Document of The World Bank Report No: 21856 CO PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$35.47 MILLION TO THE REPUBLIC OF COLOMBIA FORA PUBLIC FINANCIAL MANAGEMENT PROJECT II February 26, 2001 Poverty Reduction and Economic Management Unit Colombia, Mexico, Republica Bolivariana de Venezuela CMU Latin America and the Caribbean Region CURRENCY EQUIVALENTS (Exchange Rate Effective 02/25/2001) Currency Unit = Colombian Pesos (Pesos) I Colombian Peso = US50,000443 US$I = 2,556 Colombian Pesos FISCAL YEAR January I December 31 ABBREVIATIONS AND ACRONYMS ASYCUDA - UNCTAD's Automated System for Customs Data BPIN - Banco de Proyectos de Inversi6n Nacional (National Investment Projects Bank) CAS - Country Assistance Strategy CGN - Contador General de la Naci6n (National Accountant General) CGR - Contraloria General de la Republica (Comptroller General of the Republic) COCOR - Comite de Coordinacion (Project Coordination Committee) COMEX - Automated System for Processing Imports and Exports CUN - Cuerita Unica de la Nacion (Unique National Account) DNP - Departamento Nacional de la Planeacion (National Planning Department) DIAN - Direcci6n de Impuestos y Aduanas Nacionales (Directorate of National Taxes and Customs) DIN Direcci6n de Impuestos (Directorate of Taxes) DAN - Direcci6n de Aduanas (Directorate of Customs) DANE - Departamento Administrativo Nacional de Estadisticas (National Statistics Department) ESW - Economic and Sector Work GDP - Gross Domestic Product GOC - Government of Colombia GTZ - German Technical Assistance Agency IBRD - Intemational Bank for Reconstruction and Development ICB - Intemational Competitive Bidding IDA - Intemational Development Association IDB - Inter-American Development Bank IMF - International Monetary Fund LACI - Loan Accounting Change Initiative LCR - Latin America and Caribbean Region MHCP - Ministerio de Hacienda y Credito Pablico (Ministry of Finance and Public Credit) MIS - Management Information System MSA - Management Services Agreement NBF - Not Bank Financed NCB - National Competitive Bidding NDP - National Development Plan NPV - Net Present Value OSI - Oficina de Servicios Informaticos (Office of Informatic Services) PAD - Project Appraisal Document PCD - Project Concept Document PEM - Public Expenditure Managemnent PFMP - Public Financial Management Project PMU - Project Management Unit PMR - Project Management Report POA - Programa Operativo Annual (Annual Operational Program) RA - Revenue Administration SLAT - Sistema Informatico de Administracion Tributaria SICAT - Sytem for Selection of Cases for Tax Audit SINERGIA - Sistema Nacional de Evaluaci6n de Gesti6n y Resultados SIPAC - System for Recovery of Tax Arrears SOE - Statement of Expenses SIIF - Sistema Integrado de Informaci6n Financiera (Integrated Financial Management Information System) TOR - Terms of Reference VAT - Value Added Tax Vice President: David de Ferranti Country Manager/Director: Olivier Lafourcade Sector Manager/Director: Ernesto May Task Team Leader/Task Manager: Jit Bahadur S. Gill COLOMBIA PUBLIC FINANCIAL MANAGEMENT PROJECT II CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 2 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 11 C. Project Description Summary 1. Project components 11 2. Key policy and institutional reforms supported by the project 15 3. Benefits and target population 15 4. Institutional and implementation arrangements 15 D. Project Rationale 1. Project alternatives considered and reasons for rejection 19 2. Major related projects financed by the Bank and other development agencies 20 3. Lessons learned and reflected in proposed project design 20 4. Indications of borrower commitment and ownership 21 5. Value added of Bank support in this project 21 E. Summary Project Analysis I. Economic 21 2. Financial 21 3. Technical 22 4. Institutional 22 5. Environmental 25 6. Social 25 7. Safeguard Policies 26 F. Sustainability and Risks 1. Sustainability 27 2. Critical risks 27 3. Possible controversial aspects 28 G. Main Conditions 1. Effectiveness Condition 29 2. Other 29 H. Readiness for Implementation 29 I. Compliance with Bank Policies 30 Annexes Annex 1: Project Design Summary 31 Annex 2: Detailed Project Description 38 Annex 3: Estimated Project Costs 47 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 48 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Sunnary 50 Annex 6: Procurement and Disbursement Arrangements 52 Annex 7: Project Processing Schedule 60 Annex 8: Docunents in the Project File 61 Annex 9: Staternent of Loans and Credits 62 Annex 10: Country at a Glance 64 Annex 11: Plan de lmplementacion para Fortalecimiento de la Administracion Financiera del 66 Proyecto MAP(S) COLOMBIA PUBLIC FINANCIAL MANAGEMENT PROJECT II Project Appraisal Document Latin America and Caribbean Region LCSPS Date: February 26, 2001 Team Leader: Jit Bahadur S. Gill Country Manager/Director: Olivier Lafourcade Sector Manager/Director: Emesto May Project ID: P040109 Sector(s): BF - Public Financial Management, BI - Institutional Development, BY - Other Public Sector Management Lending Instrument: Specific Investment Loan (SU,) Theme(s): Public Sector Poverty Targeted Intervention: N Project Financing Data [Xl Loan [ ICredit 1 Grant [ lGuarantee [] Other: For Loans/Credits/Others: Amount (US$m): 35.47 Proposed Terms: Fixed-Spread Loan (FSL) Grace period (years): 5 Years to maturity: 17 Commitment fee: 0.85% for the first 4 years, 0.75% thereafter. Front end fee on Bank loan: 1.00% Financing Plan: Source Local Foreign Total BORROWER 23.41 0.35 23.76 IBRD 1.56 33.91 35.47 Total: 24.97 34.26 59.23 Borrower: REPUBLIC OF COLOMBIA Responsible agency: MINISTRY OF FINANCE AND PUBLIC CREDIT; DNP Ministry of Finance and Public Credit Address: Bogota, Colombia Contact Person: Mr. Federico Renjifo, Vice Minister Tel: 571-350-1204/1205 Fax: 571-209-6242, 571-286-4156 Email: Other Agency(ies): Departamento Nacional de Planeaci6n - Subdirecci6n General Address: Bogota, Colombia Contact Person: Mr. Tomas Gonzales, Sub-Director Tel: 571- 341-9868 Fax: 571-334-0221 Email: Estimated disbursements (Bank FYIUS$M: FY , 2001 2002 2003 2004 2005 Annual 2.50 14.40 8.85 5.69 4.03 Cumulative 2.50 16.90 25.75 31.44 35.47 Project implementation period: 05/01/01 to 04/30/06 Expected effectiveness date: 05/01/2001 Expected closing date: 10/31/2006 OPADFP...M.duX A. Project Development Objective 1. Project development objective: (see Annex 1) a. Strengthen the institutional capacity of the Direcci6n de Impuestos y Aduanas Nacionales (Directorate of National Taxes and Customs- DIAN) to foster voluntary compliance; collect revenues efficiently, effectively and equitably; and combat tax evasion and smuggling, so as to enable it to mobilize adequate tax revenues to finance public expenditures. b. Strengthen public expenditure management at the central government level, to facilitate achievement of fiscal and national development objectives, improve cost effectiveness of public services, and increase transparency and accountability. 2. Key performance indicators: (see Annex 1) a. Revenue Administration * Improvement in the effectiveness of the DIAN as indicated by: * 5% increase per annum in the proportion of total tax declarations filed voluntarily and on time. * 5% increase per annum in the proportion of total tax revenues paid voluntarily and on time. * 0.5% decrease annually in the Value Added Tax (VAT) compliance gap. * 1% decrease annually in Income Tax and Business Profit Tax compliance gap. * i% decrease annually in the ratio of contraband to total imports. * Improvement in the efficiency of the DIAN as indicated by 1% decrease per annum in the ratio of the annual recurrent budget of the DLAN to total revenue collected by it. * Improvement in the perception of taxpayers, traders and other stakeholders regarding the efficiency, effectiveness, and integrity of the DIAN as indicated by annual surveys. b. Public Expenditure Management * Increased accountability of public entities for achievement of performance objectives, spending of public resources, and procurement of goods and services, as indicated by results of evaluations done through the Sistema Nacional de Evaluaci6n de Gesti6n y Resultados ((National System for Evaluation of Management and Results - SINERGIA). * Increased value for money in public procurement and contracting in pilot agencies. * Increased transparency and enhanced civil society capacity to monitor public sector performance, as indicated by the quantity, quality and timeliness of information, pertaining to public sector performance and expenditures, available to the public. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex I) Document number: R-99201 Date of latest CAS discussion: 11/18/99 The Bank's Country Assistance Strategy has the objective of supporting poverty reduction, social development and sustainable growth. To address these objectives it targets six areas of strategic importance: (i) promoting peace and development; (ii) promoting rural development; (iii) developing human capital; (iv) attaining public sector responsiveness and efficiency; (v) improving infrastructure services; and (v) ensuring sustainable development. These objectives have been reaffirmed in the latest CAS Update discussed by the Board on November 18, 1999. -2 - The Public Financial Management Project - H (PFMP-II) would support the goal of attaining public sector responsiveness and efficiency by building on the improvements made in Revenue Administration and Public Expenditure Management at the national level, through the ongoing Public Financial Management Project (PFMP) financed by the Bank (Project ID: CO-PE-6889, closing on March 31, 2001). This follow-on project would further enhance the ability of the DIAN to collect adequate revenues on a sustainable basis, thereby assisting the government to reduce the fiscal deficit and better respond to the socio-economic needs of the public. At the same time, the project would support continuing institutional reforms and capacity building in public expenditure management, thus enabling the government to better manage the difficult fiscal situation; achieve national development objectives; and increase the cost-effectiveness of public sector operations. 2. Main sector issues and Government strategy: I. Macroeconomic Issues Macro-Economic Performance: Following the sharpest recession in its history, the Colombian economy has recently begun to show signs of recuperation, with GDP growing at an estimated 3% (annualized) in 2000, a balanced current account, and a fiscal deficit that has been reduced to 3.6 percent of GDP. Economic performance had deteriorated sharply in the late 1990s, affecting nearly all areas of the economy: (i) GDP fell by an unprecedented 4.3% in 1999; (ii) the fiscal accounts of the non-financial public sector, which were roughly balanced in the early 1990s, showed a deficit of 4.6 percent of GDP in 1998, which rose to 6.4% percent of GDP in 1999; and (iii) the current account of the balance of payments reached a deficit of 5.7 percent of GDP in 1998, although it fell to 1. I percent of GDP in 1999 as a result of a sharp decline in imports and an increase in oil revenues. Economic decline has been accompanied by a steep rise in unemployment, which in urban areas now stands at about 20 percent. Restoring medium term fiscal sustainability is essential if Colombia's efforts at poverty reduction and more rapid and sustainable medium-term growth are to be realized. It is also crucial for nursing a fragile financial sector back to health. In addition to a deteriorating domestic economy, Colombia's external environment also worsened substantially throughout 1998 and into 1999. The country was hit by severe shocks: (i) a trade shock in 1998 due to the drop in oil and coffee prices, estimated at 1.5 percent of GDP; and (ii) events in international credit markets which increased the cost of borrowing and decreased the availability of external finance for both the public and private sectors. With the virtual closing of international credit markets to developing economies and the skyrocketing cost of external credit, Colombian authorities had to turn to the domestic market to finance a growing deficit, putting pressure on domestic interest rates that resulted in a marked increase in the debt burden of the private sector. Repeated pressure against the peso trading band ensued, causing the Central Bank to initially react by further increasing interest rates, followed by a devaluation of the peso. Pressure on the currency continued, however, leading to the eventual abandonment of the trading band for the peso and the floating of the currency. Although general extemal conditions have improved, due to the heightened internal conflict in the country, the deep recession highlighting structural problems of the Colombian economy and the removal of Colombia's investment-grade status by three major credit rating companies, extemal financing has become increasingly limited and costly. Table I and Table 2 provide the fiscal accounts of the Combined Public Sector and the Central Administration, respectively from 1996 to 2002. - 3 - Government Strategy: The Government has made reducing the fiscal deficit one of its key macroeconomic objectives. During the first year of its administration, the present Government took several measures to enhance revenues and reduce expenditures, including instituting measures to fight tax evasion and smuggling, increasing gasoline surcharges, and widening the VAT base and improving tax collection. However, due to the outlays needed to rebuild the areas affected by a devastating earthquake that hit the country in January 1999, shore-up an ailing financial sector, and fund additional relief to mortgage holders, the deficit continued its increase in 1999 to 6.4% of GDP. In order to consolidate its stabilization program, the Government, towards the end of 1999, requested a three-year Extended Fund Facility from the IMF, aimed at supporting its efforts to restore growth, further reduce inflation and achieve a sustainable external position. The stabilization program calls for a sharp reduction of the Non-financial Public Sector deficit to 3.6% of GDP in 2000 and to 2.6% in 2001, and is underpinned by strong tax enforcement, better management of resources under the fiscal decentralization system and economic recovery. The restructuring of the financial sector is another of the Govermnent's major objectives, and a number of measures have been taken to help re-capitalize viable private entities, restructure public banks and restore their solvency in preparation for their divestment, and to alleviate the debt burden of mortgage holders. The success of the fiscal policy initiatives mentioned above depends, to a considerable extent, on the ability of the public sector entities, engaged in revenue administration and public expenditure management at the national level, to translate the policy into results. These are the focus of this project. Table 1: Combined Public Sector (% of GDP) 1996 1997 1998 1999 2000' 2001' 2002' Total Revenue 27.0 27.4 26.7 27.3 28.8 28.7 28.1 Tax Revenue3 16.8 17.7 17.5 16.8 17.5 19.5 19.5 Non-tax Revenue 10.1 9.8 9.2 10.4 11.3 9.2 8.6 Total Expenditure & Net Lending 29.8 31.4 30.7 33.2 32.3 31.3 29.9 Current Expenditure 20.6 21.8 22.7 24.4 24.8 23.9 23.4 Wages and Salaries 6.6 6.7 7.0 7.7 7.6 7.3 7.0 Goods and Services 3.5 3.7 3.5 3.6 3.5 3.2 3.0 Interest 2.7 2.6 3.3 3.8 4.4 4.6 4.5 Transfers and Other 7.8 8.9 8.9 9.4 9.4 8.8 8.6 Capital Expenditure 9.1 9.6 7.9 8.6 7.5 7.5 6.6 Net Lending 0.0 0.0 0.0 0.1 0.0 0.0 0.0 Non-financial Public Sector -3.0 -3.9 -4.6 -6.4 -3.6 -2.6 -1.8 Balance -4 - Table 2: Central Administration (% of GDP) 1996 1997 1998 1999 2000' 2001' 2002' Total Revenue 11.8 12.6 11.9 11.9 13.2 14.7 14.4 Tax Revenue 10.1 10.8 10.5 10.0 11.3 13.1 12.9 Tax on Income and Profits 3.8 4.4 4.3 4.2 4.6 5.3 5.0 Taxes on Goods and Services 5.3 5.3 5.0 4.9 5.0 5.7 5.8 Value Added Tax 4.7 4.8 4.5 4.4 4.6 5.2 5.3 Gasoline Tax 0.6 0.5 0.5 0.5 0.5 0.5 0.5 Taxes on International Trade 0.9 1.0 1.2 0.9 1.0 1.2 1.2 Financial Transactions Tax 0.0 0.0 0.0 0.0 0.6 0.8 0.8 Stamp Duty and other Taxes 0.0 0.1 0.0 0.0 0.1 0.0 0.0 Non-tax Revenue and Transfers 1.7 1.8 1.4 1.9 1.9 1.7 1.4 Total Expenditure & Net Lending 16.8 1 16.3 17.2 19.4 19.2 18.9 18.1 Current Expenditure 11.8 12.0 13.9 15.0 16.1 15.5 15.1 Wages and Salaries 2.5 2.5 2.7 2.9 3.1 3.0 2.9 Goods and Services 1.3 1.6 1.4 1.43 1.4 1.3 1.3 Interest 1.1 1.2 1.9 2.1 2.7 3.2 3.2 Transfers and Other 7.0 6.9 8.3 8.7 8.9 8.1 7.8 Capital Expenditure 4.46 3.6 3.42 3.8 2.5 3.0 2.7 Net Lending 0.4 0.2 0.2 0.6 0.5 0.4 0.3 Overall Balance -5.0 -3.47 -5.4 -7.4 -6.0 -4.1 -3.7 Source: DNP. 1. Projected; 2. Excludes proceeds of the financial transaction tax in 1999 from revenue and expenditure. Note: Some totals in Table I and Table 2 may not add up due to statistical discrepancies or rounding off. II. Revenue Administration Issues Revenue administration is the responsibility the DIAN, which collects Income Tax, VAT, Customs Duty, Transactions Tax and Stamp Duty. It also monitors foreign exchange transactions. The total revenue collected in 1999 was 15,554 billion Pesos, which amounted to 10.0% of GDP. Trends in tax collection from 1996 to 1999 show that total tax revenues at the central level have fluctuated between 10.0% to 10.8% of GDP. Tax revenues are projected to increase to 12.9% by 2002. The DMAN manages about 1,040,000 taxpayers and processes approximately 3.85 million tax and customs declarations annually. It has eight Regional Directorates and forty three local offices. There are also four Special Administrations: Large Tax Payers Administration, Bogota, Legal Entities Administration, Bogota, Customs Directorate, Bogota, and Eldorado Airport, Bogota. The staff strength is about 6,800. -5 - Since 1994, with the assistance of the Bank's Public Financial Management Project (PFMP), the GTZ and the IDB, the DIAN has undertaken significant capacity building initiatives. These are summarized in Annex 2. Institutional and organizational deficiencies that still need to be addressed are discussed below. (i) Organization and Management: While major efforts have been made to strengthen the organization and management of the DIAN in the last ten years, many weaknesses remain. There is a history of instability at top management levels, with ripple effects down the line. Accountability systems do not fully match the high degree of autonomy enjoyed by the DIAN. Formal planning, budgeting, evaluation and monitoring systems exist, but there is a need to increase their credibility and effectiveness. Communication, coordination, control and supervision mechanisms need improvement. The remuneration structure has become non-competitive with the private sector, affecting D"AN's ability to recruit and retain staff with appropriate skills. This poses a particularly severe problem in the context of the introduction of sophisticated infonration systems that require higher level technical skills. The administrative career is too rigid and promotion avenues are limited, causing frustration amongst staff. Recently, improvements have been made in the design of the administrative career to strengthen the link between promotion and professional qualifications. However, institutional arrangements for the transparent implementation of the new system are yet to be implemented. Business processes need to be streamlined to increase operational efficiency and reduce the risk of corruption. Internal control and anti-corruption systems are still weak. There is a need to develop a corporate information management strategy and imnprove the capacity of the central Informiatics Unit, to manage, maintain, safeguard and continually update the information infrastructure. Also, management of notifications, correspondence and paper records requires improvement. Relationships with external actors, such as the legislature, the judiciary, the Prosecutor General, commercial banks collecting taxes, taxpayers, business, industry and professional associations, other government departments and foreign tax administrations, need to be strengthened to increase the DIAN's ability to enhance the positive effect of environmental influences on its performance and reduce their negative impact. Finally, considerable management training is required at different levels of the organization. (i) Voluntary Compliance: The DLAN has made serious efforts to facilitate voluntary compliance. There is, however, a need to extend some of the recent initiatives and intensify efforts to create a tax compliance culture. The system for electronic filing of tax returns, introduced in 1999, needs to be expanded to cover medium and small taxpayers. Also, the functionality of the system has to be enhanced to provide additional electronic services, such as payment of taxes and submission of claims for tax refunds. To further reduce compliance costs, integrated taxpayer assistance units, dealing with both tax and customs matters, need to be established. The Office of the Taxpayer Ombudsman, created recently needs to be made operational to provide quick redress to taxpayers' problems. The quality of taxpayer education materials and interactive tools requires to be enhanced. Complementing these efforts to raise compliance in the near term, a longer term initiative to build a stronger social consensus in favor of tax compliance needs to be undertaken, by reaching out to future taxpayers while they are still in schools and colleges. (iii) Routine Processing of Tax Declarations and Payments: While the DIAN now possesses a complete suite of systems to manage tax declarations and payment information, some of the older systems, namely the Unique Taxpayer Register and the system for accounting of tax and customs receipts need to be updated. Also, a second generation version of the system for control of refunds and credits needs to be developed to enhance its functionality. Finally, a -6- system for assessing taxes payable by small and medium taxpayers, covered under a special tax regime, is required. (iv) Routine Processing of Cargo, Customs Declarations and Payments: The routine processing of cargo, customs declarations and payments has various deficiencies. Although a new system for processing customs declarations (COMEX) has been commissioned on a pilot basis, as yet, it covers only regular import transactions. Additional modules to deal with imports under special regimes, goods in transit and exports have yet to be developed. Thereafter, the system needs to be extended to other customs locations in the country. Due to a lack of a national level communication network for transfer of customs information, there are significant delays in transmission of data regarding customs operations between border posts and head quarters and amongst border posts. Further, most customs declaration processing stations are not linked electronically to ports, warehouses and banks. This creates discontinuities in information flows related to different stages of cargo processing, causing control weaknesses. The process of valuation and classification of goods and assessment of customs duties needs significant improvements. The physical infrastructure at customs posts, including weigh-bridges and closed circuit TV systems, requires enhancement. Also, customs facilities need to be reconfigured to minimize the interaction