities to include in their development and territorial plans (POTs) strategies and investments to improve the quantitative and qualitative indicators of public space. • Prior Action 5: The Borrower has created a national urban redevelopment company to support the structuring of urban redevelopment projects, as evidenced by Borrower’s Presidential Decree No. 4184 of November 3, 2011, duly published in the Borrower’s Official Gazette on November 3, 2011: The rigidity of urban land markets in mature Colombian agglomerations is a significant constraint on the ability of cities to redevelop high value, yet underutilized, land assets. Cities need to be able to have at their disposal flexible and transparent land management tools that enable the reconversion of land towards higher value and strategic uses. These higher value uses can generate increased revenue for local governments that can be directed towards improving access to affordable public transport, basic services and housing for lower income segments. Public intervention to promote urban redevelopment can include effective zoning, tax incentives and land use planning to create the appropriate incentives for urban redevelopment. However, broader public intervention, beyond the use of regulatory incentives, is often required due to large public infrastructure demands, complex social risks and the need for sophisticated financial structuring. The Government created through Presidential Decree 4184 of November 2011 the National Urban Redevelopment Company (EMBARCO) with the aim to promote the redevelopment of urban space in major Colombian cities. EMBARCO is registered as a company under private commercial practices with majority public ownership and the flexibility to raise capital from private sources and is entrusted with the ability to structure complex urban redevelopment projects in Bogota and major Colombian cities. 15 Key Policy Area 2: Access to Affordable Housing 43. Government Policy Objectives: The Government’s objective is to ensure access to affordable and secure housing for low-income households. 44. Government Program Supported by the Program: The Government has in recent years advanced a suite of legal and regulatory reforms that aim to create improved access to housing for the poor. Specifically, the proposed program supports reform that aims to increase the provision of public housing to the extreme poor. This priority and the associated prior action supported by the program are further discussed below. • Prior Action 6: The Borrower has established the legal framework for the provision of public housing to the poorest and most vulnerable households as regulated and evidenced by the Borrower’s Law No. 1537 of June 20, 2012, duly published in the Borrower’s Official Gazette on June 20, 2012: Approximately 15 percent of Colombia’s population lives in extreme poverty. This segment of the population has limited and tenuous access to affordable formal sector housing as it lacks both the ability to pay for market-rate housing solutions. This segment is often disproportionately associated with internally displaced peoples. The Government passed Law 1537 of June 2012 – Access to Affordable Public Housing by which it enables the provision of fully subsidized public housing for the extreme poor. Additionally, the law includes provisions eliminating procedures and permits associated with the titling of low income housing units including registrar and notary fees. The law also recognizes the importance of ensuring the continuity of basic service provision and the management of physical assets post-construction and as such creates funds to subsidize public utilities to provide access to low income residents and for the maintenance of public housing complexes. The Government will use its existing screening and qualification system managed by FONVIVIENDA to establish beneficiary eligibility for the program. The law and associated program and provisions will potentially have a significant impact on improving access to secure housing for the poor. Key Policy Area 3: Institutional Strengthening and Regional Coordination 45. Government Policy Objectives: The objective of the Government program is to increase intra-jurisdictional coordination in planning and investment between municipalities and across levels of Government. 46. Government Policies Supported by the Program: The Government made a significant policy commitment to addressing issues of regional and intra-jurisdictional coordination – recognizing the importance of improved coordination capacity at a regional scale to more effectively develop and target structural investments, mitigate intra-jurisdictional competition and the emergence of perverse incentives, improved regional environment management, amongst other priorities. In this context, the proposed program supports the following key policy actions. • Prior Action 7: Borrower, through MT and DNP, has issued a regulation for the implementation of the Contrato Plan, as evidenced by the Borrower’s Decree No. 819 of April 25, 2012, duly published in the Borrower’s Official Gazette on April 25, 2012: The 16 National Government has played an active role in promoting sector reform and investment at the subnational level in certain sectors. For example, the Government has provided large capital investment subsidies to promote BRTs in Colombia’s largest cities while linking to these investments a framework for utility management, tariff policy and maintenance. However, each subnational engagement was negotiated independently without a clear institutional framework for such collaboration. The Government approved Ministerial Decree 819 of April 2012 – Contract Plans with the aim of creating a transparent and clear instrument to facilitate coordination in initiatives that involve both the national government and territorial entities. Specifically, contract plans aim to support the development, financing and implementation of development activities at a metropolitan and regional scale where national government participation are required. The contract plan model is based on a French model used extensively in France for the same purpose. The agreements specify responsibilities and contributions from all parties and have three basic stages: (i) pre-contractual, where basic objectives for the territory are defined and a “Strategic Agreement for the Territory� is signed; (ii) contractual, for the structuring and execution processes; and (iii) post-contractual, when all evaluations of impacts are implemented. Key Policy Area 4: Urban Connectivity and Regional Infrastructure Finance 47. Government Policy Objectives: The objective of the Government program is to increase the economic efficiency of the urban system by improving logistics-based connectivity between Colombian cities and external markets. The Government program also aims to strengthen the framework for structuring of PPPs for urban and regional infrastructure. 48. Government Policies Supported by the Program: The proposed program supports the following key Government policy actions. 4.1 Urban Connectivity • Prior Action 8: The Borrower, through MT, has designated a national agency for infrastructure to structure regional infrastructure concessions, as evidenced by the Borrower’s Decree No. 4165 of November 3, 2011, duly published in the Borrower’s Official Gazette on November 3, 2011: Colombia suffers from severe connectivity challenges serving as a drag on growth and competitiveness. Colombia’s challenges are both a function of its complex geography – with primary urban agglomerations located in the Andean highlands – and chronic underinvestment in connective infrastructure. The Government approved Decree 4165 of November 2011 - Creation of ANI with provisions to improve technical, legal and financial capacity of the agency to structure regional infrastructure concessions. The reform involves a change in the legal nature of the former National Institute of Concessions (INCO) into a new entity, reflecting the Ministry of Transport’s focus on promoting greater private investment and to develop the infrastructure sector through the deeper use of concessions and PPP instruments. This institutional reform seeks to consolidate a specialized and efficient entity with high technical and governance standards. The reform provides ANI with the tools to recruit qualified human capital at competitive market salaries, strengthen corporate governance, and to structure and develop a pool of PPP projects along the lines of regional and international best practices. In 17 summary, the reform consolidates a new institutional structure in ANI that will be vested with greater PPP and concessions structuring capacity, increased human resources management authority to mobilize the highest quality professionals, improved project evaluation capacity, enhanced contract management and oversight functions and increased authority to mobilize external financing for concessions program. It is expected that the reform will reinforce the Government’s ability to apply transparent contract awarding processes, appropriately qualify and select the best PPP sponsors, standardize the tendering documents and PPP contracts, and project employ Project Management techniques. The IFC Advisory Services group on PPPs is currently engaged with ANI to support on the technical and financial structuring of a first pool of contracts. 4.2 Regional Infrastructure Finance • Prior Action 9: The Borrower has established the legal framework for the structuring and financing of public-private partnerships, as evidenced by the Borrower’s Law No. 1508 of January 10, 2012, duly published in the Borrower’s Official Gazette on January 10, 2012: The Government approved Law 1508 of January 2012 on Public Private Partnerships (PPP). The core objective of the law is to incentivize and facilitate private investment and involvement in public infrastructure development. The law is expected to facilitate the resolution of significant infrastructure bottlenecks that have slowed economic development and prevented potential benefits from foreign investment. In addition, the new law expands the scope of PPPs from traditional public works projects to public housing, courthouses, schools, health facilities and prisons – investments that are primarily located and service cities. The law draws on experiences from countries in the region that have recently experienced significant infrastructure growth, such as Chile and Peru, and also includes mechanisms to address the specific challenges of Colombian infrastructure over the last few decades. For example, under the new legal framework, payments to contractors will only be made once the respective project has reached commercial operation, and payment will be dependent on meeting certain service levels and quality standards. In essence, contractors will not be paid for work performed until the project is completed in accordance with the original project plan. Market expectations for the PPP law are strong as proposals for private initiatives at the local and national level that use the new tools are already emerging. The success of the law will depend on the capacity of the private sector to propose and collaborate on initiatives, as well as public sector ability to process, evaluate, and follow up on private initiatives effectively. 18 Table 1: Policy and Results Matrix for Programmatic Sustainable and Productive Cities Development Policy Loan Series Medium-term Objective DPL 1- Prior Actions DPL 2 – Indicative Triggers Policy Area 1: Sustainable and Inclusive Cities Establish a multi-sector policy Prior Action 1: The Borrower, through DNP, has Policy Trigger 1: Approve a CONPES national framework that aims to increase created a sub-directorate unit, within DNP, responsible policy document for strengthening the efficiency the productivity, sustainability for, inter alia, coordinating regional planning and and sustainability of the Colombian ‘System of and inclusiveness of Colombia’s investment, as evidenced by the Borrower’s Decree No. Cities’. system of cities. 1832 of August 31, 2012, duly published in the Borrower’s Official Gazette on August 31, 2012 Facilitate improved access to Prior Action 2: The Borrower, through MVCT, has Policy Trigger 2: Approve CONPES national basic services for low income issued a regulation for the provision of subsidies for policy document detailing the creation of a new households across Colombian household water and sanitation connections for low- legal framework for urban transport demand cities. income families (strata 1 and 2), as evidenced by the management. Borrower’s Decree No. 1350 of June 25, 2012, duly . published in the Borrower’s Official Gazette on June 25, Policy Trigger 3: Approve CONPES national 2012. policy document that lays out the National Policy for Integrated Public Transport Systems. Prior Action 3: The Borrower, through MT, has adopted its national road safety plan for years 2011- 2016 to increase urban and inter-urban road safety in its territory, as evidenced by the Borrower’s Resolution No. 1282 of March 30, 2012, duly published in the Borrower’s Official Gazette on March 30, 2012. Results Indicator Baseline Value DPL I Indicator DPL II Indicator Responsible Entity 1. Number of poor households in 0 25,000 90,000 MVCT cities with population greater than and Empresas de 100,000 residents that have Servicios Públicos connected to neighborhood water and sanitation networks through availing connection subsidy. 2. Establishment of an N/A Establishment of National Lead Establishment of an Ministry of institutional and monitoring Agency to address Road Safety observatory to maintain Transport/DNP framework consistent with and monitor data on international good practice to urban risk behaviors 19 address urban traffic safety issues (helmet use, safety belts etc.) and completion of first set of data collection in this regard Increase the environmental Prior Action 4: The Borrower, through CONPES, has Policy Trigger 4: Regulate through Ministerial efficiency of Colombian cities approved its national public space policy guidelines in Decree a methodology for identifying municipal with stronger risk management order to promote the creation of public spaces in urban inventory of at-risk human settlements. systems and an improved areas, as evidenced by the Borrower’s CONPES framework for urban document No. 3718 of January 31, 2012 environmental management, urban redevelopment and the Prior Action 5: The Borrower has created a national creation of public space. urban redevelopment company to support the structuring of urban redevelopment projects, as evidenced by Borrower’s Presidential Decree No. 4184 of November 3, 2011, duly published in the Borrower’s Official Gazette on November 3, 2011. Results Indicator Baseline Value DPL I Indicator DPL II Indicator Responsible Entity 3. Increase in availability of 3.3 3.6 3.9 MVCT public spaces in cities with population greater than 100,000 residents as measured by square meters of public space per capita 1 Policy Area 2: Access to Affordable Housing Increase access to affordable Prior Action 6: The Borrower has established the legal Policy Trigger 5: Approve Ministerial Decree housing for low-income framework for the provision of public housing to the regulating Law 1469 of 2011 to define municipal households. poorest and most vulnerable households as regulated fiscal responsibilities and benefits involved in and evidenced by the Borrower’s Law No. 1537 of June implementing National Macroproyectos of Social 20, 2012, duly published in the Borrower’s Official Interest Housing Program Law. Gazette on June 20, 2012 Results Indicator Baseline Value DPL I Indicator DPL II Indicator Responsible Entity 4. Number of low income 0 40,000 100,000 MVCT families with access to affordable 1 The Bank and the Government will during implementation examine how the indicator on public spaces can be disaggregated to measure increases in public spaces in low-income neighborhoods. 20 and safe housing solutions as a result of 2012 Public Housing law Policy Area 3: Institutional Strengthening and Regional Coordination Increase inter-urban and regional Prior Action 7: Borrower, through MT and DNP, has Policy Trigger 6: Consolidate the municipal coordination on strategic issued a regulation for the implementation of the governance structure to increase inter-municipal development initiatives through Contrato Plan, as evidenced by the Borrower’s Decree coordination in metropolitan areas through the the approval of fiscal incentives No. 819 of April 25, 2012, duly published in the regulation of the proposed metropolitan areas law. and coordination instruments. Borrower’s Official Gazette on April 25, 2012 Results Indicator Baseline Value DPL I Indicator DPL II Indicator Responsible Entity 5. Number of regional Contract 0 3 6 Ministry of Interior and Plans signed between territorial Territorial Entities entities with development objectives that benefit lower- income segments Policy Area 4: Urban Connectivity and Regional Infrastructure Finance Increase the economic efficiency Prior Action 8: The Borrower, through MT, has Policy Trigger 7: Approve CONPES national of urban system by improving designated a national agency for infrastructure to policy document that articulates a national policy on logistics-based connectivity structure regional infrastructure concessions, as management contracts for the national road system between Colombian cities and evidenced by the Borrower’s Decree No. 4165 of (‘CREMA’). between Colombian cities and November 3, 2011, duly published in the Borrower’s external markets. Official Gazette on November 3, 2011. Results Indicator Baseline Value DPL I Indicator DPL II Indicator Responsible Entity 6. Kilometers of principal road 0 750 2000 Ministry of Transport network under integral (NDP/SISMEG) maintenance contracts Strengthen framework for the Prior Action 9: The Borrower has established the legal Policy Trigger 8: Approve Ministerial Decree structuring of PPPs for urban and framework for the structuring and financing of public- regulating the PPP Law to provide a framework of regional infrastructure private partnerships, as evidenced by the Borrower’s guidelines for PPP structuring, financing, and Law No. 1508 of January 10, 2012, duly published in management. the Borrower’s Official Gazette on January 10, 2012. Results Indicator Baseline Value DPL I Indicator DPL II Indicator Responsible Entity 7. Number of urban PPPs 0 4 8 National Planning structured Department 21 Results Framework 49. A Results Framework has been development based on the policy matrix outlined above. The framework aims to cover the entire program period envisioned for the proposed DPL series – identifying indicators for both the first DPL and the overall program. The use of a ‘programmatic results framework’ is consistent with the medium-term focus on the Bank’s programmatic engagement on sustainable, productive and inclusive cities. The programmatic results framework will also enable the Government and the Bank to focus on structuring and targeting financial, knowledge and convening services support towards the achievement of strategic outcomes. 50. The Bank and Government analyzed during preparation the feasibility of utilizing an existing aggregate city performance indicator to measure the effectiveness of the proposed reform program. However, no clear aggregate indicator was considered appropriate for the scope of the reform program. A City Development Index (CDI) is currently collected by local chambers of commerce which provides useful information on city economic competitiveness. A non-governmental public perception initiative, ‘Como Vamos’, has been implemented in a number of Colombian cities to assess citizen perceptions of municipal performance. Similarly, existing Government measurement systems including the Sistema Único de Información (SUI) Municipal, Sistema de Información, Seguimiento y Evaluación del Transporte Urbano (SISETU) and the Indicador de Viabilidad Fiscal all provide relevant information on specific sectors (e.g. water and sanitation, urban transport and municipal finance). These measurement systems are part of an important ‘network’ of results measurement platforms that require further integration and coordination. The Government has requested Bank support, in the context of the Misión Ciudades and the completion of the DPL II indicative trigger for a ‘System of Cities’ CONPES, to develop a measurement framework that would enable to Government to measure and benchmark cities across core program objectives – sustainability, productivity and inclusiveness. 51. The programmatic results framework for the DPL outlined in the matrix above below does aim to link the measurement of expected results for specific prior actions to existing Government of Colombia development targets. Consultation Process 52. The development priorities of the Government of Colombia, including the policies supported by this DPL, are embodied in a multi-year development plan (the National Development Plan 2010-2014), and reflect not only rigorous technical analysis but also national consultative processes. The National Development Plan 2010-2014 is the foundation for many of the Prior Actions, and is developed in consultation with civil society and a wide range of governmental and non-governmental agencies. The National Planning Council (Consejo Nacional de Planeación) is the responsible entity for conducting the public consultation process associated with Colombia’s National Development Plans (NDP). The Council, according to Article 9 of Law 152 of 1994, must be comprised of national and local agencies and organizations that provide suggestions and recommendations on the most important chapters and building blocks of the NDP. The Council is in charge of ensuring a broad-based consultative process is conducted, representing a wide range of non-state organizations such as academia, 22 religious groups, private sector, trade unions, and youth groups. According to DNP, this is one of the most important instances of civil society participatory planning in the country. Between November and December 2010, 20 regional and 10 thematic forums were held around the country, as well as a National Congress of Participatory Planning (XIV Congreso Nacional de Planeación Participativa) in the city of Yopal, and several sessions and numerous working groups with the heads of planning of the regions. 53. In addition to the participatory measures outlined above, many of the Prior Actions were subject to additional consultation. These processes are outlined in depth in Annex 6. Dialogue and actions undertaken include: (i) extensive technical consultation across the relevant sectors, including the Vice Ministry of Transportation, Ministry of Health and Social Protection. vice Ministry of Education, Ministry of Housing, Cities and Territories, The National Treasury, the National Police, and the Transportation Working Group of SENA; (ii) consultation regulatory bodies as well as mayoral administrations and utilities of Bogota, Cartagena, Medellin, Quibdo, and Barranquilla; (iii) consultation with international agencies, such as the Inter-American Development Bank and UN Habitat; and (iv) many local civil society and specialist institutions such as national universities, TransMilenio, the Instituto para la Economía Social (IPES), the Urban Development Institute (IDU), the District Institute for Leisure and Sport (Instituto Distrital de Recreación y Deporte, IDRD) and chambers of commerce. In addition, all laws are subject to the Colombian Constitution and Law 5 of 1992, which define processes for public consultation, referendums, and the grounds on which citizens can comment on the formation of any law. 54. Further detail and description of the consultation process, as well as the policy areas and prior actions is included in Annex 5. The annex also includes a description of the indicative triggers for the proposed DPL II, and a discussion of the methodological considerations associated with the results framework. VI. OPERATION IMPLEMENTATION A. POVERTY AND SOCIAL IMPACTS 55. The policies supported by this operation are closely linked with well-documented positive distributional, gender, social, and poverty impacts. A Poverty and Social Impact Assessment was carried out, and documents these expected positive impacts. It provides robust analysis of potential negative outcomes and mitigation measures for these Prior Actions from a gender-sensitive social and distributional perspective. The PSIA process has been supported by strong engagement with GoC counterparts. 56. The PSIA is structured to follow the policy areas outlined in the Program Document. For the three Prior Actions that anticipate specific investments to target the poor, direct potential outcomes were analyzed with a gender-sensitive approach. Specifically, within Policy Area 1, the policy to subsidize intra-domiciliary connections for low-income households to existing WSS networks is found to positively impact access, equity of access, and key indicators in health and education. Monthly tariffs could present an additional burden and uncertainty to household budgets; however, several mitigating provisions exist, including: (i) obligatory municipal and 23 utility education campaigns; (ii) a progressive tariff structure and cross-subsidy system which protect against unexpected adjustments in tariff levels; (iii) support from the existing national transfer program (Unidos); and (iv) potential to expand a successful pilot to facilitate local pre- payment of utility bills for low-income households. Smart investments in public spaces and urban renovation can improve health, safety and assets of poor families; and existing consultation provisions and resettlement precedent can play an important role in mitigating unintended negative impacts. In Policy Area 2, the research indicates that the prior action supporting provision of housing units for the very poor can improve equity; and the GoC has demonstrated commitment in developing guidelines for project design factors such as quality, design, targeting, and management of new housing which will play an important role in determining unintended negative impacts. 57. For the Prior Actions that aim to strengthen the institutional and regulatory framework, the PSIA focused on identifying aspects of these frameworks that influence successful and socially inclusive implementation. Guidelines in the national road safety plan are likely to reduce road accident mortality, which disproportionately affects vulnerable groups, and the PSIA finds only a small proportion of households would be negatively impacted from any potential fee or standard increases. There are no anticipated negative impacts associated with the development of the new Sub-Directorate for Regional Planning and Investment within the DNP (Prior Action 1), which is expected to increase capacity for coordinated and equitable policy implementation across relevant sectors. Equally, there are no anticipated negative impacts from Contract Plans (Prior Action 7), which can leverage efficiencies that can benefit the poor. With respect to Prior Actions 8 and 9, the PSIA finds that PPPs and ANI can enable increased and improved social and connective infrastructure with significant benefits for the poor and enhance institutional capacity to address social impacts. Nonetheless, the quality and specificity of forthcoming guidelines on critical steps in terms of social impacts. For the PPP process, these guidelines expected to be incorporated in the ensuing PPP regulatory decree that is included as an indicative trigger for phase II of the DPL. For ANI, guidelines on social impact studies, consultations, and potential appropriation and redevelopment remain the same as under INCO, and were developed under an ongoing engagement with the IFC. A more detailed discussion of the ANI social management framework – and specifically the social management responsibilities of ANI concessionaires – is included in Annex 9. 58. Nearly all policies supported by this DPL explicitly target poor and vulnerable urban households, which are disproportionately headed by women. Framed within the larger context of urban sustainability and productivity, the prior actions included in this DPL almost all have a direct focus on improving outcomes for the lowest-income residents of cities. According to the latest Poverty and Labor Brief: The Effect of Women's Economic Power in Latin America and the Caribbean 1, households with female economic-headship 2 are more likely to be in extreme poverty than their male counterparts. These results are particularly important since the female economically-headed households are also more likely to support children and the elderly, and have higher dependency ratios. 1 World Bank (2012) Poverty and Labor Brief: The Effect of Women's Economic Power in Latin America and the Caribbean. Washington DC. 2 Economic-headship is defined as the share of total household income that is generated by a particular group. 24 59. A detailed summary of the PSIA is provided in Annex 9. Annex 9 also includes a summary matrix of the potential positive and negative impacts of the DPL policies and associated mitigation measures. Lastly, the Annex summarizes the proposed analytical program linked to the proposed DPL program, specifically focused on policy analysis that will inform the implementation of DPL I prior actions and the design of proposed DPL II indicative triggers. Cross-cutting implementation risks are discussed in the risks and mitigation measures section of this Program Document. B. ENVIRONMENTAL ASPECTS 60. It is expected that the policies and reforms supported by this operation will have net positive environmental effects. The 2005 Country Environmental Analysis (CEA) concluded that the most severe costs of environmental degradation are associated with urban and indoor air pollution; inadequate water supply, sanitation, and hygiene; natural disasters (such as flooding and landslides); and land degradation. The burden of these costs falls most heavily on vulnerable, and disproportionately urban, segments of the population. The proposed DPL series includes a number of specific measures to address environmental degradation in these areas, as well as strengthening overall environmental management and protection. 61. Specifically, key potential positive environmental effects of the proposed program include: • The ministerial decree enabling subsidies for household water and sanitation connections explicitly targets users that are not located in risk areas or in areas of environmental protection according to the respective land use plans. More generally, the program is expected to: (i) improve environmental health; (ii) reduce environmental degradation of watersheds; (iii) improve hygiene practices; and (iv) improve well-being and quality of life. • The CONPES document on public spaces will support the creation of green spaces, including public parks and trees, particularly in low-income areas. These measures will contribute to the mitigation of climate change, carbon sequestration, biodiversity enhancement, and improved air quality. There is also potential to finance the creation of green public spaces through carbon sequestration projects. Green public places can incorporate sustainable drainage systems (SUDS) to contribute to reduce floods risks, enhance biodiversity conservation and contribute to adaptation to climate change. Additionally, green public places can help support groundwater aquifers recharge. • The creation of EMBARCO, the national urban redevelopment company, through Presidential Decree will potentially: (i) contribute to densification and a reduction in the pace of urban expansion and sprawl, land use conversions and pressure on agricultural land; and thereby (ii) reduce the demands on extending public services, new infrastructure, treatment plants and landfills to accommodate urban expansion. The magnitude of these positive environmental effects will depend, however, on the extent to which the company is able to effectively structure and implement redevelopment projects. • The National Public Housing Law of 2012 aims to increase access to safe and secure public housing for the extreme poor. The law and associated program have significant potential positive environmental effects. The program targets the extreme poor who, 25 without access to the program, are disproportionately likely to locate in informal urban settlements with precarious access to basic urban services. As such, the program has the potential to mitigate the growth of environmentally precarious urban settlements. Additionally, the policy will likely: (i) improve environmental and public health; (ii) enhance the well-being and quality of life of poor residents; and (iii) reduce water related diseases. 