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COLOMBIA POLICY NOTES Colombia Policy Notes ACRONYMS 4G Fourth Generation ACESI Asociación Colombiana de Empresas Sociales del Estado y Hospitales Públicos (Colombian Association os State Social Enterprises and Public Hospitals) ADR Agencia de Desarrollo Rural (Rural Development Agency) ADRES Administradora de los Recursos del Sistema General de Seguridad Social en Salud (Administrator of Resources of the General Health Social Security System) AFPs Administradoras de Fondos de Pensiones (Pension Fund Administrators) ALMPs Active Labor Market Programs AML/CFT Anti-Money Laundering/Combating the Financing of Terrorism ANDI Asociación Nacional de Empresarios de Colombia (Colombian National Association of Entrepreneurs) ANI Agencia Nacional de Infraestructura (National Agency for Infrastructure) ANSPE Agencia Nacional para la Superación de la Pobreza Extrema (National Agency for Overcoming Extreme Poverty) ANT Agencia Nacional de Tierras (National Land Agency) ARN Agencia para la Reincorporación y la Normalización (Agency for the Reincorporation and Normalization) ART Agencia Nacional para Renovación del Territorio (National Agency for Renovation of the Territory) ASPIRE Atlas of Social Protection Indicators of Resilience and Equity AUC Autodefensas Unidas de Colombia (Colombian United Self-Defense Forces) BAU Business as usual BEPs Beneficios Económicos Periódidos (Periodic Economic Benefits) BRE Better Regulation Executive CAF Corporación Andina de Fomento (Andean Development Corporation) CAR Corporación Autónoma Regional (Regional Autonomous Corporation) CCE Colombia Compra Eficiente (Colombia Public Procurement Entity) CCF Cajas de Compensación Familiar (Family Welfare Funds) CCT Conditional Cash Transfer CEBAF Centros Binacionales de Atención en Frontera (Binational Border Attention Centers) CENAF Centros Nacionales Fronterizos (National Border Centers) CEPAL Comisión Económica para América Latina y el Caribe (Economic Commission for Latin America and the Caribbean) CGE Computational General Equilibrium CIF Certificado de Incentivo Forestal (Forest Incentive Certificate) CIGER Comité Intersectorial para la Gestión del Recurso Humano (Intersectoral Comittee for Human Resources Management) 2 CNPMDM Comisión Nacional de Precios de Medicamentos y Dispositivos Médicos (National Commission for Prices of Medicines) COA Central Offtake Agency COFEMER Comisión Federal de Mejora Regulatoria (Mexican Federal Commission for Regulatory Improvement) CONAFOR Comisión Nacional Forestal de Mexico (Mexican National Forestry Commision) CONAGUA Comisión Nacional del Agua de Mexico (Mexican National Water Commission) CONPES Consejo Nacional de Política Económica y Social (National Council for Economic and Social Policy) CPC Consejo Privado de Competitividad (Private Competitiveness Council) CRA Comisión de Regulación de Agua Potable y Saneamiento Básico (Regulatory Commission for Water and Basic Sanitation) CREE Impuesto sobre la Renta para la Equidad (Income Tax for Equity) CREG Comisión Reguladora de Energía (Energy Regulatory Commission) CRR Comprehensive Rural Reform CTM Comité Técnico Mixto (Joint Technical Committee) DANE Departamento Administrativo Nacional de Estadística (National Administrative Department of Statistics) DB Defined Benefit DC Defined Contribution DDR Disarmament, Demobilization and Reintegration of Former Combatants DIAN Dirección de Impuestos y Aduanas Nacionales (National Tax and Customs Administration) DNP Departamento Nacional de Planeación (National Planning Department) DPL Development Policy Loan DPS Departamento para la Prosperidad Social (Department for Social Prosperity) DRG Diagnostic Related Groups DRM Disaster Risk Management ECD Early Childhood Education EDGE Excellence in Design for Greater Efficiencies EDIT Encuesta de Desarrollo e Innovación Tecnológica (Technology Innovation and Development Survey) EE Energy Efficiency EEA European Economic Area EIAIPI Educación Inicial y Atención Integral a la Primera Infancia (Early Childhood Education) ELN Ejército de Liberación Nacional (National Liberation Army) EMEs Emerging Market Economies ENL Encuesta Nacional de Logística (National Logistics Survey) EPS Entidad Promotora de Salud (Health Insurance Entity) ESAL Entidades sin ánimo de lucro (Non-profit entities) ETC Entidades Territoriales Certificadas (Certified Territorial Entities) ETFs Exchange-Traded Funds FAO Food and Agriculture Organization 3 Colombia Policy Notes FARC-EP Fuerzas Armadas Revolucionarias de Colombia – Ejército del Pueblo (Colombian Revolutionary Armed Forces – People’s Army) FDI Foreign Direct Investment FDN Financiera de Desarrollo Nacional (Financial Institution for National Development) FGPM Fondo de Garantía de Pensión Mínima (Minimum Pension Guarantee Fund) FINDETER Financiera de Desarrollo Territorial (Financial Institution for Territorial Development) FINTECH Financial Technologies FIP Fundación Ideas para la Paz (Ideas for Peace Foundation) FOGAFIN Fondo de Garantías de Instituciones Financieras (Deposit Insurance Fund) FONPET Fondo Nacional de Pensiones de las Entidades Territoriales (Territorial Entities National Pensions Fund) FOPEP Fondo de Pensiones Públicas de Nivel Nacional de Colombia (Colombian National Public Pension Fund) FOSFEC Fondo de Solidaridad y Fomento al Empleo y Protección al Cesante (Solidarity Fund for Employment Promotion and Unemployment Protection) FSB Financial Stability Board FSP Fondo de Solidaridad Pensional (Pension Solidarity Fund) FSR Financial Stability Report FX Foreign Exchange GDP Gross Domestic Product GEIH Gran Encuesta Integrada de Hogares (Integrated Household Survey) GHG Greenhouse Gas GoC Government of Colombia GVCs Global Value Chains IADB - IDB Inter-American Development Bank IASC Inter-Agency Standing Committee ICA Impuesto de Industria y Comercio (Industry and Commerce Tax) ICA Instituto Colombiano Agropecuario (Colombian Agricultural Institute) ICBF Instituto Colombiano de Bienestar Familiar (Colombian Institute for Family Welfare) ICFES Instituto Colombiano para la Evaluación de la Educación (Colombian Institute for Education Evaluation) ICT Information and Communication Technology IDEAM Instituto de Hidrología, Meteorología y Estudios Ambientales (Institute for Hydrology, Meteorology and Environmental Studies) IDP Internally Displaced People IDS Insurance of Disability and Survivorship IETS Instituto de Evaluación de Tecnologías en Salud (Health Technology Evaluation Institute) IFC International Finance Corporation IGAC Instituto Geográfico Agustín Codazzi (Geographical Institute Agustin Codazzi) IMF International Monetary Fund INCODER Instituto Colombiano de Desarrollo Rural (Colombian Institute of Rural Development) IPS Instituciones Prestadoras de Servicios de Salud (Health Services Providers) ISAS Integrated Social Assistance Service Information System - Turkey 4 JA Jóvenes en Acción (Youth in Action) LAC Latin America and the Caribbean LCR Liquidity Coverage Ratio LVC Land Value Capture MADS Ministerio de Ambiente y Desarrollo Sostenible (Ministry of Environment and Sustainable Development) MFA Más Familias en Acción (More Families in Action) MFMP Marco Fiscal de Mediano Plazo (Medium Term Fiscal Framework) MHCP Ministerio de Hacienda y Crédito Público (Ministry of Finance and Public Debt) MIAS Modelo Integral de Atención en Salud (Integrated Model of Health Care) MILA Mercado Integrado Latinoamericano (Integrated Latin American Market) MNC Marco Nacional de Cualificaciones (National Qualifications Framework) MoF Ministry of Finance MoH Ministry of Health MoI Ministry of Interior MOPS Management and Organizational Practices Survey MOU Memorandum of Understanding MRV Monitoring, Reporting and Verification MSMEs Micro, Small and Medium Enterprises MTFF Medium Term Fiscal Framework NCRE Non-Conventional Renewable Energy NDC Nationally Determined Contributions NDP National Development Plan NEET Not in Education, Employment or Training NIS National Innovation System NTM Non-Tariff Measures NUTP National Urban Transport Program OCAD Órgano Colegiado de Administración y Decisión (Collegiate Body of Management and Decision) OECD Organisation for Economic Co-Operation and Development PA Peace Agreement PAE Programa de Alimentación Escolar (School Feeding Program) PAYG Pay-As-You-Go PDETs Programas de Desarrollo con Enfoque Territorial (Development Programs with a Territorial-Based Focus) PDP Productive Development Policy PDT Planes de Desarrollo Territorial (Local Development Plans) PER Public Expenditure Review PGOT Política General de Ordenamiento Territorial (General Territorial Planning Policy) PHC Primary Health Care PISA Programme for International Student Assessment PISDA Planes Integrales Comunitarios y Municipales para la Sustitución de Cultivos Ilícitos y Desarrollo Agrario Alternativo (Comprehensive Community-based and Municipal Plans for the Substitution of Illicit Crops and Alternative Agrarian Development) 5 Colombia Policy Notes PIT Personal Income Tax PNIS Programa Nacional Integral para la Sustitución Voluntaria de Cultivos Ilícitos (National Comprehensive Program for the Substitution of Crops Used for Illicit Purposes) UNDP United Nations Development Programme PODER Programa de Oportunidades y Desarrollo para Evitar Riesgos (Opportunities and Development Program to Avoid Risks) POMCAs Plan de Manejo y Ordenamiento de una Cuenca (Watershed Management Plans) POS Plan Obligatorio de Salud (Mandatory Health Plan) POT Programas de Ordenamiento Territorial (Territorial Zoning Plans) PPA Power Purchase Agreement PPP Public Private Partnerships PROST Pension Reform Options Simulation Toolkit PTA Programa Todos a Aprender (Everyone to Learn Program) R&D Research and Development RAIS Régimen del Ahorro Individual con Solidaridad (Private Pension Pillar) RIA Regulatory Impact Analysis RIMISP Centro Latinoamericano para el Desarrollo Rural (Latin American Center for Rural Development) ROA Return On Assets ROE Return On Equity RPM Régimen de Prima Media (Pay-As-You-Go Public Pension Pillar) RSH Registro Social de Hogares – Chile (Social Household Registry) RUT Registro Único Tributario (Single Tax Registry) SAC Sociedad de Agricultores de Colombia (Farmers Society of Colombia) SDGs Sustainable Development Goals SECOP Sistema Electrónico de Contratación Pública (Electronic Public Procurement System) SEDLAC Socio-Economic Database for Latin America and the Caribbean SEDPEs Sociedades Especializadas en Depósitos y Pagos Electrónicos (Specialized Companies in Electronic Deposits and Payments) SENA Servicio Nacional de Aprendizaje (National Learning Service) SERCE Segundo Estudio Regional Comparativo y Explicativo (Second Comparative and Explanatory Regional Study) SFC Superintendencia Financiera de Colombia (Financial Superintendence of Colombia) SGP Sistema General de Participaciones (General Participations System) SGR Sistema General de Regalías (General Royalties System) SGSSS Sistema General de Seguridad Social en Salud (General System of Social Security in Health) SIAC Sistema de Información Ambiental Colombiano (Colombian Environmental Information System) SIASAR Sistema de Información de Agua y Saneamiento Rural (Water and Rural Sanitation Information System) SIGCE Sistema de Información y Gestión de la Calidad Educativa (System of Education Quality Management) 6 SINA Sistema Nacional Ambiental (National Environmental System) SINAS Sistema de Inversiones en Agua Potable y Saneamiento (Water and Sanitation Investment System) SIRH Sistema de Información del Recurso Hídrico (Water Resources Information System) SISBEN Sistema de Identificación de Potenciales Beneficiarios de Programas Sociales (Identification System for Potential Benficiaries of Social Programs) SISPRO Sistema Integral de Información de la Protección Social (Social Protection Information System) SITP Sistema Integrado de Transporte Público (Integrated Public Transport System) SMEs Small and Medium Enterprises SNGs Subnational Governments SNIES Sistema Nacional de Información de Educación Superior (National Higher Education Information System) SNR Superintendencia de Notariado y Registro (Superintendence of Notaries and Registries) SOCX Social Expenditure Database SOE State-Owned Enterprise STI Science, Technology and Innovation SUCOP Sistema Único de Consulta Pública (Single System for Public Consultation) TERCE Tercer Estudio Regional Comparativo y Explicativo (Third Comparative and Explanatory Regional Study) TFP Total Factor Productivity TVET Technical and Vocational Education and Training UN United Nations UNDSS United Nations Department of Safety and Security UNODC United Nations Office on Drugs and Crime UPC Unidad de Pago por Capitación (Per Capita Payment Unit) UPME Unidad de Planeación Minero Energética (Energy and Mining Planning Unit) UPRA Unidad Regional de Planeación Agropecuaria (Rural Agricultural Planning Unit) URF Unidad de Regulación Financiera (Financial Regulation Unit) URT Unidad de Restitución de Tierras (Land Restitution Unit) UVT Unidad de Valor Tributario (Tax Value Unit) VAT Value Added Tax VRE Variable Renewable Energy VUCE Ventanilla Unica de Comercio Exterior (Single Window for Foreign Trade) VUE Ventanilla Unica Empresarial (Single Window for Business Registration) WB World Bank WDI World Development Indicators WEF World Economic Forum WWF World Wildlife Fund 7 ACKNOWLEDGEMENTS The Colombia Policy Notes were produced by a team of World Bank experts working in the Co- lombia Country Team. The overview as well as coordination of the set of policy notes was led by Jasmin Chakeri (Program Leader), and Cristina Savescu (Senior Economist), with inputs from Ser- gio Daniel Olivieri (Senior Economist) and Julieth Carolina Pico Mejia (Consultant). Policy Note 1 was written by Cristina Savescu (Senior Economist) and Jasmin Chakeri (Program Leader). Policy Note 2 was produced by Leonardo Iacovone (Lead Economist) and Monica Parra Torrado (Senior Economist). Policy Note 3 was authored by Pedro Cerdan-Infantes (Senior Economist), Edmundo Murrugarra (Senior Social Protection Economist) and Noel Muller (Consultant). Policy Note 4 was prepared by Heinz Rudolph (Lead Financial Sector Economist) and Asta Zviniene (Senior Social Protection Specialist). The author of Policy Note 5 is Sara Giannozzi (Senior Social Protection Spe- cialist) with inputs from Luz Stella Rodriguez (Social Protection Specialist). Policy Note 6 was pro- duced by Roberto Iunes (Senior Health Economist), Ronald Eduardo Gomez Suarez (Economist) and Juan Pablo Toro Roa (Consultant). Policy Note 7 was written by Roland Clarke (Lead Public Sector Specialist), Lorena Vinuela (Senior Public Sector Specialist) and Henry Forero Ramirez (Se- nior Public Sector Specialist). Policy Note 8 was produced by Marcelo Jorge Fabre (Senior Social Development Specialist) and Ivonne Astrid Moreno Horta (Senior Land Administration Specialist). Policy Note 9 was prepared by Alexandra Ortiz (Lead Urban Development Specialist), Nancy Lozano Gracia (Senior Economist) and Giuliana De Mendiola Ramirez (Consultant), with inputs from Vanessa Velasco (Urban Development Specialist), Michael Morris (Lead Agriculture Econo- mist), Luz Berania Díaz (Senior Agribusiness Specialist), Miguel Pinedo (Agriculture Specialist), Klaas de Groot (Senior Water Resources Management Specialist), Karen Navarro (Water Supply and Sanitation Specialist), Miguel Vargas (Senior Water Supply and Sanitation Specialist), Antonio Ro- driguez (Senior Water Supply and Sanitation Specialist), Ivonne Moreno (Senior Land Administra- tion Specialist), Joaquin Toro (Senior Disaster Risk Management Specialist), Claudia Lorena Trejos (Consultant), Camila Rodriguez (Senior Infrastructure Specialist), Mauricio Cuellar (Senior Trans- port Specialist), Carlos Murgui (Transport Analyst), Roland Clarke (Lead Public Sector Specialist), Lorena Vinuela (Senior Public Sector Specialist) and Henry Forero (Senior Public Sector Specialist). Policy Note 10 was authored by Catiana Garcia-Kilroy (Lead Financial Sector Specialist), John Gregory Graham (Principal Industry Specialist) and Gonzalo Martinez Torres (Financial Sector Spe- cialist). Policy Note 11 was written by Patricia Caraballo (Senior Financial Sector Specialist), Leyla Castillo (Senior Financial Sector Specialist) and Lina Sun Kee (Senior Financial Sector Specialist) with inputs from Fernando Montes Negret (Consultant), Goran Amidzic, Catiana Garcia Kilroy (Lead Financial Sector Specialist) and Carlos Senon (Consultant). Policy Note 12 was produced by Giovanni Ruta (Senior Environmental Economist) and Laura Calderon Etter (Consultant) with 8 contributions from Franka Braun (Senior Natural Resources Management Specialist), Luz Diaz (Se- nior Agribusiness Specialist), Fernando Loayza (Senior Environmental Economist), Nidal Mahmoud (Consultant), Elvira Morella (Senior Energy Specialist), John Morton (Senior Urban Environment Specialist), Marcela Potocarrero (Consultant), Ana María Torres (Consultant) and Javier Aguilar (Senior Mining Specialist). The policy notes were produced under guidance from Gerardo Corrochano (Country Director, outgoing), Ulrich Zachau (Country Director, incoming), Issam Abousleiman (Country Manager) and Pablo Saavedra (Practice Manager). The team is thankful to the peer reviewers Lars Son- dergaard (Program Leader), David Rosenblatt (Manager) and Jorge Muñoz (Practice Manager) for their comments. Additional comments were received from Antonio Rodriguez Serrano (Senior Water and Sanitation Specialist), John Pollner (Lead Financial Sector Economist), Raúl Alfaro-Pe- lico (Lead Climate Change Specialist), Mauricio Cuellar (Senior Transport Specialist), Jutta Kern (Operations Manager) and Maria Clara Ucros (Communications Officer). Consultations were also held with representatives from the Ministry of Finance and Public Credit, the Ministry of Environ- ment and Sustainable Development, the Ministry of Health, the National Planning Department, National Health Superintendence and other government agencies, as well as representatives of ANIF, Asofondos, Asobancaria, the Private Competitiveness Council, health associations (pa- tients, providers, insurers, laboratories), non-governmental organizations, Universidad de los An- des, researchers from the Colombian Central Bank and Fedesarrollo, who provided rich insights and knowledge of priority issues in Colombia. Editorial reviews and translations were done by Lisa Stewart, Daniel Merizalde and Luisa Fernanda Arango. Administrative support was provided by Ana Maria Yepes. 9 Colombia Policy Notes 10 OVERVIEW Colombia was one of the fastest-growing eco- (Figure 0.2). More than 6.5 million people were nomies in Latin America between 2004 and lifted out of poverty over this period. Increased 2014. During this period, Colombia enjoyed earnings and higher employment account for rapid economic growth of close to 5 percent nearly 80 percent of the decline in moderate annually, making it one of the region’s best poverty1, especially in the rural areas where performers (Figure 0.1). The rapid growth hel- these accounted for 87 percent of the pover- ped narrow the per capita income gap with ty reduction. A significant expansion of social regional peers and high-income countries. The programs2 also contributed to reducing pover- positive oil income shock bolstered domes- ty rates. Multidimensional poverty also decli- tic demand and contributed, together with ned by more than 25 percentage points to 17 structural reforms and prudent macroecono- percent in 2017, in large part due to increased mic management, to a strong acceleration access to health care and education, and hi- in investments to an average of 24 percent gher educational attainment. Per capita inco- of GDP during the commodity boom period. mes among the bottom 40 percent of the po- Increased foreign direct investment (FDI) was pulation grew above 4 percent, faster than the supported by regulatory reforms, improved se- national average over the period 2002-2016. curity and renewed efforts through investment treaties, free trade agreements, and, in recent Progress in Key Areas years, the advances made under the OECD accession process. Oil revenue provided budgetary resources for increased public spending, contributing to im- Solid economic growth contributed to progress proved outcomes. Government revenue from in terms of shared prosperity, poverty reduc- oil production reached 3.3 percent of GDP in tion and human development outcomes. The 2013, at the peak of the oil boom. Accompa- moderate poverty rate declined by nearly 20 nied by an increase in tax revenue as a result percentage points from 47.4 in 2004 to 26.9 of a series of tax reforms, total general govern- by 2017, while extreme poverty nearly halved ment revenue increased from 25.2 to 27.5 per- from 14.8 to 7.4 percent over the same period cent of GDP in 2014. This allowed for an expan- 1  Of this, 50 percent was on account of higher earnings and 30 percent due to increased employment. 2  Public transfers provided through Familias en Acción and Adulto Mayor social assistance programs. 11 Colombia Policy Notes Figure 0.1 Average annual GDP growth Figure 0.2 Trends in official poverty rates3 (2004-2014) (left) and GDP per capita (right) 9 50 10 8 PPP (constant 2005 US$) 7 40 8 Percent chnage 6 30 6 Percent 5 4 20 4 3 2 10 2 1 0 0 0 o K il ge a P na ta d ca ol ile Ur bia y u a C 04 05 06 07 08 09 10 11 DE 12 13 14 15 16 17 az ua Pa er ic Ar ore os n m LA C h 20 20 20 20 20 20 20 20 20 20 20 20 20 20 C i C ola Ri nt ex Br P om na C ug O M Poverty Extreme Poverty GDP pc Source: World Bank, OECD. Source: World Bank staff calculations based on GEIH, DANE. sion of public spending: general government croeconomic framework include the adoption spending on health increased to 5.4 percent of a full-fledged inflation-targeting regime4, a of GPD by 2014, from 4 percent of GDP in 2004. flexible exchange rate, a Fiscal Rule (2011) for Government expenditure on education repre- the central government, and a Medium-Term sented 4.7 percent of GDP in 2014 (15.8 per- Fiscal Framework. These helped anchor market cent of government spending), up slightly from expectations and contributed to the achieve- 4.1 percent of GDP in 2004. Increased spen- ment (and maintenance) of Colombia’s in- ding was accompanied by improved human vestment grade rating, which supported higher development outcomes: by 2017, Colombia capital inflows and lowered borrowing costs. had reached almost universal health covera- On the other hand, the solid macroeconomic ge, with 98 percent of the population enrolled framework also helped build resilience to ex- in either the contribution-based system (for ternal shocks, including to the significant terms those in formal employment and the non-poor, of trade shock that started in mid-2014, and fa- equivalent to 48 percent), and the non-contri- cilitated the external and domestic economic butory, subsidized system (52 percent). School adjustment. enrollment rates increased across primary, se- condary and tertiary education, and the ave- The OECD accession process boosted the mo- rage number of years of education rose from mentum for structural reforms. The process, 6.8 to 8 between 2005 and 2015. 3 which started with the invitation to open acces- sion talks in 2013, was completed in June 2018, Macroeconomic reforms reinforced the be- when Colombia became the 37th member of neficial effects of the favorable external envi- OECD. As part of this accession process, Co- ronment. Key components of Colombia’s ma- lombia undertook a series of reforms, including 3  Poverty estimates are based on official poverty lines. Given the methodological changes that took place in 2006 and 2007, only the statistics reported for the 2002-05 and 2008-17 periods are comparable. 4  The full-fledged inflation targeting was introduced in 1999, with inflation as the nominal anchor, a floating exchange rate, and the short-term interest rate as the main instrument. 12 Note 0 Overview the creation of a General Directorate of Sta- program; the process to restore the navigabili- te Participation to centralize state-owned en- ty of the Magdalena River; and the launching terprise (SOE) ownership; the strengthening of of the Master Plan of Intermodal Transport. Fur- the independence of superintendents; the ex- thermore, Colombia adopted the World Trade change of tax information with 115 jurisdiction Facilitation Agreement, and issued a new Cus- in order to strengthen the fight against tax eva- toms Statute, allowing for advanced decla- sion; the update of the tax code; reforms to the rations, adoption of risk assessment to screen liquor monopolies to increase competitiveness imports and exports, electronic payment, ab- and transparency; and stronger protection of breviated customs clearance, use of non-intru- workers’ rights and compliance with labor laws. sive inspection equipment. Additional efforts to improve the business en- These structural reforms were accompanied by vironment and reduce costs for businesses are measures to ensure environmental sustainabi- beginning to bear fruit. Colombia has progres- lity. In fact, Colombia has become a cham- sively eliminated procedures and time dedi- pion for sustainable development in recent cated to open businesses: procedures were years, embracing a Green Growth strategy for cut from 11 to 8 and time from 40 days to 11 promoting sustainable growth and competiti- days between 2008 and 20175, although there veness, and reducing vulnerabilities to the im- is great divergence between regions.6 Other pacts of climate change. Colombia also de- key reforms in this area include the creation of monstrated its commitment to climate change a one-stop shop for company registration and mitigation, setting a unilateral and uncondi- the launch of a national strategy to eliminate, tional target of 20 percent reduction7 in its automate and simplify barriers, regulations or greenhouse gas emissions (GHG) by 2030. The administrative procedures (Menos trámites adoption of a carbon tax and a tax on plastic más simples). In 2012, Colombia approved a bags in 2016, as well as mechanisms for carbon tax reform cutting payroll taxes by 13.5 percen- neutrality, reinforce Colombia’s position at the tage, which has helped bolster labor formality. forefront of the green growth agenda. Furthermore, the 2016 tax reform reduces pro- gressively the corporate income tax rate, by a The end of the armed conflict with the Farc-EP cumulative 7 percentage points by 2019, al- represents a critical step towards peace and though at 33 percent it will remain higher than social sustainability. Improvements in securi- OECD and LAC average tax rates. ty over the past 10 years already contributed significantly to greater investment in the coun- Steps were also taken to strengthen logistics try at large. The end of the 50-year conflict and connectivity, which are critical for grea- with the country’s main rebel group (Farc-EP) ter competitiveness. Progress was made on in 2016 brings the prospect of faster growth several fronts: the implementation of legal re- in lagging regions and a reduction in territo- forms to promote public-private partnerships rial inequalities. As such, it offers a chance to for infrastructure investment, culminating in the achieve the social conditions for faster poverty 4th Generation (4G) infrastructure concession reduction and inclusive growth. 5  World Bank (2017b). 6  Arango and Flores (2017). Labor informality and Colombia Subnational Doing elements for a differentiated mini- mum salary by regions in Colombia. Banco de la Republica Borradores de Economía no. 1023. 7  With respect to the Business-as-Usual (BAU) scenario. 13 Colombia Policy Notes Remaining Challenges compensated for the reduction in public in- vestment ratio. Lower investment has affec- Despite these important advances, the fall in ted Colombia’s potential growth rate, which oil prices exposed the risks associated with is now estimated at 3.4 percent. Colombia’s dependence on the oil sector. The sharp fall in oil prices since mid-2014 resulted High growth during the commodity boom mas- in a terms of trade shock estimated at more ked the fact that total factor productivity (TFP) than 3 percent of GDP, one of the largest in has been negative over the past three deca- the region and its largest from a historical pers- des. In the last decades growth in Colombia pective. Economic growth decelerated to an was mostly driven by capital and labor expan- average of 2.3 percent over the period 2015- sion, with smaller contributions from improved 2017, less than half of what it was during the quality of labor. Instead, TFP has subtracted commodities price boom. The oil price shock from growth since 1987 (Figure 0.3). During the exposed the dependence on commodities boom years, capital accumulation more than exports, both for external and for fiscal ac- compensated for negative TFP growth; but the counts. Exports fell by 61.3 percent between prospect of permanently lower oil prices un- 2013 and 2016, and the current account de- derlines the need for boosting productivity and ficit rose to 6.3 percent of GDP in 2015 from finding new engines of growth. 