between customs staff and clients, which increases the risk of corruption. Finally, the monitoring and control of private bonded warehouses is weak. (v) Enforcement: The extemal environment of the DTAN has become very difficult. The opening up of the economy has increased the complexity of business transactions that need to be dealt with, while creating additional avenues for tax evasion. Taxpayers and customs users have become more sophisticated. The narcotics trade has also contributed to the growth of the informal sector. Even though the performance of the DTAN in tackling tax evasion shows steady improvement in recent years, enforcement continues to be a relatively weak area. There are various reasons for this. The DIAN receives voluminous tax related information from third parties. However, there are major deficiencies in the classification, dissemination and effective use of this information. A system to improve management of external information relating to taxes is under development This needs to be extended to cover information relating to customs and foreign exchange violations. The DTAN does not have adequate systems and organizational arrangements to collect covert intelligence about tax evasion and smuggling. While the new system for selection of cases for tax audit (SICAT), developed under the PFMP, has shown encouraging results, its functionality and risk analysis capacity needs to be enhanced. Similar improvements are needed in the system for selection of customs cases for audit (SIFARO). The monitoring and evaluation of audit performance are weak. There is inadequate follow up of cases in the post-audit stages, such as objections, appeals and payment of additional tax liabilities. As a result, a high proportion of cases (40.2% in 1997) are decided against the DIAN leading to a major reduction in assessed tax liabilities (53.2% or 149,330 rnillion pesos in 1997) [Source: Colombia: Medidas para Aumentar las Eficacia de la Administraci6n de Impuestos, March 1998, IMF]. There is inadequate coordination between the audit (Fiscalizaci6n), assessment (Liquidaci6n) and legal (Juridicas) branches of the DIAN. Second order improvements in the fumctionality of the tax recovery system (SIPAC) and the system for monitoring filing of returns and payment of taxes need to be done. Lastly, as the final outcome of enforcement actions depends on decisions at the appellate stage, the DLAN's capacity to effectively represent cases before appellate authorities needs to be strengthened. -7 - (vi) Policy and Legal Framework of Revenue Administrafion Since 1990 there have been five Tax Reforms (Law 49 of 1990, Law 6 of 1992, Law 223 of 1995, Law 383 of 1997 and Law 488 of 1998). In addition, in 1995, through Law 218 of 1995 a series of income tax exemptions were granted to attract investment to a region affected by natural disaster. A new Customs Statute was decreed in 1999 and became effective in July 2000. A new tax reform package was passed by Congress in 2000. These tax reforms have mainly focused on increasing tax collections through widening of the tax base, levying temporary surcharges and encouraging the declaration of concealed transactions and income. They have also sought to modify the powers of the DIAN as well as administrative procedures, to facilitate compliance and enforcement. The frequent amendments to the tax laws have, however, increased their complexity. Also, the concessions granted to encourage disclosure of past tax evasion have had the unintended effect of discouraging voluntary compliance by building expectations of more such concessions in the future. In addition, weaknesses continue to exist in certain procedural and enforcement provisions of the tax and customs statutes. There is, thus, a need to carry out a systematic review of the tax structure and tax laws with a view to optimizing the tax burden, reducing distortions, lowering compliance costs by simplifying procedures, and strengthening enforcement. The costs and benefits of measures to induce declaration of evaded taxes also need to be properly evaluated. Government Strategy: The government is seeking to support the modernization of the DLAN through a multi-pronged strategy. On the legislative side, Law 488 of 1998 was passed to increase revenue collections and make major organizational changes in the DLN. In 1998, the government agreed with the IDB on the implementation of an Action Plan to reform tax and customs administration, in the context of structural adjustment loan: Programa Inter-Americano de Reforma de las Finanzas Pziblicas (Loan No. 11 66-OC-CO). Budgetary allocations amounting to a total of about US$12 million, spread over 4 years, are being made to the DIAN for the purpose of implementation of the Action Plan. Meanwhile, the government has continued to support modernization of the DIAN through the PFMP. It is relying on the PFMP-II to carry the process further. UIL Public Expenditure Management Issues During the last decade, various steps have been taken to strengthen public expenditure management. Extensive assistance to improve institutional capacity in this area was provided to the Ministry of Finance and Public Credit (Ministerio de Hacienda and Credito Publico - MHCP); the National Planning Department (Departamento Nacional de Planeaci6n - DNP); the Office of the National Accountant General (Contador General de la Naci6n) and the Comptroller General of the Republic (Contraloria General de la Republica - CGR) by the PFMP, as discussed in Annex 2. As in the case of revenue administration, however, the process of institutional strengthening in public expenditure management also needs to be continued, so as to complete some of the reforms initiated by the PFMP and to deal with other weaknesses that were not covered by that project. The main areas requiring attention are discussed below: (i) Macro-programming, Formulation and Monitoring of the Budget: The following deficiencies continue to reduce the effectiveness of the processes of macro-programming and budget formulation: * There is a lack of clarity about the role of national, regional and local governments. In many cases, ministries and agencies at the national level continue to perform, and budget for, functions that have been devolved to local and state authorities. There is also a need to clarify the roles and responsibilities - 8 - of entities that participate in different stages of expenditure management at the national government level, i.e. the MHCP, DNP, CGR, CGN and the sector ministries. For instance, the DNP spends a considerable amount of its time on technical and financial evaluation of programs and projects proposed by sector ministries because the ministries do not provide it with the results of such evaluations. Also, agencies monitoring public spending impose multiple reporting requirements on line agencies, often calling for the same information. Besides increasing the compliance overload of the agencies, this leads to proliferation of mutually inconsistent information that affects the quality of programming and budgeting decisions. * In recent years, there has been constant pressure to increase public expenditures. Many factors have contributed to this trend, including decentralization, the need to improve income distribution, efforts to enhance the credibility and legitimacy of the state, increased involvement of citizens in public decision making and an aversion amongst most politicians to saying no. Thus, in the last decade, fiscal results of the central government have changed from a surplus of 0.5% of GDP in 1990, to an estimated deficit of 6.4% of GDP in 1999. Total gross public expenditure for all programs increased from 24% of GDP in 1990 to 31% in 1998. * Partly due to political incentives and partly due to deficiencies in tools to accurately forecast economic trends, revenues and expenditures, there is a tendency to overestimate revenues and underestimate costs. The consequent relaxation of the budget constraint allows low priority prograns and projects to be included in the budget. The situation is worsened by the inadequacy of systems to evaluate programs and projects and by deficiencies in the capacity of the sector ministries to carry out such evaluations effectively. The MHCP and DNP also suffer from lack of reliable information about per unit cost of inputs and outputs of different sectors. This affects their ability to properly evaluate budget requests. 3 Due to unrealistic budget estimates as well as macro-economic shocks, the government has been unable to execute a significant portion of budgeted expenditures due to non-availability of resources. Until recently, unexecuted spending commitments and unpaid bills were automatically rolled over to the following year and were financed out of that year's revenues. The effect was to reduce the government' s ability to properly match public expenditures to strategic priorities of a particular year. The problem was particularly felt at the time of change of government. For a significant part of its tern an incoming government continued to spend money based on the priorities of the previous one. Fiscal arrears have more than tripled from 1.0% of GDP in 1990 to 3.3% in 1999 and are a major concern of the current government. To begin to tackle this problem, the budget law of 2000 provides that commitments carried over to the next year be subtracted from the budget appropriations of the concerned entity for that year. * Constitutionally mandated transfers to territorial entities have increased from 29% of total revenues in 1990 to 39% in 1998 and are targeted to increase to 38.1% in 2000. Mineral royalties are also earmarked. These entitlements, when combined with mandatory expenditures on salaries and debt service, cover close to 85% of the national budget. As a result, the degrees of freedom available to the Central government to implement its policy priorities through changes in expenditure patterns are extremely limited. * The DNP is in charge of formulation of the National Development Plan and the budget for capital expenditures. The MHCP is responsible for the preparing the recurrent budget. This division of responsibilities has led to problems in integration of investment and recurrent expenditures, although, recently, efforts have been made to improve coordination between these two entities as well as with the CGR, through an inter-institutional agreement. * The norms for formulation and execution of the budget need to be consolidated and streamlined. -9- (iU) Budget Execution, Treasury, Public Credit and Accounting: Current deficiencies in the field of budget execution, treasury, public credit and accounting are the following: * As mentioned above, when actual revenue collections do not come up to expectations, the govemment has to frequently resort to cash-flow driven cuts in expenditure. In effecting these cuts, it suffers from the same information deficiencies that affect decisions at the planning and budget formnulation stage. As such, budget cuts are often made in an arbitrary manner without full knowledge of their economiuc costs. * The Integrated Financial Management Information System (SIIF) developed with the assistance of the PFMP needs to be extended to the regional offices of central government entities. The functionality of the system needs to be enhanced based on user feedback Also, to increase the coverage of the budget by the system, a modified version of the system needs to be developed for implementation in decentralized entities that receive funds from the national budget. Further, in order to eliminate the proliferation of accounting systems used by different projects funded by extemal donors and increase control over funds executed by these projects, a new module of the SIIF needs to be developed that would allow both the execution of project funds through the system as also compliance with reporting requirements of donors. o The Treasury manages various investment portfolios. However, its current portfolio management system is inadequate and needs to enhanced to improve control of investment transactions and optimize returns on investment. * The debt management system of the Directorate of Public Credit (DPC) also needs to be replaced. While the system has adequate information about extemal debt, it suffers from various deficiencies, including the inability to connect with the SIIF and the lack of the functionality to allow debt service and cash flow projections. * In the area of accounting, there is a need to improve the quality of accounting information generated by public entities, especially those not covered by the SIIF; strengthen the informnation systems of the Office of the CGN to improve its capacity to consolidate accounting information pertaining to the national, decentralized, and territorial levels; and provide additional training to public officials in the evolving accounting norms and practices. (iii) Evaluation of Results of Public EXpenditure: Colombia has pioneered a comprehensive National System for Evaluation of Results of Public Sector Performance (SINERGIA) to institutionalize systematic evaluation of government policies, programs, projects and entities. While considerable progress has been made, given the major paradigm shift being pursued, not surprisingly, progress has been slow. The uncertainty of budgeted funds remains a major impediment in enforcing compliance with agreed performance targets. Further, performance is still not linked to specific incentives or penalties. The current version of the information system supporting SINERGIA also needs to be improved. At present it monitors performance only with respect to investment expenditures. It needs to be extended to cover recurrent expenditures as well. Further, the system needs to be extended to public enterprises and territorial entities. Furthermore there is a need to systematically analyze and design incentives faced by public sector managers in executing the budget, so as to develop insights that would help promote achievement of organizational objectives. Efficiency standards for different sectors need to be developed. In addition, it is important to improve the dissemination of public policy objectives, performance evaluation and budgetary results of public entities to civil society and the public, to improve transparency and accountability. - 10 - (iv) Government Procurement and Contracting: One of the areas that was not included in the PFMP, but has a major impact on the results of public expenditure is govermment procurement and contracting. A draft Country Procurement Assessment Report (CPAR, September 2000) highlights the strengths and weaknesses of the Colombian legal and administrative framework for public procurement and makes specific recommendations for its strengthening. The legal framework, consisting of Law 80 of 1993 and around 80 regulatory decrees and other laws, over-regulates public procurement and has introduced opportunities for corruption. Over-regulation and the high concern with corruption has in turn led to an environment of mutual distrust between the government and those doing business with it. There is a lack of institutional leadership in the area that makes it difficult to develop and improve the putlic procurement framework on an ongoing basis. Also, there is no system to monitor and evaluate procurement practices. Finally, the government is yet to develop a capacity for disseminating procurement opportunities, bidding documents and contract awards to the public via the internet, or to carry out procurement transactions on-line. Government Strategy: The government is taking various steps, in addition to those mentioned above to improve public expenditure management. A number of major reforms have been undertaken including a Fiscal Responsibility Law to reduce the level of recurrent expenditures at the local and departmental level, a bill to amend the constitution to freeze, in real per capita terms, future transfers to local governments, and a law authorizing lottery and gaming activities to contribute resources to pension and health insurance funds. In addition, the Government plans to submit to Congress legislation which aims to complete the reform of social security, including the elimination of several special regimes and an increase in the retirement age. With regard to public procurement, before the CPAR was completed, the Government submitted to Congress a bill amending Law 80. The proposed bill would, however, benefit from further improvements, which the Government is inclined to make. The DNP is promoting a series of meetings with the parties concemed to review the bill and propose changes. At the operational level, the governnent proposes to use the resources provided by this project, to continue improvements in national public expenditure management and deal with the capacity deficiencies discussed above. For strengthening financial management capacity at the territorial level, the government is being assisted by the IDB. 3. Sector issues to be addressed by the project and strategic choices: The project will support the government's efforts to improve the fiscal situation and strengthen the institutions that develop and implement revenue and expenditure policies. In the area of revenue administration, the project would address the aforesaid institutional deficiencies, by supporting activities aimed at improving the organization and managernent of the DIAN; promoting voluntary compliance; increasing institutional capacity to handle routine work flows as well as enforce tax, customs and foreign exchange laws effectively; and enhancing the policy and legal framework for revenue administration. Strategic choices made in developing project activities for revenue administration include the adoption of a well-rounded approach that not only deals with weaknesses in technical functions, but also with deficiencies in organization and management; giving greater emphasis to strengthening of customs administration to enable it to catch up with the tax administration; and ensuring complementarity between project initiatives and actions being taken by the DIAN under the Action Plan agreed with the IDB. In the field of public expenditure management, the project would complement and supplement assistance being provided under the PFMP. While recognizing that political considerations and macro-economic conditions will always have an important impact on public spending decisions, the project would seek to - 11 - enhance the quality of these decisions by improving the relevant norms, analytical tools and information systems. The project would also improve the control of the government over actual spending by extending the coverage of the SIIF; improve the management of investment and public credit portfolios; and strengthen accounting. Further, it would seek to institutionalize the incipient emphasis on results by strengthening the national evaluation system and facilitating dissemination of information relating to the objectives, achievements, performance evaluation and expenditures of the public sector to the public. Finally, the project would assist in improving procurement and contracting practices to increase transparency and value for money. In designing the public expenditure management component of the project, strategic choices have been made in selecting a small number of high value added activities, that would have an immediate benefit for practitioners in this complex field. Also in order to keep the project within manageable limits, and given the IDB's involvement in improving financial management capacity at the territorial level, the scope of the project has been limited to the national government level. C. Project Description Summary 1. Project components (see Amnex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The project would provide consulting services, training and goods to support activities under three components: Revenue Administration, Public Expenditure Management and Project Management. a. Revenue Administration: US$36.02 miffion Sub-component 1: Strengthening Organization and Management of the DIAN: $13.64 million: This sub-component would support activities aimed at strengthening critical areas of the organization and management of the DIAN, including strategic planning and management, personnel management and professional development, prevention and control of corruption, information management, managemnent of notifications, official correspondence and archives, and change management. Sub-component 2: Facilitating Voluntary Compliance: $6.50 million: This sub-component would help promote voluntary compliance by supporting the setting up of Integrated Taxpayers Education and Assistance Centers; training external stakeholders in tax and customs policy and procedures; expanding the reach and scope of electronic interaction between the DLAN and its clients; making the Office of the Taxpayer Ombudsman fully operational; and fostering a tax compliance culture Sub-component 3: Improvng the Effectiveness of the DIAN in Managing Routine Processing of Tax Declarations and Payments; $ 1.23 million: This sub-component would assist in increasing the efficiency and productivity of routine tax administration operations by supporting the updating and enhancement of systems for registration of taxpayers, accounting of revenue collections and control of refinds and credits. It would also help develop and implement a system for assessment of small and medium enterprises covered under a special tax regime. Sub-component 4: Improving the Effectiveness of the DIAN in Managing Routine Processing of Cargo, Customs Declarations and Payments: $9.61 million: This sub-component would support the improvement of routine customs operations, such as cargo processing, processing of customs declarations and payments, release of merchandise, monitoring and control of warehouses and sale of confiscated goods. It would also assist in enhancing the taxpayer current account to include customs transactions. Sub-component 5: Strengthening the Capacity of the DIAN in Enforcement Operations. $4.57 million. This sub-component would support the building up of the enforcement capacity of the DIAN by - 12 - strengthening economic studies, management of external information, intelligence operations, risk analysis, audits, investigation and inspections, monitoring of filing of declarations and payments, control of VAT invoices, recovery of tax arrears and legal and appellate functions. Sub-component 6: Improving Policy and Legal Framework of Revenue Administration: $0.45 million: This sub-component would support the review and revision of tax and customs policy, laws and regulations, and strengthen the ability of the DIAN to participate in international tax treaty negotiations. b. Public Expenditure Management: US$ 18.51 million Sub-component 1: Improving Macro-programming and Formulation and Monitoring of the Budget: $6.09 milion: This sub-component would (a) assist in clarifying and adjusting the roles and responsibilities of different entities that participate in the programming, budgeting, execution and evaluation of public expenditures; (b) develop, enhance and implement models and information systems for (i) medium term and long term macro-economic projections and simulations, (ii) evaluation of expenditure and revenue policies to assist in decisions regarding reformns in the fiscal