62. The proposed program of prior actions contemplates certain potential negative environmental effects. These effects and associated mitigating measures are summarized below: • Potential negative environmental effects from the creation of EMBARCO relate to the potential environmental risks associated with implementing redevelopment projects in dense and post-industrial sites in urban areas. EMBARCO – as a newly formed institution – has yet to develop environmental management procedures and institutional capacity. Additionally, the decree does not make reference to internal environmental capacity and processes. The key mitigating factor is the fact that all proposed EMBARCO investments will be subject to Colombia’s existing environmental analysis, review and licensing procedures – which are noted to be of high quality compared those for other countries in the region. Nonetheless, the entity will need to invest in adequate environmental management capacity. • Possible negative environmental effects of the National Public Housing Law of 2012 include: (i) project location in environmentally hazardous areas; and (ii) inadequate environmental management during and after project execution. The Law and associated regulatory instruments under development include provisions to ensure environmental sustainability of supported public housing projects. Specifically, article 47(c) of the Law prohibits locating social housing projects in areas of environmental conservation, such as areas from the national system of protected areas, forest reserve areas, areas of special management, areas of special ecosystem importance, special soil protection areas and areas with restricted land use. Additionally, all housing projects will be subject to Ministry of Environment review and approvals and, as such, will require complete environmental analysis and management planning. Lastly, the Law requires that CARs make necessary investments in environmental infrastructure associated with public housing projects. Nonetheless, the regulation of the Law will require further specificity on environmental management obligations and MVCT will need to invest in deeper environmental management and supervision procedures. Additionally, MVCT will need to improve coordination with CARs to avoid conflict over investment requirements. • The creation of ANI may imply negative environmental effects associated with the implementation of road and other logistics infrastructure concessions. Responsibility for environmental management is divided between: (i) the concessionaire who is responsible for the elaboration of environmental studies and to attain the environmental licenses; (ii) ANI which is responsible for incorporating environmental obligations into the concession structure and to participate in the processing of the environmental license; and (iii) the Ministry of the Environment and Sustainable Development which supervises the each step of the concession and conducts supervision visits in accordance with Law 99 of 1993. In performing its functions, ANI inherits a well-functioning and rigorous environmental management framework from INCO (the former National concessions institute), which is 26 due to be further strengthened through increased technical capacity. Specifically, the Vicepresicencia de Planeación, Riesgos y Entorno, has the following functions, among others: (i) design the methodologies and coordinate the necessary studies for the environmental evaluation of ANI's projects; (ii) define the requirements for land acquisition, environmental management of the projects previous to the starting date of the procurement process; and (iii) establish methodologies and management strategies, and direct and/or supervise the environmental management under contracts or licenses, including existing expropriation processes. INCO´s Grupo de Gestión Social y Ambiental had 5 people working on environmental issues which have been strengthened to 10 staff working on environmental issues at the Vicepresidencia de Planeación, Riesgo y Entorno. Additionally, a program of monthly meetings between ANI and the Ministry of Environment and Sustainable Development exists to evaluate and supervise environmental aspects of projects under concession. A more detailed discussion of the ANI environmental management framework – and specifically the environmental management responsibilities of ANI concessionaires – is included in Annex 9. 63. The ministerial decree enabling subsidies for household water and sanitation connections does not imply significant environmental effects given that the program will target users in existing systems, i.e. no trunk or secondary infrastructure investments are envisioned. Nonetheless, the environmental review of the policy recommends the preparation of guidelines for municipalities – where such procedures are not already in place – for the removal of septic tanks and latrines. These recommendations will be incorporated into the technical assistance activities as part of DPL supervision and the proposed preparation of the second DPL in the series. C. IMPLEMENTATION, MONITORING AND EVALUATION 64. The Ministry of Finance and Public Credit (MHCP) and the National Department of Planning (DNP) are designated as implementing agencies for the Loan. DNP is responsible for overall technical coordination, monitoring and evaluation. Within the DNP, the Department of Urban Development and the Department of Public Policy Monitoring and Evaluation will be the primary entity responsible for coordinating on program implementation, monitoring and evaluation with the key ministries and agencies, including the Ministry of Transport (MT), MVCT, Ministry of Environment, Ministry of Interior, as well as other departments within DNP with corresponding functional responsibilities. The evaluation of the proposed DPL program will be coordinated with the Evaluations Unit with DNP, with whom the Bank is engaged in technical assistance on policy and program evaluation issues. 65. A results framework for the proposed programmatic DPL series has been developed and is included in this document. Additionally, the Bank and DNP have outlined a series of medium- term measurement and evaluation activities that will support the Government of Colombia to strengthen the evaluation of outcomes for the broader policy agenda associated with this Productive and Sustainable Cities DPL. These activities – as described in Annex 9 – include the development of an aggregate index or measurement framework to benchmark Colombian cities in the context of the Misión Ciudades and the use of the Human Opportunity Index (HOI) to track performance of specific policies and across subnational governments. 27 D. FIDUCIARY ASPECTS Public financial management 66. The public financial management systems are adequate to support development policy lending. The national level public financial management (PFM) systems show advanced levels of performance which are close to good international practices, according to the most recent Public Financial Management and Procurement Report (2009). Moreover, Colombia has an effective track record of implementing PFM reforms, which have been supported by the Bank through a package of financing instruments and knowledge services. Salient features of the PFM systems are summarized below. 67. The budget is comprehensive, well documented, and implemented as planned, with actual expenditures deviating only slightly from planned levels. Budget planning is based on a multi-year perspective and annual formulation reflects a functioning policy-based system. Execution of budgeted expenditures suggests a largely credible budget, although some arrears may exist. The Borrower has published its annual budget in a timely fashion (Decree 4970 of December 30, 2011). 68. Revenue and expenditure controls are comprehensive, although some concerns arise with the quality of revenue reporting. Of significant relevance are strong measures to safeguard overall integrity and accuracy of revenue data, by integrating or reconciling the different accounting systems used by the tax administrator, ensuring consistency between the information from its accounting and statistical records, and guaranteeing timely recording of transactions. Records and controls on cash flows, balances, and public debt support sound fiscal management and provide public institutions with the tools for predicting funding to execute their budgets in an orderly manner. 69. The consolidated public accounts are prepared within six months of the end of the fiscal year. They include full information on revenues, expenditures, and financial assets and liabilities. Year-end accrual-based financial statements are issued by the Accountant General and presented within six months by May 15 of the following year to the Controller General for audit purposes. The Controller General’s auditing policies and procedures provide for the application of financial, compliance, and performance procedures consistent with national government auditing standards. Audit reports are submitted before July 1 of the following fiscal year to the Congress and the President of the Republic. Procurement 70. An assessment of the public procurement system concludes that Colombia has made progress over the past five years, although further progress is needed. There have been leaps forward in modernizing the procurement system, but work remains in terms of consolidating gains and ensuring sustainability. One of the most relevant steps forward the reform has been the recent creation (November 2011) of a Procurement Directorate (Agencia Nacional de Contratación Pública, Colombia Compra Eficiente) to oversee and lead the procurement reforms, replacing the inter-sectoral Commission of Public Procurement (CINCO). However, important remaining challenges include: first, the legal framework should regulate standards not 28 only processes and align procurement to expenditure policy. The legal framework has been focused heavily on the administrative function, and based primarily on legal regulations. Second, the electronic procurement system should be updated and become a transactional procurement platform, to improve transparency, generate competition, or streamlining processes. Third, professional workforce should be developed. Procurement staff lack both knowledge and professionalism to deliver best outcomes, including saving costing strategies. Finally, the Procurement Directorate should be furnished with sufficient resources and capacity to effectively champion further modernization efforts. In sum, the legal, institutional and operational frameworks must be dynamic and adaptable to respond the challenges in the market as new technologies and ways of doing business develop in Colombia and around the world. E. DISBURSEMENT AND AUDITING 71. Disbursement arrangements. Upon effectiveness and compliance with any withdrawal tranche release conditions, and following the Borrower’s request, the Bank would deposit the funds into an account denominated in US dollars of the Central Bank (Banco de la República) for subsequent credit into the Treasury Single Account of the Ministry of Finance and Public Credit, thus becoming available to finance budgeted expenditures. The Ministry of Finance and Public Credit will provide the Bank with a written confirmation of the described transaction after funds are disbursed by the Bank. 72. There is no evidence that the banking control environment into which the DPL proceeds would flow is other than adequate. This assessment is based on a review of the 2010 and 2011 External audit report of the Banco de la República, the latest IMF Central Bank safeguards assessment (2010), and the 2011 IMF Article IV Consultation. Based on the assessment of the Borrower’s current public financial management systems and the conclusion that the fiduciary arrangements for this financing are adequate, the Bank will not require an audit of the designated account, and no additional fiduciary arrangements are considered necessary at this time. F. RISKS AND RISK MITIGATION 73. The proposed operation in considered to have an overall moderate risk level and is subject to three types of risk: (a) macroeconomic; (b) political, institutional and technical; and (c) social and environmental. 74. Key macroeconomic risks include Colombia’s exposure to three different types of external shocks, including: a slowdown in economic activity in the US, a decline in oil prices, and global financial market turmoil. The country’s macro resilience is based on solid initial conditions and policy buffers to respond. Economic growth is strong and the absence of significant domestic or external imbalances help shore up stability. Substantial foreign direct investment inflows, ample accumulation of foreign reserves, and a Flexible Credit Line with the IMF protect the external position. Colombia also enjoys a flexible exchange rate and has room for monetary and fiscal policy easing. 29 75. Key political, institutional and technical risks include those related to appropriate targeting of beneficiaries, uptake of reforms by beneficiaries and institutional capacity and implementation challenges. Targeting risk is mitigated by the use of objective eligibility criteria (e.g. SISBEN and Unidos) and linkages to complementary World Bank engagement to support improvement in the management of targeting systems. The risks that beneficiaries will not access benefits related to water sector reforms are mitigated by specific requirements in the decree for municipalities to dedicate resources to social outreach and communication, existing cross- subsidies in the water sector that lessen the tariff burden for lowest income households, tariff regulatory restrictions on maximum annual increases to water tariffs, amongst other measures. Institutional and implementation risk was mitigated by prioritizing reforms where institutional capacity is considered greatest, focusing on reforms that have been demonstrated to occupy a central importance to the targets and objectives of implementing agencies and focusing on reforms where the Bank has in place active complementary engagements that include support for strengthening institutional capacity. 76. Key environmental and social risks include the risk that certain policies supported by the DPL may have some negative social and environmental impacts. The overarching environmental policy and regulating framework is strong. The Government of Colombia – with World Bank lending and knowledge services support – has made significant strides towards strengthening the national environmental regulatory and institutional framework. This umbrella engagement has strengthened the environmental regulatory framework, increased capacity of environmental authorities to enforce regulations and mainstreamed environmental assessment and management practices in sector programs. 77. A risk exists that adequate frameworks for environmental and social management are not incorporated into PPP and concessions frameworks supported under by ANI. However, ANI guidelines on social impact studies, consultations, and potential appropriation and redevelopment – developed through technical support from the IFC – are strong and in large part migrate from those utilized under INCO. These included regulatory reforms on land acquisition and management practices. Significant increases in staffing levels and capacity in the section which handles social issues will enable more thorough consideration of poverty and distributional risks 78. A more detailed assessment of risks and mitigation measures is included in Annex 6. 30 ANNEX 1: LETTER OF SECTOR DEVELOPMENT POLICY 31 32 33 34 Ministerio de Hacienda y Crédito Público República de Colombia Departamento Nacional de Planeación Bogota, Colombia Dr. JIM YONG KIM President World Bank Group Washington, DC Subject: Policy Letter – Productive and Sustainable Cities DPL Dear Dr. Kim, The Government of Colombian is committed to guaranteeing responsible management of public finances as a matter of national importance and a key to macroeconomic stability. The government has completed wide-reaching reforms in fiscal policy to strengthen fiscal sustainability objectives and continue the high rates of economic growth in recent years that have taken place despite external uncertainty. As a result of these reforms, macroeconomic stability fundamentals have strengthened. Market fundamentals are grounded by consistent economic management, coordinated fiscal and monetary policy, and backed by a solid financial system and a flexible exchange rate regime. The achievements of the central government and public sector have surpassed expectations, despite recent external shocks. A public sector deficit of 3.4% of GDP was predicted for 2011, but recent calculations show that a far better result with a deficit of only 2.0% of GDP. Net debt levels of the central government and non-financial public sector has maintained a downward trend. This situation best reflects the commitment of the Government to fiscal sustainability and responsible management of public finances. Nonetheless, the Colombian government recognizes that it still lacks capacity to finance certain policies to ensure sustained growth over the medium term. Increased competitiveness can generate employment, reduce poverty levels, and, as a result, improve living conditions. As you may know, nearly 75% of Colombians live in cities and it is estimated that by 2050 this percentage will rise to 85%. In other words, over the next four decades approximately 20 million additional Colombians will reside in urban areas, with the corresponding expansion in the demand for housing, transportation and other public and social services. In recent years Colombian cities have become key engines of growth powering the national economy. About 85% of national GDP is generated by activities in urban areas. This translates into a strong positive relationship between the level of urbanization and per-capita income. Cities play a significant role in reducing poverty and gradually closing social gaps. Nevertheless, cities in Colombia face important challenges. Accelerated urbanization has triggered problems for appropriate land management. Increased agglomeration itself carries negative externalities such as access to formal housing, settlements in at-risk areas, traffic congestion, environmental pollution, including air, noise and solid waste issues, and a lack of safety. 35 In Colombia there are significant infrastructure and connectivity lags in the ‘system of cities’, which contribute to increased cost and time required for domestic transport, as well as reduced access to markets and mobility for people, goods and services. These challenges contribute significantly to the low levels of specialization, high diversification, and low complementariness of major cities in Colombia. The 2010-2014 National Development Plan establishes policies and strategies to ensure integrated solutions to address the main challenges of urban development. The ‘Livable Cities’ strategy in particular establishes concrete actions for urban environmental sustainability, strengthened supply and demand of housing, optimization of water and sanitation, and urban mobility. To complement these initiatives, a policy has been proposed to strengthen the ‘system of cities’ as an engine of growth, through a combined promotion of regional and national competitiveness and quality of life. The policy will support the creation of a country with livable cities that is more just, competitive, and efficient. Driven by the reasons described above, the Government of Colombia requests a Development Policy Loan from the World Bank to promote the sustainability and productivity of our cities. The loan will support development in the following areas: (i) promote sustainability and inclusion in Colombian cities, (ii) promote access to housing for the lowest-income households, (iii) promote interjurisdictional coordination and institutional strengthening, and (iv) promote urban connectivity and regional infrastructure financing schemes. For the first area of engagement, assistance is needed for the recently-created Subdirectorate of Land Use and Development of the National Planning Department (Decree 1832, 2012). This Subdirectorate will be responsible for identifying the specific sources of investment financing from the national budget, the national royalties (regalías) system, and the national transfer system (participaciones) with Colombia’s regional land use and environmental planning. Further, programs are required to support household connections for water and sanitation services to low- income families classified in the bottom two socioeconomic strata. The national Government has established that these households lack the basic resources to pay for the connections that would enable access to public water and sanitation networks, and has identified the beneficiary population. (Decree 1350, 2012). Along the same lines, increases in vehicle ownership, and corresponding rises in accident rates in Colombian cities underscore the need to turn strategies proposed by the Ministry of Transport (Resolution 1282, 2010) into action and implement the 2011-2016 National Road Safety Plan. Resources are important to advance progress on two national government urban sustainability initiatives. The first initiative is the implementation of specific components of a National Public Space Policy (Conpes 3718, 2012), which aims to reduce the quantitative and qualitative deficit of public space in municipalities and districts on an urban and suburban scale. Emphasis will be placed on low-income areas. Public-private partnerships and institutional, legal, management and finance strategies will be used. The second initiative is the launch of the recently-created National Urban Redevelopment Company (Decree 4184, 2011). The NURC has a mission to establish urban redevelopment programs across the country as a primary urban sustainability strategy. The NURC will also work to facilitate the National Administrative Center redevelopment initiative. With respect to the second area of engagement, resources are also important to establish and regulate the tools and assistance used to help low-income families access decent housing (Law 1537 of 2012). The policy will identify guidelines for private-sector participation in low-income housing developments (‘Social Interest Housing’ for low-income households and ‘Priority Interest Housing’ for the poorest and 36 most vulnerable). The policy will also create tools for planning, promoting and financing land development, urban redevelopment, and provision of water and sanitation services. Inter-jurisdictional coordination and institutional strengthening (Decree 819, 2012) requires active promotion of voluntary agreements for urban development, especially Contract Plans, which bring together national-level entities and organizations. The national government considers these inter- institutional and inter-jurisdictional agreements to be the best way forward to optimize and prioritize multiple sources of resources for strategic projects that further sustainability and productivity in Colombian cities. Progress in this area includes the recently-signed Gran Darien Contract Plan pilot, which aims to decrease extreme poverty, a pillar of the current government’s National Development Plan. The pilot also includes specific initiatives for decent housing that is connected to infrastructure and public services for households in Atrato and Gran Darien. With regards to the final group of policies, urban connectivity and regional infrastructure finance, the Government of Colombia requests resources to support two programs. The first is the recently-created National Infrastructure Agency, or ‘ANI’ (Decree 4165, 2012), which aims to achieve greater efficiency and effectiveness in national infrastructure administration as well as promote engagement of private capital to projects associated with transport-sector infrastructure and development of public-private partnerships. Secondly, resources are requested to further public-private partnerships (Law 1508, 2012) as an instrument linking private capital with the provision of public goods and/or services. Finally, we would like to underscore the importance of this program to Colombia. The program makes a significant contribution towards achieving the goals of the 2010-2014 National Development Plan entitled “Prosperity for All�, particularly the urban strategy, “Livable housing and cities�, and to consolidating a more productive and sustainable system of cities. We appreciate your attention. Kind Regards, Mauricio Cardenas Santamaría Mauricio Santa María Salamanca Minister of Finance and Public Credit General Director National Planning Department Note: the original signed Policy Letter was received by the Bank on November 3rd, 2012. 37 ANNEX 2: FUND RELATIONS NOTE 38 ANNEX 3: RECENT ECONOMIC DEVELOPMENTS IN COLOMBIA Political Situation 1. President Santos has been in office since August 2010 and heads a national unity coalition. The coalition, which spans more than 90 percent of congressional seats, has proven relatively resilient and stable over the first two years of the presidential term. The country has undergone a transformation since 2002, striving to move away from internal violence, drug trafficking, and weak institutions that have plagued the country. In that context, the Santos Administration recently initiated negotiations for peace. Today, Colombia has a resurgent economy with promising prospects. It is a safer, more stable country that is popular with foreign investors, and it aspires to join the Organization for Economic Co-Operation and Development (OECD) group of countries. 2. The Government of Colombia (GoC) has registered several significant achievements in recent years and approved a range of important reforms. On the international front, this includes the restoration and normalization of diplomatic and trade relations with Venezuela and Ecuador. The long-awaited Free Trade Agreement with the United States finally became effective on May 15, 2012. Colombia is also increasingly taking an active international role, as illustrated by its current membership of the UN Security Council and the hosting of key international summits. On the domestic scene, the Government is carrying forward a range of fiscal and economic reforms, including the introduction of a fiscal rule, royalties reform and tax reforms. Legislation has been passed to reduce informality and encourage youth employment. A new legal and regulatory framework has been introduced to improve the performance of the health system. To compensate victims who have been harmed by actions occurring as a result of conflict, a Law has been enacted. A regulatory reform has been introduced to reduce ‘red tape’ when citizens interact with public entities. Finally, a new Framework Law for Peace was recently approved by Congress. Recent Macroeconomic Developments 3. Colombia was the fastest country in the region to recover from the 2008-09 global economic crisis. The economy recovered after two quarters compared to the regional average of close to six quarters (World Bank, 2012d). Colombia’s strong macroeconomic framework combined with financial sector resilience and an appropriate regulatory response helped the economy cushion the shock and recover from its effects. 4. The economy expanded by a solid 5.9 percent in 2011 – one of the best growth performances in the region. This pace of expansion brought Colombia’s growth rate above the regional average of 4.5 percent and close to that of emerging markets of 6.2 percent. Private domestic demand, supported by high consumer and investor confidence and access to cheap credit, led the growth process. On the supply side the expansion was spear-headed by the oil/mining, financial services, and commerce sectors. 5. The growth process was accompanied by substantial employment creation. Economic growth was sufficiently labor intensive to generate about 1¼ million new jobs in 2011. The manufacturing, commerce, agriculture, and other services sector accounted for the 39 bulk of job creation. Better economic conditions and demographics also increased labor market participation by one million people. In effect, unemployment declined by about ¼ million people, while the rate of unemployment declined from 11.8 to 10.8 percent in 2011. 6. The ongoing oil boom reached an all-time high in 2011, as production, exports, and foreign direct investment set new records. The country came closer to reaching the target of producing 1 million barrels per day. This, combined with record high prices, resulted in a 70 percent expansion in oil exports and a 41 percent increase in total exports. Foreign direct investment– most of which originated in the oil and mining sector – almost doubled in 2011 to gross US$13.2 billion (4 percent of GDP), bringing Colombia’s share of global foreign direct investment (FDI) up from 0.5 to 0.9 percent. 7. Despite the export boom, the current account deficit remained unchanged owing to an equally substantial increase in imports. Colombia is one of the few oil-exporting countries that is running an external current account deficit (3.0 percent of GDP in 2011) in times with very favorable international prices. While the trade surplus improved from 0.8 to 1.7 percent of GDP in 2010-11, the impact was dampened by a strong 35 percent increase in imports driven, in part, by currency appreciation. Like many other oil exporters, Colombia runs a deficit on the external current account owing to a deficit on the services balance and the repatriation of profits by foreign companies based in the country. Both items deteriorated in 2011 with the strongest effect related to repatriated profits. Net foreign direct investment financed about half of the current account deficit that year, while external debt increased by half a percentage point of GDP to 23.2 percent. 8. Colombia exhibited a relatively strong fiscal performance in 2011 thanks to strong growth, favorable oil prices, and tax reforms. The deficit of the combined public sector was reduced from 3.3 percent in 2010 to 1.9 percent in 2011, while the primary balance turned positive from -0.4 percent to 0.9 percent of GDP. This, in turn, contributed to a decline in the public debt ratio from 36.9 to 34.2 percent of GDP. The key driver was a strong increase in the central government tax-to-GDP ratio which rose by 1.3 percentage points. 9. The gradual appreciation and volatile movements of the Colombia Peso remains a substantial macroeconomic policy concern. The Colombian peso (nominal as well as real effective rate) has grown gradually stronger in recent years in response to significant capital inflows (primarily foreign direct investment) and improved fiscal policy. At the same time, the flexible exchange has exhibited substantial volatility, acting as a shock absorber in times of global economic crises and uncertainty (Figure 1, Panel d). 10. The authorities recently stepped up their efforts to reduce the pace of currency appreciation. Over the past couple of years, the Central Bank has been managing a dollar purchasing program (of about US$20 million per day) to smoothen out excess volatility in the adjustment path and international reserves have increased gradually as a result. The Government has also intervened, including through the delayed repatriation of dollar denominated dividends from Ecopetrol (the partially state-owned oil company). In August 2012, following a sustained Peso rally, the Central Bank increased average daily purchases to US$28 million while the Government engaged in open market operations worth US$700 million. More broadly, the 40 Government is also working to strengthen competitiveness through increased infrastructure investments and tax reform. 