3.2 percent in 2013. Central government oil revenues fell by 3.2 percent of GDP during Although inequality has declined, Colombia the same period, necessitating a significant remains a highly unequal country with low in- fiscal adjustment in order to ensure complian- come mobility. Colombia’s inequality as me- ce with the Fiscal Rule. Given that 80 percent asured by the Gini coefficient declined from of public spending is rigid, this adjustment fell 57.2 in 2002 to 50.8 in 2017, primarily due to primarily on general government investment, labor income dynamics and to a lesser ex- which was cut from 7.4 percent of GDP in 2014 tent transfers (Figure 0.5). However, inequality to 5.5 percent 2016. Despite the launch of the in Colombia remains higher than the LAC re- 4G program, private investment only partially gion’s average (50.5 in 2015, Figure 0.4), with Figure 0.3 Growth decomposition 6 5.5 5 4.5 0.9 4.1 4.0 3.9 4 1.3 1.8 0.2 1.8 2.7 3 1.8 2.9 1.4 0.8 0.5 1.5 2 0.4 0.7 0.7 0.3 1 2.0 2.3 1.3 1.3 1.0 1.4 0 -0.6 -0.6 -0.7 -1 1957-1966 1967-1976 1977-1986 1987-1996 1997-2006 2007-20016 Labor Quantity Contribution Labor Quality Contribution Total Capital Contribution TFP Source: The Conference Board (2017), Total Economy DatabaseTM Growth Accounting and Total Factor Productivity, 1950-2016, November 2017 (Adjusted Version). 14 Note 0 Overview Figure 0.4 Gini coefficient in selected Figure 0.5. Trends in Gini coefficient in LAC countries, 2015 selected LAC countries 0.6 0.60 0.505 0.511 0.5 0.55 Gini coefficient Gini coefficient 0.4 0.3 0.50 0.2 0.45 0.1 0.0 0.40 - u or m P n ic ru ua a Pa Ch r C rag le ta y nd a as C om a a il 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Bo R. do az os ua a Ec livi Ho Ric C nam bi Pa LA i in e y d ur 20 20 20 20 20 20 20 20 20 20 20 20 20 20 rb an Br ua lva ug l Sa ol Colombia Brazil LAC Mexico E Do Uruguay Peru Bolivia Ur Source: LAC Equity Lab tabulations based on SEDLAC (CEDLAS and Source: LAC Equity Lab tabulations based on SEDLAC (CEDLAS and World Bank) and World Development Indicators (WDI). World Bank) and World Development Indicators (WDI). Colombia being the second most unequal Social protection programs that are central to country in the region. Even though the pace reducing poverty and increasing shared pros- of inequality reduction accelerated in Colom- perity remain fragmented with gaps and/or bia, countries like Bolivia and Honduras, with overlaps in the demand and supply of social comparable or even higher levels of inequali- services. Lack of adequate and up-to-date ty in 2002, managed to reduce more income information hinders the response to evolving inequality since 2002. The persistence of high needs. Asymmetric information, coverage inequality in Colombia is underpinned by se- gaps and often conflicting eligibility require- veral factors, including insufficient access to ments are barriers to effective and opportune quality education and skills formation (Figure access to social programs. Moreover, indivi- 0.6), pensions, and affordable housing, despi- dual programs face design and implementa- te recent advances in these areas. Pensions, tion challenges that limit their effectiveness, primarily incurring to the upper part of the in- such as limited mechanisms for program exit come distribution, are inequality increasing, or to establish linkages with complementary with a pseudo-Gini coefficient of around 0.72. programs (Más Familias en Acción), and limi- Between 2002 and 2016, shared prosperity ted capacity to track employability outcomes -measured as the annualized income growth (Jóvenes en Acción). Meanwhile, pension co- of the bottom 40- was generally higher than verage remains low and is expected to decli- the overall average income growth across ne under current conditions over the medium departments, resulting in a narrowing of the term. Many of those affiliated with the pension income gap between the less well-off and system end up receiving lump-sum benefits at the average Colombian. Moreover, similarly retirement, as structural issues in the labor mar- to poverty reduction, shared prosperity out- ket make it difficult to meet the minimum requi- comes differ across the urban-rural divide, rements for receiving annuities. Furthermore, although there were important advances in there is unfair competition between the Pay- shared prosperity across departments. As-You-Go defined-benefit public scheme (Ré- 15 Colombia Policy Notes gimen de Prima Media) and the fully-funded and insufficient deployment of a results-based defined contribution private scheme (Régimen patient-focused model of care. del Ahorro Individual con Solidaridad, RAIS). The arbitrage possibilities that exist between Regional and urban-rural disparities persist. the two schemes, while generating a positive Poverty data at the department level reveals cashflow for the government in the short-term, deep geographical disparities, one of the most will put pressure on the system over the longer important challenges Colombia has in foste- term and undermine the development of an- ring a balanced territorial development. The nuities markets. poverty rate gaps between the poorest and least poor departments has widened. In 2002 Colombia still lags in human capital and skill the poverty rate gap between Choco and formation with respect to peers. Overall educa- Bogota was already very large at 37.8 percen- tional outcomes and quality lag that of OECD tage points. By 2017 this has increased to 47 peers. Educational achievements as mea- percentage points (Figure 0.7). A key source of sured by the PISA results remain low, with stu- persistent inequality in Colombia are the histo- dents underperforming in math, science and rical disparities between urban and rural areas. reading tests relative to OECD peers, although Despite sizeable declines in the incidence of there have been improvements in recent years poverty at a national level over the last fifteen across the board. Furthermore, the educatio- years, historical disparities across geographical nal achievements vary greatly across the inco- areas persist. In 2017, extreme poverty was over me distribution (Figure 0.6) limiting income mo- 3 times higher in rural areas than in urban, and bility across generations. And despite universal moderate poverty was 55 percent higher. 97 health coverage, improvements in key health out of 100 people in urban areas have access outcome indicators have generally been simi- to drinking water, compared to only 74 out of lar or lower than those seen in the LAC region, 100 people in rural areas. Similar patterns exist and are significantly lower than the average with respect to sanitation, where 85.2 percent for the OECD. This is mainly due to the persis- of urban households have access to compa- tence of barriers to access that still affect a red with 67.9 percent or rural households. The large segment of users, and to the incomplete per capita GDP of the department with the Figure 0.6 Mathematics and reading PISA scores across income quintile and area of residence 500 Richest 490 480 20 percent 470 460 450 Richest PISA score 440 20 percent Urban 430 420 410 400 Poorest Urban Rural 390 20 percent 380 370 Poorest Rural 360 20 percent 350 Math Reading Math Reading Richest and the poorest 20 percent Urban and rural Source: OECD (2016) based on PISA 2015. 16 Note 0 Overview Figure 0.7 Moderate Poverty and Annual Poverty Reduction Rates between 2002-2017, by department 80 9 70 8 60 7 6 Percentage 50 5 40 4 30 3 20 2 10 1 0 0 At rca l C re G ó C Ca lima na tá tio o Q uia C ío ila Bo jira Na á C iño da a Bo a C r de C ar nt a To r nt as r l C ta Ri uca tá a . na C de de a La hoc An tic c n Sa auc go ld ag b nd c lív es di que de Me Sa ald Hu D. le ya M rdo ua r q tio Bo ara Su a an an n a ui m lá Na ó s un lle Va rte No Poverty in 2002, left axis Poverty in 2017, left axis Annual rate of poverty reduction, right axis Source: World Bank calculations based on GEIH, MESEP - DANE. lowest GDP per capita (Vaupes) represented tion in the quality of infrastructure (particularly only 16.7 percent of the GDP per capita of the transport), with low connectivity to markets be- department with the highest GDP per capita ing a critical obstacle for economic develop- (Santander). Furthermore, two thirds of the de- ment in low-income regions. Weak local and partments had per capita GDP less than half regional administrative capacities are also that of Santander. curtailing the delivery of higher quality public services across regions. These disparities are higher in Colombia than in Latin America and in most of the world. Ove- Rapid depletion of the country’s natural capi- rall, regional inequalities are 42 times higher tal poses important risks and carries high costs. in Colombia than in Australia and more than Colombia faces mounting anthropic pressures 5 times higher than in Canada or the United on forests, key ecosystems, soils and water, has States, they are also higher than in most neigh- untapped potentials to develop nature based boring Latin American countries.8 Socio-eco- economies. Rapid deforestation and ecosys- nomic development imbalances have been tem degradation impose severe costs, increa- an important factor in the armed conflict and se vulnerability to extreme weather events, have, in turn, been aggravated by it. Decades and hinder the capacity to achieve internatio- of internal conflict destroyed physical, human, nal commitments, while at the same time the and social capital with important implications potential to develop a stronger forestry sectors for regional growth. One of the contributing remains untapped. Meanwhile, productivity factors to differences in productivity across the and innovation in the agricultural sector are different regions of Colombia is the wide varia- low, with important subsidies and price stabi- 8  OECD (2014). OECD Territorial Reviews: Colombia 2014, OECD Publishing, Paris, http://dx.doi.or- g/10.1787/9789264224551-en. 17 Colombia Policy Notes lization mechanisms supporting the sector. In- society and meeting the population’s expec- security of land tenure also impacts negatively tations and aspirations of peace, security, on investment and productivity. Environmental prosperity and reduced inequality. Given the impacts from widespread illegal mining are se- remaining challenges discussed above, mea- vere. Current regulatory framework limits the sures in the following areas are of highest priori- development of non-conventional renewable ty: (i) diversifying the economy while attracting energy and of energy efficiency strategies, investment across sectors, by boosting new and Colombia is yet to achieve universal ener- sources of growth; (ii) ensuring fiscal sustaina- gy access. Higher pollution and inadequate bility while improving public services, both in waste management have led to low environ- terms of access and quality; and (iii) consolida- mental quality in urban areas. Lack of strategic ting peace and reducing territorial gaps. Ac- alignment of incentives and regulations poses celerating progress in these three areas would challenges for transitioning towards a circular contribute to the overall objective of raising model that promotes efficient use of resources, per capita income with greater equity and en- reuse and recycling. Furthermore, natural di- vironmental sustainability (Figure 0.8). In gene- sasters and climate change will likely impose ral, special attention should be given to the full significant economic and social costs in the implementation of existing strategies, and legal years to come. and institutional frameworks, which are typi- cally of high quality. As such, the policy notes Looking Ahead: Priority Reforms presented here focus to a large extent on ways in which this implementation can be improved, It is critical for the new administration to boost putting forward specific recommendations to the reform momentum, focusing on imple- advance towards the main objective. mentation and results. The new government will face the challenge of unifying a polarized Diversifying the economy while attracting investment across sectors Figure 0.8 Main development challenges Higher productivity growth will be critical to achieve faster, more diversified economic Diversifying the growth and welfare gains. The improvements economy while attracting investment in the business environment in the past deca- across sectors de are not sufficient to raise growth to rates that would put Colombia on a path towards convergence with high-income countries. To Raising per overcome the productivity challenge, Colom- capita income bia should eliminate barriers to growth and with equity and environmental external competition; address government Consolidating sustainability Ensuring fiscal and market failures; promote private sector peace and sustainability reducing while improving investment and participation; and support fir- territorial gaps public services ms. One important priority is to continue efforts towards simplification and improved quality of regulations, including through regulatory impact assessments. Furthermore, a structural Source: World Bank staff. trade regime reform would reduce tariff disper- 18 Note 0 Overview sion and tariffs on agricultural products, and procurement may be the traditional choice. improve efficiency of the tariff system, while re- Strengthening the institutional capacity to ma- moving unnecessary non-tariff barriers. Reform nage and administer projects is equally impor- efforts should also be directed at reducing the tant. Expanding the role of the development regulatory burden of trading across borders, bank Financiera de Desarrollo Nacional (FDN) optimizing customs processes, and other me- as the structuring agent and the local bank to asures to develop an efficient logistics sector. catalyze infrastructure finance is another op- Finally, strengthening firm productivity by fos- tion. To strengthen and broaden domestic and tering good management practices, suppor- international financing sources, it will be essen- ting research and development, and fostering tial to attract new players to the infrastructure innovation is critical. These efforts should be financing market, including pension funds, and complemented by measures to reduce the reform financial sector regulations to facilitate cost and increase the benefits of business for- financial innovations (Note 10). malization, by reducing labor costs and offe- ring initiatives and products to formal firms to Efficient and inclusive financial systems are strengthen their capabilities (Note 2). also critical to support productive investments and sustain economic growth. To increase the Infrastructure investment also need to be boos- breadth and depth of the Colombian financial ted, to improve access to markets and reduce sector and correct inefficiencies in the alloca- logistics costs. Estimates suggest that Colom- tion of capital, important policy reforms are ne- bia’s infrastructure financing gap is as high as cessary. Reforms should focus on strengthening US$339 billion through 2037.9 In other words, to the financial regulatory architecture; ensuring close the gap the country would need to in- adequate levels of financial supervision of vest an additional 3-4 percent of GDP annua- conglomerates; and reducing concentration. lly. This requires maximizing financing not only Moreover, despite notable progress in some from public but also private sources. Colombia segments of domestic capital markets, more has been at the forefront of Public Private Part- needs to be done to increase capital market nerships (PPPs) in the transport sector in recent size and liquidity, and to encourage product years, with the launch of the 4th generation development. Access to finance needs to be (4G) road concession program. The 4G has expanded by developing financial instruments demonstrated the benefits that a solid legal tailored to un- and under-served segments and institutional framework for private partici- of society, such as MSMEs; women and rural pation in infrastructure financing can bring. The populations; and people on lower incomes. objective is to build on the lessons learned from Improved access to finance will also help the the 4G to mobilize private financing for other sector catch up with the fast-evolving techno- projects, at the lowest possible cost from both logical developments (Note 11). domestic and international sources, and in a way that ensures fiscal sustainability, efficiency Finally, “greening” growth is both a necessity and quality. To achieve this, there needs to be and an opportunity for Colombia, which is rich greater clarity about the criteria for when to use in natural capital. An integrated framework for PPPs, especially in sectors where public sector land planning, sustainable forest management 9  Estimate from the G20 Investment Hub including energy, transport, water and telecoms investments necessary to sustain projected growth rates. 19 Colombia Policy Notes and agricultural production and agribusiness, crease the scope for allocative efficiency. On provision of basic public goods in the rural the revenue side, it is necessary to increase area, clarity and security of land tenure are cri- domestic resource mobilization, focusing on tical to overcome the challenges in land-ba- increasing direct taxation and limiting tax ex- sed sectors. Fiscal and economic incentives penditures, while also achieving greater pro- could promote productive land use, clima- gressivity of fiscal policy. In order to reduce tax te-smart practices, efficient use of water, and evasion and achieve the full impact of recent forest restoration. Policy priorities to help ensu- tax reforms, it is also necessary to accelerate re a transition towards cleaner urban and rural the strengthening and modernization of the spaces and a circular economy include green tax administration. (Note 1). growth-oriented urban planning, targeted ac- tions in transport and industrial sectors, additio- A comprehensive pension reform would con- nal financing for waste collection and disposal tribute to fiscal sustainability and greater pro- services in rapidly urbanizing areas and infor- gressivity of public spending.10 Combined with mal settlements, establishing standards and re- the parametric reform, the insured income in quirements for discharging non-domestic wa- the RPM could be capped to disincentivize the ters, and an integrated sustainable materials arbitrage between the two pension schemes. management (Note 12). Reviewing minimum pension policy and the in- crease in retirement age to allow time to meet Ensuring fiscal sustainability while the minimum pension requirements are policy improving public services options that need to be considered to increa- se coverage from the current very low levels. Colombia has considerable spending needs True old-age income insurance to allow con- associated with infrastructure gaps, insufficient sumption smoothing should be provided, by li- access to, and quality of, public services and miting lumpsum payments at retirement, inclu- the commitments associated with the post-con- ding through non-pension instruments such as flict agenda. Addressing these needs, while at the periodic economic benefits program (Be- the same time safeguarding the hard-won fis- neficios Economicos Periodicos, BEPs). Reforms cal discipline, will require a sustained reform are also needed to develop annuities markets, effort. The fiscal consolidation consistent with including the unbundling of the fee cap and the Fiscal Rule requires a decline in the central the centralization of the provision of disability government deficit to 3.1 percent in 2018, to and survivorship insurance (Note 4). 2.4 percent of GDP in 2019, and 1.5 percent of GDP by 2022, consistent with reaching a struc- Improved education and labor market pro- tural deficit of 1 percent of GDP (Figure 0.9). grams are needed to produce a better qua- This would entail achieving higher public spen- lified labor force and facilitate the successful ding efficiency, by identifying opportunities for transition from school to work. The education savings and/or better outcomes, and ensuring system exacerbates early childhood socioeco- long-term fiscal sustainability, including in the nomic inequalities resulting in large inequalities areas of social subsidies, health, education, in youth skills, which in turn lead to low labor and public procurement. Addressing short- market outcomes. Meanwhile the upper se- comings in the budget process could also in- condary education system does not equip 10  Pensions increase inequality in Colombia and have a pseudo-Gini coefficient of around 0.72. 20 Note 0 Overview Figure 0.9 Fiscal consolidation path under the Fiscal Rule 0 -1.1 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1 -1.3 -1.6 -1.0 -1.9 -1.9 -1.8 Percent of GDP -2.2 -2.2 -2.2 -1.3 -1.2 -1.1 -1.1 -1.0 -1.0 -2 -2.2 -1.5 -1.8 -2.4 -2.4 -2.2 -3 -3.0 -3.1 -4 -3.6 -4.0 -5 2014 2015 2016 2017 2018 2019 2020 2021 2012 2023 2024 2025 2026 2027 2028 Structural fiscal deficit 2018 MTFF 2017 Deficit MTFF 2018 Deficit Source: Ministerio de Hacienda y Crédito Público, Comité Consultivo de la Regla Fiscal (2017, 2018). graduates with the right skills for productive cial sustainability are critical for Colombia’s employment, and despite progress in access development. More efficient spending and an and equity, only a limited share of youth rea- increase in financing sources are needed to ches tertiary education and attends programs make the system sustainable. To create a heal- of certified quality. Once in the labor market, th system focused on outcomes, the imple- youth lack adequate support for improving mentation of the integral model of healthca- their employability. Ensuring successful school- re should be prioritized, health insurers should to-work transitions can break the intergenera- be certified according to technical standards, tional circle of poverty and inequality. To help and the IT structure of the system needs to be youth transition successfully to the labor market improved. These sources could include higher they need a better, more relevant set of skills. taxes on products with negative health im- This entails better quality education throughout pacts, such as sugary beverages and tobac- upper-secondary: improved access to and co. The capacity of the institution in charge of quality of early childhood development pro- administering these resources (ANDRES) also grams, improved quality of basic education, needs to be strengthened. New payment me- and a transformation of the upper secondary chanisms and regulatory measures that ade- education system. An enhanced tertiary edu- quately reflect costs and risks and provide in- cation quality assurance system is needed as centives for improved financial performance well as a revised financing system to ensure and/or health outcomes could be considered. increased access and quality. It also requires Finally, policy measures are needed to ensure active and systematic support during their the adequate and sustainable implementa- transition to the labor market, by increasing tion of the right to health (Note 6). the coverage of existing programs, increasing the relevance of trainings for the labor market, Consolidating peace and reducing and improving the coordination and financing territorial gaps system of program providers (Note 3). The end of the armed conflict with the FARC Enhancing the quality of health care and heal- has the potential to boost inclusive growth but th outcomes and ensuring the system’s finan- the short-term expenditure pressures need 21 Colombia Policy Notes to be managed adequately. While improve- provisions applying to successive waves of de- ments in security are critical to boost invest- mobilized ex-combatants is also critical to fa- ment and growth, especially in lagging re- cilitate reconciliation and reintegration. Grea- gions, it will only be sustainable if the process is ter harmonization is also needed between accompanied by productivity-enhancing re- the different approaches to the problem of forms. Implementing the post-conflict agenda illicit crops. Forceful eradication and voluntary (including narrowing the service delivery gaps substitution measures need to be coordinated in conflict-affected regions) is critical and will and linked to other rural development activi- require considerable financial resources. Wide ties, particularly those under the Development inequality in land distribution, the presence Programs with a Territorial Focus (Programas de of the illegal economy, former combatant, desarrollo con un enfoque territorial, PDETs). the large numbers of victims of the conflict, Finally, the validity period of the Victims’ Law and new forms of paramilitary violence are needs to be revisited, with the possibility of ex- among the key challenges to ensuring sustai- tending it beyond 2021. Efforts should focus on nable peace. Many conflict and post-conflict collective reparations, while ensuring that the Colombian municipalities are affected by public costs remain consistent with the fiscal massive displacement, forced abandonment adjustment path required by the Fiscal Rule of property and assets and land disposses- (Note 8). sion. Making sustained progress on this agen- da, while complying with the Fiscal Rule, will These interventions need to be complemen- be a challenge. Furthermore, increasing so- ted with actions aimed at fostering territorial cial mobility and equity while responding to development. These should focus on coordi- a likely increase in demand for social services nating the already existing plans and tools of and programs in the post-conflict context will the different agencies and entities in charge likely require increased efficiency and effec- of territorial development and simplifying and tiveness of the social protection system and streamlining the processes. Policy recommen- effective coordination of interventions to en- dations consider a land administration sys- hance service delivery and income genera- tem linked to an updated national cadaster, tion capacity. continued efforts to improve regional and local data, use of the concept of a portfolio Making sustained and visible progress on the of places, where public investment is guided post-conflict agenda is critical. Building a sus- by broad distinctions of territories according tainable peace requires timely responses to to function. Performance-based grants could the most pressing problems, while also addres- be used to complement the current process sing the underlying socio-economic and po- of asymmetric decentralization. Furthermore, litical causes of the conflict. This includes the Colombia could consider strengthening in- timely processing of land restitution claims, with ter-institutional territorial development coor- better coordination among the agencies invol- dination territorial development and streamli- ved in the process. Land restitution, however, ning territorial planning instruments. Investing can only be successful if complemented by in connective infrastructure is also critical. To measures that ensure its sustainability, such as bolster regional projects, it is necessary to im- demining of surrounding areas, secure land te- prove investment planning, project structuring nure, and support for projects that ensure the and project management capacities at the productive use of land. Standardizing the legal SNG (Note 9). 22 Note 0 Overview Social protection programs should be made The institutional capacity of territorial govern- more effective and efficient to further reduce ments to manage expenditure responsibilities poverty and increase shared prosperity, inclu- and mobilize own-source revenue needs to ding in lagging regions. A dynamic and inte- be strengthened. High vertical and horizontal grated social protection system would ensure imbalances remain an outstanding challen- that people access the adequate integrated ge and negatively impact the quality of ser- package (with the adequate programs and vice delivery. The reform priorities to improve amount) at the opportune time over the life cy- the intergovernmental framework include: (i) cle. Shifting towards a citizen-centered service reviewing the delegation of expenditure res- delivery system could positively impact delivery ponsibilities and only delegating functions to performance, final outcomes and user satisfac- municipalities with the capacity to carry them tion. With that in mind, improving the quality of out, while increasing their autonomy to ma- demand-side information is critical. An integra- nage such services; (ii) enhancing the capa- ted, more dynamic social registry containing in- city of departments and municipalities to raise formation on the demand and supply for social own-source revenues, through updating and benefits and services could further enhance modernizing the cadastral and land registries, efficiency and effectiveness gains in the deter- improving tax administration and reducing mination of eligibility made with the roll-out of the number of earmarked taxes; (iii) adopting Sisben IV. To provide users with integrated pac- a single streamlined process for the prepara- kages of programs and services and improve tion and selection of process across funding the effectiveness of the system, it is critical to streams and reducing earmarking of capital address program design issues that hinder a transfers; and (iv) revising the transfer formulae more effective coordination due to misaligned to strengthen equalization (Note 7). incentives, lack of harmonization, or lack of re- ferral protocols (Note 5). 