structure, (iii) generation of consolidated economic, fiscal and budgetary accounts of the public sector, (iv) classification of budget execution information contained in the SIIF according to economic categories, and (v) monitoring of public sector finances, to improve macro-programming; (c) develop, improve and implement methodologies and systems for (i) analysis of budget programming, (ii) quantification of expenditures earmarked by different laws and development of options for reforms aimed at reducing earmarking, (iii) projection of revenues, with interfaces with information systems of the DIAN, (iv) calculation of unit costs of inputs and outputs, initially for the Transport Sector and the Judicial Branch and, subsequently, for the Education and Health Sectors, (v) formulation and monitoring of the investment budget of the central government (vi) analysis of public policies, programs and projects, (vii) projection of cash flows of the non-financial public sector, and (viii) financial monitoring of the budget; (d) improve interfaces between the information systems of the Budget Directorate of the MHCP and those of the sector ministries, to improve budget formulation and monitoring; and (e) implement existing inter-institutional agreements between the MHCP, DNP and CGR to reduce the costs of monitoring of budgetary expenditures, by identifying shared information needs, eliminating duplicate reports, establishing primary sources of information and developing systems to provide access to these sources. Sub-component 2: Strengthening of Budget Execution, Treasury, Public Credit and Accounting: $9.70 million: This sub-component would provide assistance to (a) extend and enhance the Integrated Financial Management System (Sistema Integrada de Informaci6n Financiera - SIIF) by (i) implementing it in 145 regional offices of central government entities; (ii) developing a modified version of the system for decentralized entities partially funded by the central budget and implementing the system in I I major entities that spend about 12% of the national budget; (iii) enhancing the functionality of the system in accordance with user feedback and increasing its capacity to include additional users; and (iv) developing a module of the system to allow execution and accounting of externally funded projects through the system; (b) develop and implement a system to improve the capacity of the Treasury to better manage its investment portfolios; (c) develop and implement a new system for management of the public debt portfolio; and (d) improve the quality of accounting information in public entities by (i) enhancing mechanisms for the registration and reconciliation of accounting records covering income, debt transactions, expenditures and physical assets; (ii) supporting dissemination, advisory services and training to improve accounting practices; and (iii) strengthening the information systems of the Office of the Accountant General of the Nation, to capture and integrate accounting information at the national, decentralized, and territorial levels. - 13 - Sub-component 3: Improving the Evaluation of Results of Public Expenditure: $ 0.73 million: This sub-component would support (a) the enhancement the National System for Evaluation of Results of Public Sector Performance (SINERGIA) by (i) improving the evaluation system to, inter alia, include recurrent expenditures in the evaluation process; (ii) developing new modules for strategic evaluations of different sectors and evaluation of performance of territorial and decentralized entities; (iii) developing and implementing an incentive model linked to public policy outcomes in two pilot ministries, namely the Ministry of Foreign Trade and the Ministry of Economic Development; and (iv) updating the information system supporting SINERGIA; (b) development of a systematic methodology for identification of inputs and outputs of different sectors to establish efficiency standards pertaining to delivery of public policy outcomes for each sector; and (c) design and implementation of dissemination strategies to provide information to the public on performance targets for different policies, programs, projects and public sector entities, evaluation of the actual results achieved and the amount of money spent in the process. Sub-component 4: Strengthening Public Procurement and Contracting: $ 1.99 million: This sub-component would provide assistance to (a) develop legislation and regulations to support modifications to the Procurernent and Contracting Law (Law 80) with a view to improve the legal framework for public procurement; (b) design and implement institutional arrangements, including the possibility of establishing a national body, for developing and regulating public procurement and contracting policy; standardizing and disseminating procedures, bidding documents and contracts; and assisting central and territorial entities in procurement and contracting matters on an ongoing basis; (c) develop and implement a system for monitoring and evaluation of procurement and contracting practices in the public sector, piloting the system in two central level entities, one decentralized entity and two territorial entities; (d) design and implement an internet based public procurement information system aimed at disseminating all information regarding procurement notices, bidding documents and contract awards to interested parties and the public, thereby setting the basis for online public procurement; and (e) carrying out a survey to determine procurement training needs and developing a pedagogical system aimed at providing public sector personnel with learning tools relating to the conceptual, technical, legal and procedural aspects of public procurement and contracting. c. ProjectManagement: $ 4.35 million This component will finance consulting services, equipment and training for the staff of the two Project Management Units, one at the MHCP and the other at the DNP; communication of project objectives and activities to stakeholder; and surveys to collect data on key performance indicators and obtain stakeholder feedback Indicative Bank- % of component Sector costs % of financing .ank- ._____________W (USWM) Total l US$M) fiancing A. Revenue Administration Institutional 36.02 60.8 21.70 61.2 Development Public Expenditure Management Institutional 18.51 31.3 11.15 31.4 Development Project Management Public Financial 4.35 7.3 2.62 7.4 Management Total Project Costs 58.88 99.4 35.47 100.0 Front-end fee 0.35 0.6 0.00 0.0 Total Financing Required 59.23 100.0 35.47 100.0 - 14- 2. Key policy and insfitutional reforms supported by the project: In Revenue Administration, the project would seek to (a) strengthen organization and management capacity to increase operational effectiveness; (b) create a more favorable environment for voluntary compliance; (c) implement second generation reforms in tax admninistration; (d) overcome institutional deficiencies in the ability of the customs administration to collect trade taxes with minimal interruption of trade flows; (e) strengthen enforcement capacity and (f) improve policy, laws and regulations relating to taxes and customs, to broaden the tax base, reduce distortions, increase equity, simplify procedures and facilitate enforcement. In Public Expenditure Management, the project would aim to (a) strengthen planning and budget formulation by clarifying institutional roles and responsibilities at different levels of government and among institutions involved in budget planning, improving budgeting norms and enhancing the quality of information and tools required for strategic expenditure decisions; (b) improve budget execution by extending the coverage and capacity of the SIIF to a wider set of public entities, enhancing investment and debt management capacity and improving accounting of public expenditures; (c) sharpen the focus on results by improving evaluation capacity, initiating the process of linking incentives to performance and facilitating monitoring of public sector performance by civil society; and (d) improve government procurement and contracting by revising the relevant normnative and institutional framework, streamlining processes and implementing modernized infornation systems. 3. Benefits and target population: The project would improve the ability of the Government of Colombia to collect due taxes to finance public expenditures. At the same time, it would benefit taxpayers, traders, brokers, clearing agents, tax lawyers and accountants, by simplifying tax and customs procedures, providing additional taxpayer assistance services and reducing compliance costs. Improvements in public expenditure management would enable the government to allocate public funds to priority areas; maintain macro-economic stability; and enhance the cost effectiveness of its operations. Greater emphasis on results, strengthened evaluation mechanisms and increased information availability to civil society would help improve accountability in the public sector and the quality of public services. Improvements in public procurement and contracting would benefit suppliers of goods and services to the government, by leveling the playing fields and increasing the transparency of the associated decision-making processes. It would also increase the value for money derived by the public. At the organization level, the project would benefit the DJAN, the MHCP, the DNP and the CGN by providing them with technical assistance, information systems, equipment and training, thus enabling them to better perform their fumctions. 4. Institutional and implementation arrangements: A. Project Management: Since project activities relate to multiple, autonomous organizations, it would be very important to ensure effective coordination. For this purpose a high level Project Coordination Committee (Comite de Coodinaci6n - COCOR) consisting of the Vice Minister, MHCP as Chairman; the Sub-Director, DNP; and the Director General, DIAN will be set up to provide leadership and oversight to the project. A senior, highly qualified professional will be recruited to act as the Secretary of the COCOR. In this capacity he will assist the COCOR in implementing and coordinating the activities of the project as whole. The COCOR will review the progress of the project, resolve implementation problems and - 15- bottlenecks, approve the "Programa Operativo Anual" (POAs) and project budgets and reallocate funds between components and activities as needed. The COCOR will meet at least once every three months. The project management arrangements will broadly follow the arrangements that have been successfully employed for the ongoing Public Financial Management Project (PFMP). Project activities will be divided into two clusters. Cluster 1, covering activities related to the MHCP, DLAN and CGN will be managed by Project Management Unit - MHCP (PMU-MHP) and cluster 2, covering activities related to the DNP, will be managed by Project Management Unit - DNP (PMU-DNP). PMU-MHCP will consist of the following staff: * Secretary of the Coordination Committee, responsible for overseeing the activities of the PMU-MHCP, in addition to assisting the COCOR in implementing and coordinating the project. * Technical Coordinator - DLAN, responsible for executing activities related to revenue administration, in close coordination with the management and staff of the DIAN. * Technical Coordinator - Public Expenditure Management, responsible for executing activities pertaining to expenditure management in collaboration with the management and staff of the MHCP, CGN and DNP. 3 Technical Coordinator - SIIF, responsible for the enhancement and expansion of the SIIF. He will work closely with the Technical Coordinator - Public Expenditure Management. 3 Project Administrator, responsible for developing the Annual Operational Program (Programa Operativo Anual - POA); managing procurement, accounting, financial reporting, disbursements, audits and project reporting. 3 Procurement Team consisting of a Procurement Officer and an Informatics Specialist, responsible for canrying out the selection and recruitment of consultants and the procurement of goods and other services required for the project in accordance with the relevant Bank Guidelines. The team will work closely with the procurement specialists at the UNDP who would, inter alia, ensure adherence to Bank Guidelines, invite bids, finalize contracts, clear goods through customs and make payments to suppliers and consultants. * Financial Management Specialist/Accountant, responsible for accounting, disbursements, financial reporting, auditing and adherence to Bank guidelines for project financial management. The Financial Management Specialist will also assist the PMU-DNP as needed and will be responsible for consolidating the accounts of both the PMUs into comprehensive project accounts. He/she will also coordinate disbursement and accounting activities with the UNDP. * Two Secretaries. PMU- DNP will consist of the following staff: * Technical Coordinator/ Project Administrator, responsible for coordinating public expenditure management activities within the DNP and with the MHCO and CGN, developing the Annual Program of Operations (Programa Operativo Anual - POA); managing procurement, accounting, financial reporting, disbursements, audits and project reporting. * Project Officer, who would assist the Technical Coordinator! Project Administrator in the discharge of his/ her functions. * Financial Management Specialist, responsible for disbursements, financial reporting, auditing and adherence to Bank guidelines for project financial management. He/she will also coordinate disbursement and accounting activities with the UNDPand the PMU-MHCP. * Accountant. - 16- * Secretary. To ensure coordination at the technical level, two Technical Coordination Committees (TCCs) would be established. The Technical Coordination Committee - DIAN will be headed by the Director General, DIAN and will have the Director of Taxes, the Director of Customs, the Secretary General, DIAN, Secretary General - Institutional Development, the Head of the Office of Information Systems, the Secretary of the COCOR and the Technical Coordinator - DIAN (Member-Secretary). This Committee will deal with technical issues related to the implementation of project activities in the DLAN. The Technical Coordination Committee - Public Expenditure Management will consist of the Directors of Macro-programming, Budget, Treasury and Public Credit, MHCP; Heads of the Macro-programming, Public Investment and Finance, Evaluation Units of the DNP; representatives of the Fiscal Council (Consejo Fiscal- CONFIS), the Office of the National Accountant General and the Office of the Comptroller General of the Republic; the Secretary of the COCOR, the Technical Coordinator/ Project Administrator - DNP, the Technical Coordinator - SIIF and the Technical Coordinator - PEM, MHCP (Member- Secretary). As with the ongoing PFMP, in order to ensure smooth flow of project funds and timely and efficient execution of procurement contracts, GOC will engage UNDP under a Management Service Agreement. Since UNDP cannot enter into a competitive selection process as required by IBRD guidelines, the administrative fees paid to it would be financed out of counterpart funds. B. Financial Management Arrangements: a. Accounting and FinancialReporting : While the PMUs in charge of the project have gained experience in project accounting through the execution of the ongoing Public Financial Management Project since 1994, the current financial management system needs to be reinforced and expanded in line with the new financial management requirements of the Bank. In compliance with the conditions outlined in the Bank's Project Financial Management Manual (February 1999), a Financial Management Specialist carried out the required project financial management assessment to determine the capacity of the PMUs to observe present Bank financial management standards during project implementation (see Annex 6). An Action Plan to deal with observed deficiencies was agreed with project management. A follow up visit by a Financial Management Specialist and the progress made by the PMUs in meeting the requirements of the Action Plan indicate that the project meets the Bank's minimum financial management standards. A revised Action Plan has been prepared to further strengthen project financial management capacity. An Action Plan to enable the PMUs to produce Project Management Reports will be implemented within six months of effectiveness. Within the GOC counterpart contribution, there is an amount of US$8.5 million which will be shown in the national budget as the investment budget of the DIAN and not of the project. This amount will finance some of the activities included in the Revenue Administration component of the project, which will be directly executed by the DIAN, in line with the Action Plan agreed with the IDB. Since the funds will be spent in accordance with the National Budgetary and Procurement laws, special arrangements for monitoring of these funds have been agreed. These are: (i) the monitoring of the activities and the expenditures incurred will be carried out ex-post by the PMU and Bank supervision missions; (ii) the DIAN will submit quarterly reports showing the scope of activities carried out, categories of expenditure, physical progress achieved and the impact of such activities; and (iii) on that basis, the PMU financial specialist will consolidate the information and prepare all the required reports - 17 - for the IBRD, national authorities and audit. b. Procurement: The PMU-MHCP will have a procurement team consisting of a Procurement Officer and an Informatics Specialist, who would look after procurement and contracting activities related to the project. In the PMU-DNP this function will be performed by the Technical Coordinator! Project Administrator and the Project Officer. UNDP will be hired through counterpart funds to provide procurement management support and will work closely with the PMUs. Procurement of goods under the proposed project will be carried out in accordance with the latest version of Bank's "Guidelines for Procurement under IBRD Loans and IDA Credits". Procurement of information systems would be carried out using the Bank's Standard Bidding Documents for the Supply and Installation of Information Systems. Consultants will be recruited in accordance with the latest version of "Guidelines: Use of Consultants by World Bank Borrowers and the World Bank as Executing Agency". A procurement capacity assessment has been carried out, with procurement risk being rated as "average". Procurement methods and thresholds for prior review have been agreed (Annex 6). c. Monitoring and Evaluation Arrangements: The project would be implemented on the basis of an annual work program called "Programa Operativo Anual" (POA). The POA is being used by the ongoing project. The POA for each calendar year would be submitted to the Bank by the preceding October 31 for approval. The POA would contain details of activities to be executed during the year and the resources required, source of financing, time table, performance indicators and institutional responsibility for each activity. Further, in keeping with Bank financial management guidelines, (OP/BP) 10.2., project management reports (PMRs) would be submitted. The PMRs would comprise of financial reports, progress reports, and procurement reports. The format of these reports will closely follow the guidelines in the Project Financial Management Manual (IBRD, February 1999). The reports will reflect all project financing and expenditures, including those expenditures that are financed outside of the PMU. It was agreed, that the PMUs will prepare quarterly PMRs, to be consolidated by the PMU - MHCP for review by the COCOR and the Bank. The project would be supervised by the Bank on an ongoing basis, with at least two field supervision missions each year. A mid-term review of the project would be carried out in the third year of project implementation. d. Auditing Arrangements: The Comptroller General of the Republic (CGR) by law conducts the audits of public sector programs, including IBRD projects. Accordingly, this project would also be audited by the CGR. Audits of accounts and the financial statements of the project, including a separate opinion on Statements of Expenditures, would follow accounting and auditing procedures satisfactory to the Bank. All supporting records would be maintained at least one year after the completion of the project. A consolidated audit report would be submitted to the Bank no later than four months after the end of each fiscal year. The audit would cover project expenditures until such time as the loan has been closed. To ensure timely submission of the audit reports to the Bank, the CGR will be asked to submit within six months after loan effectiveness its report on the review of Project Internal Controls. Arrangements will also be made with the CGR to ensure its involvement in project audit early in the fiscal year, thus, enabling it to complete the audit process in a timely manner. The use of Bank guidelines on project audits and the terms of reference of Auditors will be agreed before negotiations. e. Disbursement Arrangements: GOC will sign Management Service Agreements (MSAs) with UNDP, similar to the MSAs currently in place under the on-going project, to manage both loan and counterpart funds. The MSAs would have the advantages of allowing the project a more predictable - 18- access to funds due to budgetary regulations governing this type of agreement. UNDP also has ample experience in international procurement and has tax exemption status. Under the MSA arrangement, IBRD will make disbursement directly to the General Account of the UNDP in New York. Payments will be made out of this account by UNDP in dollars or in local currency. The PMUs would still have full responsibility for the financial management, monitoring and reporting of the project and for preparing all aspects of the processes related to the procurement. UNDP will act as an intemal auditor by guaranteeing that all procurement rules and guidelines are followed. It will also review all contracts executed under the project from the legal point view. UNDP will sign all contracts and pay the beneficiaries of the contracts. It will transfer all goods purchased to the executing agencies. In the future, GOC may engage another agency to perform the functions that would initially be performed by the UNDP, subject to the agreement of the Bank and under terms and conditions satisfactory to it. D. Project Rationale 1. Project alternatives considered and reasons for rejection: Revenue Administration: One of the alternatives proposed in the early stages of project design was to limit this component to investments in Information Technology. This would have had the advantage of focused project interventions, precise outputs and easier project implementation. However, this alternative was rejected, because it would not have resulted in sustainable improvements in the DIAN's performance. While IT investments are important, it is equally important to address non-IT institutional deficiencies in organization, management and operations. Therefore, an integrated modernization strategy, including both IT and non-IT interventions, was developed after a comprehensive institutional and organizational diagnosis. Public Expenditure Management: The initial strategy considered for this component was (a) to focus on extending the SIIF and (b) addressing expenditure management problems relating to the education and health sectors that account for a major proportion of public spending. Regarding the latter it was felt by GOC that deficiencies in information relating to physical inputs and outputs linked to expenditures in these sectors made it very difficult to take well-considered budgetary decisions. After several rounds of discussions with different agencies, a consensus emerged that a broader, more holistic approach dealing with continuing deficiencies at different points of the expenditure cycle would yield more sustainable improvements. Therefore a broader reform strategy was adopted covering macro-programning, budget formulation and monitoring, budget execution, management of investment and debt portfolios, evaluation, and procurement and contracting. As regards the education and health sectors, discussions with counterparts revealed the existence of serious sector-specific issues, such as private versus public provision of education and health services, financing of health care and the performance of agencies engaged in health insurance and provision of health services. Such issues need to be dealt with in order to imnprove expenditure outcomes in these sectors. It was felt that these were beyond the scope of this project and would best be addressed through other sectoral reforms. However, to address issues related to budgetary information pertaining to these sectors, they were included as pilot sectors for developmnent of information relating to per unit costs of inputs and outputs. Adaptable Program Lending vs. Specific Investment Loan: In view of the institution building nature of the project, the alternative of designing the project as an Adaptable Program Lending (APL) operation was also discussed with the government. However, considering that the project is itself the second stage of the process of strengthening public financial management that began in 1994 and, on its completion, a modem institutional infrastructure for revenue administration and public expenditure management is expected to be in place, this option was not pursued. The government also indicated that it does not envisage the need for - 19- additional loans for public financial management after the end of this project. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). . T Latest Supervision Sector Issue Project (PSR) Ratings (Bank4inanced projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Public Financial Management, Tax Public Financial Management S S Administration, National Evaluation -CO System Capital markets, public debt, pension, Financial Markets Development S S banking TA - CO Other development agencies Strengthening of financial management IDB- Strengthening of the in regional entities Regional Information System - FOSIT Technical Assistance in training and GTZ development of organizational strategy of the DIAN IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: A number of lessons learned in the course of implementation of the PFMP and similar projects have been incorporated in the project design. These include the following: - A project dealing with fundamental reforms in Revenue Administration (RA) and Public Expenditure Management (PEM) can succeed only if it has strong borrower commitment. In order to achieve this, it has been ensured that the project addresses real Borrower needs in both the areas and is in line with the Borrower's strategic priorities. Also, different agencies of the Borrower have been closely involved in preparation of the project, so as to build ownership of the proposed reforms. * While computerization is necessary to improve efficiency and effectiveness in RA and PEM, it is not sufficient. It is imperative to address underlying institutional weaknesses in order to achieve lasting results. Therefore, a well-rounded institutional development approach has been adopted. While supporting extensive information technology investments, the project would also deal with issues relating to the normative framework, incentives, human resources, organizational arrangements, management systems, business processes and training. * In addressing institutional weaknesses, it is not enough to focus on formal rules of the game. The informal rules must be taken into account. Consequently, informal rules have been specifically examined while diagnosing both RA and PEM, and to the extent possible project interventions have been designed to address problems related to both formal and informal rules. * In reforming organizations, it is important to take into account the environment in which they operate. Accordingly, enviromnental factors of both the RA and PEM have been examined in detail at the diagnostic stage and an attempt has been made to design project activities that would strengthen the positive effects of the environment and reduce its negative influences on the targeted organizations. * Institutional development is an iterative multi-year process. For this reason, the project has been - 20 - designed to support second generation reforms, building on the progress made under the PFMP. * Competent leadership of the project is essential. The project leader should have adequate authority to overcome inter-organizational hurdles and push reforms. For this purpose, the project will be headed by the Vice Minister, MHCP. It would also have a Secretary to the COCOR of sufficient stature to lead day to day implementation activities. * Due to their regular responsibilities, it is very difficult for line managers and staff to devote adequate attention to longer term modernization activities. Yet their inputs are crucial to project success. Therefore, it is essential to create a dedicated group of individuals who are devoted full time to implementation of project activities, but work closely with line staff. To address this need, Project Management Units, consisting of consultants and regular employees, have been designed to coordinate project activities with line agencies and facilitate implementation. Also a high level Project Coordination Committee and two Technical Coordination Committees have been created to ensure smooth inter-institutional cooperation and an synchronized approach in activities involving more than one organization. 4. Indications of borrower commitment and ownership: Given the serious fiscal situation faced by Colombia, reforms in revenue administration and public expenditure management are amongst the top priorities of the government. This is reflected in the high priority attached to the project in programming discussions with the Bank. The project has been extensively discussed with the Borrower, it has been designed to address manifested needs and different agencies of the Borrower have invested considerable time and effort in developing the project. The government's commitment to the project is also indicated by the provisions it has made for the project in the FY 2001 national budget, in spite of the very tight fiscal situation. 5. Value added of Bank support in this project: The Bank has been actively involved in supporting public financial management reforms in Colombia for the last six years. In the process it has acquired considerable country specific knowledge of the issues that need to be dealt with. This, coupled with the its international and regional experience in similar projects, would help the Bank provide high quality assistance to the Borrower, enabling it to consolidate the reforms initiated by the PFMP and dealing with deficiencies that remain to be addressed. Also, as has been the experience with the PFMP, as a disinterested party focused on achieving the development objectives of the project, the Bank would be able to help overcome inter-institutional boundaries and catalyze cooperation between different counterpart agencies in areas that require concerted action. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): O Cost benefit NPV=US$ million; ERR = % (see Annex 4) * Cost effectiveness O Other (specify) Economic impact of project to be evaluated. 2. Financial (see Annex 4 and Annex 5): NPV=US$ rnillion; FRR = % (see Annex 4) Fiscal Inpact: - 21 - 3. Technical: In order to identify issues in revenue administration and pin-point areas of project assistance, a comprehensive diagnosis of the DLN was carried out, based on "A Diagnositc Framework for Revenue Administration ", Jit B. S. Gill, World Bank Tecnical Paper 472, 2000. First a preliminary examination of the DIAN was conducted using Indicators of Nature and Scope of Operations; Indicators of Effectiveness; and Indicators of Efficiency. Thereafter, a detailed institutional and organizational analysis was carried out. Four major Inputs of the DLAN, namely its Environment, History, Resources, and Organizational Strategy were examined. Thereafter, Transformation Processes, through with inputs are converted into outputs were analyzed, with reference to both organization and management tasks as well as technical tasks related to tax and customs administration. For each task the formal organizational arrangements, the informal organization and the individuals performing the task were studied. Finally, Outputs at the individual, unit and organizational level were examined. In the whole analysis, the focus was on finding out as to where and why different pieces of the DIAN's system do not fit each other, thus causing performance problems. Once the causes of inadequate performance were identified, appropriate remedies were developed to deal with them. Similarly, a detailed analysis of public expenditure management institutions in Colombia was carried out, following an enhanced version of the diagnostic methodology outlined in the Public Expenditure Handbook (The World Bank, 1998). In addition, reports produced by the Commission for the Rationalization of Public Expenditures and Finances (Comisi6n de Racionalizaci6n del Gasto y de las Finanzas Publicas) were used to supplement the diagnosis. Both diagnoses were validated through consultations with concemed GOC managers and staff. Activities finally included in the project were those that the clients identified to be high priority and doable. They take into account the current level of technological and functional sophistication of the DLAN, MHCP, DNP and CGN and their capacity to absorb planned project inputs. Project costs are based on best judgement estimates, guided by the implementation experience of the PFMP. 4. Institutional: 4.1 Executing agencies: MHCP, DNP and DIAN 4.2 Project management: As mentioned above, this project will broadly follow the project management arrangements that have been successfully employed for the PFMP. The executing agencies for the project will be the DLN, for the Revenue Administration component, and the MHCPand the DNP, for the Public Expenditure Management component. The DIAN is an administratively autonomous entity closely linked with the MHCP, while the MHCP and DNP are part of the central government. Inter-agency coordination will be ensured through a high level Coordination Committee and two Technical Coordination Committees. The executing agencies will be supported by two PMUs, that are currently managing the PFPM in the MHCP and DNP. The PMUs will have the assistance of the UNDP for management of project funds and procurement processes. The PFMP is broadly similar in magnitude and complexity to this project. The satisfactory implementation experience of the PFMP indicates that the executing agencies have the capacity to execute the new project with equal success. While the range of project activities may appear to be very broad at first blush, it is - 22 - important to note that these would actually be apportioned between various functional units. In the revenue administration component, activities relating to organization and management would be led by the Secretary General and Secretary General (Institutional Development) of the DIAN; while those related to tax administration, customs administration and informatics would be managed by the Directorate of Taxes, Directorate Customs and the office of Informatics Services, respectively. Similarly, in the public expenditure management component, the oversight of activities relating to macro-programming and formulation and monitoring of the budget would be shared between the Macro-programming Directorate and the Budget Directorate of the MHCP and the Investment Budget Unit of the DNP; the expansion of the SIIF would be managed by the existing SIIF unit in the MHCP, while the development of the systems for management of investment portfolios and debt management would be led by the Treasury and Public Credit Directorate, respectively. Activities concerning accounting would be managed by the National Accountant General's office. Further, activities relating to improvement of evaluation systems would be undertaken by the Evaluation Unit of the DNP, while those related to improvements in public procurement and contracting by another team in the DNP. Consequently, the burden of implementing project activities would be evenly distributed and would not excessively strain the institutional capacity of any one functional unit. As the experience of the PFMP has shown, the quality of staff involved in implementation of project activities in various units of the DIAN, MIICP, DNP and CGN is, generally, very good. This would ensure that there is constant client involvement in the design and implementation of project initiatives and in ensuring that project outputs meet client needs. Frequent rotation of personnel at senior positions in the DIAN, MHCP and DNP is, however, expected to continue, as was the case during implementation of the PFMP. While this will no doubt have some impact on the pace of the project, it is not seen as a major impediment. During the irnplementation of the PFMP, it was noticed that officials replacing incumbents are usually of the same high caliber. After an initial period of familiarization with the project, they tend to support it strongly on account of the improvements that the project can make to performance in their respective areas of responsibility. There has also been some rotation of staff in the PMU of the MHCP. This will be sought to be reduced through contracts extending over more than one year. All the executing agencies and the PMUs have gained considerable knowledge and experience in public fmancial management reform and Bank procedures during the implementation of the PFMP. UNDP also has experience with the PFMP and other Bank projects. 4.3 Procurement issues: Regarding procurement under Bank projects, the CPAR states that while procurement problems have in some instances caused delays, a more frequent cause has been the lack of adequate and timely counterpart funding. Bank financed projects are exempted from the national law on procurement (Law 80), therefore, procurement under those projects is carried out in accordance with the Bank Guidelines. By and large, implementing agencies consider procurement under Bank projects easier and more transparent than that under national procedures. There have been no instances of mis-procurement in the recent past. The main procurement related problems found in project implementation are due to: (i) limited knowledge of Bank policies and procedures and wrong interpretation of the Guidelines; (ii) lack of qualified and experienced staff, particularly among decentralized projects and new agencies; and (iii) lack of standard documents for NCB. Procurement and inspection agents are not used in Bank projects. However UNICEF, UNDP and IICA have been hired as project administrators because of their experience in the field and their ability to assist with the resolution of administrative problems primarily related to budget management. The general risk assessment is that while Public procurement in Colombia entails high risk both for the Government and for those doing business with the Government, procurement under Bank projects, where the Guidelines are reasonably enforced, is apparently free of major risk and corruption. - 23 - This project, as a part of its Public Expenditure Management Component, includes a subcomponent aimed at (i) improving the legal and the institutional framework for public procurement; (ii) developing public procurement information systems and (iii) developing and implementing a procurement training program. A procurement capacity assessment of PMUs in the MHCP and the DNP was conducted and procurement risk for the project was assessed as "average". Procurement activities will be handled by the PMUs in conjunction with the UNDP. In the PMU-MHCP, the Project Administrator has been trained in procurement at the Bank. In addition, a Procurement Team consisting of a Procurement Officer and an Informatics Specialist has been created. In the PMU-DNP, procurement matters will be dealt with by the Technical Coordinator/Project Administrator and the Project Officer. Additional training in Bank procurement guidelines will be provided to PMU staff through the Project Launch Workshop and subsequent courses. 4.4 Financial management issues: According to the Country Financial Management Assessment (CFMA- September 1998), the general framework for financial management at the country level is already in place, legislated for both the private and the public sectors. The National Accounting Office (CGN) is the executing agency for governmental accounting and the controlling institutions in charge of monitoring compliance are the Superintendencies in charge of overseeing economic sectors as well as the CGR. Financial management in Colombia is based on Article 334 of the Constitution. The CFMA indicates that overall Colombia does not lack laws and regulations concerning financial management or the practice of the accounting profession. The main issues relate to the fact that financial management needs to be more closely linked to service of national goals. The recommendations of the report focus on improving the financial management systems to facilitate control of expenditures, allow centralized and decentralized monitoring of expenditures and permit performance assessment and the establishment of a results-oriented public sector. It should be noted that the current Public Financial Management Project I has made inroads in meeting these objectives by the implementation of the SIIF system, the strengthening of the CGN and the implementation of the SINERGIA. The follow on project will further strengthen these systems as detailed above. According to the CFMA, the hurdle most encountered by Bank projects in the country is the frequent budget cuts, along with inefficiencies in the flow of funds to the projects that affect project implementation. The use of UNDP as the fund executing agency in the project helps alleviate the flow of fund problems caused by the bureaucratic process at the central level as the funds are committed in the annual budget and deposited in the UNDP account. However, fiscal problems have led to smaller than planned budget approvals causing a shortage, sometimes, of both counterpart and loan funds. This issue will need careful attention during the yearly budget approval process. A financial management assessment of the current PMUs in the MHCP and DNP was conducted. The PMUs were observed to have various strengths including, (a) ample experience of staff in project management, (b) defined organizational structures, (c) established culture and procedures with regard to planning, budgeting and monitoring of activities, (d) knowledge of Bank guidelines and (e) experienced extemal government auditors. Weaknesses detected included the need for documentation of policies and procedures, a computerized integrated financial management/accounting system and quarterly project management reports. An Action Plan to deal with the observed deficiencies was agreed with project management. Since then, considerable progress has been made (see Annex 6). As a result, the rating for the project has been raised to "4-B". A revised Action Plan has been agreed to further strengthen project financial management. All project funds will be managed directly by the UNDP. Project accounts will be maintained by the two -24 - PMUs and will be consolidated by PMU-MHCP. These will be audited by the CGR, who has the legal responsibility in this regard. The reports of the CGR have been found to be generally satisfactory, in the case of the PFMP. However, occasional delays, not always attributable to the CGR, have been experienced in receipt of audit reports. Remedial measures will be taken to reduce the delays, including agreeing with the CGR to start audit activities early in the fiscal year concerned. Some additional training to PMU staff would be needed in the new financial management guidelines of the Bank. This will be provided through the Project Launch Workshop and other courses. 5. Environmental: Environmental Category: C (Not Required) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. The project is classified as Category C and has been cleared by LCSES on October 6, 2000. 5.2 What are the main features of the EMP and are they adequate? Not applicable. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: Not applicable. 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? Not applicable. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? Not applicable. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. The project's main social development outcome is more responsive, accountable and transparent governance. Stakeholders within the public sector who would benefit from the project include officials responsible for economic management, revenue collection, expenditure management and preparation and auditing of national accounts. These stakeholders would benefit from the improved norms, processes, systems and skills implemented through the project, that would help them take better decisions and implement them more effectively. External stakeholders who would gain form the project consist of law abiding taxpayers; traders, brokers and clearing agents; tax lawyers and accountants; suppliers of goods and services to the government; civil society organizations interested in strengthening citizen's voice in government affairs and in fighting corruption. Stakeholders who stand to lose from project initiatives would include corrupt public officials unable to earn rents due to reduced discretion, increased transparency and improved accountability; tax evaders and smugglers thwarted by improved enforcement capacity of the DIAN and corrupt vendors affected by more transparent procurement procedures and greater competition. 6.2 Participatory Approach: How are key stakeholders participating in the project? Preparation Implementation - 25 - Beneficiaries (Executing Agencies) IS, COL IS, COL Beneficiaries (Taxpayers) CON IS, CON Intermediary NGOs CON Other Donors COL COL 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? During project preparation taxpayers were consulted on issues related to voluntary compliance and interaction with the DIAN. In the course of project implementation, it is planned to carry out surveys of taxpayers, traders, brokers, clearing agents as well as their representative associations, to determine the improvement in their perception regarding the efficiency, effectiveness, integrity and quality of service of the DIAN. Also surveys of civil society organizations and suppliers of goods and services to the government would be carried out to measure improvements in transparency about the objectives, actual performance, expenditure, procurement and contracting of public entities. Further, in developing revised regulations for procurement and contracting, consultations with different stakeholders are planned. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomnes? The project provides for various coordination, consultation and change management mechanisms to build support for the reforms supported by it. It also makes provision for carrying out a sustained communication campaign for this purpose. Stakeholder surveys would also be used both to measure the progress made by the project as well as to fine-tune project interventions in line with the feedback received. Opposition from corrupt public officials, tax evaders, smugglers and corrupt vendors would be inevitable. To overcome it, the project would seek to build countervailing support for the proposed reforms amongst the honest majority of stakeholders. At the same time, it would rely on the declared commitment of the government to enforce tax laws effectively, empower civil society and combat corruption. 6.5 How will the project monitor performance in terms of social development outcomes? Performance regarding social development outcomes would be monitored through surveys and supervision. 7. Safeguard Policies: 7 Do any of the following safeguard policies apply to the proiect? Policy Applicability Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0 Yes * No Natural habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * No Forestry (OP 4.36, GP 4.36) 0 Yes * No Pest Management (OP 4.09) 0 Yes * No Cultural Property (OPN 11.03) 0 Yes * No Indigenous Peoples (OD 4.20) 0 Yes 0 No Involuntary Resettlement (OD 4.30) 0 Yes * No Safety of Dams (OP 4.37, BP 4.37) 0 Yes * No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes * No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) 0 Yes * No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Not applicable. - 26 - F. Sustainability and Risks 1. Sustainability: The critical factors on which the sustainability of project benefits would depend include: continuing public demand for improvements in quality of public services, particularly, in revenue administration, public expenditure management and public procurement and contracting; sustained commitment of the government at the political, managerial and technical levels to whole-heartedly implement project activities and support the updating and maintenance of project outputs after the project closes; the willingness of the government to base critical revenue enforcement and resource allocation decisions on the objective information generated by different tools and systems provided by the project, rather than on purely political considerations; and the effectiveness with which change management strategies are implemented. 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Risk Risk Rating Risk Mitigation Measure From Outputs to Objective Commitment to strengthening of revenue M The project would play a central role in enabling administration and public expenditure the government to respond to the difficult management at the political, managerial macro-economic and fiscal situation facing the and technical levels is not sustained. country. For this reason, continued support from the political directorate is expected. Also. while designing the project, significant effort has been made to make sure that it responds to critical needs of different functional areas. This would help secure continued commitment to its implementation at the operational level. The government is unable to effect M Most institutional changes envisaged under the institutional changes required to project are within the purview of the Executive successfully implement project outputs. branch. On account of the active involvement Af the agencies covered by the projects and their various operational units in project design, considerable ownership for the project has been built up. The process of participation and consultation will continue throughout project implementation. Provision has also been made for effectively communicating the objectives and benefits of project initiatives to managers and staff within the government and to external stakeholders, so as to create a propitious environment for institutional change. Decisions relating to enforcement of tax M The risk that some decisions in revenue and customs laws and those relating to administration and public expenditure allocation and spending of public funds management would be based on political are based on political considerations and considerations cannot be ruled out. However, it not on decision support systems developed is expected that the models, methodologies, under the project. information systems and skills provided by the project would equip decision makers with objective information with which to counter unreasonable political demands. -27 - From Components to Outputs Managers and staff of the DIAN, MHCP M Managers and staff of these agencies have been and DNP do not take an active interest in actively involved in the implementation of the the development, quality control and PFMP and the design of this project. They are implementation of project initiatives. expected to remain engaged in the implementation of the project as its outputs would have a major beneficial impact on the functioning of their respective organizations. Coordination between MHCP, DNP, M Already these entities have experience in CGN CGR and other relevant agencies in coordinating project activities due to the PFMP. common activities is weak. Adequate coordination mechanisms have been incorporated into the project design (the COCOR and Technical Coordination Committees for each component). Coordination would also be facilitated by the Bank in the course of project supervision. Adequate allocation for the project in the H Given the importance of the project to the national budget is not made from year to critical area of fiscal management, the project is year and counterpart funds are expected to receive high priority in budget inadequate. allocations, as has been the case with the PFMP. Nevertheless, given the tight fiscal situation budget cuts for the project cannot be ruled out. The PMUs would need to be proactive in ensuring that adequate budgetary provisions are made for the project. Management of project activities, finances M The PMUs have gained sufficient experience in and procurement and contracting actions project management and Bank procedures. is not effective. Effective project management would be ensured through staffing of the PMUs with qualified individuals and providing them with adequate training and coaching as needed. The engagement of the UNDP for management of project funds and procurement would also strengthen project management. Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: None. -28- G. Main Loan Conditions 1. Effectiveness Condition * The Secretary to the COCOR and other staff of PMUs, as indicated in Project Management arrangements above, appointed. * Management Services Agreement (MSA) signed with UNDP. * All actions under the revised Action Plan for Financial Management completed, including implementation of the Integrated Project Management Information System. * Procurement documents for major contracts to be executed in the first six months of project execution prepared. * Project Operational Manual finalized. 2. Other [classify according to covenant types used in the Legal Agreements.] Not applicable. H. Readiness for Implementation O I . a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. Z 1. b) Not applicable. El 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. 1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. 1 4. The following items are lacking and are discussed under loan conditions (Section G): Details of project activities and sub-activities, type of inputs needed, costs and sequencing and performance indicators have been agreed. TORs for consultants to be engaged and specifications for goods to be procured in the first six months of project implementation will be prepared before effectiveness. The same for activities to be undertaken in the next six months would be prepared in draft outline and would be further refined closer to the date for inviting bids. The Operational Manual for the project would be prepared as a condition of effectiveness. Since the Project Management Units would, essentially. be similar to those PFMP, they are substantially in place. Additional project staff required would be recruited before effectiveness. Procurement and Financial Management Assessments of the PMUs have already been carried out and remedial actions to overcome deficiencies found have been initiated. Thus, the project is substantially ready for implementation. - 29 - 1. Compliance with Bank PaoiciS t I. This project complies with aUl applicable Bank policies. U 2.The following exceptions m Bank policies are wcommneded ic approval. The project complics with all other applicable Bank policies. Jit bahAdur S &/J3 May Olivier Lafoucade ToW L;Wor Moct91 anagwr -Country Manager -30- Annex 1: Project Design Summary COLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT II Key Perormance Hierarchy of O4ectives -. Indteators Monitoring & Evaluation Critical AssumpflOns Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Attaining public sector * Improved quality of * Annual evaluation of * Macro-economic responsiveness and efficiency public services. public policies, stability. in the delivery of services programs, projects * Reduced internal and agencies by the conflict. DNP. * Service Delivery Surveys. * Reports of the Comptroller General of the Republic (CGR). -31 - Key Perfomt ance 0iHierarchy oObjes00 0 t;iv ; ;indicator# S : *Moitoring &JEvaluation Critical Assufnptins Project Development Outcome I Impact Project reports: (from Objective to Goal) Objective: Indicators: A. Strengthen the *Improvement in the * DIAN statistical * Continued demand for institutional capacity of the effectiveness of the DIAN as reports improvement in tax Directorate of National Taxes indicated by: * DIAN statistical and customs and Customs (DIAN) to foster * 5% increase per reports. administration from voluntaiy compliance; collect annum in the * Measurement of the public and othei revenues efficiently, proportion of total tax compliance gaps and stakeholders. effectively and equitably; and declarations filed contraband by the * Sustained comrnitment combat tax evasion and voluntarily and on Economic Studies Unit of the government to smuggling, so as to enable it time. of the DIAN. the modernization of to mobilize adequate tax * 5% increase per * DIAN budget. the DIAN. revenues to finance public annum in the * Stakeholders surveys. expenditures. proportion of total tax revenues paid voluntarily and on time. * 0.5% decrease annually in the VAT compliance gap. * 1% decrease annually in Income Tax and Business Profit Tax compliance gap. * 1% decrease annually in the ratio of contraband to total imports. * Improvement in the efficiency of the DIAN as indicated by 1% decrease per annum in the ratio of the annual recurrent budget of the DIAN to total revenue collected by it. * Improvement in the perception of taxpayers, traders and other stakeholders regarding the efficiency, effectiveness, and integrity of the DIAN as indicated by annual surveys. - 32 - B. Strengthen public * Increased accountability of * Evaluation reports * Continuing demand for expenditure management at public entities for generated by public expenditure the central government level, achievement of SINERGIA. reform, transparency to facilitate achievement of performance objectives, * Reports of the and accountability from fiscal and national spending of public procurement and civil society and the development objectives, resources, and procurement contracting monitoring private sector. improve cost effectiveness of of goods and services, as system. * Sustained conmmitment public services, and increase indicated by results of * Per unit costs data of for public expenditure transparency and evaluations done through selected sectors management reforms accountability. the Sistema Nacional de (Transport, the amongst different Evaluaci6n de Gestion y Judiciary, Education agencies, especially, the Resultados ((National and Health). Ministry of Finance and System for Evaluation of * Surveys of civil society Public Credit (MHCP), Management and Results - and public officials. the National Planning SINERGIA). * SINERGIA Reports Department (DNP), the * Increased value for money * Reports of the CGR on National Accountant in public procurement and social control. General (CGN) and the contracting in pilot Comptroller General of agencies. the Republic (CGR). * Increased transparency and enhanced civil society capacity to monitor public sector performance, as indicated by the quantity, quality and timeliness of information, pertaining to public sector performance and expenditures, available to the public. - 33 - Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: A. Revenue Administration * Delivery of project * Annual Operational * Sustained * Improved norms, outputs in accordance Plans (POAs). commitment to business processes, with milestones * Project Management strengthening of information systems and established in the Reports (PMRs). revenue infrastructure for Project Implementation * Supervision Reports. administration at the strategic planning and Plan (PIP), as updated * Mid Term Review political, managerial management, personnel from time to time. * Surveys of taxpayers and and technical levels. management and * Improvement in the customs users and DIAN * Ability of the professional DIAN's capacity for officials. government to effect development, prevention strategic planning, * DIAN statistical reports. institutional changes and control of budgeting, personnel required to corruption, information management and successfully management and professional implement project records management; development, prevention outputs. promoting voluntary for corruption, compliance; managing information routine processing of tax management and declarations and records management. payments; managing * ISO 9000 certification routine processing of for business processes of cargo, customs the DIAN. declarations and * Increased taxpayer payments; and satisfaction with services enforcement, provided by the DIAN to implemented and promote voluntary relevant staff trained. compliance. * Reduction in time taken * Policy and legal to process tax and framework for tax and customs declaration and customs administration payments and clear systematically reviewed cargo. and options for * Improved targeting of improvement presented cases for investigation to govemment. resulting in increased audit productivity. * Reduction in time taken to initiate action against non-filers, stop filers and taxpayers failing to pay taxes on time. * Improvements in tax policy and legal framework based on recommendations emerging from their review. - 34 - B. Expenditure Management * Roles and responsibilities of * Delivery of project * Annual Operational * Sustained commitment different agencies outputs in accordance Plans (POAs). to strengthening of involved in public with milestones * Project Management public expenditure expenditure established in the PIP, Reports (PMRs). management at the management (PEM) at as updated from time to * Project Supervision political, managerial the national level time. Reports. and technical levels. revised. * Greater clarity in roles * Mid Term Review. * Ability of the * Improved norms, and responsibilities of * Evaluation of sectors government to effect models, methodologies different entities and entities carried out institutional changes and information systems involved in PEM at the by DNP using required to successfully to support decision central level. SINERGIA. implement project making in the areas of * Increased user * SIIF reports. outputs. macro-programming, satisfaction regarding * Surveys of civil society budget formulation, the utility of new norms, and public officials. budget execution, models, methodologies investment and information systems management, debt in day to day PEM management, evaluation activities. and public procurement * At least 900/O of the and contracting, central budget executed implemented and on-line through the relevant staff trained. SIIF. * Additional 145 regional * Improvement in the offices of central coverage, quality and government entities and timeliness of 11 major descentralized information available to entities connected on the public regarding line to the SIIF. objectives, actual * Information about performance, objectives, performance expenditure and targets, actual procurement of public performance, entities. expenditure, procurement and contracting of public entities regularly available to the public. -35 - Project Components / Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) A. Revenue Administration USS36.02 million * Annual Operational * Active involvement of Plans (POAs). relevant managers and A: Revenue Administration: * Project Management staff of the DIAN in the Reports (PMRs). design, development, Sub-component 1: $13.64 million * Project Supervision quality control and Strengthening Organization Reports. implementation of and Management of the * Mid Term Review. project initiatives. DIAN. * Consultant Outputs. * Effective coordination of * Procurement documents. project acfivities Sub-component 2: $ 6.50 million. * Disbursement Reports. between different Facilitating Voluntary * Audit Reports. organizational units of Compliance. the DIAN and between $ 1.23 million the DIAN and the Sub-component 3: MHCP and DNP in Improving the Effectiveness of areas of common the DIAN in Managing interest. Routine Processing of Tax Declarations and Payments. $ 9.61 million. Sub-component 4: Improving the Effectiveness of the DIAN in Managing Routine Processing of Cargo, Customs Declarations and Payments: $ 4.57 million Sub-component 5: Strengthening the Capacity of the DIAN in Enforcement Operations. $ 0.45 million Sub-component 6: Improving Policy and Legal Framework of Revenue Administration. -36- B. Expenditure Management USS 18.51 million * Annual * Active involvement of Operational Plans relevant managers and Sub-comnonent 1: (POAs). staff of the MHCP, Improving $ 6.09 million * Project DNP, CGN and CGR in Macro-programming and Management the design, development, Formulation and Monitoring Reports (PMRs). quality control and of the Budget. * Project implementation of Supervision project initiatives. Sub-component 2: $11.47 million Reports. * Effective coordination Strengthening of Budget * Mid Term Review. between MHCP, DNP, Execution, Treasury, Public * Consultant CGN CGR and other Credit and Accounting. Outputs. relevant agencies in * Procurement common activities. Sub-component 3: $ 0.73 million documents. Improving the Evaluation of * Disbursement Results of Public Expenditure. Reports. * Audit Reports. Sub-component 4: $ 1.99 million Strengthening Public Procurement and Contracting. C. Project Management $ 4.35 million * Annual Operational * Adequate allocation for Plans (POAs). the project in the * Project Management. national budget from Reports (PMRs). year to year and * Project Supervision. availability of Reports. counterpart funds. * Mid Term Review. * Effective management * Consultant Outputs. of project activities, * Procurement docunents. finances and * Disbursement reports. procurement and - Audit Reports. contracting actions. -37 - Annex 2: Detailed Project Description COLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT 11 The Public Financial Management Project - II (PFMP-II) is a follow-on operation to the ongoing Public Financial Management Project (PFMP) financed by the Bank (Project ID: CO-PE-6889, closing on March 31, 2001), which has supported reforms in revenue administration and public expenditure management at the national level since 1994. In addition, the government has undertaken various parallel initiatives in both these areas on its own. The IDB and GTZ have also provided assistance to the DIAN. The PFMP-IT seeks to consolidate and extend the results achieved so far; undertake second generation reforms in selected areas; and deal with deficiencies that have not yet been addressed. In order to put the project in perspective, the progress made in different aspects of revenue administration and public expenditure management to date is summarized below. A. Revenue Administration: (i) Organization and Management of the DJAN: In the last ten years, important initiatives have been taken to strengthen the organization and management of revenue collection. In 1991, the Direcci6n de Impuestos (DIN) was converted into a Special Administrative Unit with increased budgetary autonomy and a special regime concerning its staff. Similar changes were made in the Customs administration, Direcci6n de Aduanas (DAN). In 1993, the DIN and the DAN were merged to form the Direcci6n de Impuestos y Aduanas Nacionales (DTAN) to exploit potential synergy between the two functions. This arrangement was partially modified in 1997 to create separate Directorates for Customs and Taxes under a common Directorate General, while keeping corporate and support functions unified. In 1998, under powers granted by Law 488 of 1998, the DIAN was designated as an essential public service, with its own legal personality and administrative autonomy. Its budgetary autonomy was increased by permitting it to retain proceeds of sale of confiscated goods as well as of other services provided to clients. Adjustments in the organizational structure were made to reduce duplication of functions and jurisdictional conflicts. New human resource management policies were instituted to ensure merit-based recruitment and promotion; facilitate inter-functional mobility; reward performance for team work, tax audit, tax collection and achievement of national level targets; improve performance evaluation; encourage professional and managerial development; and strengthen institutional capacity for HR management. To control corruption, the Office of Disciplinary Investigations was placed under the Director General and special administrative disciplinary regime was created for expeditious removal of corrupt employees. With the help of the PFMP, financial management and pay-roll systems were implemented. Also, a detailed analysis of business processes was carried out to assess corruption risks therein and identify changes to mitigate the risk. Finally, a major overhaul of the informatics infrastructure of the DL4N was undertaken. This includes creation of a wide area network, setting up of local area networks in each regional administration, procurement or upgrade of new communication systems, servers, PCs and printers. The new systems have empowered regional administrations by allowing them direct access to corporate databases for planning and execution of their operations, quickened information exchange between the head quarters and the regions, slashed processing time of major