11. The economy slowed down in 2012, mainly as a result of a deteriorating external environment. Economic growth is expected to fall to 4.3 percent in 2012 at a rate close to potential. The continued meager economic performance in the US combined with lower prices for Colombian exports is increasingly affecting the domestic economy. A tight monetary policy stance during the first half of 2012 also help explain the slowdown, though monetary policy was loosened during the second half of the year (as explained next). The ongoing process of fiscal consolidation also dampens economic activity. Finally, further growth in oil production has been hampered by a recent rise in attacks against oil pipelines, delaying the country’s aspirations of reaching the goal of producing 1 million barrels per day. 1 12. In response to slower domestic economic activity, the Central Bank has initiated a process of monetary loosening. Since August 2012, the policy interest rate has been reduced by 50 basis points to 4.75 percent. This followed a period of tightening in which the monetary authorities had gradually raised the rate by 225 basis points since the start of 2011 to reduce the risk of overheating. Further interest rate cuts to boost the economy would be expected during the rest of the year, especially in the context of low and declining inflation (3.0 percent in July 2012). Lower interest rates would also reduce portfolio capital inflows, thereby alleviating appreciation pressures somewhat. 13. The financial sector remains sound and credit growth is decelerating. The banking system is well-capitalized with a reported capital adequacy ratio of 15.3 percent in March 2012 and a tier 1 ratio of 12.5 percent. Colombia’s banks are among the most profitable in the region with return to assets and return to equity amounting to 3.8 and 26.0 percent, respectively. Nonperforming loans are manageable at 2.8 percent. Credit to the private sector has slowed down from 22 percent y/y in October 2011 to 18 percent y/y in May 2012. Non-mortgage consumer loans accounted for almost 30 percent of total credit in May 2012 (up from 18 percent in 2004) with mortgages only explaining 12.5 percent of the total. Credit growth in recent years has mainly derived from an increase in the average size of loans as opposed to an increase in the number of debtors. 14. In summary, Colombia’s economic performance has been impressive in recent years – the combined result of good luck and good policy. Favorable international oil prices certainly played a role with positive effects on foreign direct investment, exports, growth and fiscal outcomes. At the same time, good policies have supported positive outcomes. Fiscal consolidation reduced the sovereign risk premium, strengthened the resilience of the economy to external shocks, and enhanced the power of fiscal and monetary policy to act counter-cyclically. Colombia currently has the lowest EMBI (Emerging Market Bond Index) interest rate spread in the region. Sovereign debt is rated investment grade with a recent increase to a positive outlook, according to Standard and Poor’s. The country also exhibits solid liquidity management as evidenced by rapid reserve accumulation and has tapped international markets for external financing at favorable terms. 1 Between September 2011 and April 2012, Colombia experienced an average of 12.5 attacks per month against oil pipelines. By comparison, the period between January 2009 and August 2011, registered an average of 2.6 monthly attacks. 41 Macroeconomic Outlook and Debt Sustainability 15. Colombia has a robust macroeconomic framework, which rests on three mutually re-enforcing pillars: (a) a responsible fiscal policy based on a credible medium-term fiscal framework, anchored in a structural balance rule, (b) a monetary policy based on an inflation targeting regime complemented by a floating exchange rate with moderate interventions, and (c) sound macro and micro prudential policies combined with a solid financial system. This framework provides a solid basis for the country’s future economic prospects. In the short to medium term, aggregate demand is likely to be boosted by consumer and investor confidence, infrastructure investments, and the implementation of the Free Trade Agreement with the US. The protracted Euro Zone crisis, on the other hand, is expected to continue dragging down the global economy in the coming years, with negative spillover effects for Colombia. 16. The projections described below focus on the short and medium-term outlook. They incorporate the latest prospects for the global economy as well as recent Central Bank monetary and exchange rate policy announcements. The baseline scenario follows the latest update of the 2012 IMF World Economic Outlook, which assumes: (1) a gradual, but slow, recovery of US economic activity reflecting ongoing weakness in house prices, pressures to deleverage, and a weak labor market; (2) a short-lived recession in the Euro area as a result of fiscal consolidation and deleveraging – without major disruptions to the monetary union, and; (3) continued elevated oil prices arising from global supply constraints and geopolitical tensions with a gradual declining trend. Within this global context, the domestic economic policy mix is expected to be tight on the fiscal side and accommodative on the monetary side. In this baseline scenario, the Colombian economy is expected to develop as follows (see Table 1 for details): 17. Growth and inflation. Following the strong economic growth performance in 2011 of 5.9 percent, real GDP is projected to moderate to 4.3 percent in 2012 and converge to its potential rate of 4.4 percent in the medium term. Private consumption and investment are expected to sustain domestic demand growth. Inflation will stay on target of around 3 percent over the projection period, kept in check by timely Central Bank interventions. 18. Fiscal accounts. The Central Government fiscal deficit is projected to decline from 2.8 percent of GDP in 2011 to 2.2 percent in 2014, as revenue growth outpaces a gradual rise of public spending. The Government is expected to meet the fiscal rule interim target for the central government structural deficit of 2.3 percent of GDP by 2014. In light of Colombia’s solid track record of fiscal management, the authorities are expected to take the necessary corrective policy measures needed to meet this target. 19. External accounts. The external current account deficit widened during the 2010-11 economic recovery as imports accelerated and factor income outflows increased. In the medium term, the external deficit will gradually narrow again and is expected to be financed by continued high inflows of foreign direct investment. The pace of export growth is expected to slow down owing to capacity constraints in the oil/mining sector, while imports will grow slower on account of more moderate economic growth. 42 Figure 1: Colombia: Selected Economic Indicators. (a) GDP growth: Colombia, Latin America and the (b) Unemployment Rate (3 months moving avg. %) Caribbean( LCR) and Emerging Markets 10.0 min-max 2001-2009 2010 Emerging 2011 2012 17.0 8.0 Markets 16.0 6.0 15.0 Colombia 14.0 4.0 13.0 LCR 12.0 2.0 11.0 10.0 0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 9.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -2.0 (c) Colombia: Inflation and Policy Interest Rates (d) Exchange Rate: Nominal and Real Effective Rate CPI Inflation Policy Rate 1600 140.0 Nominal 11.0 Real Policy Rate 1700 Exchange 135.0 Rate per US$ 1800 (inverted left 130.0 9.0 1900 scale) 125.0 7.0 2000 120.0 2100 115.0 5.0 2200 110.0 3.0 2300 REER index 105.0 2400 (right scale) 100.0 1.0 2500 95.0 -1.0 2600 90.0 Mar-06 Feb-09 Sep-09 Oct-06 May-07 Dec-07 Apr-10 Jun-11 Jan-05 Jul-08 Jan-12 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Aug-05 Nov-10 Aug-12 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 (e) Tax Revenues (Gross) (f) CPS Overall and Structural Balance, 2005-11 120 15% 2007 2008 2009 2010 2011 2012 2013 2014 Revenue to GDP Ratio 0.0 100 (Gross), (right axis) 14% Percentage of GDP (line) -0.5 80 -1.0 13% Billion COP (bars) CPS 60 -1.5 structural balance 12% -2.0 40 11% -2.5 20 CPS -3.0 overall 0 10% balance 2005 2006 2007 2008 2009 2010 2011 -3.5 Source: IMF WEO (a), DANE (b), Banco de la República and World Bank (c and d), Tax and Customs Revenue Authority (DIAN) (e), IMF (f). 43 Table 1: Key Economic Indicators 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Real GDP growth (%) 6.7 6.9 3.5 1.7 4.0 5.9 4.3 4.4 4.4 4.5 CPI Inflation (avg. %) 4.3 5.6 7.0 4.2 2.3 3.4 3.2 2.8 3.0 3.0 Oil price, Colombian mix (US$/bl) 58.3 66.2 90.2 56.6 73.1 99.4 101.5 100.4 96.1 92.1 Gross national savings 20.6 20.2 20.6 20.3 19.0 20.4 20.2 19.6 19.4 19.5 Gross dom. Investment 22.4 23.0 23.5 22.4 22.0 23.5 23.1 22.5 22.0 22.0 Export growth (FOB, %) 15.9 21.4 26.0 -11.7 20.1 41.2 3.8 5.1 3.6 2.0 - Oil exports growth (%) 13.8 15.6 66.8 -16.0 60.7 69.6 12.5 10.5 0.7 -1.9 Import growth (FOB, %) 23.5 25.4 20.5 -16.2 22.7 35.2 7.7 4.2 3.0 3.8 Current account balance -1.8 -2.8 -2.9 -2.1 -3.1 -3.0 -2.9 -2.9 -2.6 -2.5 Foreign direct investment (net) 4.1 3.9 3.5 1.7 0.1 1.7 3.0 2.6 2.4 2.3 Gross reserves (months) 4.8 5.5 7.4 6.4 5.5 5.8 6.3 6.7 6.8 6.7 Total external debt 25.0 21.2 19.7 22.7 22.2 23.2 22.6 22.2 21.7 21.0 Combined Public Sector Total revenues 27.3 27.2 26.4 26.7 26.2 26.9 28.0 28.2 27.9 27.3 Total expenditures 28.1 28.2 26.3 29.3 29.3 28.7 28.8 29.4 29.0 28.6 Combined Public Sector, Overall -0.7 -0.7 -0.1 -2.7 -3.3 -1.9 -0.8 -1.1 -1.0 -1.1 Public debt 36.8 32.7 30.9 36.7 36.9 34.2 32.2 30.9 30.0 29.3 - o/w external 16.4 13.7 12.5 16.0 13.9 13.1 13.3 13.3 13.0 12.5 GDP (US$ billions) 162.8 210.6 235.3 231.6 284.9 327.6 365.4 387.4 407.8 430.1 Source: World Bank Staff projections based on DANE (the statistics agency), Central Bank, Ministry of Finance and Public Credit, and the IMF. Note: Combined Public Sector Balance for 2005-2009 does not equal difference between total revenues and total expenditures owing to statistical discrepancies 20. Colombia is not immune to a global economic crisis, but the country is very well prepared to respond. Colombia’s chief vulnerabilities relate to three types of external shocks: a slowdown in economic activity in the US, a decline in oil prices, and global financial market turmoil. By way of mitigation, the country has a high capacity and room to respond to shocks through counter-cyclical fiscal and monetary policies (Box 1). The recent rise in global food prices, on the other hand, is not expected to constitute a major risk to the baseline scenario. 21. While fiscal and external accounts are vulnerable to a decline in oil prices, there are reasons to remain cautiously optimistic. Commodity dependence adds fiscal risks. Oil revenues account for about 16 percent of total public revenues. For each US$10 decline in the oil price per barrel central government revenue is reduced by 0.4 percent of GDP (with a one year lag). In the event of another global economic crisis, oil prices would likely fall sharply, which would reduce government revenues and increase the external current account deficit (which in 2011 was 3.0 percent of GDP). On the other hand, Colombia is an investment grade country that enjoys solid investor confidence. Healthy levels of foreign direct investment to the hydrocarbon and financial sectors will continue to finance most of the external current account deficit. In addition, the government continues to make efforts to rebuild fiscal buffers that could cushion the negative impact of a decline in oil prices. In particular, the fiscal rule supports a steady decline in the fiscal deficit over the medium term. 44 Box 1: Potential Impacts on Colombia of a Potential Global Economic Slowdown The sources of contagion on Colombia’s economy from a potential global economic crisis are expected to be similar to those experienced in the 2008/09 crisis – namely the trade, financial and expectations channels: • The trade channel. Colombia is the fourth largest oil producer in the region, and the fourth largest coal exporter in the world. Lower external demand (mainly for oil and mining products) combined with reduced world prices would increase Colombia’s current account deficit. The oil and mining sector contributed by about 20 percent to Colombia’s growth rate in 2011, implying a non-negligible aggregate demand effect. • The financial channel. In the event of a global crisis external and domestic financing conditions would tighten. Currency depreciation would intensify as flight-to-safety would lead to a reversal in net capital flows. Financial markets dislocations could cause strain on brokerage houses and other leveraged investors. • The expectations channel. Given that GDP growth is driven primarily by private domestic demand, consumer and investor confidence are critical for future aggregate demand growth. A shock to confidence can also reduce credit growth as banks raise lending standards. Colombia is well positioned to respond to a crisis, particularly on the monetary/exchange rate and financial fronts: • Monetary easing is likely to be the first line of defense. The period of interest rate hikes since 2011 created room for monetary easing, which the authorities are currently exploiting. The monetary policy rate could be reduced further, while closely monitoring impacts on consumer and asset price inflation, as well as credit growth. • The flexible exchange rate is an effective shock absorber. The flexibility of the exchange rate regime allows the currency to depreciate rapidly, as happened during 2008/09. Along with the relatively comfortable financial cushions, this can help to absorb the impact of a potential reversal in net capital flows. • Colombia’s financial sector is sound and it has proven resilient to the global financial crisis and the associated economic slowdown. The Colombian banking system is primarily domestically owned with limited exposure to European banks. • External financing needs are manageable. The Flexible Credit Line (FCL) with the IMF and an expected high inflow of foreign direct investment provide sufficient cover. But Colombia remains moderately vulnerable on the fiscal and social fronts: • Fiscal vulnerability: Colombia is highly exposed to a fall in the international price of oil. Oil revenues account for about 16 percent of total public revenues. For each US$10 decline in the oil price per barrel central government revenue is reduced by 0.4 percent of GDP (with a one year lag). That said, Colombia has strong fiscal institutions and moderate public debt levels, and could thus engage in some counter-cyclical stimulus within the fiscal rule framework. • Social vulnerability: The relatively high poverty elasticity to growth observed during the 2008-09 crisis implies that an economic slowdown would have a more severe impact on Colombia’s poor than elsewhere in the region. The recent one percentage point decline in the unemployment rate may also partially reverse if growth comes to a halt. On a positive note, Colombia has a relatively strong basis for responding to a potential crisis using existing safety net programs, temporary employment programs, and training programs. Debt Sustainability 22. A Debt Sustainability Analysis (DSA) indicates that the trajectory of public debt is declining in the baseline scenario. The DSA was prepared by IMF staff in August 2012 and is consistent with the macroeconomic assumptions outlined in Table 1. In the baseline scenario, the public debt-to-GDP ratio is projected to decline from 34.2 percent in 2011 to 30.7 percent in 2014 (of the Combined Public Sector, gross). Given the large share of central government debt on fixed-terms and in local currency, interest rate and exchange rate shocks have a modest impact on the debt trajectory. The debt outlook is also not severely affected by shocks to economic growth or the primary balance. Contingent fiscal liabilities represent the single most important risk to debt sustainability, although the simulated shock of a ten percent of GDP 45 increase does not alter the declining debt trajectory. In sum, public debt sustainability is not a major concern in the medium term. 23. In summary, the analysis presented in this Section (II) concludes that Colombia’s macroeconomic policy framework is deemed adequate. Medium-term fiscal policy remains prudent. The fiscal outlays associated with the Program supported by the DPL have been incorporated into the Government's Medium-Term Fiscal Framework 2012, and are not anticipated to have fiscal policy implications. Monetary and exchange rate policies are also supportive of macroeconomic and financial stability Colombia: Public Sector Debt Sustainability Framework, 2007-2017 (In percent of GDP, unless otherwise indicated) Actual Staff Projections 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Debt-stabilizing primary balance 10/ Baseline: Public sector debt 1/ 32.7 30.9 36.7 36.9 34.2 32.2 31.4 30.7 30.0 29.2 28.1 0.4 o/w foreign-currency denominated 13.7 12.5 16.0 13.9 13.1 13.2 13.3 12.9 12.5 12.1 11.6 Change in public sector debt -4.1 -1.8 5.8 0.2 -2.6 -2.0 -0.8 -0.8 -0.6 -0.9 -1.1 Identified debt-creating flows (4+7+12) -6.0 -2.0 -0.3 0.0 -2.8 -1.3 -1.2 -1.4 -0.6 -0.7 -0.7 Primary deficit -3.0 -3.5 -0.8 0.2 -1.0 -1.9 -1.4 -1.3 -1.1 -1.1 -1.0 Revenue and grants 27.2 26.4 26.7 26.2 26.9 27.8 28.1 27.7 27.1 26.9 26.7 Primary (noninterest) expenditure 24.2 22.9 25.9 26.4 26.0 25.9 26.7 26.4 26.0 25.8 25.7 Automatic debt dynamics 2/ -1.5 1.6 0.7 -0.2 -1.8 0.7 0.8 0.5 0.5 0.4 0.3 Contribution from interest rate/growth differential 3/ 0.0 0.1 1.9 0.2 -1.5 0.7 0.8 0.5 0.5 0.4 0.3 Of which contribution from real interest rate 2.3 1.2 2.3 1.6 0.4 2.1 2.1 1.8 1.8 1.7 1.5 Of which contribution from real GDP growth -2.3 -1.0 -0.5 -1.4 -1.9 -1.4 -1.3 -1.3 -1.3 -1.3 -1.2 Contribution from exchange rate depreciation 4/ -1.6 1.5 -1.1 -0.4 -0.3 ... ... ... ... ... ... Other identified debt-creating flows -1.4 -0.1 -0.2 -0.1 0.0 -0.1 -0.5 -0.6 0.0 0.0 0.0 Privatization receipts (negative) -1.4 -0.1 -0.2 -0.1 0.0 -0.1 -0.5 -0.6 0.0 0.0 0.0 Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other (specify, e.g. bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Residual, including asset changes (2-3) 5/ 1.9 0.2 6.0 0.2 0.1 -0.7 0.4 0.6 0.0 -0.2 -0.3 Public sector debt-to-revenue ratio 1/ 120.4 117.1 137.2 140.9 127.2 115.8 111.6 110.7 110.8 108.5 105.2 Gross financing need 6/ 9.1 7.1 7.9 7.4 6.1 4.8 5.8 5.0 5.1 4.1 4.5 in billions of U.S. dollars 19.2 16.7 18.3 21.0 19.9 17.7 22.2 20.4 21.8 19.0 21.7 Scenario with key variables at their historical averages 7/ 32.2 30.0 28.1 26.0 23.8 21.5 0.0 Scenario with no policy change (constant primary balance) in 2012-2017 32.2 30.9 29.5 28.1 26.4 24.4 0.3 Key Macroeconomic and Fiscal Assumptions Underlying Baseline Real GDP growth (in percent) 6.9 3.5 1.7 4.0 5.9 4.3 4.4 4.4 4.5 4.5 4.5 Average nominal interest rate on public debt (in percent) 8/ 12.4 11.8 11.4 8.5 8.6 8.9 9.2 8.9 8.9 8.3 8.3 Average real interest rate (nominal rate minus change in GDP deflator, in percent) 7.3 4.3 8.0 4.8 1.7 6.7 7.0 6.3 6.3 6.0 5.7 Nominal appreciation (increase in US dollar value of local currency, in percent) 11.1 -10.2 9.8 2.7 2.4 ... ... ... ... ... ... Inflation rate (GDP deflator, in percent) 5.0 7.6 3.4 3.6 6.9 2.2 2.2 2.7 2.6 2.4 2.7 Growth of real primary spending (deflated by GDP deflator, in percent) 6.5 -1.9 15.1 5.9 4.2 4.2 7.7 3.1 2.9 3.8 4.1 Primary deficit 9/ -3.0 -3.5 -0.8 0.2 -1.0 -1.9 -1.4 -1.3 -1.1 -1.1 -1.0 Source: IMF staff estimates. 1/ Gross debt of the combined public sector, including Ecopetrol and Banco de la República's outstanding external debt. Does not assume any drawings under the Flexible Credit Line arrangement or any contingent liability. 2/ Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar). 3/ The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g. 4/ The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r). 5/ For projections, this line includes exchange rate changes. 6/ Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period. 7/ The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP. 8/ Derived as nominal interest expenditure divided by previous period debt stock. 9/ Excludes statistical discrepancy. 10/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year. Source: IMF Staff Calculations (August, 2012). 46 Colombia: Public Debt Sustainability: Bound Tests 1/ (Public debt in percent of GDP) Baseline and historical scenarios Interest rate shock (in percent) 50 12.0 50 Gross financial need under Baseline: 6.3 11.0 45 baseline (rhs) 45 Historical scenario 10.0 Scenario: 7.3 40 9.0 40 Historical: 4.4 Baseline 8.0 35 35 7.0 28.1 29.7 30 6.0 30 5.0 i-rate shock 28.1 25 25 21.5 4.0 Baseline 20 3.0 20 2007 2009 2011 2013 2015 2017 2008 2010 2012 2014 2016 Primary balance shock (in percent of GDP) and Growth shock (in percent per year) no policy change scenario (constant primary balance) 50 50 Baseline: 4.5 Baseline: 1.2 45 45 Scenario: 3.6 Scenario: 0.5 40 Historical: 4.5 40 Historical: 1.9 35 32.9 35 31.6 30 30 28.1 Growth shock Scenario with no policy change 28.1 25 Baseline 25 PB shock 24.4 Baseline 20 20 2008 2010 2012 2014 2016 2008 2010 2012 2014 2016 Combined shock 2/ Real depreciation and contingent liabilities shocks 3/ 50 50 Combined liabilities shock 45 45 30% depreciation Combined shock Baseline 38.9 40 Baseline 40 35 35 31.4 34.7 30 30 28.1 28.1 25 25 20 20 2008 2010 2012 2014 2016 2008 2010 2012 2014 2016 Sources: International Monetary Fund, country desk data, and staff estimates. 1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown. 2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance. 3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2012, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator). Source: IMF Staff Calculations (August, 2012). 47 ANNEX 4: KEY SECTOR CHALLENGES AND GOVERNMENT PROGRAM KEY SECTOR CHALLENGES 1. The efficiency and productivity of Colombia’s urban system – along with continued sound macroeconomic performance and strategic investments human capital, infrastructure and innovation and productive system – will be a key determinant in the ability of the country to transition from a middle- to a higher-income economy. The urban system in Colombia will play a critical role in supporting growth in three principal forms. 2. First, urban activities are important contributors to economic growth. While economic growth is strongly driven by commodities in Colombia and other Latin American countries, urban activities in manufacturing, services and retail sectors also account for an important part of economic growth. Urban activities combined 1 have contributed to more than 50 percent of GDP’s growth rate 2 in the last four decades. Second, strengthening the roles of cities may contribute to mitigating the risks inherent to commodity intensive economies. Recent work by the World Bank points at the risks of commodity led growth. 3 An efficient urban system will be necessary to support the move from a commodity-driven economic system to a stronger resource-based manufacturing structure and then to more knowledge intensive industries. It is in and around urban agglomerations where manufacturing activities take place. As such, it is important that cities enable this transition through improved connective infrastructure, sound land management and proactive policies that ensure urban livability. Third, almost 80 percent of Colombians live in urban areas, where unemployment rates are above 12 percent, among the highest in the region. The cities of Bogotá, Cali, Medellin and Barranquilla account for 30 percent of the country’s population and a high proportion of its jobs. Promoting a well- functioning urban system may foster growth and improve the quality of life of a largely urban population. 3. The efficient management of cities and urban areas will be the key determinants of whether Colombia will be able to cash in on a potential growth dividend to reduce poverty and inequality. Historically, urbanization is highly correlated with reductions in poverty and inequality and improvements in access to basic services. 4 In Colombia, lower poverty rates are highly correlated with levels of urbanization in departments, 5 and urbanization has been accompanied by improved living conditions across the country. In 1964, only 50 percent of people in today’s largest cities had access to electricity, water, and sanitation. In smaller cities the coverage rates approximated 40 percent for water and electricity and 20 percent for sanitation. Today, there is almost universal access to basic services in cities of all sizes. 1 Urban activities include commerce, restaurants, hotels, manufacturing, finance and other related services. 2 Urbanization Review calculations based on a moving average of the component of the economy’s growth rate contributed by purely urban activities. 3 While there is no evidence of a commodity curse in Colombia, the report identifies several commodity related risks that can adversely affect a country’s prospects for economic and institutional development if they are not managed properly, see World Bank (2010) Natural Resources in Latin America and the Caribbean beyond Booms and Busts? World Bank. Office of the Chief Economist, Latin America and the Caribbean Region. 4 See World Bank (2009) World Development Report – Reshaping Economic Geography and the Bank’s new Urban and Local Government Strategy System of Cities: Harnessing Urbanization for Growth and Poverty Reduction. 5 See the Colombia Urbanization Review (World Bank, 2012) 48 4. Nonetheless, challenges persist to secure sustainable, productive and inclusive cities in Colombia. In particular, safe and more efficient public transportation is vital to secure mobility, access to opportunities, and productivity in cities. Addressing the negative externalities of rapid motorization such as safety and congestion is becoming critical. Deficits in public space and low income housing present serious challenges for security and quality of life. Persistent inequality in the quality of public services such as water and sanitation also constitute a key challenge. Improved inter-jurisdictional coordination can help to spread the benefits and diminish negative externalities associated with urbanization. Improved connectivity is vital to support increased productivity and trade, and help support a more efficient system of cities. The relationship between policies that enhance urban productivity (e.g. structural infrastructure investments) and inclusiveness is often – but not always – complementary. An urban policy and management framework that enables cities to balance these objectives is of critical importance. 5. Water and sanitation coverage figures have consistently improved over thirty years, yet challenges remain in both improving the quality of services as well as access for the poorest. Colombia is well on track to meet ambitious targets for coverage improvement in both water and sanitation defined in the 2010-2014 National Development Plan. In 2008, coverage in urban water and sanitation access was 97 percent and 93 percent, respectively. In rural areas and small towns it was 72 percent and 69 percent, respectively. Nonetheless, regional differences in access persist, and quality of water can be poor and supply intermittent in medium and small cities, where there are challenges in financial sustainability of operators. 6 Less than 30 percent of the wastewater collected is treated, although many cities in Colombia are currently implementing wastewater management programs. There is also persistent inequality of access even in areas where networks have been expanded as these investments do not include the costs of modifying in-house plumbing to connect to the water or sewer lines. 6. Colombian cities face the twin challenges of addressing urban mobility and improved road safety through a high quality sustainable transport system in light of rising rates of motorization 7, congestion, air pollution, and accident rates in cities 8. Important steps have been taken by the Government of Colombia to address these issues in recent years, including efforts to reform the public transport system as well as initial steps to address the impacts of rapid motorization. Yet there is both the need and the opportunity to develop a multi-prong approach based on smart growth strategies in Colombian cities. The promotion of public transit and non-motorized modes (walking and cycling), land use-transport integration and addressing the impacts of motorization (focusing on safety and travel demand management (TDM) policies) can provide more cost-effective and sustainable mobility solutions. Regional transport coordination and integrated transport management agencies are also vital. 6 Colombia has a sophisticated price regulatory regime which is governed by the Comisión de Regulación de Agua Potable y Saneamiento Básico (CAR) which sets full cost recovery tariffs. The national government provides significant capital subsidies for smaller and poorer municipalities which are not taken into account in the tariff setting process. Municipalities are then allowed the flexibility to determine actual tariffs for each of the six clearly defined economic strata, thus allowing for cross- subsidies between different strata. In practice, however, the concept of cross-subsidies does not work well in smaller and poorer municipalities, thereby undermining financial sustainability and service quality. 7 According to the Secretaria Distrital de Movilidad, 2010, In Bogota alone, the vehicle fleet has dramatically increased by 105% between 2002 and 2010, reaching a total of 1.3 million vehicles in 2010. http://www.movilidadbogota.gov.co/hiwebx_archivos/ideofolio/mayo-12-de-2011---boletn-movilidad-en-cifras-2010_2299.pdf 8 In 2011 the number of fatalities caused by road accidents was 5.800 being the first cause of fatalities for the population between 5 and 35 years old. In the same year 41.000 people had have serious injuries caused by the same reason. 49 7. The Colombian legal framework for land use planning and urban development is solid, but problems there are land supply constraints and a housing deficit. Law 388 of 1997 provides a framework for municipalities to engage in short, medium and long term planning, and established mandatory provisions for conservation of critical natural resources. Nonetheless, there are critical supply-side and demand-side constraints in the housing market. 9 The formal production of housing does not meet the demand - 285,000 new households are formed every year while only 140,000 new houses are built, and the deficit is highest in low-income segments. Human and economic losses from natural events are linked to failures land use management and housing standards: historical records indicate that 80 percent of damages and losses generated by natural events can be associated to inadequate land use management (problems of location) and 20 percent to insufficient housing standards (construction quality). In order to promote efficient disaster risk management and reduce vulnerability, Colombia is putting significant effort into increasing its knowledge of disaster risk factors at the local and sector levels and investing in structural and nonstructural mitigation measures. 8. Metropolitan and regional coordination is critical. Colombia is a highly decentralized country, yet development challenges often extend beyond existing local jurisdictional boundaries. Since 1991 – when the Constitution vested political, fiscal and administrative autonomy at the municipal level - Colombia’s approximately 1,123 municipalities and 5 districts have the same responsibilities for the provision of basics services, regardless of size or capacity. There is no incentive for intra-jurisdictional coordination, as politicians are reluctant to share budget and investment resources in collective instruments, and neither the central government nor departments have the authority to intervene. The lack of metropolitan and regional coordination adversely impacts sectors where economies of scale can be exploited, such as basic service provision and public transportation. 