2018 Colombia Policy Notes Note 1: Fiscal Policy Note 2: Productivity Note 3: Easing transition from school to work Note 4: Pensions Note 5: Social Protection System Note 6: Health Note 7: Subnational government financing and management Note 8: Peace consolidation Note 9: Territorial development Note 10: Private financing of public infrastructure Note 11: Financial sector Note 12: Green growth 23 Colombia Policy Notes Table 0.1 2018 Colombia Policy Notes – selected policy options Policy Area Short-Term Options Medium-Term Options Diversifying the economy while attracting investment across sectors 1. Improve regu- • Maintain efforts to simplify admi- • Make regulatory impact assessment man- latory, tax and nistrative procedures datory for new regulations with an expected tariff framework • Revise regulations hindering impact (threshold or triage system) development and market crea- • Reduce unnecessary non-tariff barriers based tion, competition, and integra- on cost-benefit analysis tion with GVCs • Reduce tariffs on agricultural products • Decrease dispersion and improve efficiency of the tariff system • Create a special agency for regulatory quali- ty improvement 2. Develop an • Adopt implementing regulations • Make VUCE a true one-stop shop for foreign efficient logistics for the new Customs Statute; trade: incorporate all foreign trade opera- sector define responsibilities and time tions, including instant inspections and ad- schedule; and commit required vance declarations, and all operators in the budget of participating institu- country; and fully integrate it with main trade tions partners • Approve CONPES document on • Design instruments promoting innovation in logistics and guarantee finan- logistics, entrepreneurship and ICT use among cing for its effective implemen- logistics services providers and users tation • Implement instruments to promote logistics services construction and operation (i. e., proyectos tipo) • Implement the National Qualifications Fra- mework for the logistics chain (port and road freight logistics), and create appropriate training programs 3. Strengthen ca- • Prioritize financing of PDP at all • Implement Science Technology Innovation pabilities at the levels of government, with a di- PER recommendations: reduce concentra- firm level rect mandate by the President’s tion of the STI budget; promote specializa- office to make it the roadmap tion within and across entities; rationalize or for improving productivity consolidate instruments; eliminate duplication • Promote private sector finan- in objectives and beneficiaries—all based on cing of PDP proper monitoring and evaluations systems • Scale up the technology extension pilot • Design and implement tailor-made programs, that are results-based and meet the need of individual firms 4. Reduce costs • Implement VUE in Bogota • Implement VUE at the national level and increase • Identify opportunities for lowe- • Lower entry costs, labor costs and regulatory benefits of busi- ring entry costs, labor costs, and costs ness formaliza- regulatory costs • Design and implement business development tion • Create additional benefits to programs that allow access to formality be- registered firms: access to data- nefits, targeted to firms with growing potential base, accounting and media- and revealed commitment of moving up the tion assistance capabilities escalator • Revise the inspection and con- trol strategy • Approve CONPES document on business formalization and guarantee its financing 24 Note 0 Overview Table 0.1 2018 Colombia Policy Notes – selected policy options (cont.) Policy Area Short-Term Options Medium-Term Options Diversifying the economy while attracting investment across sectors 5. Strengthen finan- • Rethink the structure of SFC and streng- • Strengthen FOGAFIN’s bank cial sector regula- then the independence of the superinten- recovery and resolution powers in tory and supervi- dent a coordinated effort with URF and sory architecture • Strengthen the legal and regulatory fra- the SFC mework to identify, monitor, and respond to cross-border risks and improve consoli- dated supervision • Finalize secondary regulation to improve the effectiveness of the conglomerates law, including regulations on the definition of ‘groups’, and holding companies; capi- tal requirements for financial conglomera- tes; and exposure limits to related parties 6. Deepen capital • Set up a “Blue Ribbon” Commission, of • Develop policy and regulatory markets domestic and international experts, to changes to support a more diver- develop a strategy for the deepening of sified institutional investor base for Colombian capital markets, identifying long-term financing and improve top-down priorities, defining obstacles liquidity of government bond and offering a longer-term view market yield curve; and deve- lop alternative asset instruments through securitizations • Promote MILA initiatives to increa- se domestic competition and bring new players to compete in the local market 7. Expand financial • Encourage the growth of a well-regulated • Promote the sustainability of inclusion and supervised FinTech sector financial sector operations in rural areas, with financial education at the forefront of this agenda • Deepen the impact of the secu- red transaction reform and eva- luate options to create a second loss guarantee fund 8. Mobilize private • Review governance of public and private sector financing pension funds (under conglomerates law) • Review investment framework for public pension funds (e.g. Fonpet) • Ensure financial sector regulations support financial innovations from the supply (offe- ring/registration regimes) and demand side (investment regulations). • Support FDN in addressing market failures and financial innovations: FX hedging liquidity facility, pooling facility 25 Colombia Policy Notes Table 0.1 2018 Colombia Policy Notes – selected policy options (cont.) Policy Area Short-Term Options Medium-Term Options Diversifying the economy while attracting investment across sectors 9. Develop PPP pro- • Select sectors with strongest potential • Design programmatic sectorial pro- grams for sectors for private sector financing gram of bankable projects: coordina- • Continue support for reforms in clean tion between line ministries, MoF and energy sector DNP • Enhance PPP framework for eligible/ selected sectors: risk matrix, contract standardization, expropriations, bid- ding process • Establish non-transport PPP implemen- tation agency 10. Achieve cli- • Finalize the national forest policy, im- • Strengthen the incorporation of ecolo- mate-smart, plement the National Forest Service, gical and environmental concerns in sustainable including the creation of a high-level land use planning efforts at all levels of and productive entity to develop, support and pro- government landscapes mote sustainable forest management • Enable conditions to develop bio • Improve and implement economic economy sectors and to scale up incentives to promote climate-smart adoption of sustainable practices in agricultural practices, forest ecosys- agricultural production and agribusi- tem restoration and conservation, ness through research and knowledge water use efficiency, and GHG emis- dissemination and certifications sion reductions • Emphasize capacity-building of environmental authorities and invest in programs that explicitly target envi- ronmental sustainability with revenues from the Carbon Tax 11. Renew the ener- • Establish clear policy, a regulatory • Expand the suite of private financing gy development framework and a competitive and options and investment vehicles for model transparent procurement framework NCRE for Non-Conventional Renewable • Design and implement a rural electri- Energy (NCRE) and Energy Efficiency fication strategy to achieve universal access 12. Transition • Implement targeted actions in the • Promote circular economy by upda- towards a green transport and industrial sectors to ting and aligning regulations on mate- growth planning meet air quality norms and improve rials and waste approach in air quality information systems • Address important gaps in city clean- Colombian cities • Regulate wastewater discharges liness and health, through expansion and promoting from non-domestic sources into soil of service regulation and a national a circular eco- and water investment program nomy 26 Note 0 Overview Table 0.1 2018 Colombia Policy Notes – selected policy options (cont.) Policy Area Short-Term Options Medium-Term Options Ensuring fiscal sustainability and improving public services 13. Increase public • Conduct comprehensive reviews of qua- • Unify recurrent and investment spending effi- lity, efficiency and effectiveness of public budgets ciency spending and identify potential savings • Adopt program budget and mo- • Account for all subsidies in the fiscal ac- dern budgetary classification counts • Reduce/eliminate the disper- • Make SECOP II use mandatory for all sion of the procurement legal agencies, limit the use of non-competitive framework and make use of procurement methods and impose stricter demand aggregation mechanis- limits on contract amendments ms mandatory for high-demand • Prioritize the implementation of Jornada goods, including at subnational Única to the poorest, most vulnerable level segments of the population; and improve • Put in place an integrated system targeting for the school feeding program of information of educational PAE quality • Introduce stronger incentives to increase • Shift to a health model based on quality and reduce costs at health services primary health care principles provider level (IPS) and for the territorial • Strengthen the technical capacity authorities to evaluate the appropriateness • Introduce reimbursement mechanisms that of new technologies (IETS, Instituto result in a more appropriate risk sharing by de Evaluación de Tecnologías en insurers and providers Salud) as well as the regulation of • Award contracts to EPS based on robust medicines and their price-setting measures of quality and outcomes criteria by the Medicine Commis- sion (CNPMDM) 14. Reduce tax • Strengthen control of the special tax regi- evasion me for not-for-profit entities (ESAL) • Improve DIAN’s investment in information technology to address the serious limita- tions of its information systems • Increase DIAN’s autonomy in human re- source management 15. Increase tax • Review regulations for Zonas Francas revenues • Broaden the tax base of the personal inco- me; reduce PIT-related tax expenditures; adjust the tax schedule • Increase progressivity of dividend taxation 16. Enhance • Update the cadasters • Conduct a comprehensive review subnational go- • Put in place a common information mana- of the subnational tax system to vernment own gement platform simplify and adequate the struc- source revenue ture, tax design, procedural code, as well as the sanction framework • Replace ICA with a more efficient and simpler tax • Eliminate low revenue generating sub-national taxes, or replace them with a single tax 27 Colombia Policy Notes Table 0.1 2018 Colombia Policy Notes – selected policy options (cont.) Policy Area Short-Term Options Medium-Term Options Ensuring fiscal sustainability and improving public services 17. Improve early • Introduce Quality Assurance System • Include in the general transfer system childhood edu- for ECD the basic cost of ECD provision cation (ECD), • Improve use of information for deci- • Consolidate transfers and grant more basic educa- sion making (Sistema de Gestion de autonomy for schools tion and upper la Calidad Educativa) • Reform the Upper Secondary educa- secondary • Strengthen pedagogical support tion: create graduate profiles, develop education programs - PTA, Jornada Única and a teacher profile; improve pedagogy School Leadership Training and management; pedagogical trans- • Strengthen socioemotional skills of formation graduates • Support transitions (subsidies and academic support, skills leveling) 18. Improve tertiary • Introduce a Quality Assurance Sys- • Based on a pilot, implement inco- education tem for tertiary education me-contingent student loans on a • Pilot income-contingent student large scale loans • Move most financing to public institu- • Establish performance-based trans- tions to be performance-based fers to public institutions 19. Strengthen labor • Unify targeting mechanisms for labor • Consolidate youth programs by crea- market transi- market programs ting a Youth Policy Framework and tions • Involve private sector in skills training Institutional Consolidation • Establish a Skills Agency with strong private sector leadership • Reform and consolidate financing by linking financing to performance 20. Reform the pen- • Introduce parametric reforms of • Review minimum pension policies sion system the public pillar (regimen de prima • Mandate conversion of lump sum pay- media, RPM): eliminate gender gap ments of old age savings into periodic in retirement ages / increase retire- payments ment age; reduce pension accrual rate; review the generosity of special pension regimes. • Introduce insured income ceiling in RPM • Unbundle regulatory requirements for annuity provision from regulations for other financial services • Centralize auction of the insurance of disability and survivorship 21. Improve efficien- • Design payment and regulatory me- • Introduce new sources of financing cy and financial asures aimed at refining the relations- • Strengthen and expand the regulatory design of the hip between insurers and providers and supervision capacity of key stake- health system to holders, in areas such as medications, ensure financial financial management and informa- sustainability tion analysis 28 Note 0 Overview Table 0.1 2018 Colombia Policy Notes – selected policy options (cont.) Policy Area Short-Term Options Medium-Term Options Ensuring fiscal sustainability and improving public services 22. Steer the SGSS • Prioritize the implementation of the • Design and implement a human re- towards a sys- MIAS source for health strategy tem focused on • Design and implement a specific poli- outcomes cy for public hospitals 23. Implement the • Establish a channel of dialogue with right to health the judicial sector and other stake- in an adequate holders and provide clear informa- and sustainable tion for these decision-makers way Consolidating peace and reducing territorial gaps 24. Improve the • Conduct a new round of Sisbén data • Consolidate a dynamic social registry quality of collection through interoperability of adminis- demand-side • Implement mechanisms (and su- trative data and social contract for information for pporting operational processes) for self-reported data social protection continuous update of Sisbén data • Improve use of Sisbén data and programs through (i) user provided (self-repor- information by social programs for ted) information; and (ii) administrati- targeting (beyond score, use socioe- ve data exchange (interoperability) conomic characteristics captured by • Implement social contract with po- Sisbén, as relevant) tential users of social programs/servi- • Strengthen the role of municipalities as ces and introduce citizen-centered the key citizen-government interface principles for interface with users while maintaining policy and guideline setting role of the central government, and consolidate citizen-centered prin- ciples for interface of Sisbén with users 25. Improve the • Review individual program design; • Design packages of services centered effectiveness focus on alignment of incentives, on families’ needs and profile and and coordina- opportunities for harmonization, and supported by referral protocols and tion of social complementarity. Introduce citi- agreements across programs protection pro- zen-centered principles for interface • Implement data exchange from pro- grams with users grams back to Sisbén for data analysis • Strengthen cross-sectorial coordina- and service delivery purposes tion arrangements to facilitate data • Introduce protocols to facilitate exchanges for decision making and automatic referrals to complemen- improved service delivery (e.g. with tary programs or eligibility status (not Sisbén) enrollment) for users of programs with • Strengthen the use of Llave Maestra same eligibility requirements, to avoid to support (i) referral of potential duplicating processes users to complementary services; • Promote capacity building at the and (ii) monitoring municipal level for integrated delivery of social protection programs and services 29 Colombia Policy Notes Table 0.1 2018 Colombia Policy Notes – selected policy options (cont.) Policy Area Short-Term Options Medium-Term Options Consolidating peace and reducing territorial gaps 26. Enhance the • Introduce an asymmetric assignment • Improve central monitoring and eva- efficiency of of responsibilities that delegates luation system of local service delivery subnational more functions to municipalities with outcomes spending and the capacity to fulfill them, while in • Increase financial support for institutio- focus on results the municipalities where capacity is nal building at the departmental and absent departments retain service municipal level delivery functions. • Introduce results-based grants to in- • Simplify transfers and grants reporting centivize improvements in local service mechanisms for small municipalities delivery to alleviate their administrative bur- • Simplify and streamline the budgetary den and incentivize compliance system at the central and subnational • Reduce earmarking in the business levels and gasoline taxes and increase the • Implement a single integrated financial flexibility to execute expenditures (for management information system for subnational governments with higher subnational entities (i.e. Guatemala capacity) to increase autonomy the and Mexico) delivery of services 27. Improve the • Simplify the General Adjusted Metho- • Improve the links between planning quality of the dology and differentiate appraisal and budgeting at the central and design and se- methodologies according to the size subnational levels lection of subna- or complexity of projects • Create a program to support systema- tional investment • Establish a facility to provide tech- tic capacity building for public invest- projects nical assistance to low-capacity ment management at the subnational departments and municipalities in level the preparation of medium-size and • Simplify the system to approve and large investment projects monitor the projects financed by the • Introduce matching grants/especial SGR incentives to finance subnational pro- jects that undergo a more rigorous appraisal and selection process for medium-size and large projects • Increase financial incentives for regional cooperation across juris- dictions to strengthen in particular functional metropolitan areas • Reduce the earmarking in transfers and improve targeting of resources 30 Note 0 Overview Table 0.1 2018 Colombia Policy Notes – selected policy options (cont.) Policy Area Short-Term Options Medium-Term Options Consolidating peace and reducing territorial gaps 28. Increase own • Reduce the number of earmarked • Provide additional revenue-raising source revenue taxes powers to the largest departments and mobilization to • Provide funding and technical assis- municipalities (within establish parame- reduce transfer tance to enhance the capacity of ters) dependency municipalities to raise property taxes, • Streamline the portfolio of taxes levied and increase including updating and modernizing by departments and municipalities local accounta- the cadastral and land registries and promote shared taxation between bility • Pass a new departmental and mu- the central and subnational govern- nicipal tax code defining tax bases ments and establishing ranges of rates. • Provide technical assistance to depart- • Allow municipalities to use instru- mental and municipal tax administra- ments such as congestion charges or tions tolls. • Provide a common information ma- • Promote more flexibility in the admi- nagement platform for tax administra- nistration of user tariffs and local fees tion/collection and optimize income from properties (rents, dividends) • Revise the business tax to reduce distortions • Unify excise tax rates and gasoline surcharges. 29. Ensure that go- • Establish a regional measure of we- • Simplify the intergovernmental fiscal vernments with ll-being framework and establishing a compre- different fiscal • Review the allocation formulae for hensive strategy to guide the sequen- capacities have SGP and SGR to account for popu- cing of the decentralization reforms equal ability to lation changes, disparities in regional provide basic well-being, and the gap between public services resources and mandates to deliver basic public services 30. Ensure adequa- • Strengthen productive projects mea- • Process in Congress an extension of te land restitu- sures in restituted land the Law 1448, supporting such request tion for victims • Establish a protocol for dismantling with the figures related to the universe the economic and political structures of land restitution claims, the analysis that have supported the disposses- of security conditions, and the pace sion of land, and consolidate a judi- of implementation of the restitution cial police team specialized in land claims matters • Set up for each one of the entities in- volved in the restitution process (IGAC, SNR and ANT) an action plan with ac- tivities, products, baseline, indicators, goals, and budget 31. Ensure the effec- • Harmonize the legal framework for tive reintegration demobilization and reintegration of ex-comba- tants 31 Colombia Policy Notes Table 0.1 2018 Colombia Policy Notes – selected policy options (cont.) Policy Area Short-Term Options Medium-Term Options Consolidating peace and reducing territorial gaps 32. Eliminate illicit • Harmonize voluntary substitution • Strengthen the coordination between crops and forceful eradication approa- the Directorate for the Substitution of ches Illegal Crops and the Ministry of Defense • Link the Development Programs with a Territorial-Based Focus and the National Program for the Subs- titution of Illicit Crops 33. Ensure adequa- • Ensure a sustainable and fisca- • Extend the period of validity of the Vic- te reparation of lly-sound implementation of the tims’ Law by at least 10 years beyond the victims Victims’ Law, focusing on collecti- current limit of, and revise the eligibility ve reparations criteria for individual victims in order to focus on the most affected 34. Develop and • Continue the land administration • For the water sector, integrate informa- operationalize reform from the previous adminis- tion systems and improve capacity to a system to tration and move forward with the collect and organize data on regional support robust national property cadaster policy and local trends decision-ma- • Continue and strengthen Terrida- • Identify opportunities for closing territorial king in territorial ta’s efforts to collect and standar- gaps and improving sectoral competi- development dize local and regional data for tiveness, review the agricultural sector policy monitoring and evaluation based on territorial analysis 35. Strengthen coor- • Clearly define the institutional • Strengthen ANT’s capacity at national dination among setup that guides the territorial and subnational level to provide land institutions in development agenda tenure services throughout the country in charge of territo- an effective manner rial development • For the water sector, operationalize the and streamline National Water Council territorial plan- • Provide economic incentives to streng- ning instruments then the POT modernos, and continue with technical capacity building to improve performance of SNGs • Use Contratos Plan as a tool for depart- ments to have a stronger role in promo- ting cooperation for investment projects with a regional focus 36. Develop a • Implement the Territorial and • Use performance-based grants as a tool portfolio of Land Use Planning General Policy to complement the current process of programs, (PGOT), emphasizing the concept asymmetric decentralization incentives, and of a portfolio of places where • As more urban municipalities build their investments public investment will be driven by capacities for local revenue generation, adapted to practical considerations use LVC and PPPs for infrastructure finan- the differential cing needs of territo- • Strengthen FINDETER’s efforts to achieve ries and based more balanced territorial development on practical by lending to a wider variety of SNGs considerations 32 Note 0 Overview Table 0.1 2018 Colombia Policy Notes – selected policy options (cont.) Policy Area Short-Term Options Medium-Term Options Consolidating peace and reducing territorial gaps 37. Invest in connec- • Give national government a more active tivity infrastructu- role in supporting the development of ur- re ban transport through the National Urban Transport Program (NUTP) • Define a resource framework for the stable financing of the road sector under public management, and continue with private sector participation through toll road concessions in high traffic corridors • Improve investment planning, project structuring and project management capacities at the SNG level to ensure that projects generate impacts at the regional level • Implement the recommendations of CONPES for the management of tertiary roads 33 Colombia Policy Notes 34 FISCAL POLICY NOTE 1 Prudent macroeconomic management helped ensure a gradual adjustment to the significant terms of trade shock of mid-2014-2015, but important fiscal efforts are still needed to safeguard fiscal sustainability. Significant development needs, including those related to the post-conflict, need to be met while at the same time ensuring continued fiscal consolidation. Meanwhile, hi- gher public investment is needed to help bolster growth in the medium term. Achieving higher public spending efficiency and greater progressivity of fiscal policy represent key challenges. Tax revenues, including at the subnational level, remain low as a share of GDP despite the 2016 tax reform. Furthermore, the tax system exacerbates income inequality and has large horizontal inequities, affecting economic efficiency. Meanwhile, fragmentation of the budget process, high spending rigidities, the lack of a comprehensive view of public investment, and the lack of mo- dern budgetary classification further limit the scope for allocative efficiency. Policy options that would help address these key challenges include the following. Additional in-depth reviews of quality, efficiency and effectiveness of public spending are critical for identif- ying opportunities for savings/increased spending efficiency and to ensure long-term fiscal sustai- nability, including in the areas of social subsidies, health, education, and public procurement. In parallel, efforts are also needed to raise additional tax revenues and to increase the progressivity of the tax system. The government could consider reviewing the tax bases of direct taxes, the tax schedule for personal income tax, and limiting tax expenditures. A comprehensive review of the subnational tax system is needed, to simplify and adequate its structure and tax design. Further- more, cadasters and land registries need to be updated to support subnational own-resource mobilization. Accelerating the implementation of tax administration reforms would help reduce tax evasion and reach the full domestic revenue mobilization impact of the 2016 tax reform. Context and Reform Progress mid-2014-2015. A sound macroeconomic fra- mework, characterized by inflation-targeting Colombia’s record of prudent macroeconomic and a flexible exchange rate, supported robust and fiscal policies has contributed to economic and resilient growth over the past 15 years and stability and has allowed the economy to ad- helped Colombia achieve and maintain in- just gradually to the large oil income shock of vestment grade rating. The introduction of the 35 Colombia Policy Notes Fiscal Rule further strengthened this framework percent of GDP, instead of 2.0 percent of GDP and facilitated a gradual adjustment to the previously. Meanwhile, tax reforms passed in significant decline in oil revenues experienced 2014 and 2016 designed to compensate for over the 2014-2016 period1, helping protect cri- part of the loss in oil revenue have yet to reach tical social spending and ensuring compliance their expected revenue impact6, with the tax- with the Fiscal Rule. to-GDP ratio remaining one of the lowest in the region. Colombia has reduced primary expen- Important additional fiscal efforts are needed diture by nearly 0.8 percent of GDP between to ensure fiscal sustainability in the context 2013 and 20177, but there is room for additional of structurally lower oil revenues. Macroeco- spending measures. nomic stability and fiscal discipline (including compliance with the Fiscal Rule) are funda- Colombia has considerable social and infras- mental for sustained growth and for safeguar- tructure spending needs, which have beco- ding Colombia’s investment grade rating. The me even more critical post-conflict. Spending Fiscal Rule, which was introduced in 20122, commitments associated with the end of the targets a 1 percent structural deficit by 2022 conflict include compensation and repara- (Figure 1.1). The structural deficit adjusts for tion under the Victims’ Law, land restoration the economic cycle3 and the oil price cycle4, and other agreements related to the peace which in 2017 were estimated at 0.5 percent process8, and investments to close the service of GDP and 1.2 percent of GDP, respectively, delivery gap in regions affected by conflict.9 for a total cycle of 1.7 percent of GDP. With The government also needs to protect capital a structural deficit target of 2 percent of GDP spending to sustain medium-term growth. Re- established by the Comité Consultivo de la Re- venue and expenditure policies must be con- gla Fiscal, the fiscal deficit of the central go- sistent with the deficit reduction path manda- vernment allowed under the Fiscal Rule in 2017 ted by the Fiscal Rule. was 3.7 percent of GDP, which was met.5 Given weaker than expected economic performan- Main Challenges ce and a higher negative output gap in 2017, the Fiscal Rule now allows for a more gradual Colombia needs to further consolidate its fiscal adjustment to the headline central govern- accounts in the context of structurally lower oil ment deficit between 2018 and 2022 of 1.6 revenues and additional expenditure pressures 1  Central government revenues declined by approximately COP24 trillion or 3.4 percentage points of GDP between 2013 and 2016. 