business processes and improved the quality of information. (ii) Voluntary Compliance: Since voluntary compliance is the bedrock of revenue collection, various steps have been taken to help taxpayers comply with their legal obligations. These include setting up special units to provide services to - 38 - taxpayers, importers and exporters; establishing an Office of Grievances and Complaints; providing information regarding tax law changes and compliance procedures through publications, TV spots, the internet and over the telephone; assisting taxpayers in filling declaration forms; and providing information on specific queries. With the assistance of the PFMP, a system for electronic filing of tax returns has been made available to large taxpayers in five major regional administrations. Recently, the Office of the Taxpayer Ombudsman has been created by law. The impact of these efforts is reflected in the increase in the number of tax and customs declarations filed from 3.85 million in 1997 to 4.1 million in 1999 and a reduction in the compliance gap for VAT from 32.40 % in 1994 to 23.90% in 1999. (iii) Routine Processing of Tax Declarations and Payments: The DLkN processes about 2.88 million tax declarations and associated payments armually. The PFMP has provided it with sophisticated tools to properly manage this heavy information flow. A new taxpayer current account system has been developed, along with a system that automatically updates the current account by incorporating the impact of administrative decisions, such as assessments, penalties, appeals and refunds on a taxpayer's tax liabilities. Two systems, one for monitoring the performance of commercial banks that collect tax declarations and payments and, the other, linking their compensation to the quality of service have been commissioned. At the same time, the period for which banks could retain tax receipts has been negotiated down from 22 days to 14 days, substantially reducing the cost of services provided by them. A system for monitoring the deduction and payment of taxes by tax withholders has also been implemented. Further, a system for controlling tax refunds and credits has been put into use. As already mentioned, the facility of electronic filing of tax returns has been provided to large taxpayers. So far 8000 taxpayers, accounting for about 40% of tax payments, use this facility. The number of taxpayers filing electronically is expected to increase to 47,000 by June 2001. This has improved the timeliness of receipt of declarations, significantly reduced filing errors and enhanced the DIAN's ability to monitor compliance by this important segment of taxpayers. (iv) Routine Processing of Cargo, Customs Declarations and Payments: The merger of customs and tax administrations in 1993 created unintended problems for the customs administration. Following the merger, the number of customs staff was reduced from 5,000 to about 2,000, resulting in a significant loss of expertise both at management and functional levels. The modernization of customs administration was initially not included in the PFMP. Therefore, it lagged behind in informatics capacity as well. For the most part, customs has continued to operate with obsolete legacy systems. In addition, the level of political interference and corruption in customs is perceived to be higher than that in tax administration. These factors have resulted in a marked weaknesses in the institutional capacity of the customs administration, both in the routine processing of cargo and collection of taxes and duties as well as in enforcement. In the meantime, the volume and sophistication of international trade has increased. Efforts to deal with the institutional deficiencies of customs were initiated in the last few years. To give special attention to the needs of customs administration, a separate Directorate of Customs was created in 1993, as mentioned above. Some PFMP funds were reallocated to begin the development of a modem set of information systems, collectively christened SIGLO XXI (21 st Century), while providing assistance to update legacy systems for operation in the interim. A pilot of the new system of processing customs declarations and payments (COMEX) has been commissioned at Bogoti. Also, a system for the management of sale of confiscated goods (ADA) has been put into operation. - 39 - (v) Enforcement: In order to improve the enforcement capacity of tax administration, the PFMP has helped develop and implement an advanced system for selection of cases for tax audit (SICAT) and a system to manage the recovery of tax arrears (SIPAC). Also a system for automatically generating notices to taxpayers who fail to file returns on time and/or default on payment of taxes has been implemented. Methodologies for estimation of the extent of tax evasion in VAT and Income Tax have been developed. To support auditors in investigation of cases, an input-output matrix for major industries has been created. The impact of these tools, coupled with other measures taken by the DIAN, on the enforcement capacity of the latter has been significant. For example, additional tax assessed as a result of tax audits increased from 1.55% of total tax collections in 1996 to 5.57% in 1999. Also, the gap between potential and actual VAT collections has dropped from 32.40 % in 1994 to 23.90% in 1999 as mentioned above (the compliance gap for Income Tax and Business Tax has remained steady around 40%). Additional tax collections as a result of administrative and enforcement actions increased from US$ 35.8 million in 1995 to US$ 385.9 million in 1999 (Source: DIAN and PFMP). . In the area of customs, an audit selection system (SIFARO) has been implemented. Finally a study for estimating the volume of contraband has been completed. Under Law 488 of 1998, a Fiscal and Customs Police Directorate has been created to assist the DIAN in curbing tax evasion. B. Public Expenditure Management: During the last decade, various steps have been taken to strengthen public expenditure management. The Constitution of 1991 mandated transfer of a significant proportion of public resources to territorial entities; created the office of the Accountant General of the Nation charged with the responsibility of consolidating the accounts of all levels of government; changed the role of the Auditor General from ex-ante control to ex-post audit of government expenditures; and emphasized the establishment of modem financial administration based on efficiency and effectiveness in public spending. The Organic Budget Law (Estatuto Presupuestal) was amended four times: Law 38 of 1989, Law 179 of 1994, Law 225 of 1995 and the Law of the Plan (Law 142 of 1994). Five presidential decrees were also issued to complement the reforms introduced by these laws. The reforms aimed to strengthen fiscal stability and macroeconomic coordination; introduce a new planning framework based on increased civil society participation; provide autonomy in budget execution to operative agencies; and introduce performance management in the public sector. The current administration is also undertaking structural reforms in various areas of public finance. During 1999, within the context of the National Development Plan, Congress approved legal amendments that would improve the fiscal situation in the medium term. These include (i) reform of the resources and competencies of local governments (Law 60), including increasing efficiency of expenditure in education; (ii) improving efficiency in public Universities (Law 30); (iii) changes in royalties allocations, to attract private investment; (iv) legislation that mandates saving of a part of the transfers to local government to finance local pension funds; (v) law to rationalize territorial government finances by limiting their current expenditures; and (vi) reforms to reduce earmarking and improve the allocation of local expenditures. Complementing these reforms, the PFMP has focused on strengthening the institutional capacity of the Ministry of Finance and Public Credit (Ministerio de Hacienda and Credito Puiblico - MHCP); the National Planning Department (Departamento Nacional de Planeaci6n - DNP); the Office of the National Accountant General (Contador General de la Naci6n) and the Comptroller General of the Republic (Contraloria General de la Repuiblica - CGR). The contributions made by the project to improving public expenditure management are as follows: -40 - (i) Macro-programming, Formulation and Monitoring of the Budget: The PFMP financed the work of a multi-party Commission for the Rationalization of Public Expenditures which carried out a detailed review of public expenditure management issues. The recommendations of the Commission have been an important input into policy reforms undertaken by the government in various areas, such as pensions, territorial transfers and privatization. To strengthen the capacity of the MHCP and the DNP in macro-economic analysis for the purpose of macro-programming, the project assisted in the development of methodologies for production of quarterly national statistics and GDP estimates, monitoring of real economic activity and preparation of social accounting matrices; models for economic analysis, including general equilibrium models and a model for fiscal projections; information systems for generating leading indicators, monitoring of public finances and monitoring of public sector cash flow. It also supported studies of specific issues relating to public finance, and staff training. In the area of budget formulation the development of a system for formulation of the investment budget has been initiated. Also a system to provide online access to budgeting norms was implemented. (ii) Budget Execution, Treasury, Public Credit and Accounting: One of the major outputs of the PFMP has been the development and implementation of an Integrated Financial Management System (SITF). The system is in operation in 46 central govemnment entities since January 2000, with over 1000 users. It covers about 80% of the central government budget. The system has automated the entire process of budget execution by line entities. Payments are now made through a single national account. This has already resulted in a reduction in idle cash balances by about US$ 45 rnillion per month on average. The SIIF generates accounts based on transactional information. Its database is available to the CGR, for real time audit of central government accounts, and to the CGN, for preparation of national accounts. In addition to the SIIF, the project has also supported the development of a treasury planning module. In the area of public credit, the PFMP has provided assistance in developing methodologies for risk management and in identification of options for the replacement of the existing debt management system. A decision to implement the UNCTAD's debt management system has been taken recently. The project supported the establishment of the Office of the Accountant General of the Nation (CGN). The CGN has since developed and implemented new accounting norns, a new chart of accounts and trained officials at all the three levels of govemment. National accounts are being published by the CGN since 1995. The PFMP also provided support to the CGR for training its staff. Besides training in financial audits, assistance was provided in developing methodologies and skills in management and performance audits. Currently the project is supporting the CGR's efforts to implement a system of social control, by involving civil society in oversight and audit of public expenditures. (iii) Evaluation of Results of Public Expenditure: With the assistance of the PFMP, the govermnent embarked on an ambitious initiative to introduce results oriented management in the public sector. A National System for Evaluation of Results of Public Sector Performance (SINERGIA) has been implemented in all 16 sector ministries and 170 public entities. Under this system Indicative Plans (IPs) are established for each sector and entity for each year. In the case of sectors, the IPs include the strategic objectives of the sector and specific indicators relating to the actual results to be achieved, along with targets for minimum, satisfactory and excellent performance. In the case of public entities, besides sector objectives, the objectives of the entity are also included. The system has been in operation since 1997. Performance evaluations of the sector ministries are carried out by the DNP. The entities carry out auto-evaluation and are also evaluated by their respective ministries. An information system to manage the evaluation system has also been implemented. The IPs are being used now as the main information source for evaluating performance in the context of the National Development Plan. The -41 - SINERGIA has also changed the tenor of annual reports presented by the DNP to the Economic and Social Policy Council (CONPES), by focusing attention on strategic objectives, performance indicators and actual performance. At the entity level, they have helped clarify the key results areas of each entity and the results expected of it. Based on the SINERGIA, the DNP and MHCP have also started the practice of signing Efficiency Agreements with specific ministries and public entities. In exchange for commitments regarding availability of funds made by the DNP and MHCP, the ministry or public entity concerned commits to deliver specific outputs. Notwithstanding the aforesaid substantial achievements made in strengthening revenue administration and public expenditure management, much remains to be done as described in detail in Section 2: Main sector issues and Government strategy. In order to address the persisting deficiencies, the project would undertake the following activities falling under three components. By Component: Project Component I - US$36.02 million Revenue Administration: This component will have the six sub-components. The main activities to be supported under each sub-component are indicated below: Sub-component 1: Strengthening Organization and Management of the DL4N - $13.64 million: * Strategic Planning and Management: Develop and implement a Management Information System at the Centmal, Regional and Local levels of the DLAN; develop a project bank to facilitate better formulation, execution, monitoring and evaluation of strategic initiatives; implement an information system regarding inter-institutional and intemational agreements; and improve quality of business processes by implementing ISO 9000 standards. * Personnel Management and Professional Development: Design and implement an information system for the administration of the career path and professional development of DLN staff; provide training to 3000 staff in basic functions of tax and customs administration and to 250 staff in advanced technical functions; design and implement a Virtual Training School that will allow DLAN staff at all locations to enhance their professional skills, through conveniently paced self-learning, so as to qualify for promotions along the career path. * Prevention and Control of Corruption: Provide specialized training to staff of the Office of Disciplinary Investigations at the national level to enable them to carry out effective investigations into allegations of corruption; strengthen intemal audit; modify business processes of the DLAN, in accordance with the risks highlighted in the Corruption Risk Maps developed under the PFMP to reduce the possibilities for corruption; carry out a sustained campaign to sensitize DIAN staff to the professional ethical standards expected of them and the institutional and personal consequences of corruption. * Information Management: Review and enhance the central information system of the DLAN (Sistema Informatico de Administraci6n Tributaria - SIAT) to ensure its ability to handle new technologies and modes of reception of infornation; strengthen the capacity of the DIAN in Internet and Electronic Commerce technology; strengthen the capacity of the Office of Informatics Services (Oficina de Servicios Informaticos - OSI); consolidate servers to eliminate current proliferation of application servers; re-dimension the network administration infrastructure to connect 29 additional local administration online with the corporate systems; improve system security and contingency arrangements; train staff in new technologies and specialized tools; and measure and enhance the quality of corporate information. -42 - * Management of Notifications, Official Correspondence and Archives: Develop and imnplement systems for management of official notifications; correspondence and archives and improve record storage facilities. * Change Management: Facilitate institutional change by carrying out a sustained communication campaign to explain the objectives and implications of the modernization of the DIAN to internal and external stakeholders, in order to sustain support for the reforms. * Sub-component 2: FacUitating Voluntary Compliance - $6.50 million: * Establish Integrated Taxpayers Education and Assistance Centers to guide and assist taxpayers and customs clients in complying with their legal obligations. * Develop and disseminate educational materials and interactive tools to educate and inform current and potential taxpayers. * Extend the system of electronic filing of tax declarations, currently available to large taxpayers, to small and medium taxpayers and add functionality to the current system to enable taxpayers to interact with the DIAN online in other matters, such as payment of taxes and submission of claims for tax refunds. * Make the Office of the Taxpayer Ombudsman fully operational. 3 Train external stakeholders, such as firms providing advice in customs and trade matters, importers and exporters, in tax and customs policy and procedures. * Foster a tax compliance culture through outreach programs aimed at school and college students. Sub-component 3: Improving the Effectiveness of the DIAN in Managing Routine Processing of Tax Declarations and Payments: $1.23 million: * Update, expand and improve existing information systems for registration of taxpayers; accounting of tax and customs duty collections and control of refunds and credits. D Develop and implemnent a systemn for assessment of taxes of small and medium enterprises covered under a special tax regime. Sub-component 4: Improving the Effectiveness of the DIAN in Managing Routine Processing of Cargo, Customs Declarations and Payments: $9.61 million: * Cargo Processing: Strengthen cargo processing infrastructure, by acquisition and installation of weigh-bridges and other equipment; design and implement systems to prevent unauthorized access to restricted areas; and train staff engaged in cargo clearance. * Processing of Customs Declarations and Payments: Implement the External Commerce (COMEX) module of the SIGLO XXI customs information systems throughout the country for automatic processing of regular imports; design and implement additional modules of the COMEX to cover exports, imports under special regimes and cargo in transit; implement filing of digitally signed customs declarations and other documents; and train staff. * Release of Merchandise: Train staff in classification and valuation of merchandise and assessment of customs duties; and equip customs laboratories for effective and timely testing of materials. * Monitoring and Control of Warehouses: Design, develop and implement a system for electronic marking of cargo to facilitate tracking. * Sale of confiscated goods and other services through electronic commerce: Develop and implement a system for sale of confiscated goods and other services (such as sale of statistical information regarding foreign commerce, forms and tax literature etc.) through electronic commerce. * System to Capture Administrative Decisions of Customs Administration: Develop and implement a - 43 - system to capture administrative decisions of customs administration (GESTOR ADUANERO); and enhance the Taxpayer Current Account to include customs transactions. Sub-component 5: Strengthening the Capacity of the DIAN in Enforcement Operations: $4.57 million: * Economic Studies: Optimize the system for the production of foreign trade statistics; refine methodologies and systems for measuring tax evasion and contraband; extend the datawarehouse to the regional administrations. * External Information: Develop a system for collection of external information needed to support enforcement of customs and foreign exchange laws; Train 250 auditors in the use of the newly developed system of external information required for enforcement of tax laws. * ntelligence Operations: Review, improve and implement norms, procedures, organizational arrangements and information systems pertaining to intelligence operations conducted by the DIAN and train staff in this area. * Risk Analysis for Selection of Cases for Tax Audit: Design and implement a system for organization of statistical information required for selection of cases for tax audit; and develop additional modules of the current system for selection of cases for tax audit (SICAT). * Tax Audit and Investigation: Develop manuals on tax audit and investigation techniques and train staff. * Risk Analysis for Selection of Cargo Consignments for Inspection: Develop and implement a risk analysis system for selection of cargo consignments for physical inspection; and train staff in the use of the system. * Post-release Customs Audits: Enhance existing customs audit systern; and train staff * Monitoring of Filing of Declarations and Payment of Taxes: Enhance the current system for monitoring of filing of declarations and payment of taxes. * Control of VAT Invoices: Develop and implement a system to integrate VAT invoicing via the internet, with the systems of the DIAN. * Coercive Recovery of Tax Arrears: Enhance the current system for recovery of tax arrears (SIPAC) by developing and implementing additional modules for recovery of tax arrears through inter-institutional agreements and recovery of arrears from legal representatives. - Legal and Appellate Functions: Expand the existing legal information system for taxes and customs; organize joint seminars with the Consejo del Estado to exchange experience between the appellate authorities and the DIAN, with a view to improve the quality of DIAN's decisions, fill deficiencies in its representation of tax cases before appellate authorities and streamline disposal of appeals; and train staff working in legal and judicial areas. Sub-component 6: Improving Policy and Legal Framework of RevenueAdministration - $0.45 milion: * Review and revise tax and customs policy, laws and regulations to expand the tax base and reduce economic distortions, simplify substantive and procedural provisions to reduce compliance costs and improve the legal authority of the DLAN to enforce tax and customs laws. * Strengthen the ability of the DIAN, through staff training, to participate in international tax and customs negotiations. - 44 - Project Component 2 - US$18.51 million Public Exwenditure Management: This component will have four sub-components. The main activities to be supported under each sub-component are as under: Sub-component 1: Improving Macro-programming and Formulation and Monitoring of the Budget: $6.09 million: 0 Institutional Roles and Responsibilities: Clarify the roles and responsibilities