9. Despite strong economic growth and increases in foreign direct investment, Colombia’s connective infrastructure lags behind regional peers. This infrastructure deficit – combined with large geographical distances between cities and the coast – leads to high transportation costs, which undermines the competitiveness of goods produced in Colombia’s largest cities. Improving international connectivity of large Andean cities is extremely important to catalyze growth and improve overall efficiency across the system of cities in Colombia. Infrastructure investment is also closely linked to urban economic growth and productivity – and Colombia’s productivity performance is poor compared to the LAC region. Significant amounts of capital must be mobilized to bridge the infrastructure financing gap to improve infrastructure and connectivity in Colombia. 9 On the supply side, access to land (either expansion or re-development) remains a critical bottleneck to the large scale production of affordable housing by the private or public sector. According to Financial Support for Territorial Development S.A. (FINDETER) and MVCT, 90% of Social Interest Housing (VIS) projects are smaller than one hectare and 100 residential units, and 68% of them are 50 units. Regulatory constraints and inadequate targeting of subsidy policy also contributes to the situation. On the demand side, many low income families have limited access to housing finance. In addition to constraints on family’s ability to save for down payments, nearly 50% of the labor market in Colombia is informal and is not served by the traditional banking sector. The overall outstanding mortgage portfolio as a ratio of GDP stood at 4.2% in 2010, low compared with the 22% of Chile. 50 10. It is important that this network of sector challenges is assessed within a ‘system of cities’ framework. Policies that focus on the success of individual cities in isolation from the system can result in lost opportunities for cities to exploit their comparative advantages and engage in complementary economic activity. For example, in China, urban policy supported the formation of ‘city clusters’ in which the connectivity between small, medium and large cities were strengthened to promote economies of scale and agglomeration economies from intra- industry and inter-industry interaction (World Bank Urban Strategy, 2010). A well-functioning system of cities also promotes the fluidity of markets for land, labor and products. In Brazil, large investments in connective infrastructure facilitated the development of a system of cities where large cities diversified and benefited from agglomeration economies while medium and small cities exploited economies of scale and specialized complementarities. In Colombia – where cities do not currently play complementary roles, as there is limited specialization – a change in focus towards a system of cities perspective would bring benefits that extend beyond one single city and may lead to benefits that spread to the country as a whole. THE GOVERNMENT PROGRAM 11. The Government of Colombia has outlined a comprehensive platform to address urban challenges, including a high level policy initiative called the Misión Ciudades which was launched in late-2011. Under this initiative a council of national and international experts has been convened to provide cross-sector policy guidance to ensure that cities are engines of sustainable and inclusive economic growth in Colombia. The initiative is focused on the efficiency of the entire urban system. The creation of the Misión demonstrates the Government of Colombia’s high-level policy commitment to urban development policy and builds upon a broad network of sector specific programs which are outlined in greater depth below. The Misión will support the National Planning Department (DNP) in developing a ‘System of Cities’ framework in Colombia – resulting in a CONPES National Policy on Cities which will include recommendations for subsequent policy reform and analysis across multiple sectors. This framework will have an outlook through 2035, and will address key issues such as connectivity and mobility, labor markets, innovation, quality of life, environmental sustainability, land and housing market, good governance and regional coordination. 12. Urban policy priorities are clearly identified in successive National Development Plans. The National Development Plan (NDP) 2006-2010 highlighted three key areas for investment and reform: (i) slum upgrading and basic service provision for informal settlements; (ii) low income land and housing development programs; and (iii) urban revitalization and densification. The National Development Plan 2010-14, introduced a framework of three strategic areas – Sustainable Growth and Competitiveness, Equality of Opportunities for Social Prosperity, and Consolidation of Peace – and five key pillars for growth: (i) new sectors for innovation; (ii) agriculture and rural development; (iii) infrastructure for transport; (iv) mining and energy development; and (v) housing. 13. In urban transport, the Government of Colombia has undertaken reform to provide competitive, efficient, affordable, safe, and environmentally sustainable mobility options 51 for urban residents. The National Urban Transport Program (NUTP) 10 of 2002 calls for the implementation of Bus Rapid Transit (BRT) or Integrated Mass Transit Systems (IMTS) in large cities (more than 600,000 inhabitants) and Strategic Public Transit Systems (SPTSs) in medium- sized cities (between 250,000 and 600,000 inhabitants). To support demand management, transport orientated development, the NDP opened room for congestion charging in cities with more than 300,000 inhabitants, and a vehicle registry Registro Unico Nacional de Transito (RUNT). Efforts are also underway to: revise the Mass Transit Law (Law 86 of 1989, & Law 310, 1996) to include better coordination in mobility master plans and land use plans (POT) and flexibility in floor area ratios around mass transit stations; and, establish a legal framework to clarify the scope and responsibilities of transport authorities in metropolitan areas. In addition, there has been strong policy action on road safety through the National Road Safety Plan (2011- 2016), described in greater detail below. 14. The water and sanitation sector in Colombia has seen fundamental reforms and steady improvements over the last few decades. Decentralization through the 1991 constitution shifted service delivery responsibility to municipal governments, and Law 142 of 1994 mandated that all public service entities convert to legally autonomous stock companies with the possibility of being municipal-owned, private, or mixed public-private companies. Law 142 also established a national tariff regulator, the Comisión Reguladora de Agua (CRA), and a national service supervisor, the Superintendencia de Servicios Publicos Domicilarios (SSPD). These reforms have been associated with improved delivery in large cities, which adopted a variety of strategies to improve water services, for example, Barranquilla selected an international specialized operator to manage its system; Cartagena created a mixed-capital company with an international water company; Bogota and Medellin took measures to enhance the financial sustainability and operational efficiency of their municipal water utilities. 15. For smaller and medium sized cities, water and sanitation reforms have proved more challenging, despite efforts to provide technical assistance (for example, the creation of the Corporate Modernization Program in 1998 to provide technical assistance and financing to facilitate the introduction of specialized water operators, which, however had only reached 87 of more than 1000 municipalities by 2007) In response, the Department Water Plan (Planes Departamentales de Agua) program was created, designating the 32 department governments to act as intermediaries between the national and municipal governments. As of 2011, thirty-one departments and 727 municipalities have been incorporated into the Departamental Water Plans (PDA) program. Implementation of the program, however, has been slower than originally anticipated, with delayed investments and pronounced deficiencies in the capacity of MVCT and Departments to coordinate, lead and implement the PDA framework. The National Development Plan reconfirms support to the water sector through the ‘Agua Para la Prosperidad’ program. Key sector challenges include: (i) addressing the significant capacity and implementation constraints at the regional and medium-and small-sized city levels under the PDA program; (ii) extending and consolidating the benefits of the PME initiative in medium-sized cities and metropolitan areas; and (iii) addressing system-wide equity concerns in access and quality of 10 The NUTP is built on Law No. 86 passed in December, 1989. Two National Economic and Social Policy Council documents (CONPES No. 3167and No.3260) approved in 2002 and 2003 have established the policy and institutional framework for the NUTP. 52 access to water supply and sanitation services; (iv) implementing the intra-residence connections program for low income households; and (v) the development of rural sanitation programs. 16. The Government of Colombia outlined in 2004 a 10-year program to reduce disaster vulnerability at the national level and in key municipalities. In addition, an understanding of natural and hazard risk as well as risk reduction and institutional development policies have been a consistent emphasis in the last four national development plans, including the most recent ‘Prosperity for All’ Plan, 2010-14. These NDPs have promoted the strengthening of risk monitoring and updating the integrated information system, as well as the design and implementation of methodological instruments for hazard, vulnerability, and risk assessment. These policies have contributed to a successful improvement in early warning systems, reducing the loss of lives due to natural hazards. However, the damages and losses to property and livelihoods are still growing every year as a result of inadequate land use planning and management. In order to address this, the Government has included risk identification and zoning in the revision of existing land use plans (Article 189 of Decree 019 of January 10, 2012). Law 1450 of 2011 also mandates the development of a methodology for the formulation and consolidation of a national inventory of settlements in high risk areas. These latter policies are supported under the framework of this proposed programmatic DPL series and are described in greater detail below. 17. The Government of Colombia has developed a wide-ranging program of policy reforms, incentives and investments to address the country’s large housing deficit. The Government of Colombia has set a target of enabling the construction of one million houses in the 2010-14 National Development Plan period. The Ministry of Housing, Cities and Territories (MVCT) has developed an ambitious package of policy reforms to meet this objective. Demand side initiatives include a significant demand subsidy program, interest rate subsidies for mortgage lending to low income households, targeted housing subsidies for internally displaced populations and families adversely affected by recent natural hazards, residential ‘lease-to-own’ subsidies. The Government also continues to support the growth of the savings-linked low income mortgage lending product through the Fondo Nacional de Ahorros (FNA) that to date has over 350,000 participating clients. 18. Supply side initiatives include an ambitious reform agenda to stimulate the production of low income housing. The Ministry – with World Bank financing and technical support – is supporting the Macroproyectos Program 11 which aims to support the development of large-scale low-income housing development through the provision of supply-side subsidies under a public- private partnership (PPP) framework. Despite significant promise as an innovative approach to low-income housing policy, the Macroproyectos Program has encountered significant implementation challenges. The MVCT has been unable to sustain capacity to implement the challenging program and is currently making significant investment in internal capacity and management systems to ensure for Project implementation. Additionally, in April 2012, President Santos announced a new Public Housing Program with a commitment to building 100,000 new housing units for the extreme poor. The program aims to address a key gap in Colombia’s housing policy – provision of affordable public housing solutions for the extreme poor. The program targets a segment that is unable to participate in the subsidy-enabled 11 Law 1151 of 2007, regulatory decree 4260 of 2007 and the ‘second generation’ Law 1469 of 2011. 53 commercial housing market. The program would mitigate in part the continued growth of urban slums and informal settlements. 19. The Government of Colombia has articulated a commitment to regional coordination initiatives. The 2010-14 NDP reflects the importance of improving inter- jurisdictional coordination as a means to address the urban-rural gaps in service provision, close regional disparity in key service indicators, and amplify the gains from the pro-poor growth felt in Colombian cities to other areas. More broadly, the NDP emphasizes the need to strengthen the relationship between territorial entities (TEs) and the national government. A key reform in this context is the Ley Organica de Ordenamiento Terrritorial (LOOT) 12 which was passed in 2011 and creates a legal framework for voluntary collaboration across subnational jurisdictions to collaborate on regional planning and investment programs as well as an inter-governmental framework to improving planning and investment coordination across levels of government, from the national, departmental, metropolitan and municipal levels. The reform creates space for local administrators collaborate and take advantage of economies of scale in service provision, as well as more effectively address the negative externalities of urbanization. A new law on metropolitan areas is also anticipated, which aims to strengthen the fiscal and planning functions of metropolitan agencies. The Government has also passed recent regulation to create legal framework for ‘Contract Plans’, an instrument that will permit coordinated development planning across levels of government around development priorities. The reform is supported by this DPL series and described in greater detail below. 20. The Government has recently taken bold measures to strengthen urban, metropolitan and regional infrastructure financing. In 2011, the Government introduced reforms to the national transfer program from national natural resource extraction royalties (Regalias). A new law (Ley de Regalias) was introduced, which, among other reforms, created a dedicated fund to finance strategic regional infrastructure investments. In addition, the National concessions institute (Instituto Nacional de Concesiones, INCO) was transformed into a new National Infrastructure Agency (ANI). This agency has been given expanded responsibility and increased capacity to manage concessions. These reforms are expected to lead to efficiency gains in the Colombian logistical network, as they will affect investment in logistical infrastructure such as airports, ports, and toll roads. The reform will be supported by a law on Public Private Partnerships, which will regulate PPPs infrastructure and social sectors. These latter reforms are supported under this DPL program and described in greater detail below. 12 Ley Orgánica de Ordenamiento Territorial stands for Territorial Land Use Planning Law. 54 ANNEX 5: DETAILED OPERATION DESCRIPTION 1. This annex includes additional detailed description of: (i) indicative triggers from DPL II; (ii) the results framework; and (iii) the consultative process associated with the DPL I prior actions. Description of Indicative Triggers Second Operation of DPL Series 2. The proposed Loan is the first of a two-loan programmatic DPL series. The following table provides a summary description of the proposed indicative triggers for the second DPL in the series. Table 1: Description of DPL II Indicative Triggers DPL II Indicative Trigger Description Policy Trigger 1: Approve a The proposed CONPES is expected to be the final product of the Misión CONPES national policy Ciudades, an inter-ministerial commission mandated to develop a multi- document for strengthening the sectoral policy that aims to promote the productivity, sustainability and efficiency and sustainability of the inclusiveness of Colombia’s system of cities. The proposed CONPES will aim Colombian ‘System of Cities’. to classify the functions of major cities and urban growth corridors given existing and projected market and trade dynamics. Based on the same, the policy will provide guidelines and incentives to direct regional and urban infrastructure and productive investments to increase the efficiency and growth of the urban system. This national policy is intended to have a broad impact in labor markets and improving accessibility to jobs and urban services for low income populations. Policy Trigger 2: Approve Demand management has been identified as a key element of any plan to CONPES national policy address mobility, congestion and related sustainability issues in all of document detailing the creation of Colombia's cities. From a policy perspective, transport demand management a new legal framework for urban has been highlighted in the latest National Development Plan. This proposed transport demand management. CONPES document will aim to provide guidance to city officials on how to operationalize the range of possible travel demand management strategies. As such, this CONPES document would be expected to: (i) describe the range of possible demand management strategies applicable to the context of Colombia's cities; (ii) articulate the circumstances and environments where each of these strategies would be appropriate; (iii) establish legal and institutional guidelines for cities considering any of these strategies; (iv) identify any gaps - technical, institutional and legal - that remain for successfully implementing demand management systems; and (v) guidance on indicators and mechanisms to measure the impact of demand management measures. The proposed CONPES is an essential prerequisite for cities to implement demand management measures that could successfully mitigate congestion, increase traffic safety and pollution. Ideally, revenues obtained from a demand management scheme could also be used to finance complementary improvements in public transport and non-motorized transport systems. Policy Trigger 3: Approve The proposed CONPES document aims to further consolidate Colombia’s CONPES national policy efforts to develop metropolitan-level regulatory frameworks in principal cities document that lays out the for the integrated management of transport services. The modernization of National Policy for Integrated public transport services under such a framework – under structured Public Transport Systems. concessions with regulated operators – is underway in Bogotá, Pereira and Cartagena. The proposed CONPES would be to institutionalize learning from these pilot experiences to provide regulatory guidance to other metropolitan areas and cities go through this process. Specifically, the CONPES is expected 55 DPL II Indicative Trigger Description to provide guidance on: (i) minimum service standards and operational issues (fare issues, scheduling, transfers, assessment of user experience, transitions from existing systems); (ii) eligibility for operators (preference to existing operators in first concession, level playing field for subsequent concessions, capitalization and experience); and (iii) a regulatory structure (time period and structure of concession contracts, requirements with regards to quality and standards of buses to be used, measurement and incentive systems during concession implementation, penalties, fines and contract termination clauses, fare determination, governance structure and relationship with key urban stakeholders). It is expected that urban residents would be the most prominent beneficiaries of this reform – both public transport users directly by way of integrated fares and higher quality and reliability of service, lower accident rates , reduced pollution and lower levels of congestion. Policy Trigger 4: Regulate According to National Development Plan (Article 218, Law 1450 of 2011), through Ministerial Decree a MVCT is entrusted to develop a methodology for building the National methodology for identifying Inventory of Human Settlement in Risk Areas. The methodology is to be municipal inventory of at-risk approved in the form of a subsequent ministerial decree. The methodology human settlements. includes the identification of hazard and risk areas in municipalities, providing socio-demographic information on families at risk and defining actions for supporting prevention and mitigation measures. The inventory is an essential tool to enable the integration of disaster risk analysis in land use and investment planning. The design of the methodology should be completed by December 2012. This proposed indicative trigger would regulate Article 218 of Law 1450 in the manner indicated. Additionally, Article 218 of Law 1450 of 2011 was cited as a Prior Action for the Bank-financed CAT DDO operation approved in 2012. As such, the proposed indicative trigger aims to support the consolidation of the Government’s reform program on disaster risk management – complementing parallel Bank and GoC joint engagement. Policy Trigger 5: Approve This Ministerial Decree will establish a regulatory framework for managing the Ministerial Decree regulating Law impacts, positive and negative, of large housing projects in specific Colombian 1469 of 2011 to define municipal cities. Given the fact that many of these projects will be located in small fiscal responsibilities and benefits municipalities located in the periphery of large urban centers, and with limited involved in implementing technical capacity, this Decree intends to accurately measure and estimate National Macroproyectos of externalities caused by low-income housing development and provide Social Interest Housing Program incentives for cities to effectively manage the same. Large housing projects Law. will increase city revenues by adding housing stock and thus expanding the property tax base. Such developments will also generate important economic activities as services and commercial sectors will follow demand. Additionally, new low income housing development residents will increase the demand for social and infrastructure services - requiring more schools, hospitals and transport. The proposed Decree will construct a model for cities to work within and estimate responsibilities created with each low income housing project. Policy is expected to have an important impact in fiscal revenues and the ‘ring- fencing’ of resources for the provision of education and health, and thus impacting the poor who rely heavily on state services. Policy Trigger 6: Consolidate the The proposed national regulation aims to detail a legal framework for municipal governance structure to metropolitan management. Metropolitan cooperation in Colombia is limited in increase inter-municipal six legally-established metropolitan areas. However, even within these areas, coordination in metropolitan areas the extent of effective coordination in planning, management and investment is through the regulation of the limited and highly variable. The deep decentralization of the Colombia’s proposed metropolitan areas law. intergovernmental system does not generate an incentive for municipalities to collaborate at a metropolitan or regional scale. Nonetheless, development realities – including basic water and sanitation service provision, environmental management and transportation planning – increasingly require a metropolitan scale to exploit economies of scale. The regulation of the 56 DPL II Indicative Trigger Description proposed Metropolitan Coordination Law will create a framework for collaboration in large metropolitan areas while lowering conditions for the creation of an institutional entity for metropolitan governance. It will also foster regional development and increase resources from central government based on regional projects structured by different entities. Policy Trigger 7: Approve Colombia lags behind its peers in the accumulation and quality of its CONPES national policy productive infrastructure, particularly its road network. Fiscal constraints and document that articulates a deficient management policies have led to under-funding and deterioration of national policy on management road assets in the country. To bridge these gaps, some 4,000 km. of the contracts for the national road national primary road network have been given in concession in three system (‘CREMA’). successive waves since 1994. However, the result of private participation in road infrastructure financing has been mixed. The GoC has articulated a renewed interest to strengthen the public sector’s ability to effectively and efficiently preserve road assets with government resources, and strengthen the mechanisms to attract the private sector in projects where there are clear efficiency gains. The proposed ‘CREMA’ CONPES will aim to lay out a comprehensive policy for the maintenance and rehabilitation of road assets, including amongst other: (i) mainstreaming of performance-based contracts for managing road assets, which focus on road users’ satisfaction and on Contractor’s performance to achieve a minimum level of service, rather than on inputs (i.e. contracts based on quantity activity and unit rates compliance); (ii) strengthening the institutional capacity of the road agency, particularly in areas related to carrying out of reliable annual surveys of road condition, technical and economic analysis of subprojects, and procurement, social and environmental management of projects; and (iii) better defining the role of other stakeholders including Ministry of Finance, DNP and the Ministry of Transport as it relates to the maintenance and rehabilitation of road network. Policy Trigger 8: Approve The proposed decree aims to regulate seven key aspects of the PPP Law (Law Ministerial Decree regulating the 1508 of 2012). First, the proposed decree will regulate the concepts of PPP Law to provide a framework ‘availability of payments’, ‘service levels’ and ‘quality standards’. These of guidelines for PPP structuring, variables are critical in determining private contractor rights regarding financing, and management. compensation for construction, operation and maintenance of public infrastructure concessions. Second, the decree will aim to provide a clear definition of what should be considered public contributions towards a PPP transaction. Third, the decree will aim to regulate specific aspects of PPPs initiated by private sector entities – including the definition of a prequalification system for the selection of concessionaires and contractors. Fourth, and also for privately-initiated PPPs, the decree will regulate minimum technical, legal, financial and related standards for documentation that private structuring agents of PPPs will need to submit during prefeasibility and feasibility stages. Fifth, the decree will aim to regulate additional rules, eligibility conditions and procedures for the PPP project approval process, including the valuation of contingent liabilities and the analysis of alternatives to PPP transactions to justify the use of the proposed PPP model over alternatives available to the government. Sixth, the decree will aim to provide a framework for the evaluation of project risk, requiring that the General Directorate of Public Credit (Dirección General de Crédito Público) and the National Treasury develop methodologies to estimate the value of contingent obligations associated with proposed PPP transactions. Lastly, the decree aims to include additional provisions obligating those entities responsible for developing and approving PPPs to follow the material requirements of Colombia’s international treaties and free trade agreements. 57 Results Framework 3. A Results Framework has been development based on the policy matrix outlined above. The framework aims to cover the entire program period envisioned for the proposed DPL series – identifying indicators for both the first DPL and the overall program. The use of a ‘programmatic results framework’ is consistent with the medium-term focus on the Bank’s programmatic engagement on sustainable, productive and inclusive cities. The programmatic results framework will also enable the Government and the Bank to focus on structuring and targeting financial, knowledge and convening services support towards the achievement of strategic outcomes. 4. The Bank and Government analyzed during preparation the feasibility of utilizing an existing aggregate city performance indicator to measure the effectiveness of the proposed reform program. However, no clear aggregate indicator was considered appropriate for the scope of the reform program. A City Development Index (CDI) is currently collected by local chambers of commerce which provides useful information on city economic competitiveness. A non-governmental public perception initiative, ‘Como Vamos’, has been implemented in a number of Colombian cities to assess citizen perceptions of municipal performance. Similarly, existing Government measurement systems including the Sistema Único de Información (SUI) Municipal, Sistema de Información, Seguimiento y Evaluación del Transporte Urbano (SISETU) and the Indicador de Viabilidad Fiscal all provide relevant information on specific sectors (e.g. water and sanitation, urban transport and municipal finance). These measurement systems are part of an important ‘network’ of results measurement platforms that require further integration and coordination. The Government has requested Bank support, in the context of the Misión Ciudades and the completion of the DPL II indicative trigger for a ‘System of Cities’ CONPES, to develop a measurement framework that would enable to Government to measure and benchmark cities across core program objectives – sustainability, productivity and inclusiveness. 5. The programmatic results framework for the DPL outlined below does aim to link the measurement of expected results for specific prior actions to existing Government of Colombia development targets. Multiple indicators in the framework have been harmonized with development targets in the National Development Plan (2010-14) and the associated measurement system, Sistema de Metas del Gobierno (SISMEG). Participatory and Consultation Process 6. The National Development Plan 2010-2014 is presented for the consideration of Colombian society by the National Planning Council. The National Planning Council (Consejo Nacional de Planeación) is the responsible entity for conducting the public consultation process associated with Colombia’s National Development Plans (NDP). The Council, according to Article 9 of Law 152 of 1994, must be comprised of national and local agencies and organizations that provide suggestions and recommendations on the most important chapters and building blocks of the NDP. The Council is in charge of ensuring that civil society is well represented in the discussions regarding the formulation of the NDP. 7. The NDP is the result of a broad-based consultative process representing a wide range of non-state organizations such as academia, religious groups, private sector, trade unions, and 58 youth groups. According to DNP, this is one of the most important instances of civil society participatory planning in the country. 13 This Plan provides a road-map to achieve the expected goals and to ensure compliance with the national vision and commitment of the government program. 8. The basic themes of the NDP were presented officially on November 12, 2010. To provide the GoC an opportunity to consider and include the proposals of these various groups in the formulation of the NDP 2010-2014, 20 regional and 10 thematic forums were held around the country during the months of November and December 2010. The principle objective of these forums was to have various sectors and local authorities participate and voice their opinion with respect to the proposed areas of action covered by the NDP. The Council also organized the XIV National Congress of Participatory Planning (XIV Congreso Nacional de Planeación Participativa) in the city of Yopal, where the Council of Bogota 14 conducted several sessions and numerous working groups with the heads of planning of the regions, including on issues of housing and institutional strengthening at the municipal level. 