2  Law 1473 (2011). 3  The economic cycle is determined as the non-oil tax revenue gap relative to potential. The elasticity of non-oil tax revenues to GDP is estimated at 1. The economic cycle component was estimated at 0.5 percent of GDP in 2017. 4  The oil cycle is determined by multiplying the marginal oil revenue with the deviation of Brent oil prices in t-1 from the long-term prices, calculated as a nine-year moving average centered in the year of the analysis (4-1-4). The oil cycle component was estimated at 1.2 percent of GDP in 2017 by the Fiscal Council. 5  The fiscal deficit was 3.6 percent of GDP. 6  The tax reform enacted at the end of 2016 was expected to increase central government revenues gradually by a cumulative 3.1 percentage points of GPD by 2022. However, the effect was lower than expected, partly due to the continued economic slowdown which depressed VAT revenue in particular. 7  The government reduced general spending, froze public employee numbers, and cut public investment. The number excludes the 0.3 percent of GDP used to constitute reserves from the COP 4.3 trillion or 0.5 percent of GDP fees received by the government in 2017 from Claro and ColTel (laudos). 8  See Policy Note #8 on Peace Consolidation. 9  See Policy Note #8 on Peace Consolidation for a more detailed discussion of the post-conflict commitments. 36 Note 1 Fiscal Policy Figure 1.1 Central Government deficit path under the Fiscal Rule 0 -1.1 -1.0 -1.0 -1.0 -1.0 -1.0 -1.0 -1 -1.3 -1.6 -1.0 -1.9 -1.9 -1.8 Percent of GDP -2.3 -2.2 -2.2 -1.3 -1.2 -1.1 -1.1 -1.0 -1.0 -2 -2.2 -1.5 -1.8 -2.4 -2.4 -2.2 -3 -3.0 -3.1 -4 -3.6 -4.0 -5 2014 2015 2016 2017 2018 2019 2020 2021 2012 2023 2024 2025 2026 2027 2028 Structural fiscal deficit MTFF 2017 MTFF 2018 Source: Ministerio de Hacienda y Crédito Público, Comité Consultivo de la Regla Fiscal. arising from the peace consolidation process, contributes to reducing inequality, although hi- while ensuring greater progressivity of its fiscal gher income deciles also benefit from it. Ove- system. Compliance with the Fiscal Rule requi- rall taxes and transfers in Colombia reduce the res a sizeable 0.7 percent of GDP reduction in Gini coefficient only marginally, significantly the central government deficit in 2019. less than in OECD countries (Figure 1.2). Public spending Progressive spending items represent only a small share of GDP. Old-age income support Weak progressivity of public spending for the poor (Colombia Mayor) is progressive, Public expenditure does not contribute to a and coverage has increased significantly in re- reduction in inequality. Public social spending cent years to 1.5 million people, but the bene- is relatively low as a share of GDP compared fit is small, ranging from 7 to 12 percent of the with OECD peers and redistributes relatively litt- minimum wage.13 This represented around 0.13 le.10 Spending on pensions is very regressive, es- percent of GDP in 2016. An impact evaluation timated to increase the Gini coefficient by 1.63 of the program shows that the program is we- percentage points11, with less than 6 percent of ll-targeted and effective.14 Social welfare pro- pensions accruing to poor households.12 Cen- grams like Red Unidos, Más Familias en Acción, tral government spending on pensions increa- Jóvenes en Acción, are well-targeted but they sed rapidly after 2005, reaching 3.7 percent by are relatively small as a share of GDP and of 2017, to finance the deficit in the pay-as-you government spending. Spending on subsidies15 go pillar. Spending on pre-school, primary and for the recently-introduced individual retire- secondary education contributes to reducing ment accounts Beneficios Económicos Periódi- inequality, however spending on tertiary edu- cos (BEPS) is still very small, as a result of limited cation is regressive. Public spending on health up-take. 10  OECD (2017). 11  Nunez (2009). 12  Lustig and Melendez (2014). 13  OECD (2016). 14  Econometría (2016). 15  The government subsidizes 20 percent of the contributions by low-income individuals. 37 Colombia Policy Notes Figure 1.2 Inequality as measured by the Gini coefficient, before and after fiscal policy 0.8 0.7 0.6 Gini points 0.5 0.4 0.3 0.2 IRL HUN BEL DEU AUT LUX FIN CZE SLO GRB FRA ITA PRT SVK SWE DNK ESP OCDE GRC LTU EST NOR POL LVA ISL CHE JPN NLD AUS NZL CAN USA ISR TUR KOR ESA URY ARG BRA CHL ALC ECU CRI MEX COL BOL PER GTM After taxes and transfer Before taxes and transfer Source: OECD (for OECD countries), Lustig 2016 (for LAC countries). Table 1.1 Distribution of social subsidies by income quintiles Share of GDP 1 2 3 4 5 Education (incl. training) 3.0% 25.7% 23.4% 21.4% 18.1% 11.4% Pensions (incl. Colombia Mayor) 2.3% 4.3% 7.8% 13.7% 23.4% 50.8% Health 1.9% 33.7% 23.6% 19.7% 15.1% 8.0% Public services 0.7% 21.8% 23.2% 22.9% 20.4% 11.7% Poverty 0.5% 33.4% 23.0% 15.0% 17.2% 11.5% Early Childhood 0.4% 32.0% 27.2% 22.1% 15.4% 3.2% Housing 0.2% 11.3% 22.5% 29.6% 26.6% 10.0% Others 0.2% 48.7% 35.7% 7.5% 5.4% 2.6% Total 9.0% 22.4% 19.9% 18.8% 18.8% 20.2% Source: DNP 2015. Overall, social subsidies are not well-targeted. for the lowest income quintile.16 The Gini coe- Colombia spent the equivalent of 9 percent of fficient was reduced by only 0.01 points after GDP (or 35.4 percent of central government these monetary subsidies. This negative result is revenues) on social subsidies in 2015, an in- primarily driven by subsidies to pensions, which crease of 44 percent since 2010, financing 62 are highly regressive, and represented close to social programs. Overall, the targeting of these 28 percent of the subsidies. Almost 75 percent subsidies was not adequate: the top quintile of of pension subsidies benefit the top two quinti- the income distribution received 20.2 percent les of the population, with only 12 percent ac- of the subsidies, compared with 22.4 percent cruing to the lowest two income quintiles. 16  DNP (2015). 38 Note 1 Fiscal Policy Figure 1.3 Education performance 550 EUROPE, US & CANADA EAP Japan Estonia Finland 525 Vietnam Canada China (B-S-JG) Hong Kong SAR, China Slovenia Korea 2015 PISA Score in Science Germany Poland Netherlands Portugal Ireland Latvia France Norway ECA Austria United States Czech Republic Sweden Russian Federation Italy 475 Iceland Croatia Israel Slovak Republic Bulgaria Chile Uruguay Romania 425 Costa Rica Turkey United Arab Emirates Trinidad and Tobago Colombia Mexico LAC Indonesia Brazil Peru MENA 375 0 10000 20000 30000 40000 50000 60000 70000 GDP Per capita in 2015 or latest, PPP (constant 2011 US$); World Bank ICP Source: EduStats, PISA, and Education at a Glance (OECD). Spending efficiency is low, especially in mathematics (according to PISA), less than the health LAC regional average and significantly lower Spending inefficiencies in the education sec- than that of OECD countries (76.6 percent) tor remain. Per student spending is in line with (Figure 1.3). Repetition rates remain relatively what is expected given the country’s income high, and the cumulative drop-out rate to the level, but educational outcomes are lower last grade of lower-secondary is high compa- than that of OECD peers. Expenditure on early red with regional peers and OECD countries childhood education (EIAIPI) is still low17, and (30.9 percent as of 2013). Moreover, the quality the enrolment rate (at age 4) is lower than in of education, as measured by the simple ave- peer countries. It is particularly low among poor rage of math, language, and science scores families and in rural areas. Staff compensation (SERCE and TERCE) has not changed signifi- as a share of expenditure is higher in Colom- cantly between 2006 and 2013.19 bia than in peers, at all levels, except for ter- tiary education. Colombia has had a sustained Public spending on health is progressive, but focus on quality improvements over the past issues of quality and inefficient spending per- decade18 and made notable gains in science, sist. Colombia’s gains in terms of health outco- math, and reading since 2012, yet only 33.7 mes lag that of some of its peers (Figure 1.4). percent of 15-year old students in Colombia Furthermore, rapid increases in public health score at or above proficiency requirements in spending in recent years can threaten the fi- 17  Additional financing of early childhood education by the large municipalities could allow ICBF to focus the resour- ces it manages in the municipalities with lower institutional and financial capacity, including rural areas. 18  Colombia has a strong culture of learning assessments with annual assessments of 3rd, 5th, and 9th grade students since 2012. 19  See also Policy Note #3 on School to Work Transitions. 39 Colombia Policy Notes Figure 1.4 Health expenditure and healthy life expectancy at birth 80 Healthy life expectancy at birth (years, 2015) 75 70 65 60 55 50 45 40 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 Health expenditure per capita, constant 2011 international US$ (Average 2010-2014) OECD Structural peers LAC Colombia Frontier Source: WDI, staff calculations. nancial stability of the General System of So- growing use of Framework Agreements for the cial Security in Health (SGSSS). The Colombian procurement of important goods and services; health system is also covering costs for medici- the design of standard bidding documents for ne and medical procedures that are not clear- specific activities and the professionalization of ly aligned with its health priorities.20 procurement staff. Nevertheless, the efficiency of the Colombian system of public procure- Despite improvements, the public procurement ment is affected by limited competition, com- system continues to face issues that limit its effi- plex regulations, limited development and ma- ciency. General government public procure- nagerial capacity of the actors participating in ment affects a significant share of public spen- the public procurement system, limited access ding, equivalent to 13.4 percent of GDP and to real time information, and registries duplicity 35.7 percent of general government expendi- of potential suppliers. ture. Colombia has made significant progress in recent years in strengthening the performance Revenues of the procurement system, with the creation of a Procurement Directorate (Agencia Nacio- Tax revenues are insufficient nal de Contratación Publica Colombia Com- Tax revenues as a share of GDP remain low pra Eficiente, CCE); the implementation of the despite the tax reform approved in 2016 and transactional procurement system (SECOP II); are expected to decline further under a “busi- the adoption of a more strategic approach ness as usual” scenario. General government to procurement as an essential component tax revenue is below that of OECD countries of public sector expenditure management; a and some of Colombia’s regional peers, with 20  Spending and Public Investment Commission (2018). See also Policy Note #6 on Health. 40 Note 1 Fiscal Policy the tax burden gap21, controlling for its level of 2016 tax reform does generate a cumulative economic development and structural cha- 3.1 percentage points of GPD by 2022, as the racteristics, estimated to be around 4 percen- government expected, central government tage points of GDP.22 General government tax tax revenues will remain relatively low at 16.1 revenues as share of GDP in OECD countries percent of GDP. stood at 34.3 percent in 2016, compared with 19.9 percent in Colombia. Income tax reve- Subnational tax revenues are lower compared nues, especially from personal income tax to other countries with similar levels of decen- (PIT), are low as a share of GDP, (Figure 1.5), tralization. Subnational tax revenues make up and tax benefits for personal income tax, in- about 18 percent of total tax revenue, with mu- cluding exempted income and tax discounts nicipal and departmental revenues represen- accounted for 59.5 percent of income tax ting 3.3 percent of GDP. Tax revenues are con- and CREE collections in 2016. Meanwhile, the centrated in a few jurisdictions (primarily large high corporate income tax burden is decli- cities) and around two-thirds are earmarked to ning, as the income tax for equity CREE (Law specific sector expenditures. Bogotá, Medellín, 1607 2012) was repealed, and the surcharge, Cali, Barranquilla and Cartagena concentrate and wealth tax gradually sunset.23 So far, the almost two-thirds of total municipal revenues. slower-than-expected pace of reforms at the Property taxes made up about 21 percent of tax and customs administration (DIAN) and subnational tax revenues24, economic activity weaker-than-expected private consumption taxes represent close to 50 percent, and other has delayed achieving the full revenue ge- taxes (tax stamps, taxes on sports and enter- nerating potential of the reform. Even if the tainment events, a public contractors’ contri- Figure 1.5 Income tax revenues, 2010-2014 average 20 Personal income tax Coporate Income tax 15 Percent of GDP 10 5 0 e ia Fin d Ire d er nd Fr y Po ce ze ru Hu h R. Sp l Ja in n re l Es ry Po ia nd ol le a m il Slo nia Ur k R. ge y M a os co ca ga ae Ro az an Ar ua pa ec an n bi in a a C hi al n Pe a la la an C exi Ri to a nt Br ng Isr rtu om C va str c ug m l el ta Au Ic G C G Source: WoRLD. 21  The “gap” is defined as the excess or deficit in tax collections with respect to international patterns, controlling for GDP, the proportion of population under 15 years of age and over 65, percentage of the labor force that is self-unem- ployed, coefficient of exports and imports with respect to GDP, and coefficient of rents from natural resources with respect to GDP. 22  IADB (2013). 23  The surcharge declines from 6 percent to 4 percent in 2018, and drops to 0 in 2019, and the corporate income tax rate declines from 34 percent to 33 percent in 2018. The wealth tax revenues will drop by close to 0.2 percentage points of GDP in 2018 24  Data for 2000-2009 period. 41 Colombia Policy Notes Figure 1.6 VAT revenues by country 6 Resid VAT Revenues (% of GDP) 2014 MDA HRV GEO 4 BLR BOL ARM UKR MAR HUN CHL ALB DNK FIN 2 KGZ BGR ECU PER ARG PRT EST SVNBFA CYPURY SWE NOR HND SLV AZEBRA LVA AUT 0 NIC ROU LTU CZE PRY DEU LUX MUS KHM SVK FRA COL RUS NPL TUR BEL MWI LAO GBR IRL -2 IDN GTM UGA THA TZA ESP ITA MEX DOM BWA CRI KAZ JAM LBN KOR MDG CIV JPN -4 LKA CHE PAN PHL -6 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 Resid Log GDPper capita*, 2014 Source: WoRLD and WB staff estimates. butions) represent 15.2 percent. At the same companies, as a result of numerous tax exemp- time, some local taxes generate significant tions, non-taxable income, tax deductions, compliance costs for taxpayers. Complian- discounts and special tax regimes (including ce costs for the local business tax ICA for an Special Economic Zones26). Some firms benefit average business in Bogotá can add up to 2.3 from “juridical stability” contracts that protect percent of its turnover. Law 1819 of 2016 (the them from subsequent changes to the tax re- structural tax reform) included some provisions gime, locking in permanently lower tax rates, to improve the ICA, including: (i) definitions of larger deductions, and exemptions that are no territoriality for the activities included in ICA; (ii) longer applicable to other firms. In addition, a unique national ICA tax form; (iii) a broader wide-spread tax evasion represents a form network of banks where taxes can be paid; of unfair competition. Estimates suggest that and (iv) authorization to municipalities (Conse- evasion could amount to around 4 percent of jos) to introduce a preferential system for ICA GDP for the income tax and VAT alone.27 There for small businesses. is also wide-spread abuse of the special taxa- tion regime for non-profits, which is designed The tax system has large horizontal inequi- for certain organizations with a social objecti- ties and exacerbates income inequality ve but used by a wide range of entities that The tax system is characterized by a high de- do not necessarily comply with the eligibility gree of horizontal inequity. This inequity has criteria. The evasion rate for the income tax for distortionary impacts that prevent the creation companies, although one of the lowest in the of a level playing field necessary to support region, was estimated at 38.9 percent on ave- greater diversification and higher productivi- rage from 2007 to 2012, with an average fiscal ty.25 There are significant differences in effecti- cost of 2.5 percent of GDP.28 Common evasion ve tax rates across sectors, industries and even techniques include: holding assets in and shif- 25  See Policy Note #2 on Productivity. 26  DIAN estimated that the fiscal cost of the lower tax burden for the Zonas Francas averaged COP168 billion for the 2012-2013 period, benefiting less than 600 companies. 27  Steiner and Medellin (2014). 28  Avila and Cruz (2015). 42 Note 1 Fiscal Policy ting revenues to low tax jurisdictions; omitting The tax administration (DIAN) has inade- to declare assets and/or revenues; or inflating quate resources to effectively fight tax liabilities and/or spending. Not charging or de- evasion claring VAT is also a widespread evasion practi- DIAN is facing significant weaknesses, which ce. According to some estimates, the VAT eva- hamper effective and efficient tax collections. sion in Colombia is around 40 percent;29 official The administration suffers from organizational, estimates put the evasion rate at 23 percent institutional, information technology, and hu- (equivalent to 2 percent of GDP). The wides- man resources shortcomings that enable tax pread use of cash facilitates tax evasion, as it evasion and foregone tax revenue. Limitations reduces the traceability. These factors result in in DIAN's technological and institutional capa- important market distortions and contribute to bilities create challenges, for example to issuing resource misallocation. electronic receipts properly and to processing and analyzing the information. Furthermore, Taxes do little to reduce inequality in Colom- lack of adequate capacity and resources has bia. Colombia is the country with the second created long delays in issuing the regulation highest income inequality in the region. Con- necessary for the full implementation of many sumption taxes, which tend to be regressive, aspects of the 2016 reform, which generated have a disproportionately large weight in ove- some legal uncertainty. rall tax revenues. General taxes on goods and services represent around 37.6 percent of total Shortcomings in the budget process affect tax revenues in Colombia, compared with an the implementation of policy priorities average of 32 percent of GDP in the OECD. There are important shortcomings in the budget Despite reduced rates for products of the ba- process that limit the scope for allocative effi- sic consumption basket, the VAT is overall re- ciency. Colombia’s budget is characterized by gressive.30 As for direct taxes, collections from high spending rigidity, linked to the earmarking the personal income tax, at less than 1 percent of revenues; legal and constitutional norms that of GDP, are low in comparison with the OECD impose minimum spending limits; pre-commit- average of 8.5 percent, and represent only 15 ted investment spending (Vigencias Futuras); percent of total income tax collections. The tax and legal claims (tutelas). According to CEPAL, reform did little to broaden the base of the per- close to 80 percent of spending is rigid, with sonal income tax, and with an effective rate rigid expenditure including personnel expen- that is almost flat around 5 percent along the diture, transfers and interest payments. Only income schedule, the tax lacks progressivity. In Costa Rica and Argentina fare worse in the fact, the exemption of pensions from the per- LAC region. To circumvent some of these bu- sonal income tax31 benefits the people with hi- dget rigidities, various mechanisms are used gher incomes, given that pensions accrue dis- that result in lower budget transparency, inclu- proportionately to the highest deciles and are, ding the wide-spread use of contract workers in addition, highly subsidized.32 in the public sector. Furthermore, the budget process is fragmented, with separate processes 29  OECD (2015). 30  IADB (2013). The increase in the VAT rate to 19 percent, while important for revenue generation, is likely to have further contributed to the regressivity of indirect taxes. 31  Pensions lower than 50 times the minimum wage are exempt from the PIT, which in practice implies that almost all pensions are exempt. 32  See Policy Note #4 on Pensions for a more detailed discussion. 43 Colombia Policy Notes for recurrent and investment spending, led by grams with similar objectives should fall under different agencies (Ministry of Finance and Na- the responsibility of the same entities to facilita- tional Planning Department), respectively. The- te spending traceability and evaluation, while re is also no comprehensive view of investment also avoiding duplications. In order to correctly spending at the national and subnational le- target these subsidies, rigorous technical crite- vels, and across the different financing sources ria should be applied. Subsidies should be ade- like the General Participations System (Sistema quately recorded in a standardized manner General de Participaciones, SGP) and royalties across entities, for example by recording the (with the latter following a separate, multi-year operating and administrative costs separately, budget process with different rules). The lack to facilitate a quantification of the overall level of modern budget classification impedes pro- of spending on subsidies. All subsidies should be grammatic budgeting, as well as the assess- accounted for in the fiscal accounts (including ment and control of implementation of these cross-subsidies for household consumption of programs. Overall, these negatively affect the public services; subsidies to families through allocation of budgetary resources to respond cajas de compensaciones; and others). to policy priorities, and make it difficult to assess public spending efficiency and effectiveness. Improvements in procurement systems, practi- ces and regulations could contribute to greater Policy Options expenditure efficiency. To increase efficiency of public procurement, the following is requi- Additional fiscal measures are needed both red: (i) the proposed Procurement Law should on the expenditure and on the revenue side. reduce/eliminate the dispersion of the current Such measures are critical to create space legal framework for procurement; (ii) all agen- for post-conflict costs, to protect critical so- cies need to transition to using SECOP II to im- cial spending, and avoid further cuts to public prove availability of workable information for investments, and at the same time ensuring strategic decision-making processes; (iii) the compliance with the Fiscal Rule. use of non-competitive methods should be limited33; (iv) the use of demand aggregation Conduct comprehensive reviews of mechanisms such as Framework Agreements quality, efficiency and effectiveness of could be extended to goods for which the- public spending; identify opportunities re is high demand by the state, including at for savings/increased spending subnational level, and should be mandatory efficiency for all levels of government (for example, the centralized procurement of medicines could Social subsidies should be evaluated to ensure be expanded to achieve cost savings). There that they are equitable, efficient and effective. should be stricter limits to modifying contracts, A standard evaluation process (approved by and the scope for contract renegotiations CONPES) should be established and targeting should be limited to exceptional situations, as mechanisms reviewed and improved. These renegotiations can reduce or eliminate the evaluations should ensure that the subsidies benefits of competitive processes. Prohibitions are justified, cost-effective, and do not have and conflicts of interest should be clearly defi- unwanted effects on behavior. Subsidy pro- ned, generally and for public employees. The 33  Activities following non-competitive methods accounts for almost 60 percent of public procurement. 44 Note 1 Fiscal Policy Unique Supplier Directory (Directorio Único chronic diseases through preventive medicine de Proveedores), administered by Colombia and primary care, and away from costly inpa- Compra Eficiente, as a dynamic information tient treatments. Stronger incentives to increase system for the public procurement system quality and reduce costs at provider level (IPS), should be used, incorporating also informa- and for territorial authorities with public health tion about suppliers’ activities. The platform responsibilities should be put in place. Insurers also should have interoperability with state ac- (Entidades Promotoras de Salud) should be counting and financial information to ensure incentivized to become more effective and greater transparency and accountability. efficient purchasers of care by awarding con- tracts based on robust measures of quality and There is room to increase efficiency in public outcomes.35 Good practices in risk-adjustment spending in education. To increase quality of mechanisms and payment instruments that in- spending on early childhood education, a troduce risk-sharing between insurers and pro- more structured curriculum for the Initial Edu- viders should be considered. Strengthening the cation and Integral Attention to Early child- country’s capacity to evaluate cost-effective- hood (Programas de Educación Inicial y ness and appropriateness of new technologies, Atención Integral a la Primera Infancia, EIAIPI) as well as regulation of medicines and price-se- should be used and teacher training, technical tting criteria would greatly contribute to the sys- support and continued professional develop- tem’s short and long-term sustainability. Colom- ment for teachers need to continue. Spending bia could use the modelo integral de atención efficiency in education could be supported by en salud (MIAS) to move to a model based on improving the quality of teaching and school primary health care principles, strengthening administrators; professionalizing the teacher the role of primary care physicians, and expan- career path34; adopting higher recruitment ding the roles and responsibilities of nurses and standards (recruiting from the upper distribu- other medical professionals, removing legal tion of SABER 11 or SABER PRO); expanding the obstacles for their increased roles in health care. programs Excelencia Docente y Académica Furthermore, health system information should Todos a Aprender (PTA) and the scholarship be used to ensure improvements in quality and program for Masters degrees and credit scho- efficiency gains, by supporting monitoring and larships for teachers. The implementation of planning and by providing more detailed infor- flagship programs such as the Jornada Única mation on service quality and outcomes.36 could be enhanced, and the targeting of the program providing food at schools (Programa Accelerate implementation of tax de Alimentación Escolar, PAE) could be impro- administration reforms (DIAN) to reduce ved. Finally, an integrated information system tax evasion and reach the full domestic of educational quality, covering all educatio- revenue mobilization impact of the nal levels, should be put in place. 