of entities that participate in the programming, budgeting, execution and evaluation of public expenditures i.e. MHCP, DNP, CGN, CGR and Sector Ministries; develop and implement regulations to give effect to the roles so defined; delegate analysis of sectoral policies, programs and projects to sector ministries to enable the DNP to focus on planning and evaluation; and train relevant officials in their new roles; * Macro-programming: Develop models and systems for (a) medium term and long term macro-economic projections and simulations, (b) evaluation of expenditure and revenue policies to assist in decisions regarding reforms in the fiscal structure, (c) generation of consolidated economic, fiscal and budgetary accounts of the public sector, (d) classification of budget execution information contained in the SIIF according to economic categories, and (e) monitoring of public sector finances; and train staff in the use of these models and systems. * Budget Formulation: Develop, improve and implement methodologies and systems for (a) analysis of budget programming, (b) quantification of expenditures earmarked by different laws and development of options for reforms aimed at reducing earmarking, (c) projection of revenues, with interfaces with information systems of the DIAN, (d) calculation of unit costs of inputs and outputs, initially for the Transport Sector and the Judiciary and, subsequently, for the Education and Health Sectors, (e) formulation and monitoring of the investment budget of the central government (e analysis of policies, programs and projects, (g) projection of cash flows of the non-financial public sector, (h) financial monitoring of the budget; and improve interfaces between the information systems of the Budget Directorate of the MHCP and those of the sector ministries to improve analysis of budgetary needs and performance of the sectors. O Rationalization of information flows: lInplement existing inter-institutional agreements between the MHCP, DNP and CGR to reduce the costs of monitoring of budgetary expenditures, by identifying shared information needs, eliminating duplicate reports, establishing primary sources of information and developing systems to provide access to these sources. Sub-component 2: Strengthening of Budget Execution, Treasury, Public Credit and Accounting: $9.70 million: * Integrated Financial Management System (Sistema Integrada de Informaci6n Financiera - SUF): Extend the SIIF to 145 regional offices of central govermment entities; develop a modified version of the system for decentralized entities partially funded by the central budget and implement the system in 11 major entities; enhance the functionality of the system in accordance with user feedback and increase its capacity to include additional users; and develop a module of the system to allow execution and accounting of externally funded projects through the system. * Treasury: pevelop and implement a system to improve the capacity of the Treasury to better manage its investment portfolios. * Public Credit: Develop and implement a new system for management of the public debt portfolio. * Accounting: Improve the quality of accounting information in public entities by supporting mechanisms for the registration and reconciliation of accounting records covering income, debt transactions, expenditures and physical assets; support dissemination, advisory services and training to -45 - improve accounting practices in public agencies; and strengthen the information systems of the Office of the Accountant General of the Nation, to capture and integrate accounting information at the national, decentralized and territorial levels. Sub-component 3; Improving the Evaluation of Results of Public Expenditure: $ 0.73 million: * National System for Evaluation of Results of Public Sector Performance (SINERGIA): Enhance the SINERGIA by improving the evaluation system to, inter alia, include recurrent expenditures in the evaluation process; developing new modules for strategic evaluations of different sectors and evaluation of performance of territorial and decentralized entities; developing and implementing an incentive model linked to public policy outcomes in two pilot ministries, namely the Ministry of Foreign Trade and the Ministry of Economic Development; and updating the information system supporting SINERGIA. * Efficiency Standards: Develop a systematic methodology for identification of inputs and outputs of different sectors to establish efficiency standards pertaining to delivery of public policy outcomes for each sector. * Transparency: Design and implement dissemination strategies to provide information to the public on performance targets for different policies, programs, projects and public sector entities, evaluation of the actual results achieved and the amount of money spent in the process. Sub-component 4: Strengthening Public Procurement and Contracting: $ 1.99 million: * Procurement and Contracting Regulations: Develop legislation and regulations to support modifications to the Procurement and Contracting Law (Law 80) with a view to improve the legal framework for public procurement. * Regulation, Monitoring and Evaluation of Procurement and Contracting Practices in the Public Sector: Design and implement institutional arrangements, including the possibility of establishing a national body, for developing and regulating public procurement and contracting policy, standardizing and disseminating procedures and bidding and contract documents, and supporting central and territorial entities on an ongoing basis. In addition, develop and implement a system for monitoring and evaluation of procurement and contracting practices in the public sector, piloting the system in two central level entities (INYVIAS and Ministry of Mines and Energy), in one decentralized entity ( ECOPETROL) and in two territorial entities (Antioquia and Arauca). * Dissemination of Procurement and Contracting Information and E-Commerce): Design and implement an intemet based public procurement information system aimed at disseminating all information regarding procurement notices, bidding documents and contract awards to interested parties and the public, thereby laying the basis for online public procurement. * Training: Carry out a survey to determine procurement training needs and develop a pedagogical systern aimed at providing public sector personnel with learning tools relating to the conceptual, technical, legal and procedural aspects of public procurement and contracting. Project Component 3 - US$ 4.35 million Proiect Management: This component will finance consulting services, equipment and training for the staff of the Project Management Units; communication of project objectives and activities to stakeholder; and surveys to collect data on key performance indicators and obtain stakeholder feedback. -46 - Annex 3: Estimated Project Costs COLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT 11 Local Foreign Total Proct Cost By Component US $mIlion US $million US $million Revenue Administration 12.35 21.87 34.22 Public Expenditure Management 7.27 10.32 17.59 Project Management 4.11 0.02 4.13 Total Baseline Cost 23.73 32.21 55.94 Physical Contingencies 0.70 0.97 1.67 Price Contingencies 0.54 0.73 1.27 Total Project Costs 24.97 33.91 58.88 Front-end fee 0.35 0.35 Total Financing Required 24.97 34.26 59.23 Local Foreign Total Project Cost By Category US $million US $"mIlion US $rni11ion Goods 5.58 17.04 22.62 Services 12.56 15.16 27.72 Training 6.83 1.71 8.54 Other 0.00 0.00 0.00 Total Project Costs 24.97 33.91 58.88 Front-end fee 0.35 0.35 Total Financing Required 24.97 34.26 59.23 Identifiable taxes and duties are 0 (USSm) and the total project cost, net of taxes, is 59.23 (US$m). Therefore, the project cost sharing ratio is 59.89% of total project cost net of taxes. -47 - Annex 4: Cost Effectiveness Analysis Summary COLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT 11 Summary of benefits and costs: The qualitative benefits in the area of revenue administration would consist of improved client services to help law abiding taxpayers to comply with tax and customs laws more easily and at lesser cost; improved management of the routine documentary information and trade flows, leading to greater control over revenue collections, reduced processing times, quicker movement of imports and exports and overall efficiency gains; better targeting of tax evasion and smuggling activities, so as to maximize the deterrent impact of enforcement actions; greater organizational effectiveness, through improved strategy formulation, planning, monitoring, evaluation, personnel management, professional development and information management; prevention of corruption, through re-engineering of business processes, reduced discretion and strengthening of disciplinary mechanisms; and enhanced employee morale in the DIAN. The qualitative benefits of improving public expenditure management would include enhanced accountability for achievement of performance objectives, spending of public resources, and procurement of goods and services; increased value for money in public spending; increased transparency; and enhanced civil society capacity to monitor public sector performance. At the operational level, the project would contribute towards clarifying inter-institutional roles and equipping decision-makers with the tools, information systems and skills needed to take well-informed decisions about allocation, use, control and evaluation of public expenditures. Many of the qualitative improvements mentioned above, would also be accompanied by financial gains to the government, either as a result of increased revenue flows or savings in expenditures. These financial gains are, however, subject to a number of variables, many outside the scope of the project. Also, they are difficult to quantify ex-ante, especially in the area of public expenditure management. Be that as it may, an attempt was made to quantify the potential benefits of the project in revenue administration. First, additional revenue likely to accrue, through a combination of easier voluntary compliance and stronger enforcement, was estimated. Second, savings from increased administrative efficiency, resulting from introduction of modern technologies and other operational improvements were estimated. Estimates made by the DIAN indicate a current compliance gap of 23% in VAT and 40% in Income and Business Profit Tax. Also, contraband is estimated to be 18% of total imports. Assuming a reduction of 0.5% per annum in the VAT compliance gap, a reduction of 1% per annum in the Income Tax and Business Profit Tax compliance gap and a reduction of 0.5% per annum on contraband, the potential additional revenue collection, from 2001 to 2005, would total 4,544 billion pesos. Further, assuming an improvement of 1% in the ratio of annual recurrent expenditure of the DIAN to total revenue collected, a saving of 79 billion pesos is estimated. The net present value, of the combined benefits of additional revenue collection and budgetary savings of 4,623 billion pesos, comes to 2,500 billion pesos assuming a discount rate of 18%. As against this, project costs for the revenue administration component, over the same five year period, including incremental recurrent costs at 10% of investment costs, would come to 102.5 billion pesos in nominal terms or 66.5 billion pesos in NPV. The benefit to cost ratio for this component would therefore be 40.4. -48 - Main Assumptions: See above. Cost-effectiveness indicators: -49 - Annex 5: Financial Summary COLOMBIA. PUBLIC FINANCIAL MANAGEMENT PROJECT 11 Years Ending 2005 l Year1 I Year 2 | Year 3 | Year 4 | Year 5 | Year 6 Year7 Total Financing Required Project Costs Investment Costs 7.5 23.1 13.9 8.6 5.8 0.0 0.0 Recurrent Costs 0.2 0.8 1.1 1.3 1.5 0.0 0.0 Total Project Costs 7.7 23.9 15.0 9.9 7.3 0.0 0.0 Front-end fee 0.3 0.0 0.0 0.0 0.0 0.0 0.0 Total Financing 8.0 23.9 15.0 9.9 7.3 0.0 0.0 Financing IBRD/IDA 2.5 14.4 8.8 5.7 4.0 0.0 0.0 Government 5.5 9.5 6.1 4.2 3.3 0.0 0.0 Central 5.5 9.5 6.1 4.2 3.3 0.0 0.0 Provincial o.o 0.0 0.0 0.0 0.0 0.0 0.0 Co-financiers o.o 0.0 0.0 0.0 0.0 0.0 0.0 User FeeslBeneflciaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 8.0 23.9 14.9 9.9 7.3 0.0 0.0 I Year I Year 2 I Year 3 Year 4 Year 5 1 Year 6 Year 7 Total Financing Required Project Costs Investment Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Recurrent Costs 1.5 1.5 1.5 1.5 1.5 Total Project Costs 1.5 1.5 1.5 1.5 1.5 0.0 0.0 Front-end fee 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Financing 1.5 1.5 1.5 1.5 1.5 0.0 0.0 Financing IBRDIIDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Govemment 1.5 1.5 1.5 1.5 1.5 0.0 0.0 Central 1.5 1.5 1.5 1.5 1.5 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 User FeeslBeneflclaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total Project Financing 1.5 1.5 1.5 1.5 1.5 0.0 0.0 Main assumptions: 1. Annual recurrent costs in a particular year have been estimated @2.5% of the cumulative investment made up to that year. - 50 - Annex 6: Procurement and Disbursement Arrangements COLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT 11 Procurment Procurement Capacity Assessment: A procurement capacity assessment of the MHCP and of DNP was conducted in February 2000. The procurement risk assessed as "average". A Procurement Action Plan (PAP) to improve procurement management was developed as part of the assessment. This included the (1) establishment of a central PMU, led by a Project Coordinator and including a Procurement Specialist prior to loan negotiations; (2) establishment of a Project Management Information System, including procurement actions, prior to loan effectiveness; (3) hiring of the UNDP as a Project Administration Agency prior to loan effectiveness; (4) preparation of an Operational Manual, prior to loan effectiveness, that would include a description and organization of the project, the responsibilities of different staff of the PMU, TOR for key staff, and summary of key operational, administrative, procurement and financial requirements; (5) preparation of a procurement plan prior to loan negotiations with annual updating; (6) use of Bank standard procurement documents for International Competitive Bidding and acceptable model documents for National Competitive Bidding (NCB), to be agreed upon prior to the issuance of the first NCB, and (7) inclusion of adequate segments for procurement training in the Project Launch workshop. Various actions have been taken to advance the PAP. The organization structure of the project has been agreed. There will be two PMUs, one located at the MHCP and another one at the DNP. The PMU-MHCP will have a procurement team consisting of a Procurement Officer and an Informatics Specialist, who would look after procurement and contracting activities related to the project. In the PMU-DNP this function will be performed by the Technical Coordinator/ Project Administrator and the Project Officer. UNDP will be hired through counterpart funds to continue procurement management support under this project and will work closely with the PMUs. A draft Operational Manual has been developed. A Procurement Plan relating to project activities has been prepared. Also the use of Bank standard bidding documents has been agreed. Training of PMU staff in Bank procurement will be included in the Project Launch workshop. Pre-eminence of Bank Guidelines: Law 80 of 1993 and regulatory decrees, especially Decree 172/95 constitute the regulatory framework for procurement in Colombia. The Law embraces public competitive bidding as the preferred procedure for contracting and constitutes an important instrument for achieving efficiency in public procurement. The Law has areas conflicting with the Bank rules, especially regarding confidentiality, previous registration of contractors and procedures for hiring consultants. Any bidder has the right to obtain copies of the offers of other contractors. Frequent resulting claims, however, do not produce suspension of the procurement process. Article 22 of the Law establishes the requirement for all firms, including foreign firms, to register in a national system. According to the Law, the bidding process for the employment of consultants is the same as for any other type of contracts. These deviations from Bank Guidelines would, however, not affect the project, because the Law also establishes the precedence of the Bank procurement guidelines over Colombian legislation, although its Art 40 limits the precedence of the Guidelines "to the extent that they are not contrary to the constitution or the law." This matter has been solved by Decree 1721, where IBRD procurement has been excluded in the applicability of Article 40. - 52 - Procurement methods (Table A) The following paragraphs provide information on the methods for procurement of goods, hiring of consultant services and training. The procurement methods are summarized in Tables A and B. The project does not envisage financing of civil works. Goods Procurement of goods will follow the "Guidelines for Procurement under IBRD loans and IDA credits", dated January 1995 (revised January and August 1996, September 1997 and January 1999). Procurement of information systerns would be carried out using the Bank's Standard Bidding Documents for the Supply and Installation of Infornation Systems. Goods estimated to cost US$250,000 or more will be procured through International Competitive Bidding. Goods estimated to cost less than US$250,000, but more than US$ 100,000, will be procured through National competitive bidding (NCB), up to an aggregate of US$1,000,000. Finally, goods estimated to cost US$100,000 or less will be procured through international or national shopping procedures, up to an aggregate of US$1,500,000. International competitive bidding (ICB) will follow World Bank standard documents. NCB will use documents acceptable to IBRD. According to national procurement policy, bidders have access to bids presented by other bidders, contractors are required to register prior to bidding, and consultant services are considered as restricted procurement of services. To deal with these deviations from the Bank's Guidelines, the Loan Agreement specificies that, (i) all bids will be kept confidential throughout the evaluation, and (ii) foreigners who wish to participate in national biddings should not be required to pre-register. The first National Competitive Bidding (NCB) will be subject to the IBRD's prior review, irrespective of the estimated amount of the contract. Consultant Services and Training Employment of consultant services will follow the "Guidelines for the Selection and Employment of Consultants by World Bank Borrowers" (dated January 1997 and revised September 1997 and January 1999). Firns: Consultant and training services from firms will be procured through Quality and Cost Based Selection (QCBS). Other methods are not envisaged, but may be considered by the Bank at the request of the borrower with adequate justification. Individuals: Individual consultants will be hired following procedures established in Section V of the Bank's Consultant Guidelines. World Bank standard model request for proposal (RFP) and contracts will be followed. Table Al provides a breakdown of selection procedures for consultant services. - 53 - Main packages of goods and services to be procured under the project: Revenue Administration component: US$ 2.7 million in electronic processing equipment for customs; US$ 0.34 million of laboratory equipment for customs; US$3.0 million of hardware and US$ 2.0 million in consulting and training services for expanding the electronic declaration and payment system to medium and large taxpayers; US$ 0.8 million for database servers for DIAN. Public Expenditure Management component: USS 1.9 million of computer equipment for SIIF (approximately 946 PCs), US$ 1.8 million for the adaptation of the SIIF in the decentralized entities; and US$0.98 million for the development and implementation of the Treasury's system for managing its investment portfolio; US$ I million for hardware and software (servers, firewall and licenses) for the development of a web-based procurement system for the GOC; and US$ 2.5 million for the design and implementation of a debt management system for the Directorate of Public Credit. Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Pwourqm,nt Method E-penditure Catgory .-iB me's N.B.F. Total Cost 1. Works 0.00 0.00 0.00 0.00 0.00 .______ _ i(0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 15.71 1.00 1.50 4.41 22.62 (15.04) (0.50) (1.50) (0.00) (17.04) 3. Services 0.00 0.00 23.31 4.41 27.72 (0.00) (0.00) (17.15) (0.00) (17.15) 4. Training 0.00 0.00 8.54 0.00 8.54 ___________ (0.00) (0.00) (1.28) (0.00) (1.28) 5. Front-end fee 0.00 0.00 0.00 0.35 0.35 (0.00) (0.00) (0.00) (0.00) (0.00) Total 15.71 1.00 33.35 9.17 59.23 (15.04) (0.50) (19.93) (0.00) (35.47) "Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies v Includes goods to be procured through national and international shopping, consulting services and training. ICB: International Competitive Bidding NCB: National Competitive Bidding NBF: Not Bank Financed. - 54 - Table Al: Consultant Selection Arrangements (optional) (US$ million equivalent) A. Firms 15.16 0.00 0.00 0.00 0.00 0.00 0.00 1516 (12.13) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (12.13) B. Individuals 0.00 0.00 0.00 0.00 0.00 8.15 4.41 12.36 (0.00) (0.00) (0.00) (0.00) (0.00) (5.02) (0.00) (5.02) Total 15.16 0.00 0.00 0.00 0.00 8.15 4.41 27 72 1 (12.13) (0.00) (0.00) (0.00) (0.00) (5.02) (0.00) (17.15) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parenthesis are the amounts to be financed by the Bank Loan. - 55 - Prior review thresholds (Table B) Prior review thresholds for the applicable procurement methods are identified in Table B. Approximately US$33.87 million of the procured goods and services (95% of loan amount) will require the Bank's prior review. Terms of references for critical tasks, irrespective of the amount of the contract, will require the Bank's prior review and approval. The critical tasks will be identified in the POA and will be reviewed annually. Table B: Thresholds for Procurement Methods and Prior Review' Contract Value Contracts Sublect te. Threshold Procurement Prior Review Expenditure Catsoory (US$ thousands) Method (US$ nitfions) 1. Works 2. Goods > $250 ICB 15.71 < $250 and > $100 NCB 1.00 Below $100 Shopping (International or National) 3. Services Firms > $100 QCBS 15.16 Individuals > $50 2.00 Training Total value of contracts subject to prior review: 33.87 Overall Procurement Risk Assessment Average Frequency of procurement supervision missions proposed: One every 12 months (includes special procurement supervision for post-review/audits) In addition, project procurement activities will be supervised during each supervision mnission. This would include ex-post reviews of procurement actions and agreement on a revised procurement plan, as may be necessary. 'Thresholds generally differ by country and project. Consult OD 11.