9. In addition to the participatory measures associated with the National Development Plan, many of the Prior Actions were subject to additional consultation. A preliminary assessment of consultative actions taken is presented in the figure below and will be updated during preparation. These are outlined in Figure 1. Figure 1: Prior Action Consultations Prior Action Consultation Prior Action 1: The Borrower, through The process of restructuring of the National Planning Department to DNP, has created a sub-directorate unit, form the Sub-Directorate of Regional Planning and Investment that within DNP, responsible for, inter alia, involves the internal restructuring of an administrative body. As such, coordinating regional planning and the consultation process for the same involved key public sector investment, as evidenced by the stakeholders exclusively. Specifically, the Office of the President of the Borrower’s Decree No. 1832 of August Republic, the Office of the High Commissioner for Good Governance 31, 2012, duly published in the (Alta Consejería para el Buen Gobierno y Eficiencia Administrativa) Borrower’s Official Gazette on August and the Administrative Department for Public Management 31, 2012 (Departamento Administrativo de la Función Pública) were closely consulted as part of the preparation and approval of the decree. More broadly, it is important to note that the creation of the Sub-Directorate on Regional Planning and Investment is consistent with the policy focus on regional development and planning within the National Development Plan, 2010-14 which was subject to extensive stakeholder consultation as summarized above. Prior Action 2: The Borrower, through The Decree was developed in partnership with the Vice Ministry of MVCT, has issued a regulation for the Water and Sanitation of the MVCT, and in consultation with the Vice provision of subsidies for household Ministry of Housing. Work on the prioritization of beneficiaries was water and sanitation connections for low- elaborated with the UNIDOS program. Given the expected health income families (strata 1 and 2), as benefits of the program, input was also gained from the Ministry of evidenced by the Borrower’s Decree No. Health and Social Protection. The Treasury was consulted, and 13 See DNP. Sociedad Civil Iniciará en Yopal Discusión del Plan Nacional de Desarrollo. 14 The District Council of Bogota is a political-administrative Corporation elected by popular vote that exercises its powers as the supreme authority of the District Capital of Bogota. The District Council carries out its regulatory functions and political control through three (3) specialized standing committees, as follows: First Committee on the Development and land use plan, Second Committee on Government, Third Committee on Finance and Public Credit. For more information, see http://concejodebogota.gov.co/prontus_concejobogota/site/artic/20090909/pags/20090909143119.php 59 Prior Action Consultation 1350 of June 25, 2012, duly published in technical support was provided by the Inter-American Development the Borrower’s Official Gazette on June Bank. Furthermore, administrations and utilities of Bogota, Cartagena, 25, 2012. Medellin, Quibdo, and Barranquilla were consulted. Prior Action 3: The Borrower, through The Plan was developed with inputs from the Vice Ministry of MT, has adopted its national road safety Transportation, as well as academics from the University of Los plan for years 2011-2016 to increase Andes, representatives from the Association of Traffic Accidents (Liga urban and inter-urban road safety in its contra la violencia vial), the National Police, and the Transportation territory, as evidenced by the Borrower’s Working Group of SENA. Ongoing consultation with the National Resolution No. 1282 of March 30, 2012, Planning Department, the Social Protection Ministry, the Ministry of duly published in the Borrower’s Official Education, as well as Mayors Offices and Transportation Workers Gazette on March 30, 2012. Groups has been undertaken. Discussions have also been held with the Colombian Automobile Club, Insurance Companies, and universities on five particular themes: institutional aspects, human behavior, vehicle strategies, infrastructure issues, and issues to do with treatment of victims. The Haddon methodology has been applied for the development of the strategy, in keeping with World Health Organization guidelines, and European Commission Road Safety standards for Monitoring and Evaluation of impacts were incorporated. Prior Action 4: The Borrower, through The Conpes was created through agreement of the Ministry of CONPES, has approved its national Housing, Cities and Territory (MVCT) and the Ministry of public space policy guidelines in order to Environment and Sustainable Development (MADS), as well as the promote the creation of public spaces in Ministry of Transport, the Ministry of Culture, the DIMAR, and the urban areas, as evidenced by the National Police. It was also approved by the Ministerial Council on the Borrower’s CONPES document No. 3718 31st of January 2012. Local and regional input was gained through of January 31, 2012 participation in the International Congress on Public Space held in Barranquilla in 2010. Many meetings were also held with public and private entities, universities and consultants during the development of the methodology and framework of the document. Entities consulted include: UN Habitat, TransMilenio, the Instituto para la Economía Social (IPES), the Adminsitrative Department for Public Space (the Departamento Administrativo de la Defensoría del Espacio Público, DADEP), the Urban Development Institute (IDU), the District Institute for Leisure and Sport (Instituto Distrital de Recreación y Deporte, IDRD), as well as district secretaries of Planning, Environment, and Habitat. The Bogota Chambers of Commerce, FENALCO Bogotá, and the Colombian Society of Archetects (SCA) as well as the National Universities were also consulted. This CONPES was developed over a four month period between November 2010 and March 2011. The DNP led this process, in partnership with the Ministry of Housing, Cities and Territory, and with active participation from the Treasury, the Ministry of Transportation, The Ministry of Education, and the Ministry of Defense. The latter three Ministries are all headquartered in the Centro Administrativo Nacional (CAN) area. Consultations were held with the Mayor’s Office (17 March 2011) and was proved by the Council of Ministers on the 28th of March. Prior Action 5: The Borrower has created Not Applicable. a national urban redevelopment company to support the structuring of urban 60 Prior Action Consultation redevelopment projects, as evidenced by Borrower’s Presidential Decree No. 4184 of November 3, 2011, duly published in the Borrower’s Official Gazette on November 3, 2011. Prior Action 6: The Borrower has A consultative event hosted by the think tank Fedesarrollo was held established the legal framework for the with participation from the Minister, relevant senators, the president of provision of public housing to the poorest Chamber of Construction Firms (CAMACOL), and representatives and most vulnerable households as from academia and civil society organizations. It was also discussed in regulated and evidenced by the an Urban Forum held in Medellin in June 2012 (attended by the Borrower’s Law No. 1537 of June 20, Minister of Housing). 2012, duly published in the Borrower’s Official Gazette on June 20, 2012. Prior Action 7: Borrower, through MT Given the specific characteristics of the decree, the consultation and DNP, has issued a regulation for the process associated with its development and approval took place within implementation of the Contrato Plan, as the Ministry of Finance and Public Credit, Ministry of Interior and the evidenced by the Borrower’s Decree No. National Planning Department. 819 of April 25, 2012, duly published in the Borrower’s Official Gazette on April 25, 2012 Prior Action 8: The Borrower, through In addition to legally defined consultation required for the constitution MT, has designated a national agency for of a Law, a workshop was held with investment bankers in advance of infrastructure to structure regional developing the first draft of the law (June 7 2011) as well as three infrastructure concessions, as evidenced sessions to gain feedback on the first draft of the law with bankers by the Borrower’s Decree No. 4165 of (September 16 2011), with representatives from ministries and the November 3, 2011, duly published in the national government (September 21 2011), and with guilds and Borrower’s Official Gazette on multilateral organizations (September 27 2011). November 3, 2011. Prior Action 9: The Borrower has The 2010-14 National Development Plan established the foundations established the legal framework for the for this decree. The development of the Decree was undertaken with structuring and financing of public- internal consultation between the National Government and the high private partnerships, as evidenced by the level committee on good governance (Alta Consejería para el Buen Borrower’s Law No. 1508 of January 10, Gobiernoy Eficiencia Administrativa), the Ministry of Transportation 2012, duly published in the Borrower’s and the Treasury, the National Planning Department, and the National Official Gazette on January 10, 2012. Concession Institute (INCO) in October 2011. 61 ANNEX 6: RISKS AND MITIGATION 1. The proposed operation in considered to have moderate risks. Table 1 summarizes the main risks associated with the proposed policy program supported by the DPL and indicative mitigation measures. A number of targeting, technical, social, environmental risks are discussed throughout this document in greater detail. Table 1: Risks Assessment and Mitigation Measures Macroeconomic Risks Mitigation Measures Overall Macroeconomic risks. Colombia is The country’s macro resilience is based on solid initial exposed to three different types of external conditions and policy buffers to respond. Economic growth is shocks, including: a slowdown in economic strong and the absence of significant domestic or external activity in the US, a decline in oil prices, and imbalances help shore up stability. Substantial foreign direct global financial market turmoil. investment inflows, ample accumulation of foreign reserves, and a Flexible Credit Line with the IMF protect the external position. Colombia also enjoys a flexible change rate and has room for monetary and fiscal policy easing. Political, Institutional and Technical Risks Mitigation Measures Targeting-related political and technical risks A detailed discussion of this risk is included in Annex 9. In associated with reforms directed at extreme summary, for WSS subsidies, issues of targeting are more poor. The proposed program supports reforms objective as beneficiaries will be those households not to housing and water and sanitation subsidy connected to available WSS network infrastructure. In addition, policy with the aim of reaching – in both most urban municipalities in Colombia have disaggregated cases – the extreme poor. A risk exists that urban areas by strata for the purpose of accessing WSS such programs will be ‘politicized’ with subsidies. As such, identifying stratum 1 households is largely beneficiaries selected outside of the means- an objective exercise. based eligibility framework or targeted subjectively within the same. Related to the With respect to housing subsidies, MVCT aims to utilize the above, the proposed subsidy policy reforms existing eligibility screening framework managed by requires a transparent and technically well FONVIVIENDA. The system has been analyzed as part of the managed eligibility screening instrument that Bank’s parallel lending engagement in the housing sector and would need to be maintained over time. A was found to include adequate controls and management. risk exists that systems will not be appropriately managed and maintained In addition, the Bank and the GoC have agreed to conducted leading to the imprecise targeting of the analytical work to assess the effective of additional targeting reform program. mechanisms for both the WSS and public housing subsidies. The analysis will identify households with the lowest asset index (SISBEN). HOI will be calculated to assess impacts on inequality and micro-simulations under the PSIA will be extended to look at impacts on poverty using the multidimensional poverty index (MPI), which was adopted in Colombia in 2011. Further details are outlined in Annex 9. Uptake Risk. The reform associated with the While an uptake risk will persist for the poorest households, extension of water and sanitation subsidies measures are in place to mitigate this risk. The decree includes for intra-household connections is new and minimum requirements for municipalities to finance social will require effective ‘uptake’ from outreach and communication to households to educate on the beneficiaries. A risk that poor beneficiaries health benefits of connecting to the formal WSS network. will not avail the subsidy to connect to the Additionally, the existing national transfer program (Unidos) network as this would imply being subject to provides support network both in terms of education of regular billing. households and income transfers that may help support the additional monthly costs associated with formal access to WSS service. Further, the well-established cross-subsidy system for utilities in Colombia guarantees that poorest households receive water supply at subsidized monthly tariffs. In addition, methods 62 to facilitate local pre-payment and daily payment of utility bills as alternatives for low-income households have been piloted in two Colombian cities and are being analyzed for replication in other urban centers. Lastly, the CRA regulates variability in tariff levels to ensure lowest income households do not suffer income shocks. In addition, in order to better understand these ‘take-up’ dynamics, additional analytical work will be done in partnership with the DNP Impact Evaluation Unit. The Bank and DNP will conduct a behavioral study in two municipalities where the WSS network has been expanded to low-income neighborhoods but take-up has been low. In particular, the team will organize focus groups in two neighborhoods (in Cartagena and Barranquilla, respectively) that have been selected by MVCT and DNP as pilot areas for initiating the subsidy program. This work will contribute to further understanding the obstacles that households face in both connecting to existing networks and the continuing use of service. Institutional Capacity and Implementation As a first measure, the proposed program has been trimmed to Risk. The proposed program supports reforms focus on: (i) eliminating prior actions where institutional in housing, urban transport, intra- capacity is weak and concentrating on sectors and programs jurisdictional coordination and with respect to where the Government has demonstrated increased capacity; (ii) the structuring of intra-urban road better aligning the proposed DPL program on sector and concessions and urban PPPs that require programs where – despite broader institutional weaknesses – strong commitment to maintain institutional responsible ministries have both demonstrated a strong policy capacity at both the policy and operational and implementation commitment. For example, the current levels on associated planning agencies and policy matrix eliminated prior actions associated with the technical ministries and agencies. Macroproyectos Program and the residential leasing decree. For the former, noted implementation capacity constraints motivated the exclusion. For the latter, the Bank team assessed that MVCT did not consider the reform a high priority. However, the policy matrix did retain reforms that would be implemented by the MVCT, specifically the ministerial decree on household water and sanitation connections and the Public Housing Law. In both policy areas MVCT has demonstrated a strong prioritization of the reforms and initiated implementation of associated programs. The Public Housing Law is a parallel program to the Macroproyectos loan and they are not anticipated to have any interrelated impacts in terms of implementation. Implementation risks associated with the capacity of the Ministry are anticipated to be mitigated by high levels of political will associated with achievement of targets under this program, evidenced by a presidential announcement in April 2012 which was followed by the appointment of a new Vice-Minister for Housing. In addition, the policy matrix was prioritized with a view to linking reforms with existing Bank engagement that aims to mitigate implementation risks. For example, the retention of the Public Housing Law in the matrix was, in part, motivated by the fact the Bank’s broader engagement on low-income housing will support MVCT in strengthening technical and social management aspects of the associated Public Housing Program. 63 A preliminary assessment of the mitigating framework is favorable in certain other sectors. On intra-urban road concessions, ANI benefits from inheriting functioning technical, financial, social and environmental management systems from INCO and has made additional commitments to strengthen these functions. ANI is also engaged with IFC Advisory Services as a structuring advisor for a first pool of concessions and to building technical capacity within the institution. Asset Management and Maintenance. The Public Housing Law includes provisions that enable the Reforms supported in the housing sector aim creation of condominium and related maintenance funds to to increase the supply of public housing to the address post-construction asset management. The Law also extreme poor. International practice in public includes provisions that classify public housing projects as housing developments points to the ‘stratum 1’ areas for 10 years to enable continued access to importance of establishing clear tools and water and sanitation subsidies. Additionally, the Bank and instruments for the post-construction MVCT are collaborating on technical assistance under the management of physical assets. A risk exists Macroproyectos Loan to develop a post-construction asset that MVCT will not adequately invest in management framework for public housing projects that will structuring condominium management apply to investments under the Public Housing Law. structures in public housing projects leading to a deterioration of the asset quality. Incentive Mismatch Risk Between and Across This programmatic DPL series, and the associated knowledge Levels of Government. The ‘systems of cities’ and convening services program, are expressly aimed and framework that underlies this proposed designed to support this shift in focus on urban and regional programmatic DPL focuses on hierarchical or policy. A number of mitigating factors are in place. First, the differential policy and investment priorities Misión Ciudades intra-ministerial commission includes a broad across different levels of Governments. For consultative process with subnational governments across the example, it suggests that investment and system of cities spectrum, with an express focus on lagging policy should aim to further enhance the regions, urban corridors, port and border cities and development economic efficiency of larger agglomerations regions. Second, the Systems of Cities National Policy – the (concluding that the same will be a benefit to commission’s core product – will be approved by a CONPES the system as a whole) while in small towns commission which includes subnational participants. Third, the the focus should be disproportionately on Government aims to continue its policy of incenting regional bridging the gap in social performance and cooperation around key development initiatives (e.g. the recent connectivity to the urban network. This Royalties Reform includes the structuring of a Fund for approach is not uncontroversial in Regional Development). Fourth, the Bank is working with democratic, highly decentralized countries strategic regions as part of the Sustainable, Productive and like Colombia where ‘lagging’ local Inclusive Programmatic Engagement to articulate coordinated governments advocate for a ‘progressive’ regional development policy and investment programs (e.g. the distribution of Government investment, Korea-ICT supported Caribbean Corridor Green Growth subsidies and policy attention as a means to Strategy). Fifth, the Bank has agreed to continue to monitor, ‘catch up’ to larger agglomerations. A risk during the DPL implementation and the preparation of the that the broader thrust of the ‘system of cities’ proposed second DPL in the series, subnational perceptions policy framework will conflict with the regarding the policy dialogue and analyze incentive questions political economy incentives of cities across where necessary. The Bank will coordinate efforts with the the urban system. GoC to ensure that subnational governments are engaged in an ongoing consultative process on the reform agenda under the Misión Ciudades. Social and Environmental Risks Mitigation Measures Environmental Impacts. Certain policies A detailed analysis of the environmental risks of specific policy supported by the DPL, such as those that aim measures is provided in the ‘Environmental Issues’ section to increase the supply of affordable housing, above. The Government of Colombia – with World Bank water and sanitation services, urban lending and knowledge services support – has made significant redevelopment, urban transport and intra- strides towards strengthening the national environmental urban connectivity may have some negative regulatory and institutional framework. This umbrella environmental impacts. engagement has led to a range of specific reforms (e.g. national 64 regulations on fuel quality and urban air quality, ministerial decrees on closing of non-sanitary landfills, amongst other), increased capacity of environmental authorities to enforce regulations and the mainstreaming of environmental assessment and management practices in sector programs. Adequate framework for environmental and A detailed discussion of this risk is presented in Annex 9. In social management in concessions and PPP summary, ANI guidelines on social impact studies, models supported under the program. consultations, and potential appropriation and redevelopment Proposed reforms associated the creation of remain the same as under INCO, and were developed through ANI and the approval of the PPP Law both technical support from the IFC. These included regulatory involve the strengthening of the framework reforms on land acquisition and management practices. ANI for structuring concessions and PPPs for will be responsible for elaborating studies and compiling intra-urban roads and other urban information about social factors whenever needed to best guide infrastructure. A risk exists that these design and management of concessions and other PPPs. technical and structuring models do not Significant increases in staffing levels and capacity in the adequately address social and environmental section which handles social issues can enable more thorough management requirements. consideration of poverty and distributional risks. Key institutional processes affecting social outcomes holdover from INCO, and are considered to be relatively robust, such as the methods for assessing social costs of projects prior to commitment, stakeholder consultations, and appropriation and resettlement practices among low-income and vulnerable groups. The IFC maintains has an ongoing advisory services engagement with the agency to support the integrated structuring of a first batch of concessions. A more detailed discussion of the ANI environmental and social management framework – and specifically the environmental and social management responsibilities of ANI concessionaires – is included in Annex 9. Social Management Risks. Reforms The Bank and the Government have developed, in the context associated with the promotion of safe public of the parallel Macroproyectos Loan, a detailed social housing under the program are subject to the management framework for managing market rate low-income risk that MVCT does not develop an adequate housing settlements. MVCT and the Bank have agreed to framework for post-delivery social further collaborate under the Loan’s technical assistance management. International and regional component to adapt this social management framework to practice in public housing points to the public housing communities. The framework focuses on crime importance of strong frameworks for social and violence prevention, access to social protection services management and social protection in public and community mobilization and conflict resolution. The housing communities. The absence of such framework also builds on highly successful city-level social interventions increases the risk of crime and inclusion and crime prevention practices in Medellin and violence and other social risks. Bogotá. The frameworks would be analyzed and adopted as part of the Government system for social management for public housing programs. Resettlement Risk. Policies supported by this The analysis of the resettlement-related risks for specific program – including those associated with policies is discussed in greater detail in Annex 9. In general disaster risk management, affordable housing, terms, this assessment notes that Colombia benefits well water and sanitation services, urban established frameworks for land acquisition and resettlement redevelopment, urban transport and intra- management – that are considered leading practice in the urban connectivity may have negative region. The Ministry of Transport and ANI, responsible for impacts in terms of the involuntary implementing key reforms under this DPL series, have resettlement of vulnerable groups. recognized institutional capacity and procedures in place to manage resettlement and compensation for economic losses. In the case of transport, the framework for resettlement was developed with the support from the Bank-financed NUTP. This framework has been developed and adopted as the Government framework for land management and resettlement 65 for the Government’s National Urban Transport Program. Similarly, the Bank has developed a comprehensive social and resettlement management framework in the context of the Macroproyectos Loan. Engagement under the parallel operation will include technical assistance to assess how to ‘migrate’ and adopt elements of these frameworks to the Government Public Housing Program. Gentrification Risk. The proposed program The Government, as part of the new Housing Law, has required supports the creation of a national urban that all partial land use plans include at least 20 percent of land redevelopment company (EMBARCO) which use dedicated to low income housing. Stronger measures have aims to support the structuring of urban recently been adopted by Bogota, requiring 40 percent of land redevelopment projects in large Colombian use dedicated to low-income housing. These provisions will cities. A risk exists that the framework for apply to all partial land use plans – including those associated structuring redevelopment projects developed with future EMBARCO urban redevelopment projects. by EMBARCO does not adequately accommodate affordable housing – thereby leading to gentrification. 66 ANNEX 7: RELATIONSHIP TO OTHER BANK OPERATIONS 1. The proposed programmatic DPL series complements current sustainable development sector lending operations and knowledge services in Colombia. The proposed DPL is part of a strategic and programmatic engagement in Colombia in the areas of urban transportation, connectivity and logistics, water and sanitation, urban development, disaster risk management, low-income housing, and urban infrastructure. These activities include lending operations as well as knowledge products and technical assistance. The Programmatic Knowledge Services (PKS) engagement is summarized in Figure 1. 2. The DPL complements the large Bank-financed program in urban mass transit systems in Bogotá and five other Colombian cities. A multi-year Bank-supported NUTP seeks to: (i) strengthen capacity for analyzing urban mobility and options to strengthen planning, management, operations and financial sustainability of integrated public transport systems; (ii) strengthen capacity for planning and implementing travel demand management strategies and non-motorized modes; (iii) provide how-to guidance for the implementation of possibilities to better coordinate land-use with transport demand and promote transit-oriented development; and (iv) mainstream issues of road safety, gender and universal accessibility in public transport. Projects include lending of over US$450 million to support the development of bus rapid transit systems in Bogotá 15 and five major cities. Technical assistance and knowledge services include projects to design the Bogotá Metro system under the Bogotá Basic Urban Services Project, and a Feasibility Study to Develop Tradable Air Rights Instruments to Mobilize Private Financing for Bogotá’s Carrera 7 Bus Rapid Transit Corridor. 3. The DPL is well aligned with Bank support to urban water and sanitation services. Ongoing water and sanitation operations include: (i) the La Guajira Water and Sanitation Infrastructure and Service Management Project, which aims to support the development of financial sustainable utilities and improve the quality of basic services in La Guajira; (ii) the Rio Bogotá Environmental Recuperation and Flood Control Project, which aims to transform a highly polluted river into an environmental asset for the District of Bogota; and (iii) a Solid Waste Management project, which aims to support public–private partnerships for the development and management of multi-municipal regional sanitary landfills. These challenging engagements have encountered serious implementation delays caused by a combination of capacity constraints in implementation agencies, political economy challenges at regional and local levels and also as a result of the underlying complexity of the proposed investment programs. The investments are currently subject to ‘high-priority’ supervision and joint Bank and GoC remedial management planning to improve implementation performance. 4. The engagement also includes SFLAC financed assistance to support MVCT to analyze and coordinate two programs to strengthen water services: (i) modernization of water utilities through introduction of specialized water operators; and (ii) Planes Departamentales de Agua, which empower department governments to take co-responsibility for water and sanitation services with municipalities. The Bank is also providing support to the municipality of Barranquilla in exploring opportunities for an integrated ICT-enabled platform for service delivery. In 2013 the Bank will continue to work with MVCT in the analysis of and integration 15 Integrated Mass Transit System and Additional Financings (Loan 7231-CO, Loan 7457-CO and Loan 7739-CO). 67 of the Corporate Modernization Program (PME – Programa de Modernización Empresarial) and PDA programs, through analysis of specific case studies at the municipal level, general policy recommendations, and stakeholder workshops. 5. Ongoing activities to support the redevelopment of urban land and public space include a Fee Based Advisory service with the Empresa Nacional de Renovacion Urbana which will support the renovation of the Centro Administrativo Nacional (CAN), through a workshop and forum of leading international experts and local stakeholders to discuss best practice in models of urban renovation centered around administrative and public buildings. In addition, the Bank and the GoC are collaborating on a PPIAF-supported Sub-National Technical Assistance Program (SNTA) that aims to structure and take to market innovative ‘land value capture’ financial instruments for urban redevelopment. 