2016 tax reform To contain costs in the health sector, it is neces- Stronger control of the special tax regime for sary to shift resources to an effective control of not-for-profit entities (Entidades sin ánimo de 34  This entails merit-based recruitment and promotion process, induction, evaluation of in-service teachers linked to training programs. 35  OECD (2015b). 36  See Policy Note #6 on Health. 45 Colombia Policy Notes lucro, ESAL) is needed to close loopholes that sonnel would allow them to make better use of allow non-eligible organizations to unduly en- information technologies to detect potential joy its tax benefits. Law 1819 of 2016 and De- fraud and increase capacity to perform audits. cree 215037 need to be fully implemented. The latter regulates who can benefit from the Adopt additional tax policy measures to Special Tax Regime and the tax treatment of increase revenues and efficiency donations38 made by ESALs.39 The unified an- nually-updated web registry40 of ESALs should The current regulations related to Zonas Fran- facilitate control and supervision by DIAN and cas need to be reviewed. Special tax treat- increase the transparency of the qualification, ment to corporations can only be justified if permanence and updating process. Some of the benefits in terms of job creation and invest- this information would need to be made pu- ment outweigh the cost (including the forego- blic. In addition, the introduction of balance ne tax revenue and the economic distortions sheet controls is needed to dis-incentivize inde- they introduce). As such, a rigorous cost-bene- finite accumulation of profits that contravenes fit analysis should be conducted for all existing ESALs’ social objectives. Zonas Francas, as well as for new tax benefit schemes such as those for new investment in Tax administration reforms need to continue to post-conflict regions. Single-company Zonas reduce compliance costs and enable reve- Francas should be phased out. Tax expenditu- nue mobilization. Good corporate governan- res linked to Zonas Francas should also be expli- ce and autonomy play a critical role. DIAN’s citly quantified42 and made public. spending on technology should converge to international standards, and the limitations of The personal income tax base should be its information systems should be addressed.41 broadened and the rate schedule adjusted Low spending on technology is reflected in low accordingly. Over 80 percent of the active incidence of electronic payments and low le- population has incomes that fall below the cu- vels of electronic government. It also limits the rrent threshold.43 To increase the progressivity of effectiveness of the fight against contraband, the tax system, a change to the tax schedule due to lack of traceability systems and scan- could be considered. The maximum marginal ners. In addition, increased autonomy in hu- tax rate of 33 percent could be increased to 35 man resource management could increase percent, as suggested by the Tax Commission, the efficiency of DIAN, as more qualified per- and the number of income brackets could be 37  Decree 2150 regulates Articles 105, 140 and 163 of Law 1819 of 2016 and Article 22, 23, and 257 of the Tax Code. 38  Donations will be treated in a harmonized manner, with 20 percent of the donation resulting in a 20 percent tax discount. It limits the total tax discount for Art. 255,256,257 of the Tax Code to 25 percent of that year’s ISR. 39  The reimbursement of ESALs’ contributions and the distribution of surpluses, directly or indirectly, are prohibited even after dissolution or liquidation. 40  The web registry (and the annexes) should include information regarding the activity, the amount and destination of the net surplus or profit, the annual management report, the amount and destination of permanent resource ear- marking (asignaciones permanentes), the name and ID of management, control, founders, donors, the value of the assets at the previous year-end, annual results report, financial statements. 41  The 2016 Tax reform (Law 1819) mandated DIAN to prepare a 5-year technological plan to improve tax adminis- tration and revenue collection efficiency. 42  The MFMP does not quantify tax expenditures resulting from the fiscal benefits extended to Zonas Francas (tax free zones). DIAN estimated that the fiscal cost from the reduced tax applied in Zonas Francas was COP200 million in 2012 and COP168 million in 2013. There are 31 permanent Free Zones (with 500 companies operating in them), and numerous special or single-company free zones. World Bank (2012). 43  Schatan (2015), World Bank (2012). 46 Note 1 Fiscal Policy increased. The income bracket for the 0 per- common information management platform cent marginal tax rate could be lowered, and could support local governments in administe- an intermediary marginal tax rate between ring property and other local taxes and central the 0 percent and the 19 percent could be rules could ensure higher compliance with pro- introduced. Pension incomes should have the perty taxes. same tax treatment as other income, including the same tax benefit caps. A comprehensive review of the subnational tax system is needed, to simplify and adequate PIT-related tax expenditures should be redu- the structure and tax design. There are nume- ced. The cap for all deductions, exemptions rous subnational taxes with very different bases and tax benefits for labor income, which is and tax rates across departments and munici- currently at 40 percent of the annual income palities, which increase tax compliance costs up to 5040 UVT (COP167.1 million), should be for taxpayers and make local tax administra- lowered to increase the effective PIT rate but tion more complex. For specific consumption also to improve progressivity of the tax system. taxes, the dispersion of tax rates should be re- Regressive exemptions, such as those on volun- duced, including with respect to VAT. The lo- tary savings for retirement and real estate, and cal business tax (ICA) should be standardized deductions on incomes for employees should across activities, taking different rates of pro- be phased out. The cap for non-income labor fitability into consideration. Over the medium deductions should be lowered. term, Colombia should consider replacing the ICA with a more efficient and simpler tax. Ad- Taxation of dividends should become more ditionally, to simplify the subnational tax system progressive. They are currently taxed at 5 and reduce compliance and administrative percent for dividend incomes greater than costs, taxes that have low revenue generation 600 UVT44 (COP19.9 million) and at 20 UVT potential (such as stamp taxes, slaughter, noti- plus 10 percent for dividend incomes greater ces and boards, etc.) should be eliminated or than1,000 UVT (COP33.2 million). Furthermore, replaced with a simple unique tax.46 the loophole on dividends received but not dis- tributed should be closed. The preferential tax regime for capital gains should be reviewed, and the tax should also be increased. Enhance subnational own-resource mobilization Updating cadasters and land registries and as- suming same effective tax rates could double tax collections from this source.45 Strong insti- tutional coordination and political support are needed to fully implement the Multi-Purpose Cadaster as laid out in CONPES 2859 of 2016. A 44  One Unidad de Valor Tributaria (UVT) was set at COP33,156 for year 2018 with the Resolution 000063. 45  Sánchez and España (2012). For more detailed recommendations, see Policy Note #9 on Territorial Development. 46  For more detailed recommendations, see Policy Note #7 on Financing and Managing Subnational Governments. 47 Colombia Policy Notes Annex 1.1 Matrix of Policy Options Development Policy Options Challenge Short Term Medium Term 1. Increase public • Conduct comprehensive reviews of • Unify recurrent and investment bud- spending effi- quality, efficiency and effectiveness of gets ciency public spending and identify potential • Adopt program budget and mo- savings dern budgetary classification • Account for all subsidies in the fiscal • Reduce/eliminate the dispersion of accounts the procurement legal framework; • Make SECOP II use mandatory for all and make use of demand aggre- agencies, limit the use of non-competi- gation mechanisms mandatory for tive procurement methods and impose high-demand goods, including at stricter limits on contract amendments subnational level • Prioritize the implementation of Jornada • Put in place an integrated system of Única to the poorest, most vulnerable information of educational quality segments of the population; and im- • Shift to a health model based on prove targeting for the school feeding primary health care principles program PAE • Strengthen the technical capacity • Introduce stronger incentives to increa- to evaluate the appropriateness se quality and reduce costs at health of new technologies (IETS, Institu- services provider level (IPS) and for the to de Evaluación de Tecnologías territorial authorities en Salud); and the regulation of • Introduce reimbursement mechanisms medicines and their price-setting that result in a more appropriate risk criteria by the Medicine Commission sharing by insurers and providers (CNPMDM) • Award contracts to EPS based on robust measures of quality and outcomes 2. Reduce tax eva- • Strengthen control of the special tax sion regime for not-for-profit entities (ESAL) • Improve DIAN’s investment in informa- tion technology to address the serious limitations of its information systems • Increase DIAN’s autonomy in human resource management 3. Increase tax • Review regulations for Zonas Francas revenues • Broaden the tax base of the personal income tax; reduce PIT-related tax ex- penditures; adjust the tax schedule • Increase progressivity of dividend taxa- tion 4. Enhance sub-na- • Update the cadasters • Conduct a comprehensive review tional gover- • Put in place a common information of the subnational tax system to nment own management platform simplify and adequate the structure, source revenue tax design, procedural code, as well as the sanction framework • Replace ICA with a more efficient and simpler tax • Eliminate low revenue generating sub-national taxes, or replace them with a single tax 48 Note 1 Fiscal Policy REFERENCES Alvaredo, F. and J. Londoño (2013), “High Incomes neación, Archivos de Macroeconomía, No. 359. and Personal Taxation in a Developing Economy: OECD (Organisation for Economic Co-Operation Colombia 1993-2010”, CEQWorking Paper, No. and Development) (2014a). Consumption Tax 12, March. Trends 2014: VAT/GST and Excise Rates, Trends Ávila, J., y Cruz, Á. (2015). Colombia: Estimación de and Policy Issues. Paris: Publications OCDE. la Evasión del Impuesto de Renta de Personas OECD (2014b), OECD Territorial Reviews: Colombia Jurídicas 2007-2012. Bogotá: DIAN: Subdirección 2014, OECD Publishing. de Gestión de Análisis Operacional. OECD (2015a). OECD Economic Surveys: Colom- Comisión de Expertos para la Equidad y la Competi- bia 2015. Paris: OECD Publishing. http://dx.doi. tividad Tributaria (2015). Informe final. org/10.1787/eco_surveys-col-2015-en Comisión del Gasto y la Inversión Pública. 2017. In- OECD (2015b). OECD Reviews of Health Systems: forme final. Presentación. http://www.repository. Colombia 2016. Paris: OECD Publishing. fedesarrollo.org.co/handle/11445/3516 OECD (2016). OECD Reviews of Labour Market and De la Maisonneuve, C. (2017). “Towards more in- Social Policies: Colombia 2016. Paris: OECD Pu- clusive growth in Colombia”, OECD Econo- blishing. mics Department Working Papers, No. 1423, OECD (2017). OECD Economic Surveys: Colom- OECD Publishing, Paris. http://dx.doi.or- bia 2017. Paris: OECD Publishing. https://doi. g/10.1787/334902e0-en org/10.1787/eco_surveys-col-2017-en DNP (Departamento Nacional de Planeación) Olaberría, E. (2017). “Reigniting Growth through (2015). Mimeo. Productivity-Enhancing Reforms in Colombia.” Econometría (2016). Evaluación de impacto del OECD Economics Department Working Papers programa Colombia Mayor que permita medir 1424. https://doi.org/10.1787/dac4e274-en. el efecto causal de la intervención en el ingreso, Sanchez Torres, F., España, I., and Zenteno Gonzalez, consumo, pobreza y condiciones de dignidad J. (2012). "Sub-national Revenue Mobilization in de los beneficiarios. Informe final. Bogotá. Latin American and Caribbean Countries: The Galvis-Aponte, L.A. (2015). “La Eficiencia del Gasto Case of Colombia," Research Department Publi- Público en Educación en Colombia”, Economía cations 4820, Inter-American Development Bank, & Región, Vol. 9, No. 2, (Cartagena, diciembre Research Department. 2015), pp. 75-98. Schatan, R., Pérez-Porrúa, J.M. y C. Pérez Trejo. IADB (2013), More than Revenue: Taxation as a De- (2015). Reforma de 2012 y Nuevos Retos de la velopment Tool, Corbacho, A., V. Fretes Cibils Política Tributaria. Departamento de Finanzas and E. Lora (eds.), Development in the Americas, Públicas del FMI- mimeo. Inter-American Development Bank, Washington, Steiner, R. (2014), “Taxation and Economic Grow- DC. th in Colombia”, IDB Working Paper Series, No. Lustig y Meléndez (2014). “Social Spending, Taxes IDB-WP-493, Inter-American Development Bank, and Income Redistribution in Colombia”, Mimeo, Washington, DC, February. CEQ. Steiner, R. and J.C. Medellín (2014), “Parte II: Elemen- Ministerio de Hacienda y Crédito Público (2017), tos para una nueva reforma tributaria”, in Pers- Marco Fiscal de Mediano Plazo, June. pectivas Fiscal 2014-18, Fedesarrollo, April. Ministerio de Hacienda y Crédito Público (2018), World Bank (2012). “Tax expenditures in Colombia Marco Fiscal de Mediano Plazo, June. a proposal for a comprehensive and systematic Montenegro Trujillo, S., L.F.J. Salazar and C.A. Hurta- evaluation of this policy instrument”. do Martilletti (2013b). “Los subsidies pensionales World Bank (2016). Reforma del sistema tributario a en el régimen de reparto colombiano: reformas nivel local: El caso del ICA en Bogotá (mimeo). paramétricas para focalizar correctamente el Yori Parra, G., D.M. Parra Garzón and P.H. Sierra Re- gasto social del estado”, Documentos CEDE, No. yes (2013), “El Gasto Tributario en Colombia. Prin- 33, Universidad de los Andes. cipales beneficios en el impuesto sobre la renta e Núñez, J. (2009), “Incidencia del Gasto Público So- IVA. Años gravables 2010 y 2011. Actualización”, cial en la Distribución del Ingreso, la Pobreza y Cuaderno de Trabajo, No. 50, DIAN, December. la Indigencia”, Departamento Nacional de Pla- 49 Colombia Policy Notes 50 PRODUCTIVITY NOTE 2 There has been no productivity growth in Colombia since 1951, reducing potential economic growth and wellbeing. Overall productivity performance is a result of productivity dynamics at the firm level, influenced by both external and internal factors to the firms’ operations. Four challenges have been identified for such poor performance: (i) regulatory, tax and tariff distortions that create a restrictive business environment; (ii) underdeveloped and costly logistics that limit Colombia’s integration with international markets; (iii) firms lacking production, tech- nological and innovation capabilities needed to catch up with the production frontier; and (iv) business informality, which correlates with low productivity performances. The skills mismatch is another factor contributing to low productivity growth and is discussed in the Policy Note #3 on School to Work Transitions. Public policy should focus on eliminating barriers to growth and external competition; it should also provide the right incentives for capital, skills and knowledge accumulation; correct govern- ment and market failures; promote private sector investment and participation; and support fir- ms’ capabilities with an appropriate policy mix that expands programs that are proven successful and eliminate duplications in support to firms’ development. Context And Reform Progress ged 4.1 percent1, while productivity grew at an average of 0.2 percent (Figure 2.1).2 This Even though Colombia’s economy has proven low productivity growth represents a missed resilient to various external shocks over the opportunity for improving the well-being of Co- years, the disappointing productivity growth lombians as productivity growth is the ultimate has been a missed opportunity to reduce po- long-term driver for improving a country´s living verty and promote shared prosperity. In the standards.3 If Colombia had experienced the period 1951-2016, economic growth avera- same productivity growth as China since 1954, 1  All productivity and GDP data and estimations are based on The Conference Board (2017) Total Economy Databa- seTM Growth Accounting and Total Factor Productivity, 1950-2016, November 2017 (Adjusted Version). 2  Productivity growth was lower than 0.5 percent in 38 out of the 66 years analyzed. 3  Krugman (1994). 51 Colombia Policy Notes Figure 2.1 Total Factor Productivity growth, 1951-2016 5.0% 4.4% 3.7% 2.5% 0.8% 0.0% -1.2% -2.5% -3.2% -4.5% -5.0% 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: The Conference Board (2017), Total Economy DatabaseTM Growth Accounting and Total Factor Productivity, 1950-2016, November 2017 (Adjusted Version). its income per capita would be five times hi- ductivity growth rather than to any structural gher today. Similarly, if Colombia’s productivity transformation of the economy. Following Ro- growth had been the same as Uruguay´s GDP drik’s decomposition5, we find that labor pro- per capita would have been double what cu- ductivity growth in Colombia is mainly due to rrently is today.4 productivity growth within sectors rather than to productivity growth resulting from realloca- Total factor productivity (TFP) has contributed tion of labor between sectors (i.e. structural negatively to economic growth in almost every transformation). Similarly, our results show that year over the last three decades. In the last de- there is no evidence of conflicting growth-re- cades growth in Colombia was mostly driven ducing structural change in Colombia during by capital and labor expansion, with smaller this period, compared to what Rodrik finds for contributions by higher value-added inputs Latin America and Africa between 1990 and such as skilled labor and information and com- 2005. In conclusion, structural transformation munication technology (ICT) capital. Instead had a neutral effect on labor productivity total factor productivity has contributed nega- growth during the last 25 years in Colombia.6 tively to growth in all but five years since 1987 (Figure 2.2). Main Challenges Labor productivity growth has been positive Overall productivity growth is influenced by since 2001, mainly due to within-sector pro- firm-level productivity growth7, which responds 4  Productivity in the agriculture sector is not specifically discussed in this note, but it is also a crucial area contributing to overall low productivity in Colombia. First, agriculture is characterized by lower productivity than other sectors as it employs more than 15 percent of workers but contributes just 6 percent of GDP. Second, agricultural productivity growth has been lower than in other comparator countries (Mexico, Brazil, Argentina, Chile) during the last 20 years. USDA (2014); Castro (2017). For a detailed analysis of the causes of low productivity in agriculture, which include land distribution inequality and ineffective factor markets, refer to the recent World Bank report “Getting agriculture going in Colombia”. World Bank (2018). 5  Rodrik (2011). 6  A complementary counterfactual exercise confirms this finding, in which labor productivity growth would be prac- tically the same as the observed, if the labor shares across sectors are assumed to remain the constant as in 1990 for the entire period. 7  See for instance Brown et al. (2016). 52 Note 2 Productivity Figure 2.2 Economic growth decomposition, 1957-2016 6 5.5 5 4.5 0.9 4.1 4.0 3.9 Percentage points 4 1.3 1.8 0.2 1.8 2.7 3 1.8 2.9 1.4 0.8 0.5 1.5 2 0.4 0.7 0.7 0.3 1 2.0 2.3 1.3 1.3 1.0 1.4 0 -0.6 -0.6 -0.7 -1 1957-1966 1967-1976 1977-1986 1987-1996 1997-2006 2007-20016 Labor Quantity Contribution Labor Quality Contribution Total Capital Contribution TFP Source: The Conference Board (2017), Total Economy DatabaseTM Growth Accounting and Total Factor Productivity, 1950-2016, November 2017 (Adjusted Version). to factors that are external and internal to firms’ lombia (GoC) implemented important milesto- operations. External factors affect the deci- nes: it issued a decree12 creating the one-stop sions and actions firms take regarding their per- shop Ventanilla Única Empresarial (VUE) for formance in the market while internal factors firm registration and other business activities, are related to managerial practices, talent, re- and launched a national strategy to eliminate, search and development (R&D), and innova- automate and simplify barriers, regulations or tion, among others.8 Colombia faces five main administrative procedures (known as “menos challenges for productivity growth: regulatory, trámites, más simples”). tax and tariff distortions; costly logistics; weak firm capabilities; business informality and skills Despite these improvements, businesses conti- mismatch.9 nue to face significant regulatory barriers and restrictions imposed by redundant and ineffi- Regulatory, tax and tariff distortions cient regulations. In 2014, Colombia establi- The Colombian government has made impor- shed a policy roadmap for regulatory improve- tant efforts to improve the business environ- ment13, which recommends ex-ante regulatory ment. Since 2008, Colombia has progressively impact analysis (RIA) and appropriate public eliminated procedures and the time required consultations through a web platform Sistema to open a business: procedures were cut from Único de Consulta Pública (SUCOP) to minimi- 11 to 8, and time was reduced from 40 days to ze adverse impact of new regulations limiting 11 days in 201710, even if these improvements markets functioning. However, RIA is not yet le- have not been implemented uniformly across gally enforced and the reforms do not affect the country.11 In 2017, the Government of Co- the stock of distortionary regulations and go- 8  Syverson (2011). 9  For the latter see also Policy Note #3 on Boosting Youth’s Skills and Easing Transition from School to Work. Particular attention is given to the lack of responsiveness of the supply of skills to the demand from private companies. 10  World Bank (2017b). 11  World Bank (2017b). In some cities opening business entails 13 to 14 procedures, and takes 30 to 40 days. 12  Decreto 1875 (2017). 13  Documento CONPES 3816 Mejora normativa: análisis de impacto. Available for download at https://colabora- cion.dnp.gov.co/CDT/Conpes/Econ%C3%B3micos/3816.pdf  53 Colombia Policy Notes vernment interventions. According to the Na- siness 2018, Colombia’s effective rate of corpo- tional Planning Department (DNP), between rate taxation is one of the highest in the region 2000 and 2016, the executive branch of the (69.7 percent), after Argentina (106 percent), Colombian government issued 94,748 regula- well above the LAC and OECD averages (52.1 tions14 (9,222 in 2016 alone), many of which im- and 42.1 percent, respectively).19 The 2016 tax pose additional regulatory burdens on private reform also introduced the monotributo (single businesses.15 Furthermore, state involvement in tax) a simplified tax for individuals owning small business operations (price controls and com- businesses in retail and beauty salons, with cer- mand and control regulation) is higher than tain restrictions. However, the effective rate of the average among Organisation for Econo- the monotributo is greater than that of the or- mic Co-operation and Development (OECD) dinary income tax regime for individuals20 and countries. The latest OECD Economic Survey of the benefits of the monotributo do not com- Colombia estimates that aligning market regu- pensate the higher tax burden21, which resulted lation to OECD standards could boost GDP by in a very limited uptake. Furthermore, paying 0.25 to 0.5 percent annually within 5 years.16 As taxes is burdensome and time-consuming: it suggested by the recent Doing Business (2018) takes 15 payments and 239 hours a year, com- report, key areas where Colombia lags include pared to 11 payments and 163 hours a year on contract enforcement (177/190), paying taxes average in the OECD.22 The lack of coordina- (142/190) and trading across borders (125/190). tion, at least in terms of thresholds and tax ba- ses, between the national and subnational tax Recent fiscal reforms have addressed some structures leads to double taxation and other distortions, but have not eliminated the misa- inefficiencies. As an example, tax compliance llocation resulting from the existing tax system. cost of the ICA (local business tax) is estimated In 2012, Colombia approved a tax reform17 de- on average at 1 percent of total sales, higher creasing payroll taxes by 13.5 percentage. Fur- than the tax rate itself.23 thermore, the 2016 tax reform18 established a progressively lower corporate income tax rate, Although trade-related tariffs have gradually reducing it by 7 percentage points by 2019, declined and are relatively low, tariffs disper- although it will remain higher than OECD and sion has increased and there are important LAC average tax rates. According to Doing Bu- non-tariff barriers that undermine internatio- 14  According to DNP (2017), in a given day, the national executive entities would issue 2.8 decrees, 11.2 resolutions, 0.3 circular letters, and 15,4 other type of norms.  15  Out of these 9,222 norms issued in 2016, 1,070 were decrees, out of which only about 45 percent were considered substantial. 16  OECD (2017). 17  Law 1607 (2012). 18  Law 1819 (2016). 19  For the methodology to calculate the total tax and contribution rate as percentage of profits please refer to http://www.doingbusiness.org/Methodology/paying-taxes#DB_tax_total. In the case of Colombia, the calculation is as follows (statutory tax rate in parenthesis): municipal tax of 19.52 percent (1.10 percent) + corporate income tax of 16.33 percent (25 percent) + social security contributions of 14.12 percent (12 percent) + financial transaction tax of 6.51 percent (0.40 percent) + CREE of 5.88 percent (9 percent) + payroll tax of 4.51 percent (4 percent) + real estate tax of 1.48 percent (1 percent) + urban boundary tax of 0.79 percent (2.6 percent) + net wealth tax of 0.29 percent (0.15 percent-1.0 percent) + vehicle tax of 0.26 percent (2.5 percent) = 69.7 percent. 20  The effective rate of taxation is only lower than the income-tax rate for individuals with at least 30 percent profits in the highest income category. 21  CPC (2017). 22  Excluding subnational taxes, which make the tax burden even higher.  23  World Bank (2015). 54 Note 2 Productivity Figure 2.3 Ad-valorem equivalent of Non-Tariff Measures, 2000-2004 40 39.0% 35 30 28.3% 25 25.7% Percent 24.7% 20 22.3% 21.7% 21.5% 20.5% 18.7% 15 15.2% 13.8% 5.9% 5.2% 10 3.3% 2.6% 9.6% 9.3% 9.2% 9.1% 7.7% 7.2% 5 0 Brazil Colombia Mexico Peru Argentina Chile Ecuador All Agriculture Manufacturing Source: Kee at al. (2006). nal integration efforts. The Colombian trade the mining sector, Colombia’s participation in regime continues to be complex and burden- GVCs has decreased since 1995 and it is the some due to high dispersion in tariffs and the lowest among comparator countries.26 presence of non-tariff measures (NTM), which have increased over time. As shown in Figure Costly logistics 2.3, from 2000 to 2004, the Ad-Valorem Equiva- lent of NTM for Colombia was estimated to be In recent years, the Colombian government higher than in similar economies in the region, started taking steps to develop the logistics particularly for agricultural products.24 In fact, sector to improve competitiveness. The gover- NTMs in the agriculture and poultry sectors are nment included the objective of providing in- considerably higher than in other sectors. frastructure, logistics and transport services for regional integration and competitiveness in the As a result, Colombia is not integrated into glo- National Development Plan 2014-2018.27 Du- bal value chains (GVCs) in a significant way, ring this period, progress was made on several and its integration is mostly through forward fronts: implementation of legal reforms to pro- linkages. In Colombia foreign inputs represent mote public-private partnerships for infrastruc- only 8.9 percent of exports (2014), making the ture investment; launch of the process to res- country the second to last (after Saudi Ara- tore the navigability of the Magdalena River; bia) in a sample of 59 countries analyzed by and launch of the Master Plan of Intermodal a recent study.25 Similarly, the share of foreign Transport. Also, Colombia adopted the World value added in Colombian exports (16 per- Trade Facilitation Agreement28, and issued a cent) is half of that in countries such as Mexico, new Customs Statute29, which introduced the Thailand and Malaysia. Furthermore, excluding regulatory framework for important improve- 24  Kee at al. (2006). 