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance. - 56 - Disbursement Allocation of loan proceeds (Table C) The project is estimated to be disbursed over a period of 5 years, in accordance with the Table in Annex 5 laying out the disbursement schedule of IBRD funds. The proceeds of the Loan would be disbursed against 100% of foreign expenditures of goods and equipment and on consultants and training and against 85% of local expenditures of equipment and materials through Management Service Agreements with UNDP. An advance under the contract to cover 3-4 months of IBRD financing of expenditures will be deposited in UNDP's general account. Funds will be spent and reimbursed by JBRD though this account. Retroactive Financing Under the Public Financial Management Project (PFMP), the World Bank has provided a no objection to the Government of Colombia to sole source with UNCTAD for the purchase of a public debt management information system - SIGADE. The first phase of the contract is expected to be financed by the PEMP (U$105,000), while phases II and III would be financed by PFMP-IE (US$580,099). However, if the Borrower incurs eligible expenditures, after the closure of PFMP-1 (3/31/2001), but before the date of signing of the Loan Agreement, these expenditures will be financed retroactively by PFMP-II up to an aggregate amount of US$500,000. Table C: Allocation of Loan Proceeds 1x ed 0 i ture Categor Amounf0;RS0 1t in U8miIo f t0fFXinanci Percen00 1. Goods 17.04 100% of foreign expenditures and 85% of local expenditures 2. Consultant's Services and Training 18.43 100% 0.00 Total Project Costs 35.47 Front-end fee 0.00 Total 35.47 Use of statements of expenditures (SOEs): Disbursement applications will be submitted on the basis of Statements of Expenditures for: (a) contracts whose value does not exceed the equivalent of: * US$ 250,000 for goods; * US$ 100,000 for consulting firms; and * US$ 50,000 for individual consultants. (b) all local training programs All other expenditures will be fully documented when submitted to IBRD. All consolidated documentation relevant to SOEs, will be available at the PMUs for review by Bank missions and auditors for one fiscal year after the year in which the last disbursement occurs. - 57 - Once the Action Plan to enable the PMUs to produce Project Management Reports has been implemented in a manner satisfactory to the Bank, the Borrower will have the option to request withdrawals from the Loan Account on the basis of Project Management Reports, such withdrawals to be made under terms and conditions as the Bank shall specify by notice to the Borrower. Financial Management Arrangements GOC has decided to sign Management Service Agreements (MSAs) with UNDP to manage both loan and counterpart funds. The MSAs would include a clause that would allow anyone of the implementing entities to contract out of such an agreement and use the direct payment option as allowed by the Bank, whenever this is deemed more convenient by the authorities. Since UNDP cannot compete, as required by Bank procurement rules, the MSA would be financed entirely out of counterpart funds. The MSAs would have the advantages of allowing the project a more predictable access to both loan and counterpart funds due to budgetary regulations governing this type of agreement. UNDP also has ample experience in international type of procurement and has tax exemptions status. Under this arrangement the responsibilities of the PMUs and UNDP would be divided as follows. The PMU would have the primary responsibility for: (i) financial management, monitoring and reporting of the project; (ii) dealing with all aspects of the processes related to procurement under the guidelines applicable to each source of funds i.e. technical specifications, TORs, no objections, draft contracts etc.; (iii) authorizing UNDP to pay for such services or goods that have been received satisfactorily; and (iv) preparing withdrawal applications and sending all required documentation to the IBRD for reimbursement. The UNDP would have the responsibility for- (i) acting as an internal auditor by guaranteeing that all applicable procurement Guidelines are adhered to; (ii) reviewing the contracts to be signed, from the legal point of view; (iii) signing all contracts and paying the beneficiaries of the contracts and (iv) transferring all goods purchased to the executing agencies; (iv) at the end of each month, sending all payment vouchers and a statement of expenses to the PMU for accounting purposes. In addition, for the management of counterpart funds, UNDP would play a fiduciary role in accordance with its procurement guidelines. Under these guidelines, UNDP sets thresholds for prior review by either a local committee or a committee in New York. Presently those thresholds are > US$30,000-99,000 for review by the local committee and > US$100,000 by the committee in New York. In the future, GOC may engage another agency to perform the functions that would initially be performed by the UNDP, subject to the agreement of the Bank and under terms and conditions satisfactory to it. Summary of the Financial Management Assessment A Financial Management Assessment of the PMUs was carried out in February, 2000. It was noted that through the execution of the ongoing Public Financial Management Project since 1994, the PMUs responsible for the new operation have gained experience in accounting, disbursements, financial report preparation and management of the project audit process. The strengths of the PMUs include (a) ample experience of staff in project management, (b) defined organizational structures, (c) established culture and procedures with regard to planning, budgeting and monitoring of activities, (d) knowledge of Bank guidelines and (e) experienced external government auditors. However, in the light of certain deficiencies found at the time, the project was rated 4-C and an Action Plan for strengthening the financial management capacity of the PMUs was agreed. Since then, the PMU-MHCP has prepared a - 58 - draft of the Operation Manual, including an organization chart, Chart of Accounts and TORs for PMU staff. It has also contracted consultants for designing a project financial monitoring system. The system will integrate project procurement with budgeting and accounting. It will also include an inventory module. Thus, the requirements of the revised Bank financial management policies and procedures (OP/BP 10.02) have been met substantially. As a result of these actions and review of the progress by the FMS, the PMUs' financial management capacity rating has been raised to 4-B. Certain enhancement actions described in Annex 11 will be carried before project effectiveness. An Action Plan to enable the PMUs to produce Project Management Reports will be implemented within six months of effectiveness. Audit Arrangements The Comptroller General of the Republic (CGR) by law conducts the audits of public sector programs, including IBRD projects. Accordingly, this project would also be audited by the CGR. Audits of accounts and the financial statements of the project, including a separate opinion on Statements of Expenditures, would follow accounting and auditing procedures satisfactory to the Bank. All supporting records would be maintained at least one year after the completion of the project. A consolidated audit report would be submitted to the Bank no later than four months after the end of each fiscal year. The audit would cover project expenditures until such time as the loan has been closed. It is noted that during the ongoing project there have been some delays in the submission of the audit reports by the CGR. To ensure timely submission of the audit report to the Bank, the CGR will submit within four months after loan effectiveness their report on the review of Project Internal Controls. Further, arrangements will be made with the Office of the CGR to ensure its involvement in project audit early in the fiscal year, thus, enabling it to complete the audit process in a timely manner. The use of Bank guidelines on project audits and the tenns of reference of Auditors have been agreed. - 59 - Annex 7: Project Processing Schedule COLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT 11 Project Schedul* Planned Actual Time taken to prepare the project (months) 22 28 First Bank mission (identification) 09/07/98 09/07/98 Appraisal mission departure 10/10/2000 10/10/2000 Negotiations 02/13/2001 02/13/2001 Planned Date of Effectiveness 05/01/2001 Prepared by: MHCP, DIAN, DNP, CGN and Bank Project Team Preparation assistance: BB Budget Bank staff who worked on the project included: Narne Speciality Jit B. S. Gill, LCSPR Task Team Leader/ Sr. Public Sector Management Specialist John Pollner, LCSFPSI Sr. Financial Sector Specialist Carmen Machicado, LCSPR Operations Analyst Jaime Roman, LCOPR Principal Procurement Specialist Luiz Gazoni, LCOPR Senior Procurement Specialist Norma Rodriguez, LCSPR Procurement Analyst Emilio Rodriguez Consultant - Procurement Specialist Livio Pino, LCOPR Senior Financial Management Specialist Manuel Vargas, LCOPR Financial Management Specialist Issam Abousleiman, LOAEL Senior Disbursement Officer Marie Khoury Consultant - Disbursement Specialist Jose Augusto Carvalho, LEGLA Senior Counsel, Country Lawyer Mariana Montiel Counsel Natalia Gomez, Resident Mission Project Officer Zeinab Partow Country Economist Sharon Spriggs Program Assistant Eduardo Fernandez Consultant - Public Expenditure Management Fernando Medina Consultant - Revenue Administration Ronald Myers Peer Reviewer Michael Engelschalk Peer Reviewer Vinaya Swaroop Peer Reviewer - 60 - Annex 8: Documents in the Project File* COLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT 11 A. Project Implementation Plan * Project Implementation and Procurement Plan * Matrix of Project Costs B. Bank Staff Assessments * Diagnosis of Institutional and Organizational Weaknesses of Revenue Administration in Colombia, October 1999. * Diagnosis of Public Expenditure Management, October 1999. * Country Procurement Assessment Report, July 28, 2000. * Procurement Capacity Assessment, March 2000. * Financial Management Capacity Assessment, February 2000. C. Other 3 Colombia: Medidas para Aumentar las Eficacia de la Administraci6n de Impuestos, Marzol998, IMF. 3 Modernizaci6n de la Administraci6n Aduanera Colombiana, Julio 1998, IMF. 3 Reports of the Commission for the Rationalization of Public Expenditures and Finances (Comisi6n de Racionalizaci6n del Gasto y de las Finanzas Publicas). v Solicitud de Donaci6n (Proceso de contrataci6n y adquisiciones en el estado) entre la Repuiblica de Colombia y El Banco Mundial, DNP. e Diagnostico, Acciones para Detectar, Prevenir y Compartir los Posibles Casos de Enriquecimiento Ilicito, Sintesis, Conclusiones y Recomendaciones, August, 1998. 9 Analysis economic benefits of the project in revenue administration. *Including electronic files -61 - Annex 9: Statement of Loans and Credits COLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT II Feb-2001 tNfference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Fnn Rev'd P044140 200 CARTAGENAWATERSUPPLY&SEW. ENVIRO 85.00 0.00 0.00 75.75 12.05 0.00 P050578 2000 CO- RURAL EDUCATION 20.00 0.00 0.00 19.80 1.95 0.00 P057326 2000 SIERRA NEVADA SUSTAINABLE DEVELOPMENT 5.00 0.00 0o00 4.77 -0.23 0.00 P063643 2000 CO-FSAL 506.00 0.00 0.00 212.99 0.00 0.00 P065263 2000 EARTHQUAKE RECOVERY 225.00 0.00 0.00 103.86 -2.81 0.00o P068762 2000 CO- COMMUNITY WORKS (MANOSALAOBRA) 100.00 0.00 0.00 100.00 11.67 0.00=. P039082 1999 TOLL ROAD CONCESSION 137.00 0.00 0.00 100.00 100.00 0.00 P050576 1999 CO- YOUTH DEVELOPMENT 5.00 0.00 0.00 3.18 2.35 0.00 P053243 1998 PEASANT ENTERPRISE Z 8.00 0.00 0.00 3.46 1.63 0.00 P046112 1998 CO- PASTo EDUCATION 7.20 0.00 0.00 4.28 262 0.00 P006891 1998 CO- ANTIOOUtA EDUCATION 40.00 0.00 0.00 31.71 16.56 0.00 P006861 1998 URBAN INFRASTRUCTURE 75.00 0.00 0.00 57.32 14.49 0.00 P040102 1997 REG.REF.TA 12.50 0.00 0.00 6.77 4.27 0.00 P006884 1997 FINANCIAL MARKETS DEVELOPMENT 15.00 0.00 0.00 10.52 9.62 0.00 P039291 1996 URBAN ENVIRONMENT TA 20.00 0.00 0.00 3.39 3.39 -1.20 P006887 1998 POWER MARKET DEVELOPMENT & ENERGY (TA) 249.30 0.00 0.00 19.00 14.83 1.54 P006872 1998 URBAN TRNSPRT 65.00 0.00 0.00 4.16 3.00 0.16 P006894 1996 SANTAFE I (WaredSupp(y) 148.00 0.00 0.00 64.87 62.70 0.00 P006880 1995 AGRICULTURETECHNOLO 36.00 0.00 0.00 15.95 13.35 -4.75 P006893 1995 ENERGY TECHNICAL ASSISTANCE 11.00 0.00 0.00 0.47 0.47 0.00 P006866 1994 CO- SECONDARY EDUCATION 90.00 0.00 0.12 0.06 0.18 -3.76 PD08854 1993 CO- MUNICIPAL HEALTH SERVICES 50.00 0.00 2.12 0.09 1.39 2.22 P006889 1994 PUBLIC FINANCIAL MANAGEMENT 30.00 0.00 0.00 1.94 1.94 0.00 Total: 1904.00 0.00 2.24 842.41 273A8 4.80 - 62 - COLOMBIA STATEMENT OF IFC's Held and Disbursed Portfolio Feb-2001 In Millions US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1969/85/88/93/95 CF del Valle 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1963/90 Coltejer 6.02 0.00 0.00 0.00 6.02 0.00 0.00 0.00 1995/99 Corfmsura 25.00 0.00 25.00 0.00 0.00 0.00 25.00 0.00 1999 Harken 30.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1987 PRODESAL 0.00 0.59 0.00 0.00 0.00 0.59 0.00 0.00 1977189/92/94196 Promigas 6.88 0.00 0.00 14.58 6.88 0.00 0.00 14.58 1994/95 Promisan 0.00 0.23 0.00 0.00 0.00 0.23 0.00 0.00 1996 Proyectos 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00 1997 Suleasing 24.82 0.00 0.00 0.00 2.25 0.00 0.00 0.00 1999 Surenting 0.00 5.10 0.00 0.00 0.00 2.50 0.00 0.00 Total Portfolio: 92.72 10.92 25.00 14.58 15.15 8.32 25.00 14.58 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2001 Tolcemento 3333.33 0.00 0.00 10666.67 2001 CHMC 0.00 10000.00 30000.00 0.00 2001 Cementos Caribe 4047.62 0.00 10000.00 12952.38 Total Pending Commitment: 7380.95 10000.00 40000.00 23619.05 -63- Annex 10: Country at a Glance COLOMBIA: PUBLIC FINANCIAL MANAGEMENT PROJECT II Latin Lower- POVERTY and SOCIAL America middle- Colombia & Carib. income Developmnsnt diamond' 1999 Population, mid-year (millions) 41.5 509 2,094 Life exspectancy GNP per capita lAtlas method, US$) 2,170 3,840 1,200 GNP (Atlas method, US$ billions) 90.0 1,955 2,513 Average annual growth, 1993-99 Population M%) 1.S 1.6 1.1 G Labor force (%) 2.7 2.5 1.2 p Gross per - primary Moat recant estimate (latest year available, 1993-99) capita enrollment Poverty (% of population below national povertv line) 21 Urban population (% of total population) 73 75 43 Life expectancy at birth (Years) 70 70 69 Infant mortality (per 1,000 live birthas) 23 31 33 Child malnutrition (% of children under 5) 8 8 15 Access to safe water Access to improved water source (% of population) 78 75 86 illiteracy (% of population age 15+) 9 12 16 Gross Drimary enrollment (% of school-ape populaion) 113 113 114 Colombia Male 113 114 Lower-middle-income group Female 112 116 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1979 1989 1998 1999 Economic ratios' GDP (US$ billions) 27.9 39.5 99.1 86.6 Grossdomesticinvestment/GDP 18.2 18.5 19.5 13.0 Trade Exports of goods and services/GDP 15.2 18.0 15.0 17.8 Gross domestic savings/GDP 19.9 22.7 13.6 11.0 Gross national savings/GDP 19.2 19.8 12.3 9.0 Current account balancetGDP 1.4 -0.5 -5.3 -1. 1 m Interest paymentslGDP 0.9 4.0 1.6 2.1 Domestic Investment Total debt/GDP 21.0 42.7 33.6 39.9 Savings Total debt srvicel/xports 14.3 48.4 30.5 43.2 Present value of debt/GDP 32.7 45.1 Present value ofdebt/exports 216.5 255.6 Indebtedness 1979-89 1989-99 1998 1999 1999-93 (average annual growth) GDP 3.4 3.4 0.5 -4.3 2.6 -Colombia GNP per capita 0.8 1.6 -0.9 -7.1 1.0 ----Lower-middle-income group Exports of goods and services 5.8 5.8 5.9 4.7 3.6 STRUCTURE of the ECONOMY 1979 1989 1998 1999 Growth of investment and GOP (%) (% of GDP) Acriculture 22.0 16.6 13.3 12.2 Industr" 30.3 38.2 25.7 24.8 so Manufacturing 23.0 21.6 14.2 12.9 2 Services 47.7 45.1 61.0 62.9 o Private consumption 70.7 68.1 67.5 67.9 40 _ General government consumption 9.3 9.2 18.9 21.1 1GD GDP Imports of coods and services 13.5 13.8 20.9 19.5 (average annual growth) 197989 1989-99 1999 1999 Growth of exports and imports (%) Agriculture 2.5 -2.1 0.6 -0.2 40 Industry 4.7 1.9 -1.8 -11.0 Manufacturing 2.8 -1.7 -0.3 -12.4 20 Services 3.0 5.3 -5.5 -0.7 Private consumption 2.6 3.5 0.8 -5.1 o 9I7 General qovernment consumption 4.3 8.4 0.9 4.3 94 96 96 Gross domestic investment 2.3 5.7 -5.7 -301 20 Imports of aoods and services 0.8 13.2 -2.8 -13.5 Exports lmports Gross national product 2.9 3.6 1.0 -5.5 Note: 1999 data are preliminary estimates. The diamonds show four key indicators in the country (in bold) compared with its income-qroup average. If data are missing, the diamond will be incomplete. - 64 - Colombia PRICES and GOVERNMENT FINANCE 1979 1989 1998 19" Inflatlon (%) (% change) 30 Consumer prices 24.7 26.1 16.7 9.2 20 Impicit GDP deflator 24.1 24.7 15.5 12.5 10 Government finance (% of GDP, includes current grants) 0 Currentrevenue .. 10.2 11.9 12.6 94 96 96 97 98 Current budget balance .. 1.2 -3.1 -4.7 -GDP deftor _CP Overall surplus/deficit .. -0.5 -5.3 -8.5 TRADE (US$ millions) 1979 1989 1998 1999 Export and Impon levels (USS rnill.) Total exports (fob) 3,441 6,031 11,494 12,044 20,000 Coffee 2,005 1,476 1,896 1,325 Petroleum 146 1,400 2,333 3,761 15000, Manufactures 1,224 2,145 6,588 3,922 IC Total imports (cif) 2,978 4.558 14,836 10,311 10,0DO Food 254 219 1,655 1,415 SOD Fuel and enerqy 322 316 158 270 Capital goods 1,077 1,595 5,522 3,651 0o .E__ _ _ _ _ 93 94 96 96 97 98 99 Exportpricmindex(1995=100) 5 36 112 117 Importpriceindex(1995=100) 4 43 116 116 HExports aImports Terms of trade (1995=100) 123 82 96 101 BALANCE of PAYMENTS (USS millions) 1979 1989 1998 1999 Currant account balance to GOP (%) Exports of goods and services 4,532 7.330 13.560 13,959 0 Imports of goods and services 3,919 6.411 17,542 13,595 Resource balance 613 919 -3.982 363 Net income -277 -2.019 -1,735 -2,123 Net current transfers 66 898 444 796 Current account balarnce 402 -201 -5,273 464 -4_ _ Financing iterms (net) -487 350 6,663 1,387 Changes in net reserves 85 -149 -1.390 -423 .s Memo: Reserves induding gold (USS millions) .. . 8,741 8,103 Conversion rate (DEC, loclUS$) 42.5 382.6 1,426.5 1,757.0 EXTERNAL DEBT and RESOURCE FLOWS 1979 1989 1998 1999 (USS millions) ComnpositIon of 1998 debt (US$ mill.) Total debt outstanding and disbursed 5,869 16,886 33,263 34,519 IBRD 838 3,808 1,740 1,958 A: 1,740 IDA 22 15 9 8 G0:2,801 Total debt service 703 3,905 4,585 6.596 E: 1,397 IBRD 124 640 347 391 IDA 0 1 1 1 Composition of net resource flows Offidal grants 10 37 61 Official creditors 137 102 107 923 Private creditors 542 -10 56C 995 Foreign direct investment 127 576 3,038 1,008 Portfolio equity 0 0 26 663 F: 21,084 World Bank program Commitments 331 330 227 591 A - lsRD E - Bilateral Disbursements 139 361 184 499 B-IDA D-Othermultilateral F-PrPvate Prinipal repaVments 52 333 233 271 C - IMF G - Short-term Net flows 87 28 -48 228 Interestpaytnents 73 308 115 123 Net transfers 14 -280 -164 105 Development Eoonomics 8/29/00 - 65 - Additional Annex 11 Plan de Implementacion para Fortalcimiento de la Administracion Financiera del Proyecto Concepto Responsable (1) Fecha Seguimiento 1. Personal Calificado Contrataci6n del personal: DNP/MHCP Antes Todo el personal de - Terminos de Referencia Negociaciones presente proyecto se - No objeci6n del Banco Mundial mantiene; se ainadira a - Firma de contratos otra persona en MHCP - Inicio del trabajo que formara parte del equipo de contrataciones Implementacion de sistema de DNP/MHCP Antes evaluaci6n Efectividad 2. Responsabilidades Preparacion de descripci6n de cargos DNP/MHCP Manuel Terminos de referencia incluyendo areas t6cnicas Operativo han sido preparados e Inclusi6n de Manual Operativo incluidos en el Manual Operativo Elaboraci6n del manual operativo. DNP/MHCP Antes Manual Operativo ya - Borrador Negociaciones esta en preparaci6n - Revisi6n muy avanzada, una -Aprobaci6n copia del contenido de este se envio al FMS - Definici6n mecaDismo de manejo de fondos DNP/MHCP Antes Ya esta definido se - PNUD: contrato Negociaciones utilizara un MSA con - Cuenta especial PNIJD - Procediniiento de tesoreria, flujo de Antes fondos Efectividad Ates Ya estan definidos el en Negociaciones manual de operaciones Apertura de Cuenta Especial Antes N/A Efectividad Apertura de Cuentas en moneda local Antes N/A Efectividad -66- 3. Salvaguardias para los activos Mejoramiento del registro auxiliar de DNP/MHCP Antes Se esta disefiando un activos Efectividad sistema de integrado de administraci6n del proyecto que mcluye un modulo de registro de inventarios. El sistema esta contratado y segun el cronograma se espera terminarlo en diciembre 4. Sistems de Contabilidad Preparaci6n del Manual de DNP/MHCP Antes Ya esta listo Contabilidad Negociaciones Actualizaci6n de Plan de Cuentas DNP/MHCP Antes Ya esta listo Negociaciones Instalaci6n software sistema de DNP/MHCP Antes El sistema de informaci6n financiera MHCP Negociaciones informaci6n financiera - Revision ya ha sido contratado. -Aprobaci6n El sistema unira el -Instalaci6n sistema de - Prueba adquisiciones con la parte financiera (incluye desembolsos, contabilidad). Tambi6n incluyera un modulo de inventarios y producira todos los reportes de monitoreo acordadas durante la evaluaci6n 5. Informes Peri6dicos Mecanismos para consolidaci6n DNP/MHCP Antes Formaran parte del mensual de estados financieros Efectividad sistema de contabilidad descrito arriba -67 - Implementaci6n de PMRs (I) DNP/MHCP Antes Formaran parte del - Definici6n de formatos Efectividad sistema de contabilidad - Presupuestos indicadores fisicos descrito arriba. Ya se basados en PAD definieron los formatos, - Sisterna de informaci6n dentro del manual de implementado operaciones - Borradores - Revisi6n - Aprobaci6n 6. Auditoria Externa Acuerdo para uso de Guias de DNP/MHCP/CGR Antes De acuerdo a leyes Auditoria. Negociaciones nacionales CGR continuarA efectuando las auditorias del proyecto Coordinaci6n de visitas intemas DNP/MHCP/CGR Antes Efectividad (1) DNP - Departamnento Nacional de Planeaci6n, MHCP - Ministerio de hacienda y Credito Publico, CGR - Contraloria General de la RepuTblica (2) De acuerdo con los nuevos requisitos de informaci6n financiera del Banco Mundial, los proyectos producen Informes de Administraci6n de Proyectos en periodos trimestrales (PMRs), lo cual le permite al Banco Mundial y al ejecutor el monitoreo fisico, financiero y de adquisiciones en forma simultanea. Los reportes mencionados sirven ademas para la realizaci6n de desembolsos del Prestamo al proyecto (debe especificarse en el contrato legal). - 68 - IBRD 26153. COLOMBIA - i...,, S:# mSMm vsjt. nC8OMBIAt - > c7l,~~~1 ATLANTI 0 o 0 :- BRAZIL ; \XC E SAR L. ROLIVIA t -,PANAMA W>/A\[ t<, PANANkA! o 0 NORTE 4 The boundaries, colors, denominations < e \ i an/CORDOB .C J and any other information shown on j 4~~ '- ~~ c this map do not imply, on the part of IL7 i / g _\>c l \ ;t i 3 GbThe World Bank Group, any judgment on telglsauofnyterritory or A N T 1Q A oSANTA N ARAUCA . VENEZUELA 7 ~~~~~~~~~~~~~~~~~~~~~~~~~Puerto Carrton ~ ASANR W ,, ARAWA. N ARE' < c e c . b ! st*},; 9g^fi-< i c ~~~~~~V I C H A D A- -IE g*mIc >~ /TOLI A TOLlt/, .PJS M E T A | -, G ~ 7~RTA I A AGUA IN P Aero - ~~> <; / \\ :G ~~~~U A V I A R E._-,,, N A R I Nt k y e~~~~Flonencb ia\- NA~~~~~~~~~~~~fN ~ ~ ~ ~ ~ ~ %%%,\ NARlN 5,'>\(C A Q U (E T A V A U P E S 'E C U AD OR > MILES '0 -~~~~~~~~~~~~ '5 ~ ~ ~ 0 s 0 2 ° 50 100 150 0 50 100 150 200 250 0 ~~~~~~KILOMETERS AMAZONAS BR A Z I L ELEVATION ABOVE 1000 METERS / * NATIONAL CAPITAL * DEPARTMENT CAPIALS 'RNERS -P E R U/ j J< - DEPARTMENT BOUNDARES ./ - INTERNATIONAL BOUNDARIES -| 7,tA 199k 4- 74' 2 - = ~~~~~~~~~~~~~~~AUGUST 19944