6. A range of critical linkages also exist between the Bank’s Urban and DRM practices in Colombia. The Bank has played a prominent role in financing Colombia’s disaster risk management and reconstruction programs since the late 1990s. In recent years this has included work to strengthen the capacity of the national Government to coordinate disaster risk management, build capacity at the municipal level, and reduce disaster risk. Projects include the Natural Disaster Vulnerability Reduction APL 1 and 2 (2005 and 2006), as well as the 2008 and 2012 DPLs with a Catastrophe Deferred Drawdown (CAT DDOs) in support of Colombia’s disaster risk management framework articulated in the National Development Plan 2008-2011. The World Bank is also working with financing from Global Facility for Disaster Reduction and Recovery (GFDRR) to support four technical assistance processes using an open source risk assessment platform to integrated probabilistic risk information into specific policy-making processes. In addition, there is ongoing work on integrated urban flood prevention with the District of Barranquilla. Lastly, the World Bank and DNP collaborated on a country disaster risk management analysis (CCDRMA) for Colombia, with result published in a book launched during June 2012. 7. The World Bank’s engagement on housing is closely aligned with national government priorities. The Bank-financed National Macroproyectos Social Interest Program Project seeks to address the urban low-income housing deficit in Colombia and is supported by the Cities Alliance to develop critical technical and management instruments related to development of a public-private partnership (PPP) model for the Macroproyectos Program. The Bank has also provided the GoC support through Public-Private Infrastructure Advisory Facility (PPIAF) to structure and develop a ‘window’ for private Second Generation Macroproyectos. This activity will provide important support to the Government to successfully harness private sector interest in developing land for low-income housing identified under the Program. 8. MVCT has been unable to sustain capacity to implement the challenging Bank-financed Macroproyectos Program and is currently making significant investment in internal capacity and management systems to ensure for Project implementation. The Bank is also closely supervising the Loan and has agreed with MVCT on a detailed work program for the preparation of underlying subproject investment as a first step in a proposed Project restructuring. 68 9. The Bank has supported the Government of Colombia on regional infrastructure and connectivity policy through leading analytical support. The 2004 World Bank ‘Recent Economic Developments in Infrastructure’ (REDI) report provided a comprehensive overview of Colombia’s urban, regional and productive infrastructure requirements subsequently informing sector infrastructure investment policy in successive national development plans. The GoC has recently requested the Bank’s support to prepare a new REDI, scheduled for delivery in 2013. 10. The proposed DPL series also complements Bank engagement in public sector management. The proposed Bank-financed Subnational Institutional Strengthening Project currently under preparation aims to strengthen the capacity of subnational governments in municipal fiscal and overall public management. The Project also aims to strengthen subnational performance monitoring and evaluation systems, design and implement and performance-based fund for subnational public management, amongst other key reforms. In addition, the broader public sector engagement has recently engaged key subnational clients (i.e. Cali and Barranquilla) with rapid advisory services support in public sector, fiscal and debt management. 11. The Bank has an ongoing and deep engagement in environmental policy and management that complements this programmatic DPL series including: (i) a program of analytical studies to identify the range of environmental policy priorities through the 2005 Country Environmental Analysis; (ii) policy lending to help solidify the Government’s commitment to an agreed environmental policy and reform agenda, which the Bank has supported through the Sustainable Development Policy Loan (DPL) program over the 2005-2008 period, and (iii) earmarked investment lending for supporting the broader reform agenda developed mainly through the DPL Program, through the 2005-2012 Sustainable Development Investment Project and the Additional Financing for the 2012-2015. This comprehensive approach to engagement in environmental policy has been evaluated to have had the cumulative effect of strengthening the regulatory framework for environmental policy, deepened the institutional capacity of environmental agencies and integrating environmental management concerns into sector programs. 12. In addition, the IFC has provided high-quality support to the Government of Colombia’s infrastructure connectivity and urban development agenda. IFC Advisory Services’ PPP practice area serves as the lead structuring advisor to the Ruta del Sol road concession, Colombia’s primary highway corridor connecting Bogotá to the Atlantic Coast. Additional, the IFC PPP practice group is a lead technical and structuring advisor to the newly- formed ANI to structure an initial batch of concessions. More broadly, the IFC Municipal Simplification program is active in 21 cities focused on reducing ‘red tape’ in business permitting, construction licensing and other related administrative procedures. IFC continues to identify and originate investments in housing finance and directly with low-income housing developers. Past IFC operations have been critical to strengthen the fundamentals of the housing market. Specifically, including technical assistance and financing to support the establishment of Titularizadora Colombiana, the country’s first secondary mortgage company. 16 16 The IFC provided a US$40 million equity investment to create Colombia’s first secondary mortgage company (Titularizadora de Colombia) through the Colombian Home Mortgage Corporation Project (Project 4156), approved in May 2000. 69 ANNEX 8: ANALYTICAL UNDERPINNINGS 1. The program is grounded in a solid analytical foundation, which includes analysis reflected in a 2012 World Bank report, Colombia Urbanization Review: Amplifying the Gains from the Urban Transition and other economic and sector work relevant to each of the Policy Areas of the DPL. The Colombia Urbanization Review was informed by a series of commissioned background studies on these interrelated themes of logistics and connectivity, intra-jurisdictional coordination and urban infrastructure finance. 2. The Bank has extensive experience in providing analytical support in the ‘Sustainable, Productive and Inclusive Cities’ multi-sector policy area. The DPL is well aligned with the World Bank Urban Strategy, ‘Systems of Cities: Harnessing Urbanization for Growth and Poverty Alleviation (2009)’. In addition to the programmatic knowledge services outlined above, there are a number of key analytical studies in the areas of water and sanitation services, public transportation and road safety, disaster risk management and urban redevelopment that are directly relevant to this proposed DPL. 3. An in-depth analysis of the water and sanitation sector is provided in Andres, L. A., D. Sislen, and P. Marin, eds. 2011, Charting a New Course: Structural Reforms in Colombia’s Water Supply and Sanitation Sector (Bogotá: PPIAF/World Bank). The report provides a comprehensive review of the modernization and concessions program implemented with World Bank support over the last 15 years. In addition, recent work by Velez, Azevedo and Posso (World Bank, 2010) indicates that inequality in terms of water and sanitation (measured through the Human Opportunity Index – HOI) seems to have increased in urban areas between 2003 and 2008, despite high levels of coverage in the country as a whole. These latter findings directly inform the second prior action for this Loan focused on targeting subsidies to intra-domiciliary connections. 4. In public transportation and road safety, a comprehensive review of transportation challenges is provided in the World Bank joint publication with the Ministry of Transport, ‘Transport on a Human Scale’ (2009). 17 In addition, several studies highlight the importance of integrating public transportation systems – moving away from an atomized institutional structure in which individual bus companies obtained route permits from the local transit authority to provide transit services leading to a ‘race to the bottom’ competition among bus owners for passengers, over supply of buses, and safety concerns (Ardila, 2006). Studies also show that Colombia is experiencing rising rates of motorization, 18 with some predictions indicating that under existing scenarios by 2040 cars could account for more than half of transportation. World Bank analysis on carbon reductions in Colombia also highlight the benefits associated with integrated transportation in terms of reduction in air pollution. Colombia’s public transport programs are accumulatively expected to reduce CO2 emissions from public transportation by 44 percent, reaching 1.2 million tons by 2040. 19 17 Transporte a la Escala Humana, World Bank 2009. ISBN: 978-958-98712-8-7 18 According to the Secretaria Distrital de Movilidad, 2010, In Bogota alone, the vehicle fleet has dramatically increased by 105% between 2002 and 2010, reaching a total of 1.3 million vehicles in 2010. http://www.movilidadbogota.gov.co/hiwebx_archivos/ideofolio/mayo-12-de-2011---boletn-movilidad-en-cifras-2010_2299.pdf 19 World Bank 2012. Colombia: Low Carbon Study. 70 5. A recently completed World Bank study supported by GFDRR provides a comprehensive review of hazard risk and disaster risk management policy in Colombia. 20 The report stresses that weaknesses in Colombia’s land use planning system is amongst the primary reasons for the increase in the costs of disaster events reported in Colombia. 6. In terms of public space and urban redevelopment, analysis undertaken to accompany the PPIAF funded Financing Infrastructure for Urban Re-development Technical Assistance highlights the importance of urban renovation given the constraints on land availability in urban areas. According to the Land Use Plans (POT) of Colombia’s five largest cities there are only 5,300 hectares of available land for residential urban expansion in Bogota, Medellin, Cali, Barranquilla and Bucaramanga. At the current rate of household formation, it is expected that this available land will be consumed in less than 6 years. 21 7. The Bank has conducted several studies related to access to affordable housing in association with the Macroproyectos Social Interest Program Project (P110671). This analytical program points both supply and demand side constraints contributing the pressing housing deficit in Colombian cities. These findings were echoed in background studies during the first phase of the Colombia Urbanization Review, which concluded that zoning deregulation, housing finance, and urban upgrading can be powerful instruments to reduce the housing deficit and make urbanization inclusive. 8. On institutional strengthening and regional coordination, analysis under the Urbanization Review points to the potential benefits of improved coordination. This analysis was undertaken with leading international experts, drawing on lessons from case studies from around the world, as well as local consultations. The analysis highlights the potential gains from improved coordination, as well as the importance of taking the opportunity provided by the legal reform currently underway for the new law regulating spatial planning - Ley Orgánica de Ordenamiento Territorial (LOOT) - which responds to the need to develop a clear institutional framework to support the aggregation of municipal functions and coordination between territorial entities. 9. In the policy area of urban connectivity and regional infrastructure finance, the Urbanization Review highlights the costs of infrastructure gaps and transportation costs on trade, growth and productivity in Colombia. These conclusions are further supported by 2005 and 2006 World Bank studies, as well as recent joint work by the World Bank and the Inter-American Development Bank (IDB) stresses the link between connectivity and poverty reduction in LAC, through their impact on food prices (Schwartz et al., 2009). In terms of financing cities, background work for the Colombia Urbanization Review also points at weaknesses in municipal financing that may lead to inadequate infrastructure investment and that improved coordination can foster economies of scale in service provision and help mitigate the negative externalities associated with rapid urbanization. 20 Campos, A. N. Holm-Nielsen, C. Díaz G, D. M. Rubiano, C.R. Costa, F. Ramírez, and E. Dickson Eds, Análisis de la gestión del riesgo de desastres en Colombia: Un aporte para la construcción de Políticas públicas’ World Bank 2012. 21 Departamento Nacional de Planeación DNP. Construir Ciudades Amables. Bogotá, 2006, –p. 30. 71 10. The analysis of overall environmental policy and management that underpins the assessment of environmental risks and mitigation measures for this proposed loan is supported by a comprehensive analytical and advisory program. The Colombia Country Environmental Analysis (2007), the associated analytical program that supported the Sustainable Development DPL series and the recent Colombia: Strengthening Environmental and Natural Resources Institutions (2012) sector work collectively inform the Bank’s engagement on environmental management. 72 ANNEX 9: POVERTY AND SOCIAL IMPACT ASSESSMENT 1. The policies supported by this operation are closely linked to positive distributional and poverty impacts. The poverty and social impact analysis (PSIA) conducted for this operation documents these expected positive impacts and provides robust analysis of potential negative outcomes and mitigation measures for the proposed prior actions from a gender-sensitive social and distributional perspective. This annex provides a summary of the PSIA, including a matrix on Positive and Negative Impacts and Mitigation Measures (Table 1). The full PSIA document has been made publically available through disclosure in WBdocs. 2. The PSIA is structured to follow the policy areas outlined in the Program Document. In the four policies that are associated with specific investments to target the poor – household water and sanitation connections, low-income housing, public transport, and access to public spaces – direct potential outcomes are analyzed. For other policies that aim to strengthen the institutional and regulatory framework, the PSIA focuses on identifying aspects of these frameworks that influence successful and socially inclusive implementation. Cross-cutting implementation risks are discussed in the risks and mitigation measures section of this Program Document. This PSIA will also seek to identify areas for further analysis. These analytical areas are those where knowledge gap exist and the results of the proposed work are of potential relevance for policy. 3. Nearly all policies supported by this DPL explicitly target poor and vulnerable urban households, which are disproportionately headed by women. Framed within the larger context of urban sustainability and productivity, the prior actions included in this DPL almost all have a direct focus on improving outcomes for the lowest-income residents of cities. According to the latest Poverty and Labor Brief: The Effect of Women's Economic Power in Latin America and the Caribbean 22, households with female economic-headship 23 are more likely to be in extreme poverty than their male counterparts. These results are particularly important since the female economically-headed households are also more likely to support children and the elderly, reflected in the higher dependency ratio of these households. 4. In Colombian cities, the majority of poor households are now headed by women. 24 Gender disparities are even more apparent, and appear to be widening, for access to key services covered the prior actions included in this DPL. For example, the rate of outright homeownership among women has been declining more rapidly than for men over the past decade. 25 This places a double burden on women, as they are not only more likely to be living in areas with low levels of service provision, but also because they are in most cases baring the additional costs of coping with the lack of services (e.g. time spent getting water). 22 World Bank (2012) Poverty and Labor Brief: The Effect of Women's Economic Power in Latin America and the Caribbean. Washington DC. 23 Economic-headship is defined as the share of total household income that is generated by a particular group. 24 UN Habitat. Colombia. Land Tenure, Human Rights and Gender Series: Latin America. Further, the likelihood for a women- headed household to be in poverty, especially for households with children, has increased over the last two decades. 25 ECH data for 2002-2005; GEIH data for 2006-2011. 73 Table 1: Summary Matrix on Positive and Negative Impacts and Mitigation Measures Matrix on Summary of Potential Positive and Negative Impacts of Supported Prior Actions and Mitigation Measures Mitigation Measures Prior Action and Potential Positive Social Impacts Potential Negative Social Impacts Prior Action 1: The Borrower, through the DNP, None expected Not applicable. has created a sub-directorate unit, within DNP, responsible for, inter alia, coordinating regional planning and investment, as evidenced by the Borrower’s Decree No. 1832 of August 31, 2012, duly published in the Borrower’s Official Gazette on August 31, 2012 The new Sub-Directorate will manage key policy areas for the poor related to subnational, urban and regional development. Increased efficacy can help improve programmatic delivery to the poor and vulnerable. Prior Action 2: The Borrower, through MVCT, Possible negative outcomes include: Several provisions in the broader legal context mitigate these has issued a regulation for the provision of (i) monthly tariffs, which have a fixed negative impacts, such as: (i) required awareness and education subsidies for household water and sanitation and variable component, can from the counterparties, access to cash transfers through the connections for low-income families (strata 1 and represent an additional burden to Unidos program, intra-municipal cross-subsidization of the 2), as evidenced by the Borrower’s Decree No. household budgets in particular variable cost of services, and methods to facilitate local pre- 1350 of June 25, 2012, duly published in the informally-employed households in payment and daily payment of utility bills (precedents in Borrower’s Official Gazette on June 25, 2012.. the lowest income strata with day-to- Cartagena and Medellin have been tested); and (ii) control of day budgets and little or no tariff increases by the Water Regulatory Commission (CRA). The program is expected to reduce poverty through: accumulation; and (ii) tariff (i) targeting urban and peri-urban areas which lack variability might represent an connectivity and have a large number of poor additional source of uncertainty to households; (ii) benefitting households in poverty and households. extreme poverty, as defined by areas with high levels of Unidos recipients; and (iii) targeting the neediest areas. The policy increases access and equity of access. Research suggests many positive spillovers and network effects of WSS connection, including improved health and educational outcomes as well as time and monetary savings. Over the coming month, the PSIA team is undertaking quantitative research on 74 role of fixed cost as barrier to household connectivity. Prior Action 3: The Borrower, through MT, has Possible negative impact on the few Detailed policy focused on safeguarding vulnerable populations adopted its national road safety plan for years poor and informal households that from adverse impacts is mandated by law and currently under 2011-2016 to increase urban and inter-urban road own and drive vehicles in the form of development. The current yearly tax on used vehicles varies by safety in its territory, as evidenced by the increased vehicle maintenance and model and year, and a similar model is under study for other Borrower’s Resolution No. 1282 of March 30, operating costs from: (i) licensing and areas of fees. Overall, positive impacts of increased road safety 2012, duly published in the Borrower’s Official registration fees; and (ii) higher significantly outweigh increased marginal costs to low income Gazette on March 30, 2012. standards for vehicles and related households. safety equipment. Increased road safety reduces mortality disproportionately for vulnerable groups. Prior Action 4: The Borrower, through CONPES, A low risk of potential negative Policy establishes framework for catalyzing income-generating has approved its national public space policy impacts is associated with the activities on or adjacent to site to fund ongoing maintenance and guidelines in order to promote the creation of possibility that poorly managed programming. To date, implementation has focused on informal public spaces in urban areas, as evidenced by the public spaces can reinforce existing and poor urban areas. Good precedents in three major cities Borrower’s CONPES document No. 3718 of conditions of insecurity and violence around management and programming; commitment of resources January 31, 2012 in low income communities. for maintenance, and community management and ownership. A 2009 policy on violence and safety and ongoing Bank sector The policy builds on principles established in the engagement can complement project implementation. National Development Plan 2010-2014 as well as the ‘Livable Cities’ strategy in Vision Colombia 2109 and places focus on informal and poor neighborhoods in urban areas. Prior Action 5: The Borrower has created a Potential negative impacts of the Mitigation measures include: (i) the GoC has prioritized national urban redevelopment company to policy reform include: (i) risks related increasing neighborhood resilience over resettlement. Municipal support the structuring of urban redevelopment to resettlement and land precedents exist and a national policy framework for resettlement projects, as evidenced by Borrower’s Presidential appropriation; (ii) expedited land is in discussion; (ii) projects are subject to same environmental Decree No. 4184 of November 3, 2011, duly development through EMBARCO and social impact assessment, licensing and consultation published in the Borrower’s Official Gazette on may exclude low-income processes as all other government initiatives; and (iii) most November 3, 2011. stakeholders and reduce attention to projects expected to occur in central areas with high transport social issues; (iii) location of social connectivity. EMBARCO urban renewal projects will create more housing in areas with poor public space and enable social housing development accessibility. on key urban parcels. A minimum of 20 percent of buildable land on every project will be dedicated for low-income housing investments. 75 Prior Action 6: The Borrower has established the Potential negative impacts include: (i) Housing Law includes a number of provisions that aim to legal framework for the provision of public poor ‘quality-at-entry’ as a result of mitigate possible quality, targeting and sustainability risks housing to the poorest and most vulnerable substandard urban design of including: (i) requirements for responsible Ministries to prioritize households as regulated and evidenced by the settlements, inappropriate project delivery of wide set of social services to the new housing areas; Borrower’s Law No. 1537 of June 20, 2012, duly selection resulting in poor urban (ii) resources for public amenities and infrastructure will be published in the Borrower’s Official Gazette on accessibility, poor or substandard provided by the national government; (iii) targeting of June 20, 2012. design of units; (ii) poor targeting of beneficiaries through ongoing qualification for social transfers beneficiary households could lead to (Sisben, Unidos); (iv) maintains households classification as Law 1537 aims to support the development of social capture by non-eligible groups; (iii) 'strata 1' for ten years following move-in date to ensure access to housing for the poorest households and deliver concentration of the poorest subsidies for basic services. Law also establishes clear completed units to 100,000 targeted households. households can create 'poverty traps' mechanisms and criteria for involvement of qualified developers, Improvements are expected in access and equity of and social stigma, unsafe dwellings, and existing stock may be purchased. Additionally, the GoC and homeownership measured through indicators such as and rapid asset depreciation in the World Bank are collaborating – under the Macroproyectos Loan reductions in poverty and inequality. absence of an adequate social –on developing both social management and condominial management strategy; and (iii) management frameworks in the context of the public housing inadequate ‘post-construction’ asset program. Lastly, the Law includes prohibitions for resale and management framework. retained title transfer for 10 years to avoid capture. Prior Action 7: Borrower, through MT and DNP, None expected Not applicable. has issued a regulation for the implementation of the Contrato Plan, as evidenced by the Borrower’s Decree No. 819 of April 25, 2012, duly published in the Borrower’s Official Gazette on April 25, 2012. The policy reform can increase metropolitan and regional capacity to develop and implement complex and medium-term development initiatives, while improving coordination in the targeting of the same to the poor and vulnerable. Prior Action 8: The Borrower, through MT, has Potential negative impacts can ANI guidelines on social impact studies, consultations, and designated a national agency for infrastructure to include poor project design, potential appropriation and redevelopment remain the same as structure regional infrastructure concessions, as inadequate land and social under INCO, and were developed through technical support from evidenced by the Borrower’s Decree No. 4165 of management associated with project the IFC. These included regulatory reforms on land acquisition November 3, 2011, duly published in the implementation, poor environmental and management practices. Changes in structure to the agency Borrower’s Official Gazette on November 3, 2011. analysis and management standards. itself resulting from the restructuring decree do not add any significant new elements that could have negative social impacts. Increases in effectiveness and efficiency of ANI can ANI will be responsible for elaborating studies and compiling improve delivery of intra-urban connective and information about social factors whenever needed to best guide 76 logistics infrastructure with the potential to design and management of concessions and other PPPs. significantly improve the productivity of urban Significant increases in staffing levels and capacity in the section centers and the Colombian economy. which handles social issues can enable more thorough consideration of poverty and distributional risks. Key institutional processes affecting social outcomes continue those of the previous version of agency, INCO, and are considered to be relatively robust, such as the methods for assessing social costs of projects prior to commitment, stakeholder consultations, and appropriation and resettlement practices among low-income and vulnerable groups. The IFC maintains has an ongoing advisory services engagement with the agency to support the integrated structuring of a first batch of concessions. More specifically, the legal and regulatory framework for managing social and environmental impacts under ANI- facilitated concessions specifies clear and detailed responsibilities and guidelines for implementing concessionaires. This framework is detailed below. Social Management. Ministerial Resolution 545 of 2008, and the associated Annex on Social and Land Management, require that the concessionaire develop three social management instruments which are the subject of continuous monitoring and supervisión by the Grupo Interno de Trabajo de Gestión Predial, Social y Ambiental of ANI. These include the: (i) Basic Social Plan; (ii) Socio-Economic Compensation Plan; and (iii) Social Management Plan. The Basic Social Plan is presented at the initiation of the concession and includes specific action plans for neighborhood social management, communication and outreach, road safety, special social risk mitigation initiatives, involuntary resettlement and client services. The Socio-Economic Compensation Plan outlines all compensation associated with non-voluntary resettlement, temporary impacts and economic losses for all households and business impacted by the implementation of works. This plan expressly outlines compensation for property owners, renters and those otherwise adversely impacted. These compensation practices have been assessed to be of high standard and consistent with those established by multilateral institutions and international protocols. Lastly, the Social Management Plan, which focuses on 77 the immediate area of influence of the proposed works, and details programs for information and communication, involuntary resettlement, archeological management and contracting of labor. This ‘package’ of three instruments represents a robust framework for the management of social risks under ANI concessions. Environmental Management. Two key regulatory instruments outline the environmental management framework under ANI- structured concessions. First, Ministerial Decree 4165 of November 2011 creating ANI specifically entrusts the institution with the responsibility for overseeing and/or executing the environmental assessment, planning, licensing and management under ANI structured concessions. The same decree also entrusts ANI with specifying the necessary guidelines and methodologies for environmental assessment, planning, licensing and management. Second, Ministerial Resolution 475 of August 2012 approves a Operational Manual for the Agency and assigns to the Vice Presidency for Planning, Risks and Management, amongst other functions outlined above, responsibility for coordination of environmental assessment, planning, licensing and management for ANI concessions across multiple levels of Government and agencies, including the Ministry of Environmental and Sustainable Development. Prior Action 9: The Borrower has established the Lack of detailed guidelines on key Projects are subject to same overall social standards as all public- legal framework for the structuring and financing steps of the PPP process, such as sector initiatives (Laws 88, 90). The law establishes basic of public-private partnerships, as evidenced by the contract design, bids, reviews, and parameters for projects initiating in the public and private sectors, Borrower’s Law No. 1508 of January 10, 2012, implementation and monitoring can including timelines and limitations of post-approval duly published in the Borrower’s Official Gazette place projects at risk of overlooking modifications. ANI offers an example of an institution that has on January 10, 2012. social or distributional impacts. developed higher levels of capacity for working with PPPs. A However, this PSIA will not discuss follow-on regulation of the PPP law is under preparation – and Establishes regulatory framework for effective the potential impact of specific part of the proposed policy actions for the second operation( DPL collaboration and co-financing of public-private projects, as the law can enable a 2) under this series – and aims to clarify a range of technical partnerships and enables governmental entities to broad range of project configurations issues related to PPP structuring including issues of contract partner with the private sector on traditional and and outcomes. design, bids, reviews, valuation methodologies, implementation social infrastructure projects. Successful PPPs can arrangements and monitoring procedures. provide an effective means to ensure timely and quality execution of infrastructure and social projects that directly benefit the poor. 78 POLICY AREA 1: SUSTAINABLE CITIES 5. Prior Action 2: The Borrower, through MVCT, has issued a regulation for the provision of subsidies for household water and sanitation connections for low-income families (strata 1 and 2), as evidenced by the Borrower’s Decree No. 1350 of June 25, 2012, duly published in the Borrower’s Official Gazette on June 25, 2012. The policy aims to subsidize intra-residence connections for low-income households to existing water supply and sanitation (WSS) networks. As such, the reform will positively impact access, equity of access, and key health and education indicators. The decree establishes a framework and funding sources to deliver the ‘last mile’ in WSS connectivity. The federal government has committed to subsidize up to 8 SMMLV of cost, and, along with regional and private participation, the initiative is expected to reach at least 90,000 low-income urban homes by 2014, generating significant benefits in public health, gender, and educational outcomes. In Colombia, recipients of social programs like those in Red Unidos (formerly Red Juntos) have traditionally had a very high representation of women-headed households. 