25  OECD (2018). 26  Arenas and Taglioni (2015). 27  The National Logistics System and the National Logistics Strategy were included in the National Developing Plan (2010-2014). 28  Ratified by Congress on January (2018). 29  Decree 390 (2016). 55 Colombia Policy Notes ments such as the possibility of advanced de- a lack of human capital with skills suited for the clarations; adoption of Dirección de Impuestos logistics sector, and the supply of formal logis- y Aduanas Nacionales (DIAN) risk manage- tics training is scarce.34 ment system; electronic payment; abbreviated customs clearance; and use of non-intrusive Behind-the-border barriers restrict competi- inspection equipment. However, many of these tiveness of the Colombian logistics sector, li- reforms still lack full implementation. miting the country’s international integration. Of the firms surveyed in the ENL (2015), 11.8 Despite these recent efforts, logistics are poor percent believe that the foreign-trade logis- and the logistics service sector is underdeve- tics sector is not competitive, mainly as a result loped, hindering economic integration and of inefficient customs management. Respon- productivity growth. According to the World dents point to complex custom procedures Bank’s Logistics Performance Index, in 2016 and a lack of knowledge about current regu- Colombia ranked 58 out of 160 countries, re- lations. In Colombia, cargo inspections take 5 presenting a considerable improvement with days on average, compared to about 2 days respect to 2016 when it ranked 94 out of 160. in Mexico, Chile and Peru; import procedures Such performance is due to improvements take 130 hours due to customs declarations, in the efficiency of the clearance process by which take between 83 and 109 hours. border control agencies, including customs, in the ease of arranging competitively priced shi- Weak firm capabilities pments and in the ability to rack and change consignments. Nonetheless, according to the Good managerial and organizational practi- 2015 National Logistics Survey30 (ENL, in Spani- ces, crucial for innovation and firm producti- sh), logistics costs in Colombia are estimated vity, are especially low in Colombia, and ma- at 14.97 percent of total sales, higher for sma- nagers systematically overestimate the quality ller firms. In terms of quality, only 77.3 percent of their managerial and organizational structu- of deliveries arrive on time, while just 57.8 per- re.35 Recent empirical evidence suggests that cent are considered perfect orders.31 The use about 25 percent of cross-country productivity of logistics operators is low (37.5 percent32) and gaps are a result of management practices36, concentrated among large firms. Many firms and management quality is significantly higher operate their own services mainly due to the in more advanced and productive countries low supply of specialized tailor-made logistics (Figure 2.4). Yet, management practices in Co- services, particularly for small firms; lack of in- lombia are poorer than in most countries in the novation; and low ICT use. In this under-deve- sample37, including comparable countries in loped market prices are high.33 Finally, there is the region such as Argentina, Brazil and Chile.38 30  DNP (2015). 31  Idem. 32  Idem. 33  Idem. 34  Only 61 percent of universities offering logistics training are accredited and just 3 percent of academic programs in logistics are accredited. 35  See Cirera & Maloney (2017) for an overview of the literature on firm capabilities for innovation. 36  Bloom et al. (2014) 37  Argentina, Australia, Brazil, Canada, Chile, China, Colombia, France, Germany, Great Britain, Greece, India, Italy, Japan, Mexico, New Zealand, Northern Ireland, Poland, Portugal, Republic of Ireland, Singapore, Sweden and USA. 38  This is true across all areas: monitoring, targets, people management and, particularly, operation. 56 Note 2 Productivity Particularly worrying is how managers syste- Figure 2.4 Management quality and matically overestimate the quality of their economic growth managerial and organizational structure: 3.5 SWE Colombian firms within the sample have the DEU USA largest over-estimation gap. This is explai- JPN Management quality FRA CAN GRB ned by a variety of reasons, including lack 3.0 MEX POL ITA AUS PRT NZL SGP of knowledge of high-standard managerial CHN IRL CHL practices; the prevalence of family-owned KEN IND NGA BRA ARG ESP 2.5 MMR COL GRC firms; asymmetric information in the market NIC TUR ETH ZMB for consulting services; and weak contract TZA GHA enforcement which leads to a preference MOZ 2.0 among family-owned SMEs for relying on fa- 7 8 9 10 11 mily managers, rather than professional exter- Log of 10-yr average GDP based on PPP per capita (current international $, billions) nal administrators. Source: Cirera and Maloney, 2017. Colombian firms that lack strong manage- ment and organizational capabilities are Colombia has set up a 2025 road map to pro- limited in their path towards the technologi- mote sustained productivity growth, but imple- cal frontier. Managerial and organizational mentation challenges need to be addressed capabilities are crucial to accumulate other to make it successful. A recently approved technological capabilities and innovate, CONPES document for productive develop- and critical for catching-up and converging ment43 is an important milestone to promote to the technological frontier.39 Firms with no firm-level productivity growth. It includes the basic accounting and tracking routines40 are National Productivity Escalation Program ba- in fact less likely to push for research or inno- sed on the technological extension pilot led vation. Organizational practices, such as the by DNP and Servicio Nacional de Aprendiza- introduction of quality managerial processes, je (SENA), with the support of the World Bank; creation of design and engineering depart- tailored training and technical assistance pro- ments, and performance-based rewards sys- grams to strengthen business innovation; and tems, are also positively related to rapid lear- initiatives to promote innovation finance and ning processes and the implementation of exports. However, the main challenge is to im- innovative practices.41 Only 7 percent of ma- plement this policy in a context of increasing nufacturing firms have an R&D department in budget restrictions and fragmented resources, charge of Science, Technology and Innova- weak targeting and challenges to effective in- tion (STI) activities.42 terinstitutional coordination. 39  Cirera & Maloney (2017). See Figure 2.7 for an explanatory diagram of the accumulation of capabilities across several dimensions as firms gain in sophistication. 40  Iacovone et al. (2017). 41  Cirera and Maloney (2017) cite Bell and Figueiredo (2012) for a review of research over 25 years on learning processes as a source of innovation capability building in firms from developing economies; and Garicano and Ros- si-Hansberg (2015) for the role on knowledge-based hierarchies. On performance-based reward systems they cite De Jong and Den Hartog (2007); Ederer and Manso (2013); Gibbs et al. (2015); Leiblein and Madsen (2008); Chen, Chen, and Podolski (2014) and Mao and Weathers (2015). 42  EDIT (2015-2016). 43  Documento CONPES 3866 Política Nacional de Desarrollo Productivo. Available for download at https://colabo- racion.dnp.gov.co/CDT/Conpes/Econ%C3%B3micos/3866.pdf 57 Colombia Policy Notes The most pressing challenge for Colombia re- about US$ 7 billion per year.48 Estimations find mains to create the incentives for firms to reach that small formal firms in Colombia are about the global productivity frontier. The Colombian four times more productive than small informal productivity frontier is further away from the firms and median formal firms are twice as pro- global frontier than that of comparable coun- ductive as their informal counterparts.49 tries.44 Furthermore, while the number of firms increased by four between 2000 and 2011, few The entry costs faced by Colombian firms, in Colombian plants are at the global producti- addition to the regulatory and tax burden, vity frontier. Brown et al. estimate that only 20 makes formalization unattractive. Another im- plants exceeded the global productivity fron- portant barrier to formality is costly business tier in 2011, corresponding to about 23 percent registration, and structural design problems.50 of total manufacturing plants that year.45 These Salazar51 shows that business registration fees in “global” plants are concentrated in few sectors. Colombia52 are significantly higher than those of other countries in the region53 and European Business informality countries like the UK.54 Furthermore, fees for re- gistration renewal are higher than in Argenti- High business informality hampers economic na, the only other country in the region where growth. Defining informality, particularly busi- such cost exists. In Colombia, renewal fees are ness informality, is not straightforward since for charged annually and based on the same re- a firm to be considered formal it must comply gistration fee structure.55 Likewise, Salazar et al. with several requisites, ranging from business argue that Colombia and Brazil are the only registration, to social security payments, and two countries in the region where firms need to accounting practices.46 However, firms do not pay registration fees for new branches56, and in comply with all requisites at the same time (Figu- this case, too, Colombian firms pay higher fees re 2.5). Such levels of business informality impo- than Brazilian firms.57 se important costs on the economy. Under-re- gistration of firms in the tax system is reflected in High labor costs also disincentive formalization. elevated levels of tax evasion: about 4 percent The minimum wage is 86 percent of the me- of GDP for the value-added tax (VAT) and in- dian wage, considerably higher than in Mexico come tax combined47; according to CPC, the and Spain (37 percent), Germany and Gree- cost of not paying social security amounts to ce (about 47 percent), or Chile (76 percent).58 44  Brown et ál. (2016). 45  Idem. 46  According to DANE, labor informality in 2017 was 48.8 percent in the 23 largest cities and metropolitan areas, when measured in relation to the size of the establishment (at most five workers); and 49.2 percent when measured in relation to the pension contributions. 47  IMF (2017). 48  CPC (2017a). 49  Hamann and Mejia (2011). 50  The regulatory and tax distortions are also disincentives to business formalization. 51  Salazar et al. (2017). 52  For firms with social capital higher than US$ 1,000. 53  In Argentina the registration fee is US$ 5.88, in Brazil is US$ 18.34 and in Mexico is US$ 5.8. 54  DNP (2017). In the United Kingdom the registration fee is US$ 15.8. 55  In the renewal fee is increasing in the firm’s share capital and it is lower than the one faced by Colombian firms with assets above US$ 1,000. 56  Salazar óp. cit. (2017). 57  Above US$ 200 in assets. 58  DNP (2017). 58 Note 2 Productivity Figure 2.5 Business formality: compliance with requirements (share of firms) Tax registration (RUT) 78.2% Business registration 72.6% Pays wages and salaries 46.7% Informal accounting practice 31.0% Pays pension and health benefits 30.6% Pays social benefits 23.6% Pays occupational hazard affiliation 23.6% Accounting based on daily book keeping 22.5% Accounting based on profit and loss balance 15.7% 0 10 20 30 40 50 60 70 80 Source: DNP (2018) based on DANE’s Micro-Establishments Survey (2012-2016). Figure 2.6 Non-wage labor costs 70 58% 60 53% 8% 50 8% 44% 11% 40% 40% 10% 6% Percent 40 4% 1% 2% 5% 10% 11% 30 10% 12% 21% 14% 10% 19% 20 13% 8% 10 21% 16% 19% 2% 13% 11% 6% 3% 0 Colombia Argentina Peru Uruguay Brazil Chile Social security Vacations and bonuses Severance payments Parafiscal Other Severance savings Source: DNP (2017). Such distortions create rigidities in the labor Benefits from formalization may not be attaina- market. Mora and Muro59 show that Colom- ble for low-capability firms. Formalization per bia’s minimum wage is responsible for increa- se has no automatic effect on access to credit sing informality and its persistence. Non-wage or to other potential benefits of being formal.61 labor costs decreased substantially with the Furthermore, programs for companies with 2012 tax reform, and existing evidence sug- weak business development that focus on pro- gests that the reforms had a positive impact viding information on the registration process on formal employment, with larger effects es- and on the potential benefits of formalization, pecially among smaller companies.60 However, or those that focus on reducing formalization non-wage labor costs continue to be among costs or simplifying entry processes to formality, the highest in the region (Figure 2.6). on their own only have a modest impact.62 59  Mora and Muro (2017). 60  Kugler et al. (2017). 61  De Mel et al. (2013); McKenzie & Sakho (2010); Alcazar et al. (2011). 62  De Giorgi & Rahman (2013); Alcazar & Jaramillo (2012); Bruhn (2011); Bruhn & McKenzie (2013); De Mel et al. (2013); Kaplan, Piedra, & Seira (2011); Galiani et al. (2017). 59 Colombia Policy Notes Policy Options body be established close to the center of go- vernment, and that it remain independent from Improving regulatory, tax and tariff political influence when performing technical framework63 functions of assessing and advising the quali- ty of regulations.67 The need for a new agency Regulatory quality improvement is driven by the importance of not diluting the Create a special agency for regulatory quali- focus on improving regulatory quality among ty improvement to be scaled up progressively; other responsibilities of existing institutions (e.g. start from implementing a system following the DNP), as this would hardly be a priority in such RIA-Light approach. RIA implementation could a situation. Importantly, the agency should be be challenging, especially for emerging coun- small and of high quality, with concrete targets tries like Colombia. It could start with a “lighter” to assess its effectiveness. system that incorporates the most basic and necessary elements of a RIA system, seeking RIA should be mandatory for new norms with to gradually establish better practices accor- an expected impact above a specific thres- ding to the local context and capacities.64 hold, or according to the results from applying Ladegaard et al., in a study of sixty regulatory a triage system. Although such an analysis is quality reforms in developing countries, identify required by Document CONPES 3816, it has not two key predictors of success: the formal inte- been formalized by an Executive Decree. Gi- gration of RIA procedures in the policy-making ven time and budgetary restrictions, RIA should process, and the establishment of an oversight follow the proportionality principle, that is, the body. Thus, the medium-to-long term goal is extent of the analysis would depend on the to create an independent oversight body in magnitude of the expected impact. Thus, RIA charge of revising the national regulatory fra- could be applied only to those regulations that mework; diagnosing the applicability of norms; exceed certain expected compliance costs, and putting forward legal and administrative for which criteria should be established in ter- proposals, and sectoral regulations. The agen- ms of economic, social and environmental cy should analyze new rulings before they are dimensions. One option is to establish a thres- enacted by the Executive branch, and over- hold for expected monetary costs in addition see their public consultation process, under to other criteria (such as scope). In the United the technological platform SUCOP. These and States, the threshold is set at US$ 100 million per other functions should be compatible with tho- year, and there are also assessments of whe- se set by CONPES Document 3816. Examples ther it imposes considerable costs to a certain of such agencies include Comisión Federal de sector or region, or whether it has adverse Mejora Regulatoria (COFEMER)65 in Mexico, or effects on competition, employment, invest- the Better Regulation Executive (BRE) in the ment, productivity or innovation.68 In South Ko- UK.66 OECD’s Council on Regulatory Policy and rea, RIA applies if the expected costs exceed Governance recommends that the oversight the threshold of US$ 10.5 million per year, or if 63  For recommendations on tax policy see also Policy Note #1 on Fiscal Policy. 64  Ladegaard et al. (2018). 65  Comisión Federal de Mejora Regulatoria, https://www.gob.mx/cofemer/ 66  https://www.gov.uk/government/groups/better-regulation-executive 67  OECD (2012). 68  OECD (2014b). 60 Note 2 Productivity the regulation affects more than one million progressive, provide the right incentives and people, among other criteria.69 Alternatively, a be aligned to the practice in other countries. triage system could be implemented in which Finally, it should scale up the implementation proposed regulations are classified based on of the one-stop-shop (VUE) launched initially a triage questionnaire and the level of RIA is only in Bogota. applied accordingly. In Canada, regulations with an expected cost of CAD 10 million pre- International trade reforms sent value over a 10-year period, or less than A structural reform of the trade regime should be CAD 1 million annually, are considered of low carried out and unnecessary non-tariff barriers impact; those with expected costs between should be reduced, aiming at deeper trade these thresholds and CAD 100 million present integration. Colombia should reduce tariffs on value or CAD 10 million per year are consi- agricultural products, decrease tariff dispersion dered or medium impact; and those with hi- and improve efficiency of the tariff system. A gher expected costs are considered of high less distortionary trade regime structure should impact.70 The RIA should specifically address be put in place, reducing tariff dispersion for the regulatory burden for SMEs, and consider similar goods, in particular for industrial goods, a strategy for their compliance.71 As for existing to reduce incentives for contraband and tariff norms, the regulatory improvement agency evasion.72 The government should also reduce should progressively review the current inven- non-tariff measures to make customs proces- tory, eliminating redundant, obsolete or cost- ses more agile and efficient. The prioritization ly norms. The agency should set cost-benefit of non-tariff barriers to be removed should be standards such as the UK’s one in, one out, or based on a cost-benefit analysis. Efforts should United States’ one in, two out, for all new nor- be made to strengthen integration into GVCs, ms. Crucially, these policy practices should be by attracting foreign investors and supporting extended to subnational governments. local firms in connecting to international part- ners; and improving domestic value chains. The government of Colombia should maintain Regulatory and investment actions should also its strategy to simplify administrative procedu- be taken to create a world-class business en- res. In collaboration with other government vironment for international trade integration.73 entities at the national and subnational level, the Ministry of Commerce, Industry and Tourism Developing of an efficient logistics should continue leading this process with its sector flagship strategy Menos trámites, más simples. The government should also continue to impro- Reduce the regulatory burden for trading ve the country’s business environment, inclu- across borders, especially with respect to cus- ding the revision of the payment structure for toms processes. The adoption of implemen- the business registry which needs to be made ting regulations for the new Customs Statute 69  OECD (2014a). 70  OECD (2015). In Canada, the Triage Statement can be omitted and an expedited RIA process applied when regulations have immediate or serious risk to health and safety, security, the environment or the economy. 71  This chapter should also be included in RIA of technical regulations, for which a modification of Decree 1595/2015 is needed. 72  Javorcik and Narciso (2008). There is a large evidence in the literature that higher tariffs dispersion is associated to higher contraband and tariffs evasion especially for industrial and non-homogenous goods. 73  Taglioni & Winkler (2016); Arenas and Taglioni (2015); Pathikonda and Farole (2016). 61 Colombia Policy Notes is critical. Immediate approval of the National Framework (Marco Nacional de Cualificacio- Logistics Policy by CONPES will drive the im- nes, MNC). The MNC pilot in the port logistics plementation of the Statute, defining specific subsector is a good start, followed by the road responsibilities, a clear time schedule for im- freight logistics. Implementation of the MNC plementation, and a committed budget by for the whole logistics sector will allow the participating institutions. The policy document development of certified new technical and includes a much-needed strategy that inclu- academic programs and the formalization of des all the required changes in regulation and logistics-specific skills acquired at work. It will infrastructure needed to create an efficient in- also help reduce the shortage of labor with the termodal transport system. required competencies for the logistics sector. Current customs declarations processes need Create incentives to develop specialized lo- to be optimized to shorten export times. DNP gistics infrastructure and services. Instruments estimates that adding flexibility to some of the that promote the construction and operation punitive aspects tied to the anticipated decla- of specialized logistics infrastructure include ration, and extending their use to the universe standardized projects under the standardized of traded goods would reduce the time nee- projects policy (política de proyectos tipo) and ded for this procedure by 93 percent (compa- the model of National and Binational Border red to the 110 hours it currently takes). Other Centers (CENAF and CEBAF).  Programs pro- such tools are already included in the Customs moting logistics innovation, entrepreneurship Statute and their implementation would gene- and ICT usage among of logistic providers and rate substantial benefits in the areas of customs users should also be implemented. risk management, systematization and intero- perability (i.e. granting Authorized Economic Strengthening capabilities at the firm Operators status to foreign companies, un- level der DIAN’s oversight), and increasing the use of technology and information systems. The Tailor-made programs that meet the needs of single window for trade (Ventanilla Única de individual firms are required to address poor Comercio Exterior, VUCE) must become a true management practices among exporting and one-stop shop for foreign trade, incorporating importing firms. Improved management co- all foreign trade operations, including instant rrelates with R&D and increases the impact inspections and advance declarations, and of R&D on innovation. The policy mix, which should be fully integrated with main trading depends on the stage of the National Innova- partners. Finally, strengthening the newly crea- tion System (NIS) (Figure 2.7), should integrate ted National Logistics Observatory74 to provide elements such as: scaling-up the existing tech- permanent monitoring and the unification and nological extension pilot; providing technical upgrading of all information systems, including assistance to promote exports; competitivity-in- VUCE, is also recommended. ducing practices; matching grants; technolo- gy centers and transfer offices; and business Train human capital for logistics. The govern- development services for SMEs. Interventions ment needs to define profiles for the logistics should be results-based. Colombia formulated chain in the catalog of National Qualifications the Productive Development Policy (PDP), fo- 74  https://onl.dnp.gov.co/es/Paginas/Inicio.aspx 62 Note 2 Productivity cused on the development of the firm, which Implement fully the recommendations of the includes many of these recommendations. The STI Public Expenditure Review (PER) to improve government should keep this as its roadmap to the design and functioning of STI instruments.77 increase productivity and foster innovation in If the STI budget is concentrated in few instru- the medium term.75 ments (12 programs have 75 percent of the bu- dget), the Mixed Technical Committee for In- Guarantee public and private financing of the novation (Comité Técnico Mixto, CTM), under Productive Development Policy.76 Competent DNP leadership, should prioritize the functional government agencies to implement the PDP review to improve these instruments based on should fully take ownership. Making this policy adequate monitoring and evaluations systems. the roadmap to Colombia’s productivity grow- It is key to promote specialization across and th implies prioritizing the financing of initiatives within entities according to their mandate and at all levels of government with a direct man- to the type of beneficiaries they primarily serve date from the President’s office. Private sector based on their innovation stage, and elimina- funding, included as a key aspect of the PDP, te overlap and competition among agencies. is also essential and needs to be crowded in. It is also important to implement an in-depth Brazilian-style sectoral funds or models such as analysis to rationalize or consolidate instru- Fundación Chile, and the active involvement ments, and to eliminate duplication in terms of of the capital and risks markets are needed to objectives and beneficiaries. A methodology strengthen innovation and even technological also needs to be defined to carry out pilot pro- adoption in specific areas. grams that are completely new, that respond Figure 2.7 The Capabilities Escalator • Long-term R&D and technological programs STAGE 3 • Minimize innovation gap leaders and laggards Mature NIS • Collaborative innovation xprojects • Building technological capabilities LEVEL OF DEVELOPMENT • Incentivize R&D projects STAGE 2 Maturing NIS • Link industry and academia • Improving quality of research, innovation and export infrastructure • Building managerial and organizational capabilities • Start collaborative projects STAGE 1 Incipient NIS • Need to develop STEM skills and engineering • Need to basic infrastructure - NQI and incubation • Elimination of barriers to physical, human and knowledge capital Source: Cirera & Maloney (2017). 75  Efforts should be made to implement the Management and Organizational Practices Survey (MOPS) and the in- novation survey (EDIT) to gather systematic information that serves as basis for the formulation of firm-level tailor-made programs. 76  Also, it is urgent the issuing of secondary norms to regulate the recent Constitutional reform of the General Royalty System, to improve the allocation and execution of the STI Fund. 77  The STI PER was carried out in 2015 by DNP and the World Bank. 63 Colombia Policy Notes to a market failure not yet served by any exis- Increasing the benefits of business formali- ting instrument, include rigorous impact eva- zation is critical. The cost paid by firms to for- luations and are scaled up only after a careful malize should be offset by effective benefits. cost-benefit analysis. Using registration fees, chambers of commer- ce should provide services free of charge to Reducing the costs and increasing the registered firms to incentivize registration, inclu- benefits of business formalization ding free access to the registration database. Furthermore, chambers of commerce, in coor- It is critical to lower the cost of entry and labor dination with the Ministry of Commerce, DNP costs, to reduce regulatory burdens through and other key actors, should define a set of a business simplification strategy and to sim- differentiated products available to registered plify the tax system.78 Substantially reducing firms to increase the benefit from registration, labor costs would require labor market and, for instance, accounting and mediation servi- eventually, pension system reforms, as well as ces. further reduction of non-wage labor costs. For instance, the parafiscal cost covering affilia- Formalization policy should incorporate bu- tion to family compensation benefits (Cajas de siness development initiatives as well as a Compensación Familiar, CCF) should be elimi- revised control strategy. This would include nated from the payroll and financed using less providing a set of basic business develop- distortive sources, under common agreement ment initiatives that would help firms reap the between employers and employees of volun- rewards from formalization. In view of recent tary affiliations to such CCF benefits. The remai- empirical evidence80, it is important that these ning parafiscal costs related to health, SENA initiatives target firms with the highest growth and Instituto Colombiano de Bienestar Fami- potential and revealed commitment to move liar (ICBF) should also be gradually eliminated up the capabilities escalator. These interven- from the payroll and replaced by alternative, tions should be results-based. Finally, the for- less distortive financing sources, in line with the malization and control strategy should prioritize recommendation of the Commission of Experts its focus on larger informal firms instead of small for Equity and Tax Competitiveness.79 Similarly, subsistence firms.81 the costs for business registration and renewal fees should be revised in line with OECD coun- try standards. Finally, the adoption of the one- stop-shop (VUE) outside Bogota, starting with the larger cities, is crucial to make business procedures seamless, including registration for new firms. 78  For recommendations on tax simplification see also Policy Note #1 on Fiscal Policy. 79  The Expert’s Commission proposed to budget this cost based on the average cost of the last wo or three years, indexed by inflation and an additional factor whenever the economy grows more than 4 percent. 80  For instance, Benhassine et al. (2018), through a randomized experiment in Benin, show that interventions are only effective when including supplementary efforts, such as facilitating access to training services, to commercial banks, and to tax mediation services. The authors do not find, though, significant impacts on firms’ performance. Also, the additional tax revenue from formalization does not seem to cover the cost of the program, for which better targeting towards firms more likely to formalize on their own and simpler registration process are recommended. 81  Bruhn and McKenzie (2013). 64 Note 2 Productivity Annex 2.1 Matrix of Policy Options Development Policy Options Challenge Short Term Medium Term 1. Improve regu- • Maintain efforts to simplify administra- • Make regulatory impact assessment latory, tax and tive procedures mandatory for new regulations with an tariff framework • Revise regulations hindering develop- expected impact (threshold or triage ment and market creation, competi- system) tion, and integration with GVCs • Reduce unnecessary non-tariff measu- res based on cost-benefit analysis • Reduce tariffs on agricultural products • Decrease dispersion and improve effi- ciency of the tariff system 2. Develop an • Adopt implementing regulations for • Make VUCE a true one-stop shop for efficient logistics the new Customs Statute; define res- foreign trade: incorporate all foreign sector ponsibilities and time schedule; and trade operations, including instant commit required budget of partici- inspections and advance declarations, pating institutions and all operators in the country; and • Approve CONPES document on fully integrate with main trade partners logistics and guarantee financing for • Design instruments promoting innova- its effective implementation tion in logistics, entrepreneurship and ICT use among logistics services provi- ders and users 3. Strengthen ca- • Prioritize financing of PDP at all levels • Implement Science Technology Inno- pabilities at the of government, with a direct manda- vation PER recommendations: redu- firm level te by the President’s office to make it ce concentration of the STI budget; the roadmap for improving producti- promote specialization within and vity across entities; rationalize or consolida- • Promote private sector financing of te instruments; eliminate duplication in PDP objectives and beneficiaries—all based on proper monitoring and evaluations systems • Scale up the technology extension pilot • Design and implement tailor-made programs that are result-based and meet the need of individual firms to address poor management practices 4. Reduce costs • Implement VUE in Bogota • Implement VUE at the national level and increase • Identify opportunities for lowering • Lower entry costs, labor costs and benefits of busi- entry, labor, and regulatory costs regulatory costs ness formaliza- • Create additional benefits to regis- • Design and implement business deve- tion tered firms: access to database, ac- lopment programs that allow access to counting and mediation assistance formality benefits, targeted to firms with • Revise the inspection and control growing potential and reveled com- strategy mitment for moving up the capabilities • Approve CONPES document on escalator business formalization and guarantee its financing 65 Colombia Policy Notes REFERENCES Alcazar, L., & Jaramillo, M. (2012). El impacto de la tion: Evidence from an RCT in Bangladesh. Eco- licencia municipal en el desempeño de las mi- nomic Letter, Volume 120, Issue 3, Pages 573-578. croempresas en el Cercado de Lima. Lima: GRA- De Mel, S., McKenzie D., & Woodruff, C. (2013). The DE-Grupo de Analisis y Desarrollo. Demand for, and Consequences of Formaliza- Alcazar, L., Andrade, R., & Jaramillo, M. (2011). Pa- tion among Informal Firms in Sri Lanka. American nel/tracer study on the impact of business facili- Economic Journal: Applied Economics, 5(2):122- tation processes on enterprises and identification 150. of priorities for future Business Enabling Environ- DNP (2015). The National Logistic Survey 2015. Bogo- ment projects in Lima, Peru. ta: Departamento Nacional de Planeación. Arenas, G. & Taglioni, D. (2015). Colombia Integra- _____. (2017). Reporte: Aproximación al inventario tion into Global Value Chains: Stylized Facts and normativo por medio del piloto Big Data regu- Preliminary Assessment. World Bank. latorio. Bogota: Departamento Nacional de Pla- Bloom, Nicholas, Renata Lemos, Raffaella Sadun, neación. Daniela Scur, and John Van Reenen (2014). “JEE- Galiani, S., Meléndez, M., & Navajas Ahumada, C. AFBBVA Lecture 2013: The New Empirical Econo- (2017). On the effect of the costs of operating mics of Management.” Journal of the European formally: New experimental evidence. Labour Economic Association 12: 835–76. Economics, 143-157. Brown, D., Crespi, G., Iacovone, L. & Marcolin, L. Hamann and Mejia (2011). Formalizando la Informa- (2016). Productivity Convergence at the Firm Le- lidad Empresarial en Colombia. Borradores de vel: New Evidence from the Americas, in Unders- Economía Nro. 676, 2011. Bogota, Colombia. tanding the Income and Efficiency Gap in Latin Iacovone, L., D. McKenzie, and William F. Maloney America and the Caribbean, Edited by Brown, (2017). “Management Upgrading in Colombia.” D., Crespi, G., Iacovone, L. & Marcolin, L. Publi- Working Paper, World Bank, Washington, DC. shed: March 2016 Pages: 117 – 186. IMF (2017). IMF Country Report No. 17/138. ht- Bruhn, M. (2011). License to sell: The effect of busi- tps://www.imf.org/~/media/Files/Publications/ ness registration reform on enterpreneural activi- CR/2017/cr17138.ashx ty in Mexico. The Review of Economics and Statis- Javorcik and Narciso (2008). Differentiated products tics, Volume 93, Issue 1, February 2011, p.382-386. and evasion of import tariffs. Journal of Interna- Bruhn, M., & McKenzie, D. (2013). Entry Regulation tional Economics 76 (2008) 208–222 and Formalization of Microenterprises in Develo- Kaplan, D., Piedra, E., & Seira, E. (2011). Entry regula- ping Countries. Washington DC: World Bank. tion and business start-ups: Evidence from Mexi- CAF, CPC & PNUD (2015). Lineamientos para la co. Policy Research Working Paper. Washington identificación y el cierre de brechas de capital DC: World Bank. humano para las apuestas productivas departa- Kee, H., A. Nicita, & M. Olarreaga. (2006). “Estima- mentales del país. Bogota, Colombia. ting Trade Restrictiveness Indices”. World Bank Castro, A.H. (2017). La productividad total de los Policy Research Working Paper 3840. Washington factores en el sector agropecuario en Colombia DC: World Bank. 1961 – 2013. Published in: Economía & Región, Koske, I., Wanner, I., Bitetti, R., & Barbiero, O. (2015). Vol. 11, No. 1, (Cartagena, junio 2017), pp. 89- “The 2013 update of the OECD's database on 126. product market regulation: Policy insights for Cirera & Maloney (2017). The Innovation Paradox: OECD and non-OECD countries”, OECD Eco- Developing-Country Capabilities and the Un- nomics Department Working Papers, No. 1200, realized Promise of Technological Catch-Up. The OECD Publishing, Paris. http://dx.doi.org/10.1787/ World Bank, Washington DC 5js3f5d3n2vl-en Comisión de Expertos para la Equidad y la Competi- Krugman, P. (1994). The Age of Diminished Expecta- tividad Tributaria (2015). Informe final presentado tions, Palatino: MIT Press. al Ministro de Hacienda y Crédito Público. Bogo- Kugler, A.; Kugler, M.; Prada, L. O. (2017). “Do Payro- tá. ll Tax Breaks Stimulate Formality? Evidence from CPC (Consejo Privado de Competitividad). (2017a). Colombia’s Reform”, NBER Working Paper No. Informalidad: Una nueva visión para Colombia. 23308 Bogotá, Colombia. Ladegaard, P.; Rimmer, S.; Rodrigo Enriquez, D. (2009). _____. (2017b). Informe Nacional de Competitividad Making it work: 'Ria light' for developing countries 2017-2018. Bogota, Colombia (English). Washington, D.C.: World Bank Group. De Giorgi, G., & Rahman, A. (2013). SME’s registra- http://documents.worldbank.org/curated/ 66 Note 2 Productivity en/184141468167049021/Making-it-work-Ria-li- registro en las cámaras de comercio y beneficios ght-for-developing-countries de sus servicios: impacto sobre la competitividad Ladegaard, P., Lundkvist, P. & Kamkhaji, J. (2018). y la formalidad empresarial. Fedesarrollo. Bogo- Giving Sisyphus a Helping Hand. Pathways for tá, Colombia. Sustainable RIA Systems in Developing Countries. Syverson, C. (2011). What Determines Productivi- Policy Research Working Paper 8367. World Bank, ty? Journal of Economic Literature 2011, 49:2, Washington DC. 326–365, http:www.aeaweb.org/articles.php?- McKenzie, D., & Y. Sakho. 2010. “Does it Pay Firms doi=10.1257/jel.49.2.326 to Register for Taxes? The Impact of Formality on Taglioni, D., & Winkler D. (2016). Making Global Value Firm Profitability”. Journal of Development Eco- Chains Work for Development. Trade and Deve- nomics, 91:15-24. lopment.  Washington, DC: World Bank. © World Ministry of Commerce, Industry and Tourism (2018). Bank. https://openknowledge.worldbank.org/ Menos trámites, más simples. http://www.mincit. handle/10986/24426 License: CC BY 3.0 IGO . gov.co/antitramites/ USDA. 2016. International agricultural productivity. OECD (2012). Recommendation of the Council on United States Department of Agriculture (USDA). Regulatory Policy and Governance. The OECD Washington, DC. https://www.ers.usda.gov/da- Regulatory Policy Committee. Paris: OECD Pu- ta-products/international-agricultural-producti- blishing. Available for download at: https:// vity. www.oecd.org/governance/regulatory-poli- World Bank (2015). República de Colombia. Refor- cy/49990817.pdf ma del Sistema Tributario para Micro, Pequeños y _____. (2014a). Estudio de la OCDE sobre la política Medianos Negocios. Reporte preparado bajo el regulatoria en Colombia: Más allá de la simpli- Proyecto de Simplificación Tributaria de Colom- ficación administrativa. Paris: OECD Publishing. bia (599785). December, 2015. http://dx.doi.org/10.1787/9789264201965-es _____. (2017a). Doing Business in Colombia 2017. _____. (2014b). OECD Regulatory Compliance Cost World Bank Group, Washington D.C. Assessment Guidance. OECD Publishing, Paris. _____. (2017b). Doing Business 2018. Reforming to http://dx.doi.org/10.1787/9789264209657-en Create Jobs. World Bank Group, Washington D.C. _____. (2015). OECD Regulatory Policy Outlook World Bank (2018). Getting agriculture going in Co- 2015, OECD Publishing, Paris. http://dx.doi.or- lombia: Identifying opportunities based on func- g/10.1787/9789264238770-en tional territories. Report No: AUS0000227. © World _____. (2018). Import content of exports (indicator). Bank. doi: 10.1787/5834f58a-en (Accessed on 05 Fe- WTO. (2009). World Tariff Profiles 2009, WTO ITC UNC- bruary 2018). TAD. Olaberría, E. (2017). “Reigniting growth through pro- _____. (2010). World Tariff Profiles 2010, WTO ITC UNC- ductivity enhancing reforms in Colombia”, OECD TAD. Economics Department Working Papers, No. _____. (2011). World Tariff Profiles 2011, WTO ITC UNC- 1424, OECD Publishing, Paris TAD. Pathikonda, V. and T. Farole (2016). The Capabilities _____. (2012). World Tariff Profiles 2012, WTO ITC UNC- Driving Participation in Global Value Chains. Po- TAD. licy Research Working Paper 7804. Available for _____. (2013). World Tariff Profiles 2013, WTO ITC UNC- download: http://www20.iadb.org/intal/catalo- TAD. go/PE/2016/16408.pdf _____. (2014). World Tariff Profiles 2014, WTO ITC UNC- Perfetti, J. & Botero, J. (2018) Política comercial agrí- TAD. cola: nivel, costos y efectos de la protección en _____. (2015). World Tariff Profiles 2015, WTO ITC UNC- Colombia. Fedesarrollo. Bogota, Colombia. TAD. Rodrik, D. (2011). The Future of Economic Conver- _____. (2016). World Tariff Profiles 2016, WTO ITC UNC- gence. NBER Working Paper 17400. Cambridge, TAD. MA. http://www.nber.org/papers/w17400.pdf _____. (2017). World Tariff Profiles 2017, WTO ITC UNC- Salazar et al. (2017). La estructura de las tarifas de TAD. 67 Colombia Policy Notes 68 EASING TRANSITION FROM NOTE 3 SCHOOL TO WORK Colombian youth have better prospects than ever before, but too many still face difficulties in the labor market. Too many young people drop out from school before completing upper secondary education, resulting in very high unemployment, informal employment or inactivity. Most of those who drop out come from disadvantaged backgrounds and rural areas. Even those who conti- nue their studies show low levels of learning, despite recent improvements. In the 2015 PISA test, 43 percent of 15-year-olds in Colombia performed at levels demonstrating functional illiteracy. The results of the national test SABER 11 reflect these deficits in the performance of students in tertiary education. Very few institutions and programs have high-quality accreditation, and those programs are accessed mostly by better-off students. As a result, most youth bring inadequate skills with them to the labor market, regardless of their level of education: employers mention the lack of skills of graduates as one of the key constraints to fill vacancies. Once in the labor market, many youth do not find support for compensating their lack of skills that employers look for and overcome other barriers. Improving outcomes requires a combined strategy to upgrade skills and to provide active su- pport for the transition to the labor market. A skill upgrading strategy needs to start with providing good quality early childhood development programs and a focus on learning during basic and upper secondary education. The transition between levels of education also needs to be facilita- ted to reduce repetition and drop-out rates. A reform of the quality assurance and financing sys- tems for tertiary education is needed to improve access and ensure quality of tertiary education. To support transition to the labor market it is necessary to: align technical education and training with the needs of the private sector in the management of the skills development system; offer pathways to return to the formal education system for drop-outs; and expand effective active labor market policies. 69 Colombia Policy Notes Context and Reform Progress lence, and a better context for their children to grow and prosper.6 Providing youth with the Colombian youth have better prospects than skills can be one of the most effective policies ever before but too many of them face a di- for breaking the intergenerational transmission fficult transition to the labor market. Between of poverty.7 2005 and 2015, the average number of years of education increased from 6.8 to 8, and the Main Challenges gross enrollment rate in tertiary education dou- bled to 49.4 percent. More youth participate in Too many young people leave school the labor market and work in formal jobs than before completing upper secondary a decade ago. Still, 25 percent of youths ages education 15–29 are working in precarious, informal jobs.1 Another 20 percent of youth are ninis2 (out of Drop-out rates in basic and upper secondary school and out of work, i.e., NEET). These ninis education are high, especially between le- are mostly women (70 percent), from the poo- vels. Access to education has improved sig- rest 40 percent of households (60 percent), and nificantly over the past decade, especially in living in rural areas (88 percent). Jobless youth, early childhood education and tertiary edu- especially men, are more likely to fall into crime cation, but the drop-out rate starting with the and illegal activities, even more so in Colombia transition to lower secondary remains high: 17 with areas of high criminality rates.3 percent of students who complete 5th grade (primary) drop out in the transition to 6th grade Ensuring education and skills for all young peo- (lower secondary).8 Of those who continue to ple is essential to increase the country’s pro- 6th grade, 37 percent do not graduate from ductivity, improve equity and reduce poverty upper secondary education after four years. and violence. More education and improved For those who complete upper secondary skills of the working population increase pro- education, only 38 percent immediately tran- ductivity, and lead to higher long-term econo- sition to tertiary education, and 28.3 percent of mic growth.4 They also benefit individuals throu- those who enroll drop out before completing gh better jobs and higher incomes, especially their first year at college. This is even higher in in Colombia, where economic returns to edu- technical and technological programs, where cation are among the highest in the region.5 35.1 percent of students drop out.9 Non-economic outcomes for youth and their families also improve, and include better heal- Youth report that the main reasons why they th, more support for democracy, and less vio- drop out are their lack of interest and a per- 1  Estimates are based on the 2016 National Household Survey of Colombia (Gran Encuesta de Hogares, in Spanish). 2  “Nini” is the contraction of the Spanish phrase “ni estudia ni trabaja,” which refers to youth who are not in emplo- yment,education nor training. 3  De Hoyos, Rogers, and Székely (2016), Chioda (2017). 4  World Bank (2018). Hanushek and Woessmann estimate that raising learning outcomes for all 15-year-old students to minimum levels in Colombia would raise long-term GDP growth by 0.7 percentage points per year (OECD 2015b). 5  Acosta, Muller and Sarzosa (2015), Ferreyra et al. (2017). The economic returns of completing higher education is 179 percent in Colombia, compared to the Latin American average of 104 percent (Ferreyra et al. 2017). 6  OECD (2015a); World Bank (2018). 7  García et al. (2015); Heckman and Mosso (2014); Rubio-Codina, Attanasio, and Grantham-McGregor (2016); Gron- qvist, Ockert, and Vlachos (2017). 8  Sanchez et al. (2016). 9  Ferreyra et al. (2017) 70 Note 3 Easing Transition from School to Work ceived lack of relevance of education, with to think, analyze and solve problems. Socioe- significant differences by gender. A third of motional skills are behaviors and attitudes for drop-outs cite a lack of interest or a feeling of managing personal and social situations, and having completed education. Inadequate su- are as important for success.11 Socioemotional pply of school infrastructure is an uncommon skills also drive a range of social outcomes: bet- reason for dropping out. The share of students ter health and well-being (including fewer tee- reporting a lack of school or space in a nearby nage pregnancies) and less violence.12 While school as the main reason for dropping out is cognitive skills are the traditional focus of the low at 6.7 percent in rural areas, and 5 percent education system, cognitive and socioemotio- in urban areas. Differences by gender are subs- nal skills reinforce each other.13 Together they tantial. For 11 percent of females who dropped lay the foundations for developing technical out, a pregnancy was the main reason. For an skills, and success depends on having all three additional 18 percent, the main reason was ta- types of skills. The development of these skills king care of the family. The two most common- is not formed only during adolescence but is ly cited reasons for males to drop out are lack a cumulative process that starts at birth. It de- of interest (36 percent) and a reported need to pends to a high degree on family background, work (17 percent). early childhood experiences, and the quality and type of education.14 Low levels of learning and high repetition also drive high drop-out rates. More than 40 per- The quality of education has improved, but cent of 15-year-olds in Colombia have repea- overall levels of cognitive skills remain low ted at least one grade, the highest rate among and disguise many inequalities. Colombia countries participating in the Programme for achieved one of the largest improvements of International Student Assessment (PISA).10 This any country in the 2015 PISA, which focuses repetition happens mostly in the first years of on the cognitive skills of 15-year-old students primary, secondary and upper secondary edu- in math, reading and science.15 The impro- cation, and repetition is one of the key predic- vement was most significant among low per- tors of dropping out. Students with low learning forming students: the share of students in the outcomes cannot follow the curriculum and lowest reading level decreased significantly are forced to stay behind, eventually dropping from 57 to 43 percent in 2015, although this out of school. figure is still high compared to other coun- tries in the region and OECD countries (Figure The education system does not provide 3.1, panel A). The average student in Colom- the right skills for graduates, starting with bia lags the average OECD student by the low learning in basic education equivalent of 3 years of schooling (learning). Learning gaps are also large between popu- Youth need cognitive, socioemotional and te- lation groups in Colombia. Rural students lag chnical skills to succeed in the labor market urban students by the equivalent of one year and in life. Cognitive skills provide the ability of schooling, and the poorest students lag the 10  OECD (2016) 11  Kautz et al. (2014); OECD (2015a); Cunningham, Acosta and Muller (2016). 12  Gimenez and others (2015); OECD (2015a). 13  Heckman and Mosso (2014). 14  Idem. 15  OECD (2016a). 71 Colombia Policy Notes Figure 3.1 Low levels of skills a. Percentage of 15-year-olds with functional b. Performance in mathematics and reading illiteracy in reading in PISA in Colombia in PISA across income quintile and area and selected other countries, 2006–15 of residence in Colombia, 2015 60 500 Percentage of 15-year olds with Richest functional illeteracy in reading Colombia 490 480 20 % 50 Difference in PISA score 470 460 40 Mexico 450 Richest 440 20 % Urban 30 430 Chile 420 410 20 400 Poorest Urban Rural OECD 390 20 % 10 380 370 Poorest Rural 360 20 % 0 350 2006 2015 Math Reading Math Reading Richest and the Poorest Urban and rural 20 percent Source: OECD (2016) based on PISA 2015. richest students by the equivalent of three learn less and are more than 9 times more likely years of schooling (Figure 3.1, panel B). to have dropped out before they enter upper secondary education than children with high Low levels of learning and insufficient focus on cognitive development.18 They are also 6 times socioemotional skills mean that graduates of- more likely to have repeated a grade. Colom- ten do not meet the demand for skills in the la- bia’s early child development (ECD) strategy, bor market. In addition to low cognitive skills, a “De Cero a Siempre” (From Zero to Forever), large share of adults also lacks socioemotional provides comprehensive care for pregnant skills.16 A 2016 Manpower Group global survey women and children in early childhood. The on employers’ difficulties to find the right profile strategy has had impressive results in covera- to fill their positions placed Colombia 12th out ge, and there is an increasing focus on impro- of 43 countries.17 In most of the countries, the ving quality of services. The biggest challenge main reason for this was lack of applicants (24 is in the quality of the interactions and peda- percent), but in Colombia lack of skills headed gogical practices in the classroom. For ins- the list (30 percent). Half of the Colombian em- tance, most teachers need to strengthen the ployers claimed difficulties in finding suitable connection between learning and children´s people for their jobs. experiences; they also need to plan more sys- tematically and place a strong focus on lear- Addressing low skill levels needs to start with ning. The steps taken towards a comprehensi- good quality early-childhood development ve ECD quality assurance system need to be programs. Poor children enter formal educa- consolidated and expanded. tion with development deficits, and they conti- nue to do badly throughout the education sys- The education system also needs to streamli- tem. Children with low cognitive development ne its planning to get schools what they need 16  Acosta, Muller and Sarzosa (2015). 17  ManpowerGroup (2018). 18  Fuertes and Rodríguez (2017). 72 Note 3 Easing Transition from School to Work to improve learning. Colombia has a long upper secondary should act as a bridge be- tradition of measuring and focusing policies tween basic and tertiary education, it is the on learning outcomes, but implementing the- last formal level of education for more than se policies often conflicts with those goals. half of Colombian youth. Adolescence is a Schools have autonomy over the curriculum, key period for learning socioemotional skills19, but they manage an extremely low share of yet upper secondary is currently focused on resources and have very little autonomy in the consolidation of basic competencies, not their use; they rely on the central government, broad skills. In addition to suffering from the Entidades Territoriales Certificadas (ETCs; Cer- same problems as basic education, the lack tified Territorial Entities) and municipalities for of a graduate profile and curricular autonomy financial and resource inputs, including human result in large heterogeneities in what students resources (teachers, coordinators). ETCs and learn. In addition, many students, especially the central government often lack the infor- poor or rural children or those from an ethnic mation and administrative capacity to identi- minority, enter upper secondary with severe fy the schools’ needs, resulting in a mismatch skill deficits that are not addressed systema- between the needs of schools and the targe- tically. As a consequence, most graduates ting of programs and resources. In addition, this leave upper secondary education without cumbersome management generates a hea- the skills to succeed. While resources are not vy administrative burden for school directors the only challenge, government spending on and leaves little time for pedagogical leader- upper secondary is lower than on any other ship. The financing system is also fragmented educational level and low compared to other — schools receive funding from up to eleven Latin American countries and OECD mem- different sources. Education transfers within the bers: Colombia spends US$2,000 per student Sistema General de Participaciones (SGP; Ge- compared to US$4,000 in Argentina or US$3700 neral System of Participations) are used mostly in Mexico (in power purchasing parity). for salaries, leaving little for quality investments. In addition, they do not provide the right incen- The quality of upper secondary education de- tives for ETCs to focus on increasing efficiency termines students’ future options. Students with or improving quality. lower results in SABER 11 (exit exam) are more likely to attend technical programs and pro- Upper secondary education is not grams without high-quality accreditation, whe- preparing most students for tertiary reas students with the best scores go to high education or the labor market quality, accredited institutions (Figure 3.2). The former also tend to have higher drop-out ra- Upper secondary education has not received tes: 47 percent for the students with low results the financial and strategic support it needs. in Saber 11, compared to 30 percent for those The National Development Plan 2014–18 es- with the best results. One of the most unfortu- tablished universality of upper secondary nate aspects of the challenges to the educa- education as a target by 2025 in urban areas tion system is that students with poor acade- and 2030 in rural areas. Yet, enrollment rates mic performance are also more likely to come have stagnated in the past 5 years. While from poorer social backgrounds. Low quality 19  Guerra, Modecki, and Cunningham (2014). 