1,2 6. While Colombia has achieved impressive progress in the expansion of WSS services, the benefits have not been distributed evenly. Urban areas have achieved connectivity levels of 97 percent for water and 90 percent for sewerage, but peri-urban areas still lag at 50 percent. While water and sanitation connectivity are powerful levers of positive social impacts for poor families, 3 vulnerable populations remain disproportionately under-served. Inequality as measured through the Human Opportunity Index, illustrated in Box 1, appears to have increased in urban areas between 2003 and 2008. Recent analysis indicates inequality of access to water and sanitation connections has increased in urban areas; the rate of urban households without access to water increased among poor and extremely poor over the last decade, rising from 3.9% without access in 2003 to 6.9% in 2011 for water and from 16% in 2002 to 20% in 2011 for sanitation. 4 Nevertheless, declines in connectivity appear to have slowed between 2010 and 2011, and gender gaps appear to be narrowing. 5 1 A 2010 report observed that 40% of families in Red Juntos were headed by women, higher than the level nationally (32.2% at that time) (from Steiner, Roberto, Acosta Paula, Vasquez Tatiana. 2010. Análisis del Informe de Estado de Familias en la Red Juntos. Fedesarrollo.) 2 In 2004, a UN publication observed that over 94% of the approximately 350,000 households in Familias en Accion, the flagship program for the Red Juntos/Unidos, were headed by women Observatorio de Asuntos de Género, as cited in “Informe del Estado colombiano sobre la aplicación de la Plataforma de Beijing (1995) y los resultados del vigésimo tercer periodo extraordinario de sesiones de la Asamblea General (2000).� �lvaro Uribe Vélez, Presidente de la Repúblic, Carolina Barco Isackson, Ministra de Relaciones Exteriores; Martha Lucía Vásquez Zawadzky, Consejera Presidencial Para la Equidad de la Mujer. Bogotá.May 2004. 3 Access to water and sanitation is among the seven primary factors behind differences in opportunities for children across Colombia (see De Barros, Ferreira, Molinas Vega & Saavedra Chanduvi, Measuring Inequality of Opportunities in Latin America and the Caribbean, World Bank, Washington DC: 2008.), and has specific documented impacts on health (De Barros, Ferreira, Molinas Vega & Saavedra Chanduvi, Measuring Inequality of Opportunities in Latin America and the Caribbean, World Bank, Washington DC: 2008), and gender equity( United Nations Women 2000 and Beyond, Women and Water, UN: Geneva). 4 Increases in households without sanitation coverage were sharper among the extreme poor, rising from 21% in 2002 to over 27% in 2011. ECH data for 2002-2005 GEIH data for 2006-2011 5 Analysis of ECH data for 2002-2005 GEIH data for 2006-2011. Spatial patterns could play a role; Latin American city trends indicate that male-headed households tend to cluster disproportionately in the least-serviced outskirts of informal neighborhoods (Buillion Buendia et al., 2012 “Room for Development� IADB). 79 Box 1. Human Opportunity Index (HOI) The HOI is a measure that is based on discounting a penalty associated with inequality of opportunity (𝑃) at the rate of global coverage (𝐶 ) of a specific human opportunity, i.e.: 𝐻𝑂𝐼 = 𝐶 − 𝑃 The HOI runs from 0 to 100, where 100 would represent a society with universal coverage of all services. The penalty would be given by P = (C*D) where 𝐷 is the dissimilarity index, which measures the degree of difference in rates of coverage given an opportunity through the different sets of circumstances. This index represents the fraction of people who would reallocate a good or service as a percentage of all people who access the service. Consequently, (1 − 𝐷 ) it would represent the percentage of available opportunities that were assigned correctly: 𝑃 𝐻𝑂𝐼 = 𝐶 − 𝑃 = 𝐶 ∗ (1 − 𝐷 ) = 𝐶 ∗ �1 − � 𝐶 The penalty will equal zero if the rates of access to the good or service measured is equal between all groups, and increases as the difference between groups increases. The inclusion of this penalty makes this indicator sensitive to equality of access and overall coverage of opportunity. Intuitively, 𝑃 is the measure of the spread between the rates of coverage of different groups. Only when the rate of coverage is universal and the penalty equals zero will the HOI acquire a value of 1. The HOI will equal 100 if the rate of coverage is universal (when the penalty would be equal to zero). Uneven allocation of access to basic opportunities and coverage rates will result in a ‘discount’ in the HOI. The index is thus improved when general access improves; regardless of how this access is distributed, the HOI will increase (the peak value is one) if someone is better off and no-one is worse off. Sources: Jose Molinas Vega, Ricardo Paes de Barros, Jaime Saavedra Chanduvi, et all, (2010). "Do Our Children Have a Chance? The 2010 Human Opportunity Report for Latin America and the Caribbean - Conference Edition", World Bank: Washington, DC. And Carlos Eduardo Vélez, Joao Pedro Azevedo, and Christian Posso (2011). “Oportunidades para los niños colombianos: cuánto avanzamos en esta década�. Banco Mundial, Banco de la Republica, DNP: Bogotá, Colombia. 7. Barriers to connectivity have been identified as the major bottleneck to increasing access for urban households. Despite considerable network expansion in recent years, connectivity has not increased proportionately. 6 Factors behind this gap have been well-studied, yet few interventions have documented strategies for effective program structure and implementation. This prior action will be contribute to addressing the knowledge gap related to drawing lessons from successful local programs for effective program design and scale-up. 8. Potential negative impacts from the proposed prior action include the additional burden to household budgets from monthly tariff payments. This additional burden may in particular affect the poorest informally-employed households with day-to-day budgets and little or no income accumulation. Tariff variability could represent an additional source of uncertainty to households. 9. The GoC has several provisions in the broader legal context that may contribute to mitigating these negative impacts. First, the policy requires a minimum contribution from municipalities and utility companies to provide awareness and education campaigns directed to beneficiaries. Further, the existing national transfer program (Unidos) provides education and 6 Colombia Water And Sanitation Sector Support Project, Implementation Completion And Results Report (Ibrd-72810), Report No: ICR00001316 80 income transfers that may help support the additional monthly costs associated with formal access to WSS service. Further, the well-established cross-subsidy system for utilities in Colombia guarantees that poorest households receive water supply at subsidized monthly tariffs. Lastly, methods to facilitate local pre-payment and daily payment of utility bills as alternatives for low-income households have been piloted in two Colombian cities and are being analyzed for replication in other urban centers. Understanding the Welfare Impacts of Water Supply and Sanitation (WSS) intra-domiciliary connections for low-income families 10. To estimate the welfare impact of the policy that promotes household WSS connections for low-income families in urban areas, static micro-simulations were completed using the 2010 household survey in Colombia (Gran Encuesta Integrada de Hogares 2010). 7 This household survey has information on the census tracks for households, which enables the analysis to identify coverage at the neighborhood level. Excluding two types of neighborhoods, 8 the HOI is calculated for a simulated change in intra-household connectivity to the WSS network. Table 2 shows the resulting HOI when 30,000 WSS connections are distributed among households in urban areas according to two targeting rules: (i) the poorest households by per capita income (simulation 1), and; (ii) the households with the lowest HOI (simulation 2). 9 11. Micro-simulation findings highlight the importance of good identification and understanding of the target population. Results suggest the impact on coverage from distributing 30,000 WSS connections is equivalent to an increase in 0.2 percent of the households with connections in urban areas, using either one of the targeting rules. However, when subsidies are targeted to those households with low HOI, improvements in equity are highest. Thorough analysis of the target beneficiaries and their local conditions is essential to guarantee the success of these kinds of programs. Spillover effects from the public good aspect of sanitation connections were not taken into consideration in this analysis. Medium Term Analysis to Accompany this PSIA 12. A clear understanding of the main barriers that prevent households from connecting to the network will contribute to better designed policies to increase access and reduce inequality. Barriers may include both the lack of financial capacity to pay both for a connection in the form of a lump sum payment, but also limited capacity to afford a (variable) monthly fee. 7 Urban areas in the GEIH are defined as geographic location with buildings and structures grouped into contiguous blocks, which are bounded mainly by streets, roads or avenues. These areas have access to a group of essential services such as water, sewage, electricity, health centers and schools. This category includes capitals and other municipalities known as cabeceras municipals. 8 In a first step of this micro-simulation –which focuses on urban areas – two types of neighborhoods are excluded. First, all neighborhoods with universal coverage (more than 95 percent of the houses have access to the WSS system). Second, all neighborhoods with no coverage were excluded. These neighborhoods can be considered to have no access to the WSS network and, therefore, would not be eligible to receive subsidies under the policy. 9 The vector of circumstances for the estimates includes the following variables for the household head: gender, age, literacy and dummy’s for departments 81 Table 2: Effects of WSS Accessibility on the Human Opportunity Index in Urban Areas in Colombia Baseline Simulation 1 Simulation 2 Water Coverage 91.0 91.2 91.2 Dissimilarity 4.6 4.5 4.4 Human Opportunity Index 86.8 87.1 87.1 Decomposition (p.p.) Change (p.p.) 0.3 0.3 Composition (p.p.) 0.0 0.0 Scale (p.p.) 0.2 0.2 Equalization (p.p.) 0.1 0.2 Decomposition (%) Composition (%) 0.0 0.0 Scale (%) 70.3 53.6 Equalization (%) 29.7 46.4 Sewage Coverage 74.3 74.5 74.5 Dissimilarity 11.6 11.5 11.3 Human Opportunity Index 65.7 65.9 66.0 Decomposition (p.p.) Change (p.p.) 0.2 0.3 Composition (p.p.) 0.0 0.0 Scale (p.p.) 0.2 0.2 Equalization (p.p.) 0.1 0.2 Decomposition (%) Composition (%) 0.0 0.0 Scale (%) 69.2 45.8 Equalization (%) 30.8 54.2 Source: Own calculations using the 2010 GEIH. Note: Simulation 1 corresponds to the targeting rule that distributes 30,000 WS connections to the poorest households by per capita income, while Simulation 2 corresponds to the targeting rule that gives the subsidy to those households with the lowest HOI. 13. Experiences from pilots in Colombian cities and international cases also discuss financial assistance to increase connectivity to water networks, but highlight the role of community ownership, contracting, and partnerships to overcome challenges, such as in Medellin. The experience of Empresas Públicas de Medellin (EPM) – the WSS service provider for Medellin and the Aburra Valley – suggests that financial assistance to poor household to connect to the network has led to increased connections. EPM has designed a portfolio of initiatives to promote access for the poorest population. In particular, the firm created a Network Connection Financing Program to provide access for poor household in peri-urban areas of the 82 Valley. This program offers long-term credit to households to finance the construction or improvement of infrastructure required to connect their houses to the public utility network. By accompanying the credit component with a system to award contracts to organized community entities, the program contributed to both increasing access to water supply and generating local employment. It has been estimated that between 1998 and 2010 this program enabled 10,163 household connections to water supply services and 13,917 sewerage connections, benefitting 55,670 residents. 10 A more detailed assessment of the EPM experience suggests that, in addition to connection fees, other factors such as social interactions, violence, informality, may undermine efforts to improve service access. 14. Gender-sensitive community partnerships are also critical, as illustrated by a case study of WSS upgrading in informal neighborhoods in Cali.11 A successful shallow sewerage-upgrading pilot in Altos de Menga was designed by local women and, with the local university and utility companies, incorporated a gender-sensitive community stewardship. This experience showed the ability of women to set their community´s priorities and to work, together with men, towards managing water effectively. Besides achieving water connectivity, this project allowed gender dynamics to change, leading men to accept and value women´s contribution to building a public infrastructure and space. Moreover, setting contracts that involve organized communities in building urban infrastructure have proven to deliver a sense of ownership and responsibility among beneficiaries, which are key aspects in bringing about effective and sustainable projects and overcoming barriers related to fears of financial risk. 12 15. In order to better understand these dynamics, additional analytical work will be done in partnership with the DNP Impact Evaluation Unit. The Bank and DNP will conduct a behavioral study in two municipalities where the WSS network has been expanded to low-income neighborhoods but take-up has been low. In particular, the team will organize focus groups in two neighborhoods (in Cartagena and Barranquilla, respectively) that have been selected by MVCT and DNP as pilot areas for initiating the subsidy program. This work will contribute to further understanding the obstacles that households face in both connecting to existing networks and the continuing use of service. 16. Prior Action 3: The Borrower, through MT, has adopted its national road safety plan for years 2011-2016 to increase urban and inter-urban road safety in its territory, as evidenced by the Borrower’s Resolution No. 1282 of March 30, 2012, duly published in the Borrower’s Official Gazette on March 30, 2012. Ministerial resolution 1282 formalizing the National Road Safety Plan 2012-2016 mandates a series of reforms and regulations that will strengthen vehicle safety standards, improve driving behavior, enhance enforcement and oversight capacity and improve awareness and communication. Increased road safety aims to reduce road accident mortality, which disproportionately affects vulnerable groups. Road safety 10 UN Water International Conference, Zaragoza, Spain, 3-5 October 2011. Water in the Green Economy in Practice: Towards Rio+20 11 Sijbesma, C. Sanitation financing models for the urban poor. IRC, 2011; Marín de Jaramillo “The Altos de Menga community experience in establishing simplified sewerage systems with a gender focus in urban periphery sectors� Mexico; Foro Mundial del Agua, 2006. 12 Tournée, Jane and van Esch, Wilma. 1998. Community Contracts in Urban Infrastructure: Practical Lessons from Experience, ILO Turin Centre: Italy. 83 fatalities are more prevalent in urban areas 13, and are the leading cause of death amongst children and early youth (5 to 14 year cohort). Furthermore, 31 percent of those killed are pedestrians, and 39 percent are motorcycle users. 14 Pedestrians, cyclists and motorcyclists are disproportionately poor. 15 In a city like Bogota where incomes strata 1 and 2 have the highest share of their trips in non-motorized modes (walking and cycling represent 60 percent of the trips), road safety remains a significant concern for the most vulnerable urban poor. 17. Negative impacts from reforms may include increases in fees and related costs associated with higher vehicle standards. However, these potential adverse impacts can be expected to impact only a small percentage of poor households. Increased inspections, fines, standards and licensing requirements as mandated in the Resolution will affect poor households who own cars; the costs of fees and equipment represent an expense that is disproportionately higher for households in the bottom of the income distribution, and these households are more likely to own older and informal vehicles. Registration fees will continue to be based on model and year. No other financial offsets for the poor and vulnerable are planned for registration or other programs. Still, the proportion of households that own a car (or motorcycle) in urban areas in Colombia is very low for the lower income deciles (see figures 1a and 1b below). Only 2 in 100 and 3 in 100 households own a car in the bottom two and four income deciles, respectively. As such, benefits from improved safety are expected to be larger than the negative impacts. Figure 1: Proportion of Households that Own a Car or Motorcycle by Income Decile (Urban Areas 2011) (a) % of households that own a car (b) % of households that own a motorcycle 100 100 97.20 98.51 90 96.60 96.67 90 94.61 94.44 91.23 90.67 87.87 87.91 80 80 85.05 83.44 80.77 80.75 81.42 79.10 70 70 76.22 74.06 74.32 60 60 52.51 50 47.49 50 40 40 30 30 25.94 25.68 23.78 19.23 19.25 20.90 18.58 20 20 14.95 16.56 12.13 12.09 8.78 9.33 10 5.39 5.56 10 2.80 3.40 3.33 1.49 0 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Income Decile Income Decile % without a car % with a car % without a motorcycle % with a motorcycle Source: Own calculations using the 2011 GEIH. 18. Prior Action 4: The Borrower, through CONPES, has approved its national public space policy guidelines in order to promote the creation of public spaces in urban areas, as evidenced by the Borrower’s CONPES document No. 3718 of January 31, 2012). Increased and improved public spaces can catalyze safer and healthier poor neighborhoods, but carefully structured management and programming is crucial to ensure ongoing benefits and mitigate 13 65 percent of deaths occur in urban area. Presentación Fondo de Prevención Vial, 2011. 14 Presentación Fondo de Prevención Vial, 2011. 15 Naci H., Baker T.D., and Chisholm D. 2009. "Distribution of road traffic deaths by road user group: A global comparison". Injury Prevention. 15 (1): 55-59. 84 negative externalities. The CONPES outlines a policy framework to catalyze public space investments that prioritizes existing unbuilt spaces on public land in low-income informal urban neighborhoods. Positive social impacts for the poor from increased public spaces can be sustained when linked to effective community mobilization, resources for maintenance and ongoing oversight and impact monitoring. The CONPES also enables income-generating activities on or adjacent to site, subject to social benefit analysis. Successful precedents of public space investment exist in Colombia’s three major cities. 19. Increased and improved public spaces can catalyze safer and healthier poor neighborhoods. Low-income urban Colombians disproportionately live in areas with scarce public facilities and infrastructure, higher rates of crime and violence, and an overall lower quality of life. 16 The case of Medellin indicates that improved transit access and municipal investments, including street lighting and urban design in poor informal areas is associated with significant declines in urban violence – the relative homicide rate fell by 66% in neighborhoods with integrated public space and infrastructure investments. 17 Including a gender perspective and incorporating various actors in the design of public space will also help overcome the perceptions of insecurity that often prevent women and vulnerable users from becoming users of public space. 18 The case of Medellin indicates that municipal investments, including street lighting and urban design in poor informal areas, are associated with significant declines in urban violence overall. 19 20. No significant negative impacts are envisioned from the policy. 21. Prior Action 5: The Borrower has created a national urban redevelopment company to support the structuring of urban redevelopment projects, as evidenced by Borrower’s Presidential Decree No. 4184 of November 3, 2011, duly published in the Borrower’s Official Gazette on November 3, 2011.The creation of a national urban redevelopment company through the presidential decree (EMBARCO) aims to support a pro-active and planned conversion of underutilized land in urban areas for productive uses and social interest housing. With significant scarcity of land for urban expansion, urban renewal and regeneration is an important means to enable new land for development. According to the land use plans (POT) for Colombia’s five largest cities, only 5,300 hectares of available land for residential urban expansion is available in Bogota, Medellin, Cali, Barranquilla and Bucaramanga. At the current rate of household formation, it is expected that this available land will be consumed in less than 6 years. 20 Further, the most recent National Security Plan includes urban regeneration projects as a recommended measure to prevent violence. 21 16 From Medellin’s 2008 quality of life census, as analyzed in Medina and Tamayo. 2011. “An Assessment of How Urban Crime and Victimization Affects Life Satisfaction.� Borradores de Economia: Bogota. 17 Cerda M., Morenoff, Hansen B.B et al. 2012. "Reducing violence by transforming neighborhoods: A natural experiment in Medellín, Colombia". American Journal of Epidemiology. 175 (10): 1045-1053. 18 It has been documented through several surveys that the perception of insecurity in Colombia is higher than real insecurity. This perception of insecurity, or fear of crime, tends to be higher in women than in men, and it affects people´s use of public space and transportation. Restrepo, Elvira María and Moreno, �lvaro José, Bogotá ¿más crimen? ¿Más miedo?, Desarrollo y Sociedad: Bogotá D.C., 2007. 19 Cerda M., Morenoff, Hansen B.B et al. 2012. "Reducing violence by transforming neighborhoods: A natural experiment in Medellín, Colombia". American Journal of Epidemiology. 175 (10): 1045-1053. 20 Departamento Nacional de Planeación DNP. Construir Ciudades Amables. Bogotá, 2006, –p. 30. 21 Política Nacional de Seguridad y Convivencia Ciudadana, 2011. 85 22. When done carefully, urban regeneration projects, including land and public space development in low-income neighborhoods can significantly increase quality of life, including less insecurity and crime and violence, 22 and increased economic opportunity, and increase housing development. 23 However, in the current context, consultation and resettlement processes remain a potential concern. Specific provisions under this policy reform may help reduce these concerns. For example, a minimum of 20 percent of buildable land on all redevelopment projects will be assigned for low income housing purposes, mitigating the risk of gentrification. Bogota has set a strong precedent for its urban redevelopment company with detailed regulations governing the process of engaging with communities that could be resettled due to redevelopment. 24 POLICY AREA 2: ACCESS TO HOUSING FOR LOW INCOME FAMILIES 23. Prior Action 6: The Borrower has established the legal framework for the provision of public housing to the poorest and most vulnerable households as regulated and evidenced by the Borrower’s Law No. 1537 of June 20, 2012, duly published in the Borrower’s Official Gazette on June 20, 2012. Law 1537 of 2012 represents a significant commitment to housing and urban services for the poorest and most vulnerable households, who would require significant subsidies even with a fully-functioning housing finance system While the high-profile commitment of fully-subsidized 100,000 units addresses less than 2 percent of the current housing deficit, it represents a major social investment with a wide range of likely positive outcomes. 24. Women-headed poor and extremely poor households have experienced a sharper decline in a variety of housing indicators over the last few years. Among women-headed households, homeownership rates have declined faster, mortgage permeation has increased more slowly, and the share of homes with informal tenure has increased more rapidly over the last several years than in households headed by men. 25 Further, a recent Central Bank study of Barranquilla and Soledad suggests that women-headed households are significantly more likely to have a qualitative housing deficit. 26 While the selection criteria in regions has yet to be finalized, women are disproportionately represented in all of the major categories targeted by the policy. 22 See Llorente, María Victoria, and �ngela Rivas. 2005. Case study reduction of crime in Bogotá: a decade of citizen's security policies. Washington, D.C.: World Bank. 23 Physical neighborhood improvements and regularization in poor areas have been shown to positively impact child nutrition, higher school attendance, and lower teenage pregnancy rates (Argentina; Galiani and Schardgrodsky 2004), petty crime decreases (US; Sampson 1999). 24 Decree 296 of the Mayor of Bogota, 2003 details specific steps to undertake in intervention areas, including a census and socioeconomic diagnostic study, a social development plan, social, economic and legal development and involvement with the community. 25 About 1/3 of both men and women-headed households in poverty have outright homeownership. Ownership rates fell about 10% between 2009 and 2011, and slightly faster for women-headed households (12% decrease vs 8% decrease for men). Homeownership among households in extreme poverty fell by over a fifth in the same time period. In the past 4 years, women- headed households became more likely than men-headed households to live in homes without title, or on common land; official statistics report that only 5.7% of women-headed households live in land without title as opposed to 4.8% of men, but the rate of increase for women was more than double that of men-headed households in poverty - and over four times faster for households in extreme poverty. For the extreme poor, mortgage permeation has expanded among men-headed household three times faster than among women-headed households; among the poor, the reverse is true (Calculations for poor and extremely poor households using GEIH data for 2006-2011 and ECH data for 2002-2005.) 26 Galvis, Luis Armando. 2011. Geografía del déficit de vivienda urbano: Los casos de Barranquilla y Soledad. Working Papers on Regional Economy, no 138.. Center for Regional Economic Studies, Banco de la Republica. Cartagena. 86 25. Poverty and distributional impacts of the Law will depend on: (i) quality at entry, i.e. design and specification of units and access to neighborhood amenities, social services, basic infrastructure, and broader urban connectivity; (ii) design of targeting measures to ensure lowest income families benefit from the program; and (iii) commitment to establish robust frameworks post-construction property and social management systems. Preliminary guidelines for Law 1537 have been issued that specify quality at delivery conditions and procedures for beneficiary selection that cross-reference existing social support programs. Although no current guidelines exist public housing property management, the GoC and the World Bank are collaborating on technical assistance to design property management schemes in the context of the Macroproyectos de Interes Social Program Project (P110671). 26. The current distribution of housing in Colombia is unequal. Data from the 2011 household survey in Colombia (Gran Encuesta Integrada de Hogares 2010) shows that, in urban areas, only 1 in 4 households in the bottom decile of income distribution own a house. This ratio is 6 in 10 in the highest decile group (see Figure 2). Inequities in access to housing exist across regions, cities, gender and income. Research from across Latin America identifies significant differences between men and women-headed households in choices on tenure, unit size and quality. 27Of the estimated 2.2 million-unit deficit of urban housing, 1.2 million units are qualitatively deficient (i.e. substandard structures with inadequate access to basic services). 28 This ‘qualitative deficit’ is disproportionately born by the poorest households. 29 Neighborhood stratification in housing deficits, compounding the challenge, has been recently documented in Cali, Barranquilla and Bogota. 30 Insecure tenure, either by lack of deeds or unstable rentals, is also a major barrier to investment in low income housing. 31 Approximately one third of all Colombians rent, 32 and 12-25 percent of urban Colombian households live on invaded or informally urbanized land. 33 Rental represents a greater portion of income expenditure for households in the lower quintiles of the income distribution. Indeed, low-income households – especially displaced families and migrants – are less likely to purchase houses and are more likely to live in informal settlements. 34 This effect is likely to be accentuated for informal workers, of which there are an estimated 8 million in Colombia (56 percent of the workforce in 27 Men are more likely to rent or own informal housing, while women-headed households often favor quality over size, for example, in Uruguay, Brazil and Argentina. IADB 2012. Room for Development, ed Buillion Buendia. 28 2005 Census. It is also estimated that between 2005 and 2009 285,000 new households were formed but only 140,000 new houses were built (Proyeccion Deficit DNP y Encuesta a municipios DNP 2010). 29 68% of households in qualitative deficit are very poor. Torres R., Jorge Enrique. DNP, 2007.Las Condiciones Habitacionales de los hogares y su relación con la pobreza.. p 178. 30 In Cali quantitative deficits were 6.8 percent in the poorest comunas versus 2.5 percent in the richest in 2005, and qualitative deficits were also estimated to be five times higher. In Barranquilla there was a 16 percent quantitative deficit in the periphery compared to 7 percent in the inner city, and a qualitative deficit three times greater. In Bogota the poorest community of Cuidad Bolivar had a quantitative deficit of 11 percent, while the deficit in rich Usaquén was estimated to be 2.9 percent in rich Usaquén. The qualitative deficit was also estimated to be four times higher in the poorest area. Colombia Urbanization Review Phase I 31 Community surveys from Bogotá and Barranquilla’s informal neighborhoods, Gestión Habitat y Territorio. Dec 2009. 32 Often higher in urban centers. 41% of Bogota households rent. ‘Room for Development’. IADB 2012. 33 Instituto Geográfico Agustín Codazzi, as cited in Torres R., Jorge Enrique. Las Condiciones Habitacionales de los hogares y su relacion con la pobreza. Departamento Nacional de Planeacion, 2007, 141. 34 María Angélica Arbeláez, Roberto Steiner, Alejandro Becerra and Daniel Wills, ‘Housing Tenure and Housing Demand in Colombia’, Fedesarrollo, January 2011 87 Colombia’s thirteen main urban areas), who typically improve their homes incrementally 35 and are not served by the traditional banking sector. 36 Figure 2: Proportion of households that own a house by income decile, 2011 70 60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 Income Decile National Urban Rural Source: Own calculations using the 2011 GEIH 27. Improved access to safe, secure and well serviced public housing is expected to result in welfare gains for the poor, especially women-headed households Although there is evidence to suggest that ownership patterns are not related to qualitative housing deficits, 37 large-scale measures to increase access to housing for the poor are likely to positively impact poverty reduction and asset creation. However, preliminary analysis for this PSIA suggests that the distributional effects of home ownership and the implicit income effect of owning a house are not necessarily progressive (Figure 3). This exercise is based on the existing stock of houses in the Colombian market and cannot capture differences on the vintage of housing once the proposed program is rolled out. 35 Over the past decade, urban residential construction activity in homes undergoing gradual construction was over four times the number of new homes completed. Titulizadora Colombiana, ‘Informe de Gestion 2010’. 36 While the microcredit sector has expanded, few formal bank loans and mortgage credits are disbursed for low-income households. Titulizadora Colombiana, ‘Informe de Gestion 2010’. 37 María Angélica Arbeláez, Roberto Steiner, Alejandro Becerra and Daniel Wills, ‘Housing Tenure and Housing Demand in Colombia’, Fedesarrollo, January 2011 88 Figure 3: Decomposition of the Growth Incidence Curve Source: own calculations using data from GEIH (2008 and 2011) using Azevedo et all (2012) methodology. 28. The policies discussed here may also have positive distributional effects through employment creation for low-skilled workforce. It has been estimated that the housing sector represents 5-6 percent of total construction employment, and although the sector remains predominantly male, it continues to have a high potential to absorb low-trained workers. 38 29. Other unintended consequences could have negative impacts on the overall positive distributional benefit of the policy if not properly mitigated. International experience suggests that the provision of social services to accompany households as they move from informal to formal housing is critical so as to ensure that the benefits of formal housing are not undermined by decreased access to jobs and diminished social capital. 39 The Bank and MVCT are engaged in an ongoing technical assistance program to develop a social management framework for public and low-income housing programs in the context of the Macroproyectos loan. The framework builds upon highly successful Colombian experience in social management and inclusion in low income urban areas, i.e. Medellin and Bogotá. 30. In addition, the development of large-scale low-income housing can be associated with expropriation of land and resettlement. It is important, therefore, that appropriate measures are taken to mitigate this risk. Colombia has incorporated international norms on resettlement as control-parameters on the constitutionality of laws through the “Bloque de Constitucionalidad� (see articles 9, 93, 94, 214, 53 and 102 of the National Constitution). Thus, although there is not an explicit resettlement norm in the law, the Constitution guarantees private property (article 58) and establishes the prevalence of international rights and human rights over internal regulation 38 Sergio Clavijo, Michel Janna, and Santiago Muñoz, THE HOUSING MARKET IN COLOMBIA: Socioeconomic and Financial Determinants, Document prepared for the “Workshop on Housing, Capital Markets, and Social Policy� (World Bank, Asobancaria, and Government of Colombia; Cartagena-Colombia, August 19th and 20th of 2004). 39 Examples of challenges in large-scale relocation and housing development abound; see famous ‘Moving to Opportunity’ experiments in the US for a long-term study. 89 (article 93). Law 16 of 1972 pertaining to the Costa Rica convention establishes that “All people have the right to the use and enjoyment of their goods. The law can subordinate the use and enjoyment to the social interest. No one can be denied their goods, except through just indemnity payment, for reasons of public utility or social interest and in cases established by the law� (article 21). The process and procedure for the acquisition of property on the grounds of public utility, as well as resettlement compensation, is governed by Law 399 of 1997, which complies with the policy of the World Bank. The Government of Colombia has demonstrated interest in building a legal framework for compensation and resettlement, building on instruments used: (i) under the political framework of Mass Transit (SITM and SETP) in eight medium sized cities and six large cities (with involvement from the World Bank, IDB and CAF); resolution 545 of ANI, which was revised by the IFC, and applies to all road concessions; and (iii) resolutions adopted by specific municipalities, such as Bogota, Medellin and Barranquilla. Colombia also has one of the strongest legal frameworks on Indigenous Peoples’ rights. 40 Understanding the welfare impacts of access to housing for low income families 31. Similar to the analysis of the welfare impact of WSS connections, a static micro- simulation was carried out to assess the impact of allocating 100,000 to the poorest households on coverage and equity measures, using the 2011 household survey in Colombia (Gran Encuesta Integrada de Hogares 2011). 41 The targeting mechanisms are the same as those used for the case of water subsidies described above: (i) first, the poorest households according to per capita income are targeted to receive public housing units (simulation 1); and (ii) the households with the lowest HOI (simulation 2) receive public housing units. 32. The results of these scenarios are shown in Table 2 below. The results suggest that the provision of 100,000 public housing units to the extreme poor increase homeownership in urban areas by 0.8 percent. As in the case of WSS connections, this social housing policy would improve equity to a higher degree if the targeting mechanism corresponds to allocating the houses to those households with the lowest HOI as opposed to allocating the houses to the poorest households as measured by per capita income. Nonetheless, in either targeting scenario, the welfare impacts are firmly positive. 33. In the context of this law, positive gender, poverty and distributional impacts will depend on: (i) the quality of public housing investments at outset related to the design of units, availability of neighborhood amenities and access to social services and urban infrastructure; (ii) design and accuracy of targeting measures to ensure that eligible beneficiaries receive expected benefits; and (iii) commitment to establish effective property management and social and community management and communication systems. Relatively detailed guidelines for law 1537 have been issued to ensure quality of delivery, and household selection that cross- references existing social support programs. Although current guidelines do not exist on how to manage properties for public housing projects, the GoC has expressed a strong interest in obtaining support and guidance from the World Bank on designing property management 40 Macroproyectos PAD Social Assessment 41 In this case we use the 2011 GEIH instead of the 2010 GEIH since the distribution of houses do not depends on census tracks as was the case for the WS connections. 90 schemes for public housing in the context of the Macroproyectos de Interes Social Program Project (P110671) and related technical assistance programs. Table 2: Effects of the Provision of Houses on the Human Opportunity Index in Urban Areas Baseline Simulation 1 Simulation 2 Housing Coverage 46.4 47.2 47.2 Dissemilarity 19.0 18.5 17.2 Human Opportunity Index 37.6 38.5 39.1 Decomposition (p.p.) Change (p.p.) 0.90 1.49 Composition (p.p.) 0.00 0.00 Scale (p.p.) 0.66 0.66 Equalization (p.p.) 0.24 0.84 Decomposition (%) Composition (%) 0.00 0.00 Scale (%) 73.11 43.97 Equalization (%) 26.89 56.03 Source: Own calculations using the 2011 GEIH. Note: Simulation 1 corresponds to the targeting rule that distributes 100,000 houses to the poorest households by per capita income, while Simulation 2 corresponds to the targeting rule that gives the houses to those households with the lowest HOI. POLICY AREA 3: INSTITUTIONAL STRENGTHENING AND REGIONAL COORDINATION 34. Prior Action 7: Borrower, through MT and DNP, has issued a regulation for the implementation of the Contrato Plan, as evidenced by the Borrower’s Decree No. 819 of April 25, 2012, duly published in the Borrower’s Official Gazette on April 25, 2012.The policy reform can increase metropolitan and regional capacity to develop and implement complex and medium-term development initiatives, while improving coordination in the targeting of the same to the poor and vulnerable. No significant potential negative social or distributional impacts are expected from the mechanism itself. 35. Coordination can foster economies of scale in service provision, and help mitigate negative externalities associated with rapid urbanization. In large and midsized cities, water, sewerage, solid waste management, electricity, and transport networks frequently span several administrative boundaries in metropolitan areas. Because the poor have in most cases limited or marginal access to these services, policies that improve management by capturing the efficiency benefits of scale are likely to have a positive impact on the poor through increased access and lower costs. 36. Coordination, in particular between adjacent jurisdictions, may contribute to improving access to social services in peri-urban and rural areas, where large proportions of the urban poor are located. Initial evidence in Colombia suggests that coordination across municipalities in the Valle de Aburrá, led by the metropolitan area administration, has helped to spread the benefits of 91 urbanization from the most populous and richer municipality – Medellin – to outlying and poorer municipalities. This can be seen, for example, by looking at the evolution of the percentage of deprived households (NBI) over the period between 1993 and 2005. The NBI in municipalities neighbouring Medellin declined by 14 percentage points on average in this period. In contrast, the NBI declined only 4 percent in municipalities that neighbour Barranquilla, where coordination is weak, over the same period. Another example is that of Bucaramanga, where coordinated frameworks on transportation, investment and financing is also expected to have led to benefits in delivery of services for periphery populations. POLICY AREA 4: URBAN CONNECTIVITY AND REGIONAL INFRASTRUCTURE FINANCE 37. Prior Action 8: The Borrower, through MT, has designated a national agency for infrastructure to structure regional infrastructure concessions, as evidenced by the Borrower’s Decree No. 4165 of November 3, 2011, duly published in the Borrower’s Official Gazette on November 3, 2011.The restructuring of ANI has enhanced capacity to address social impacts and more thoroughly implement existing policies on poor and vulnerable populations. Agency guidelines on social impact studies, consultations, and potential appropriation and redevelopment remain the same as under INCO, and were developed under an ongoing engagement with the IFC. Changes in the structure of the agency resulting from the restructuring decree create the potential to deepen investment in relevant social and environmental management expertise. 38. Prior Action 9: The Borrower has established the legal framework for the structuring and financing of public-private partnerships, as evidenced by the Borrower’s Law No. 1508 of January 10, 2012, duly published in the Borrower’s Official Gazette on January 10, 2012. The legal framework for PPPs can enable increased and improved access to infrastructure with benefits for the poor and vulnerable. Follow-up regulation and capacity- building processes are critical to prevent negative outcomes. Law 1508 is a first step to enable public entities to access more sophisticated mechanisms to leverage private capital and capacity for the implementation of complex urban and regional infrastructure. PPPs will be subject to the same social cost analysis processes as all other public-sector initiatives. Quality and specificity of forthcoming guidelines on critical steps of the PPP process, such as contract design, bids, reviews, and implementation and monitoring, will be especially critical to effective and gender and socially-sensitive projects given current inexperience with PPPs across public entities. 42 These PPP guidelines are expected to be incorporated in the ensuing PPP regulatory decree that is included as an indicative trigger for the second phase of this proposed DPL series. MEDIUM TERM ENGAGEMENT WITH THE GOVERNMENT AS A RESULT OF THE PSIA 39. The PSIA identifies a series of specific research topics to support the design of a medium-term analytical agenda to 'fill analytical gaps' and provide concrete input on future policy development. This medium term engagement includes, as noted above, collaboration with 42 Decree 1467 is the first example of subsequent regulation that has followed the law, and provides useful details on key steps in the process. 92 the Government of Colombia on further analysis related to intra-household water connectivity to inform subsequent policy implementation. Specifically, focus groups will be conducted in two neighborhoods (in Cartagena and Barranquilla, respectively) that have been selected by MVCT as pilot areas for initiating the subsidy program. This work will contribute to further understanding obstacles that households face in both connecting to existing networks and continuing use of WSS service. 40. The team is also engaged in discussion with the GoC on additional analytical research into the poverty and distributional impacts of institutional strengthening and regional coordination. Additional research in this area could help shed light on both recognized challenges and under-acknowledged bottlenecks in inter-municipal and sub-regional coordination. Although regional coordination has been the subject of high profile national policy dialogue, there is limited existing research to date which measures spatial externalities (positive and negative) in public service delivery across municipal boundaries. Spatial analysis could also be used to identify clusters of good or bad service provision, through measurement of levels of access in areas that surround high service level municipalities (low access indicating negative externalities and high access indicating positive externalities). Identifying the top candidates and ‘low-hanging fruit’ for metropolitan coordination between neighboring municipalities in Colombia would support implementation and phasing of the contract plans tool. 41. Additional examination of the significant investment of the housing ministry in the ‘100,000 homes’ initiative could strengthen understanding of the social impacts of large-scale supply-side housing interventions that are increasing in popularity around the region. This research could also help clarify long-term social impacts of these policies by analyzing potential spillover effects and capacity gains from providing incentives for firms to serve lower income segments of the population. For example, related to both the housing and WSS policies, service provision from the selected utility companies and developers to the very low-income outside of the subsidized population, could be tracked and compared to the quality of service (and other performance indicators) of firms that do not participate in these programs. 42. The analysis for the PSIA also highlights benefits of including additional research related to roads and public spaces in the medium term research agenda. First, establishing the impact of road-related deaths and disability on family members’ long-term poverty likelihood and inequality of opportunities could inform and future cost-benefit analysis of future road safety interventions. Second, establishing a clear baseline of a broad set of public spaces, such as parks and sports facilities, would allow the benefits of interventions to be more clearly defined through the happiness approach to valuing public amenities, as well as more traditional measures such as neighborhood investment and health benefits. 93 ANNEX 10: COLOMBIA AT A GLANCE Colombia at a glance 8/31/12 Latin Upper Key Development Indicators America middle Colombia & Carib. income Age distribution, 2010 (2011) Male Female Population, mid-year (millions) 46.3 583 2,452 75-79 Surface area (thousand sq. km) 1,142 20,394 59,328 60-64 Population growth (%) 1.4 1.1 0.7 Urban population (% of total population) 75 79 57 45-49 30-34 GNI (Atlas method, US$ billions) 284.92 4,505 14,429 15-19 GNI per capita (Atlas method, US$) 6,110 7,733 5,884 GNI per capita (PPP, international $) 9,060 10,926 9,970 0-4 10 5 0 5 10 GDP growth (%) 5.9 6.2 7.8 percent of total population GDP per capita growth (%) 2.6 5.0 7.1 (most recent estimate, 2005–2011) Poverty headcount ratio at $1.25 a day (PPP, %) 8 6 .. Under-5 mortality rate (per 1,000) Poverty headcount ratio at $2.00 a day (PPP, %) 18 12 .. Life expectancy at birth (years) 73 74 73 60 Infant mortality (per 1,000 live births) 17 18 17 Child malnutrition (% of children under 5) 5 3 3 50 40 Adult literacy, male (% of ages 15 and older) 93 92 96 30 Adult literacy, female (% of ages 15 and older) 93 90 91 Gross primary enrollment, male (% of age group) 116 119 111 20 Gross primary enrollment, female (% of age group) 114 115 111 10 0 Access to an improved water source (% of population) 92 94 93 1990 1995 2000 2010 Access to improved sanitation facilities (% of population) 74 79 73 Colombia Latin Americ a & the Caribbean a Net Aid Flows 1980 1990 2000 2011 (US$ millions) Net ODA and official aid 90 89 186 910 Growth of GDP and GDP per capita (%) Top 3 donors (in 2010): United States -14 -19 105 424 8 France 1 18 9 160 6 Spain 0 7 13 56 4 2 0 Aid (% of GNI) 0.3 0.2 0.2 0.3 -2 Aid per capita (US$) 3 3 5 20 -4 -6 Long-Term Economic Trends -8 95 05 Consumer prices (annual % change) 26.5 29.1 9.2 4.8 GDP implicit deflator (annual % change) 27.6 26.1 32.4 6.9 GDP GDP per c apita Exchange rate (annual average, local per US$) 47.3 502.3 2,087.4 1,847.0 Terms of trade index (2000 = 100) .. .. 100 118 1980–90 1990–2000 2000–11 (average annual growth %) Population, mid-year (millions) 26.9 33.2 39.8 46.3 2.1 1.8 1.5 GDP (US$ millions) 33,401 40,274 100,364 327,600 3.7 2.8 4.5 (% of GDP) Agriculture 19.9 16.7 8.9 6.4 2.9 -2.7 2.0 Industry 32.5 37.9 29.5 34.3 5.0 1.4 4.4 Manufacturing 23.9 20.6 15.5 12.7 3.5 -2.5 3.6 Services 47.6 45.4 61.6 59.3 2.9 4.1 4.7 Household final consumption expenditure 70.2 66.4 68.6 61.7 5.1 1.1 4.4 General gov't final consumption expenditure 10.1 9.4 16.7 16.0 4.2 10.9 4.0 Gross capital formation 19.1 18.5 15.0 23.5 1.4 2.1 9.0 Exports of goods and services 16.2 20.6 16.4 19.0 7.5 5.0 5.2 Imports of goods and services 15.6 14.8 16.7 20.1 0.4 9.3 9.6 Gross savings .. .. .. .. Note: Figures in italics are for years other than those specified. 2011 data are preliminary. .. indicates data are not available. a. Aid data are for 2010. Development Economics, Development Data Group (DECDG). 94 Colombia Balance of Payments and Trade 2000 2011 Governance indicators, 2000 and 2010 (US$ millions) Total merchandise exports (fob) 13,158 57,721 Voice and accountability Total merchandise imports (cif) 11,786 52,225 Net trade in goods and services 1,411 5,496 Political stability Current account balance 770 -9,978 Regulatory quality as a % of GDP 0.8 -3.0 Rule of law Workers' remittances and Control of corruption compensation of employees (receipts) 1,610 4,168 0 25 50 75 100 Reserves, including gold 9,006 31,912 2010 2000 Country's percentile rank (0-100) higher values imply better ratings Central Government Finance Source: Worldwide Governance Indicators (www.govindicators.org) (% of GDP) Current revenue (including grants) 23.8 15.3 Tax revenue 14.4 13.6 Current expenditure 20.6 13.8 Technology and Infrastructure 2000 2010 Overall surplus/deficit -2.9 -2.8 Paved roads (% of total) 14.4 .. Highest marginal tax rate (%) Fixed line and mobile phone Individual 35 33 subscribers (per 100 people) 24 112 Corporate 35 33 High technology exports (% of manufactured exports) 7.7 5.1 External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 33,937 58,931 Agricultural land (% of land area) 40 38 Total debt service 5,104 18,288 Forest area (% of land area) 55.4 54.5 Debt relief (HIPC, MDRI) – – Terrestrial protected areas (% of land area) 19.4 20.9 Total debt (% of GDP) 33.8 18.3 Freshwater resources per capita (cu. meters) 51,414 46,261 Total debt service (% of exports) 28.7 32.1 Freshwater withdrawal (billion cubic meters) .. .. Foreign direct investment (net inflows) 2,436 5,447 CO2 emissions per capita (mt) 1.5 1.5 Portfolio equity (net inflows) 17 67 GDP per unit of energy use Composition of total external debt, 2010 (2005 PPP $ per kg of oil equivalent) 9.8 11.8 Short-term, 8,209 IBRD, 7,504 IDA, IMF,00 Energy use per capita (kg of oil equivalent) 674 697 Other multi- lateral, 8,282 World Bank Group portfolio 2000 2010 (US$ millions) Bilateral, 432 IBRD Total debt outstanding and disbursed 1,920 7,504 Disbursements 266 1,279 Principal repayments 242 342 Private, 38,637 Interest payments 126 249 IDA US$ millions Total debt outstanding and disbursed 7 0 Disbursements 0 0 Private Sector Development 2000 2011 Total debt service 1 1 Time required to start a business (days) – 14 IFC (fiscal year) Cost to start a business (% of GNI per capita) – 14.7 Total disbursed and outstanding portfolio 107 972 Time required to register property (days) – 20 of which IFC own account 84 833 Disbursements for IFC own account 26 191 Ranked as a major constraint to business 2000 2010 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 20 63 Anticompetitive or informal practices .. 34.5 Crime .. 13.0 MIGA Gross exposure 97 3 Stock market capitalization (% of GDP) 9.5 72.2 New guarantees 0 3 Bank capital to asset ratio (%) 11.2 14.3 Note: Figures in italics are for years other than those specified. 2011 data are preliminary. 8/31/12 .. indicates data are not available. – indicates observation is not applicable. 95 Millennium Development Goals Colombia With selected targets to achieve b etween 1990 and 2015 (estimate closest to date shown, +/- 2 years) Colombia Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2010 Poverty headcount ratio at $1.25 a day (PPP, % of population) 8.2 13.0 17.9 8.2 Poverty headcount ratio at national poverty line (% of population) .. .. 49.4 37.2 Share of income or consumption to the poorest qunitile (%) 3.6 2.4 1.9 3.0 Prevalence of malnutrition (% of children under 5) 8.8 6.3 4.9 5.1 Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) 71 83 94 88 Primary completion rate (% of relevant age group) 74 87 95 114 Secondary school enrollment (gross, %) 53 64 72 96 Youth literacy rate (% of people ages 15-24) .. 97 .. 98 Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) 108 105 104 104 Women employed in the nonagricultural sector (% of nonagricultural employment) 42 45 49 48 Proportion of seats held by women in national parliament (%) 5 12 12 13 Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 37 32 27 19 Infant mortality rate (per 1,000 live births) 30 26 23 17 Measles immunization (proportion of one-year olds immunized, %) 82 82 80 88 Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) 140 120 110 85 Births attended by skilled health staff (% of total) 82 86 86 96 Contraceptive prevalence (% of women ages 15-49) 66 72 77 78 Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 15-49) 0.2 0.6 0.9 0.5 Incidence of tuberculosis (per 100,000 people) 54 48 43 34 Tuberculosis case detection rate (%, all forms) 70 57 68 72 Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 88 90 91 92 Access to improved sanitation facilities (% of population) 68 70 72 74 Forest area (% of land area) 56.3 .. 55.4 54.5 Terrestrial protected areas (% of land area) 19.3 19.3 19.4 20.9 CO2 emissions (metric tons per capita) 1.7 1.6 1.5 1.5 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 8.4 8.7 9.8 11.8 Goal 8: develop a global partnership for development Telephone mainlines (per 100 people) 7.3 10.6 18.1 15.5 Mobile phone subscribers (per 100 people) 0.0 0.8 5.7 96.1 Internet users (per 100 people) 0.0 0.2 2.2 36.5 Computer users (per 100 people) .. .. .. 43.1 Education indicators (%) Measles immunization (% of 1-year ICT indicators (per 100 people) olds) 125 100 120 100 100 75 75 80 50 50 60 25 40 25 0 20 2000 2005 2010 0 0 1990 1995 2000 2010 2000 2005 2010 Primary net enrollment ratio Colombia Latin America & the Caribbean Fixed + mobile subscribers Internet users Ratio of girls to boys in primary & secondary education Note: Figures in italics are for years other than those specified. .. indicates data are not available. 8/31/12 96 COLOMBIA-ASSESSMENT LETTER FOR THE WORLD BANK December 7, 2012 1. Economy growth has moderated in 2012. Sound macroeconomic policies and a flexible exchange rate have helped shield Colombia from the global economic turmoil in recent years. Growth is projected to slow to about 4.3 percent in 2012 (from 5.9 percent in 2011), largely reflecting countercyclical policy actions adopted last year in response to overheating and high credit growth concerns. CPI inflation has been subdued and is projected to close 2012 below 3 percent (the midpoint ofthe official target range of2-4 percent) ..Amidst a slightly more pronounced economic slowdown than anticipated, the central bank lowered the policy rate by 75 bps (to 4.5 percent) in the second half of2012. Against the backdrop of renewed appreciation pressures in early 2012, the central bank reinstated in February its program of daily foreign exchange purchases of at least US$20 million, which it plans to continue until at least March 2013. High oil prices and improvements in tax administration have contributed to a reduction in the overall fiscal deficit of about 1.1 percentage points ofGDP in 2012 (to 0.8 percent ofGDP). 2. The outlook for 2013 is positive, though downside risks stemming from the external environment remain elevated. A pick up in public investment spending to address Colombia' s infrastructure gap, combined with still favorable export prices and continued large FDI inflows, is expected to sustain a moderate expansion in domestic demand, with growth envisaged to settle at about its estimated potential rate of 4Yz percent. Inflation is expected to remain within the official target range. High commodity prices and favorable prospects for the Colombian economy will likely back continued brisk inflows ofFDI. However, Colombia's near-term outlook could be adversely affected if the global economy falters, commodity prices drop sharply, and/or global financial conditions worsen significantly. 3. The financial sector remains solid. Financial soundness indicators and supervisory practices are strong. Banks are resilient to severe shocks, except those related to concentration risk, and are well capitalized with low and well provisioned non-performing loans. Credit to the private sector, which gained considerable steam in 2011 , has moderated. In addition, the regulatory agency is contemplating the adoption of measures aimed at improving the quality of banks ' capital. 4. Colombia's medium-term outlook is favorable. Very strong fundamentals and institutional frameworks and abundant natural resources will continue to attract large FDI inflows and support growth. Fiscal policy is on track to achieve the fiscal rule target of a structural deficit for the central government equivalent to 2.3 percent of GDP in 2014. In addition, the government has submitted to Congress an ambitious tax reform, which is expected to broaden the tax base and improve tax compliance as well as help address labor informality-which is a key challenge, along with reducing structural unemployment and promoting financial inclusion-by reducing high payroll taxes. The government also plans to propose a reform of the pension system to improve coverage. 5. The latest Executive Board assessment of Colombia is presented in Press Release No. 121159 for the Review under the Flexible Credit Line and the staff report was published (Country Report No. 121274). The IMF Executive Board approved the two-year Flexible Credit Line arrangement on May 6, 2011 (Press Release No. 111165). 2 Table 1. Colombia: Selected Economic and Financial Indicators I. Social and Demographic I ndica t o rs Population (millions), 2011 46.1 Ph ys ician s (per 1,000 people), 2010 1.47 GDP, 2011 Adu lt illiteracy rat e (ages 15 and older), 2009 6.8 per capita (US$) 7, 114 Gross primary sch oo l enro llment rat e, 2010 115.4 in billions of Col$ 615,727 Sustainable access to sa f e wate r, 2006 in billions of US$ 327.6 (percen t of p o pulati on) 92.0 Unemployment rate, July 20 12 (percent) 10.9 Gini index, 2010 55.91 Life exp ectancy at birth (years), 2010 73.4 Poverty rate ($2 a day (PPP)), 2010 15.8 Under 5 mortality rate (per 1,000 live births), 20 10 21.7 Ext reme poverty rate ($ 1.25 a day (PPP)), 2010 8.2 Net Fo reig n direct investment, 2011 (US$ milli ons) 5,447 Public Debt (in percent GDP), 20 11 34.2 Net Fo reign direct in vestment (in percent GDP) 1.7 o/w external 13. 1 II. Economic Indicators Pre I. Proiections 2007 2008 2009 20 10 20 11 20 12 2013 (Percentag e changes, un less otherwise indicated ) National income and prices Real GDP 6.9 3.5 1.7 4.0 5.9 4.3 4.4 GDP d eflator 5.0 7.6 3.4 3.6 6.9 2.5 3.0 Cons umer prices (average) 5.6 7.0 4.2 2.3 3.4 3.2 2.8 Co nsumer prices (end of period) 5.7 7.7 2.0 3.2 3.7 2.7 3.0 External sector (on the basis of US$) Expo rts (f.o.b.) 21.4 26.0 -11 .7 20.1 41.2 3.8 5.1 Imports (f.o. b.) 25.4 20.5 -16.2 22.7 35.2 7.7 4.2 Terms of tra d e (deterioration -) 4.2 10.6 -9.8 9.8 13.2 -2.8 -2.7 Real effective exchange rat e (depreciation -) 7.7 0.4 5.2 5.5 4.0 Central government Reve nu e 14.8 16.0 2.8 -2.8 25.7 14.9 9.5 Expenditure 9.9 12.9 13.6 -1.9 16.4 8.8 10.5 Money and credit Broad money 17.4 18.5 8. 1 11.5 18.9 11.1 11.5 Cred it to the private sector 25.6 14.0 0.9 16.8 22.9 12.9 13.5 Interest rate (90-day time deposits; percent per yea r) Nominal 9.0 10.1 4.1 3.5 5.1 Real 3.3 2.4 2. 1 0.3 1.4 On percent of GDP) Centra l government balance -2.7 -2.3 -4.1 -3.9 -2.8 -2.0 -2.2 Combined public sector balance 1/ -0.7 -0.1 -2.7 -3.3 -1.9 -0.8 -1.1 Public debt 2/ 32.7 30.9 36.7 36.9 34.2 32.2 30.9 Public debt, excluding Ecopet rol 32.7 30.9 35.6 35.7 33. 1 30.9 29.7 Gross domestic in vestment 23.0 23.5 22.4 22.0 23.5 23.1 22.5 Gross national savings 20.2 20.6 20.3 19.0 20.4 20.2 19.6 Current account (CA) (d eficit -) -2.8 -2.9 -2 .1 -3. 1 -3.0 -2.9 -2.9 Ext erna l d ebt 21. 2 19.7 23 .2 22.7 23.2 22.6 22.2 Of which: public secto r 13.7 12.5 16.0 13.9 13.1 13.3 13.3 GIR in percent of short-term (Sn debt 198.7 207.3 242.5 194.7 157.8 163.7 166.9 On percent of exports of goo d s and services) Exte rnal debt service 39.2 32.0 37.9 30.2 29.1 37.8 39.0 Of which: Publi c secto r 15.6 12.7 11.7 11.0 9.0 10.6 8.7 Of which: Interest payments 9.2 7.7 8.1 7.5 6.0 6.7 6.7 Of which: Pu blic sect o r 6.4 5.5 5.7 5.4 4.1 3.9 4.0 On millions of U.S. dollars) Changes in GIR 5,498 3,065 1,321 3,086 3,834 4,402 3,101 Exp o rt s (f.o.b.) 30,577 38,534 34,025 40,867 57,721 59,922 62,987 Of which: Petroleum produ ct s 7,318 12,204 10,254 16,483 27,954 31,446 34,750 Coffee 1,714 1,883 1,543 1,884 2,608 1,556 1,576 Gross official reserves 20,607 23,672 24,992 28,078 31,912 36,313 39,414 Sha re of ST debt at rema ining maturity+ CA deficit 120 145 131 115 103 109 116 In months of imeorts of goods and services 5.5 7.4 6.4 5.5 5.8 6.3 6.7 Sou rces: Colombian authorities; UN DP Hu ma n Development Report; Wo rld Deve lopment Indicators; and Fun d staff estimates and projections . 1/lncludes the qu as i-fiscal balance of Banco d e Ia Rep ub lica, Fogafin balance, net cost of financial system restructuring, and statistica l discrepancy. 2/lnclud es Ecopetro l and Banco de Ia Republica 's outstanding exte rnal debt.