73 Colombia Policy Notes Figure 3.2 Enrolment in institutions 2015, by students’ score level in Saber 11 and type of institution 100 Percentage of enrolled students 10.2 14.1 17.2 80 43.2 47.7 39.5 43.2 60 44 40 40.3 37.7 20 50.3 42.6 38.8 16.5 14.6 0 Techincal Official Private Official accredited Private accredited Low SABER 11 score Medium SABER 11 score High SABER 11 score Sources: ICFES, Ministry of Education, and SNIES. upper secondary education does not prevent system was a recognized pioneer in Latin Ame- the perpetuation of inequalities later in life.20 rica, but it has not evolved to respond to ra- pidly changing needs. Licensing requirements Quality tertiary education needs to be (the minimum to operate) are too lax, while accessible to more young people the requirements for high quality accreditation are too stringent and too focused on research Despite impressive improvements, access to capabilities of institutions.22 As a result, many good quality tertiary education is still highly institutions do not even seek accreditation, as unequal. Only 11.3 percent of students from their institutional goals do not include research. the poorest families enroll in tertiary educa- Accreditation is also very costly and cumber- tion, compared with 56.7 percent from the some, with long and repeated processes to wealthiest ones. Regional disparities are also obtain and renew accreditation. Importantly, stark: five departments account for two- it focuses on inputs rather than outcomes and thirds of all undergraduate students in the as a result, accreditation system coverage is country.21 insufficient. In 2017, high-quality accreditations covered only about 11.7 percent of the pro- The quality assurance system for tertiary edu- grams and 17.4 percent of the institutions. Whi- cation needs to cover more institutions, recog- le 44 percent of university students are enrolled nize the diversity of the system and provide in high-quality programs, the equivalent share incentives for continued improvements. Co- of students in technical and technological pro- lombia’s tertiary education quality assurance grams is 9.1.23 20  Half of students whose family income is lower than the minimum wage, who are highly likely to have developed large deficits, performs at the bottom two quintiles on SABER 11 (the national upper secondary examination), and only one in ten in the top quintile. Low scores severely limit their options for tertiary education. According to the Ministry of Education, only 38 percent of upper secondary graduates transit to tertiary education during the year after comple- tion, and many of those who do, do so without the necessary skills to succeed in tertiary. 21  SEDLAC (2018). 22  OECD (2016b). 23  Gónzalez-Velosa et al. (2015); Camacho, Messina, and Uribe (2017). 74 Note 3 Easing Transition from School to Work The financing system is another major obs- pacities.25 Recent policies aimed at providing tacle to access, quality and equity. Tertiary an articulated approach for youth employ- education institutions have been running ment have not yet translated into operational deficits for years, and their financing system results. Despite the number of programs and is inefficient and rigid: budgets are linked to 2 million beneficiaries (1.2 million excluding the inflation-adjusted costs registered by the public employment services), they represent institutions in 1992 and do not take growth less than half of 4.7 million youth who are ninis in enrollment (or any other outcomes) into and informal workers. consideration. Moreover, the system has ge- nerated great disparities between funding Youth employment programs face outreach allocations to different types of institutions, and quality issues. Some interventions do not particularly affecting regional institutions and reach the most vulnerable as a result of in- non-university institutions. This financing model efficient outreach mechanisms and program also does not incentivize good performance content, even though they may have ade- and results, affecting in particular regional quate coverage. Most employment services and non-university institutions.For example, in are provided by the National Learning Service 2017 the allocation per student to technologi- (Servicio Nacional de Aprendizaje, SENA) and cal, technical or university institutions was, on the Public Employment Service, which do not average, 17 percent below the allocation per have sufficient outreach efforts and ease of student of public universities. utilization to ensure adequate take up. In other cases, there are limitations arising from the im- Youth often enter the labor market plementation of programs. For example, youth with low skill levels and receive limited without completed secondary education (37 support for improving employability percent of those who graduated from basic secondary) are not eligible for major skills for- Youth employment programs are fragmen- mation programs like SENA. In addition, other ted and limited in coverage, even for at-risk programs like the Ministry of Labor’s 40,000 youth. In the last decade, the government Empleos wage subsidy program did not ade- has implemented a range of policies and quately target informal or vulnerable youth in programs to address supply and demand its early implementation as it was implemented constraints that prevent youth from effecti- through the Family Welfare Funds (Cajas de vely transitioning into labor markets.24 These Compensación Familiar), which are territorial interventions include apprenticeships, entre- entities that provide services to the contribu- preneurship programs, public employment tory formal workforce. More importantly, some services, vocational and socioemotional skills interventions with potential impact on skills up- trainings, and wage-subsidy programs. They grading have limited linkages to labor market respond to different institutional objectives, demands. Training programs like the Depart- have different target populations and types ment for Social Prosperity’s (DPS) Jóvenes en of benefits with varying implementation ca- Acción (a classroom and on-the-job training 24  Youth’s constraints in the labor market can be defined in two groups: (i) “supply constraints” as lack of job-rele- vant skills and experience, job-search capacity, constraints to set up a business, restricting social norms, etc.; and (ii) “demand constraints” as lack of demand of employers for youth work, financial disincentives, employer discrimination, etc. Cunningham et al (2010); Kluve et al, (2016). 25  These institutions include the Department for Social Prosperity, the Ministry of Agriculture, the Ministry of Education, the Ministry of Labor, the National Training Agency, among others. 75 Colombia Policy Notes for youth with stipends) relies on the existing Existing monitoring and mechanisms limit the institutional package offered by training insti- capacity for enhancing coordination and in- tutions, which in many cases is not aligned with creasing efficiency. Youth ALMPs have limited changing local labor needs or interest from monitoring and evaluation instruments, and participants. although some programs have implemented rigorous impact evaluations, most have limited These programs have uneven financing me- evaluation or weak performance.28 Lacking a chanisms that limit medium-term planning set of results indicators that can be monitored and weaken the potential for synergies. Some during implementation reduces the transpa- programs are financed through special, short- rency of public resources and the potential for term budgetary allocations with unclear futu- coordinated action on the ground. As a result, re funding. For instance, the 40,000 Empleos funding is not linked to specific outcomes but wage-subsidy program was financed with the associated to inputs or outputs of specific inter- unused resources of the FOSFEC revenues for ventions. the 2015 exercise only, and does not have a specific allocation for the following years.26 Pro- Policy Options grams like Jóvenes en Acción have a regular budgetary allocation that partly reflects the Improving youth outcomes needs a combined existing commitment to multiyear programs strategy of skills upgrading and active support (e.g. stipends during university careers), but sti- in the transition to the labor market. A skill upgra- ll face lack of clarity in terms of the targeted ding strategy needs to start by providing good coverage, distribution by type of subprograms quality ECD programs and a focus on learning (university, technical), and the implications for during basic and upper secondary education. medium-term cost implications. This unclear It also needs to facilitate transitions between medium-term financing of some of the acti- levels of education, where most repetition and ve labor-market programs for youth (ALMPs) drop-out occurs, and to improve access and affects the planning and the development of quality of tertiary education through a reform synergies across them. Conversely, the main of the quality assurance and financing systems training provider, SENA, is funded by payroll for tertiary education. Supporting transitions to contributions which represents a more stable the labor market requires (i) aligning technical stream allowing for greater planning of service education and training with the needs of the provision.27 This uneven financing mechanisms private sector in the management of the skills create different incentives on the implemen- development system; (ii) offering pathways to tation agencies from ensuring full and quick return to the formal education system for drop- execution to maintaining expenditure capaci- outs; and (iii) expanding effective active labor ty that weakens the incentive for coordination market policies. across agencies. 26  FOSFEC is the Solidarity Fund for Employment Promotion and Protection against Unemployment (Fondo de Soli- daridad y Fomento al Empleo y Protección al Cesante) that delivers family allowance funds, social insurance unem- ployment benefits, and other benefits through the Cajas de Compensación Familiar. Collected earmarked taxes are added to the fund every year and are not exhausted. 27  Specific interventions like SENA Emprender (entrepreneurship program) have the capacity to raise funding from other sources as well. 28  See, for instance, Attanasio et al. (2017) and DPS (2017) for impact evaluations of Jóvenes en Acción. 76 Note 3 Easing Transition from School to Work Upgrading Skills upper secondary education needs a funda- mental transformation in order to expand the Improving the quality of early childhood set of skills it provides to prepare students for education, basic education and upper se- tertiary education or the labor market. condary education Financing and governance of the system. Truly Quality assurance system for ECD. Colombia aligning the education system to get schools is one of the few countries that have measu- what they need to improve learning would red both child development outcomes and require governance and financing reforms at service delivery indicators for ECD, and these ECD, basic and upper secondary education measurements should occur periodically in a levels, but those are highly complex reforms. sample of children and institutions. While cove- In ECD, financing is concentrated in the Co- rage of ECD programs needs to improve, buil- lombian Institute for Family Welfare (Instituto ding on the successful ECD strategy De Cero Colombiano de Bienestar Familiar, ICBF), but a Siempre, the priority should be to use these service provision is regulated by the Ministry measurements of child development and ser- of Education and the quality assurance is ca- vice delivery to developing an effective qua- rried out by local governments. An ideal reform lity assurance system for early childhood de- would increase funding through the Ministry of velopment programs, especially in rural areas Education and ETCs (through the Sistema Ge- and for community-based modalities. In im- neral de Participaciones, SGP), to ensure ade- plementation, the Ministry of Education and quate funding and link resources to quality of ETCs should have a stronger role in financing service. In basic and upper secondary educa- and enforcing this quality assurance system to tion, the financing system is highly fragmented, balance the prominent role of the ICBF in the fi- earmarked and with very low autonomy in the nancing and provision of ECD services. The Na- use of resources at the school level. In basic tional Development Plan 2014–18 included the and upper secondary education, the priority development of these systems as a target for should be to set up the systems for the educa- 2018. While the basis of these systems has been tion system to respond to the needs of schools developed, their implementation still needs to by (i) consolidating fund flows to reduce the be defined and rolled out. number of instances that receive transfers and the number of earmarked transfers to increa- Better information on the needs of schools to se efficiency; (ii) giving more resources and improve learning using the new System of Edu- increased autonomy to schools in the use of cation Quality Management (Información y resources, compensating for equity considera- Gestión de la Calidad Educativa, SIGCE). The tions; (iii) introducing performance incentives SIGCE is designed to give comprehensive in- in the SGP; and (iv) increased transparency formation about each school in 6 dimensions and accountability in the use of resources, es- of quality in a user-friendly and actionable pecially to the school community. format to all actors in the system (schools, pa- rents, ETCs and central government). The sys- Quality would be improved by focusing on two tem was reformed in 2017, and could poten- cross-cutting themes that affect all levels of tially transform how the system is managed if education: (i) improving quality measuring and it is properly used. However, it is not currently assurance systems; and (ii) focusing on peda- used widely for decision making. Without sig- gogical support programs. In addition to these, nificant changes to the governance and fi- 77 Colombia Policy Notes nancing structure of the system, information panding the counseling to students on possi- should be the cornerstone of the manage- ble study paths and careers. Other countries in ment of the sector to ensure that all actors are the region (Brazil, Mexico, Peru, Uruguay) have using the same information to identify and sol- realized the importance of this shift and are ve the needs of schools. implementing reforms aimed at changing the focus of upper secondary education to skills. Extend school leadership and pedagogical Short-term options to improve upper secon- support programs but improve their sustainabi- dary education could include (i) expanding lity. Programs like Rectores Lideres Transforma- demand-side support through Jóvenes en Ac- dores and similar school leadership programs, ción for upper secondary education students; Todos a Aprender and Jornada Única (full (ii) expanding the Fondo de Educación Media, time school which has a strong pedagogical which provides leveling courses to students at support component) have proven effective in risk of dropping out, but considering alternati- raising learning outcomes, but they are cost- ve implementation modalities that reduce the ly and sometimes inefficiently targeted. While cost per student (such as non-university part- these programs should continue and be ex- ners); and (iii) increasing the focus on socioe- panded, they could be implemented more motional skills through existing mechanisms like efficiently through mentoring networks for tea- the Cátedra de la Paz (Chair of Peace) and cher and directors, or by decentralizing their Competencias Ciudadanas (Citizenship com- implementation to ETCs. In the case of Jorna- petencies). In addition, medium-scale piloting da Única, which extends the school day by of drop-out prevention programs such as the at least one hour, there is also a need to roll Programa de Oportunidades y Desarrollo para out the program efficiently. As extending the Evitar Riesgos (PODER) in Mexico, which com- school day is very costly for a school (becau- bine tutoring with cognitive and socioemotio- se it may need additional infrastructure and nal skills interventions, could prove effective in extra teachers), the program should take into preventing drop-out and improving transitions consideration teacher distribution and existing to tertiary education. infrastructure to expand while minimizing the cost of the operation. Supporting transitions to tertiary education through better information, financial and Upper secondary education reform. In addi- academic support. tion to better information and pedagogical Providing better information and guidance support, upper secondary education is also in through socio-occupational support. There need of a fundamental transformation, focu- are many initiatives to provide information sing on skills (cognitive, socioemotional, and to upper secondary students such as Bus- technical) instead of basic competencies. A cando Carrera (providing information about strategic reform would require (i) identifying degrees) and Observatorio Laboral de Edu- the skills a graduate should have through a cación (providing information on graduate graduate profile; (ii) developing a teacher pro- salaries), but students are generally not fami- file; (iii) expanding promising pilot initiatives to liar with these tools. More career guidance improve skills for students (currently through the and academic support is needed to navigate Fondo de Educación Media) and improve pe- these options, especially for the most disad- dagogy and management (currently through vantaged students. Adequate guidance and the program Todos a Aprender); and (iv) ex- information can help students to construct a 78 Note 3 Easing Transition from School to Work strong and positive self-image, define their in- professional lives; levels of repayment would terests based on their capacities, and consoli- depend on income upon graduation. Inco- date employability skills. me-contingent financing can remove barriers to accessing tertiary education, while impro- Increasing demand-side financing and impro- ving the financial sustainability of the tertiary ving its sustainability. Colombia is a pioneer in education system and cutting the cost of loan financing tertiary education through student defaults for students. This modality could repla- loans, providing disadvantaged students with ce Ser Pilo Paga, as it would have the same interest rate and subsistence subsidies. These benefits as that program (removing access programs have shown to increase enrollment barriers) but would be more sustainable; part and reduce drop-outs.29 They should increa- of the scholarship would be recovered throu- singly support accredited programs and insti- ghout the life of the graduate. Colombia has tutions in order to incentivize quality, increase taken the necessary steps to set up the system, beneficiaries’ return to education, and impro- and details of implementation will be crucial ve repayment rates. The Ser Pilo Paga pro- for its success. gram, introduced in 2014 as a large merit- and needs-based scholarship program, has contri- The quality assurance system for tertiary edu- buted to eliminating barriers to entry into top cation needs to be reformed to (i) recognize private universities for the best students from the diversity of institutions, especially non-uni- disadvantaged backgrounds. However, con- versity institutions; (ii) focus more on outcomes sidering the fiscal situation of the country, the in the quality assessment; and (iii) develop insti- sustainability of the program would depend tutional capacity for an effective and efficient on introducing cost savings or cost-recovery quality assurance, including the enforcement mechanisms to guarantee resources for future of least requirements to operate. The current cohort (see next recommendation). accreditation system is too narrowly focused on universities that have research capacity, effec- Improve the quality of tertiary education tively leaving many institutions outside of the A reform of the tertiary education financing quality assurance system, especially technical system is urgent. The public university system and technological programs and institutions. To needs more resources to cover the current de- improve efficiency of existing quality assurance ficit. These resources are necessary and should processes, the plurality of information systems be linked to enrollment and quality improve- should be articulated into a centralized system. ments. The transfers to public institutions should A broad reform could also include more auto- be based on numbers of students. Additional nomy, efficiency, and coherence for quality funding mechanisms should be linked to results processes by concentrating all quality assuran- in quality improvements. ce functions into a single agency. Promote equity in access by promoting inco- Provide active and systematic support me-contingent financing for tertiary education. for transition to the labor market Students financed under this modality would receive tuition support, but repay a portion Strengthen the policy framework for youth em- of the cost of their financing throughout their ployability. Youth employability policies should 29  Sanchez (2014). 79 Colombia Policy Notes prioritize specific populations and align inter- the private sector and policy makers, and for ventions to achieve the expected results of im- taking the skills policy forward.30 SENA’s appren- proved skills and employability. Existing policy ticeship program, Contratos de Aprendizaje, coordination entities, such as the CIGER (Co- requires firms to meet a quota of apprentice hi- mité Intersectorial para la Gestión del Recurso res or pay an equivalent amount (monetization Humano), part of the national competitiveness of the quota). However, true ownership of the system, needs to strengthen its policy coordi- private sector in the production of skills for the nation and its monitoring roles to ensure results job could be taken further. World leaders in the for specific populations. CIGER could also in- development of skills implement Technical and clude entities like DPS to ensure that employa- Vocational Education and Training (TVET) pro- bility interventions, even for the most vulnera- grams where the private sector plays an active ble, are linked to strategies to improve national role in the provision of skills supply, from funding competitiveness. In addition, more in-depth (Germany) to managing public training cen- systematic and rapid sector-level assessments ters (South Korea, Singapore).31 could build on existent sources of information and institutions, such as sectorial committees Improve pathways for continued skills upgra- (mesas sectoriales), the National Qualifications ding. Young people who are not in work or Framework, and labor observatories. These as- school need retraining. Vocational training is sessments would be the basis for defining sec- most appropriate and would need to be com- tor strategic action plans to improve compe- bined with socioemotional skills formation or en- titiveness, involving heavily the private sector trepreneurship programs. Stronger and clearer needs in more formal settings (such Chambers pathways should be provided to students to of Commerce) or in less institutional contexts move between institutions and advance from (trade unions of microenterprise organizations). one level to the next. Development and im- The actions plans could provide guidance on plementation of a National Qualifications Fra- designing effective skills interventions specific mework and Credit Transfer System should be to the sector and region being analyzed, with accelerated to facilitate this type of integration. a proper monitoring and evaluation system, At the territorial level, these activities should Strengthen subsidized employment and direct be led jointly by the Ministry of Labor, Ministry employment programs (such as wage subsi- of Education, SENA, but more importantly in dies, labor-intensive public works). The current close collaboration with representatives from scope of these programs is limited, and most the private sector such as Consejo Privado have not been evaluated rigorously for their de Competitividad, National Business Associa- impact and cost effectiveness. Global eviden- tion (ANDI), the Society of Colombian Farmers ce on wage subsidies shows limited impacts (SAC) and Chambers of Commerce. on employment unless they are closely tied to increased productivity interventions (such as The private sector should also take a more acti- skills formation). Linking programs like 40,000 ve role in facilitating provision of skills. Initiatives Empleos (wage subsidy) to training packages such as mesas sectoriales have been essential such as those provided by SENA or with incen- for nurturing the dialogue between academia, tives like Jóvenes could be an area for piloting, 30  For further information see the evaluation of Mesas Sectoriales (SENA, 2014). 31  Singapore’s Institute of Technical Education with substantial autonomy under the guidance of a board of gover- nors whose members include private sector business leaders and has strong ties to the private sector. 80 Note 3 Easing Transition from School to Work evaluation, and program revision. In parallel, increase accountability and ensure relevan- labor-intensive public works can be effectively ce of interventions. Performance-based finan- used in case of emergencies (natural or eco- cing could enhance the technical relevance nomic) as these programs can play a risk-co- of each intervention, but more importantly, ping role with a limited duration, such as the could ensure that synergies are exploited. For Emergency Employment program during the instance, Chile implements a results-based bu- Ola Invernal in 2010.32 Given the recurrence of dgeting where transfers from one agency are emergencies in Colombia, these represent an made to say, specific intermediation providers opportunity to enhance youth participation in when they cover a group of TVET trainees, typi- training and employment when opportunity cally from most vulnerable groups. This would costs are lower. need stronger management information sys- tems across implementing agencies, especia- Across interventions, performance-based fi- lly among those controlling the budget alloca- nancing mechanisms should be designed to tion decisions. Annex 3.1 Matrix of Policy Options Development Policy Options Challenge Short Term Medium Term 1. Improve early • Introduce Quality Assurance System • Include in the general transfer system childhood edu- for ECD SGP basic cost of ECD provision cation (ECD), • Improve use of information for deci- • Consolidate transfers and grant more basic educa- sion making (Sistema de Gestión de resources and autonomy to schools tion and upper la Calidad Educativa) • Reform upper secondary education: secondary • Strengthen pedagogical support create graduate profiles; develop a education programs - PTA, Jornada Única and teacher profile; pedagogical transfor- School Leadership Training mation • Strengthen socioemotional skills of graduates • Support transitions (subsidies and academic support, skills leveling) 2. Improve tertiary • Introduce quality assurance system • Based on a pilot, implement income education for tertiary education -contingent student loans on a large • Pilot income-contingent student scale loans • Move most financing to public institu- • Establish performance-based trans- tions to be performance based fers to public institutions 3. Strengthen labor • Unify targeting mechanisms for labor • Consolidate youth programs by crea- market transi- market programs ting a Youth Policy Framework and tions • Involve private sector in skills training Institutional Consolidation • Establish a Skills Agency with strong private sector leadership • Reform and consolidate financing by linking it to performance 32  See http://www.colombiahumanitaria.gov.co/Damnificados/Paginas/ApoyosGeneracionEmpleo.aspx 81 Colombia Policy Notes REFERENCES Acosta, P. A., N. Muller, and M. Sarzosa. (2015). “Be- for Latin America’s Ninis. 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(2018), “Browse by theme: Education”, ciamiento de la Educación Superior en Colom- Data Centre, UNESCO Institute for Statistics, bia”. www.uis.unesco.org/DataCentre/Pages/Brow- Rubio-Codina, M., O. Attanasio, and S. Gran- seEducation.aspx tham-McGregor. (2016). “Mediating pathways World Bank. (2018). World Development Report 2018: in the socio-economic gradient of child deve- Learning to Realize Education's Promise. Washin- lopment: Evidence from children 6–42 months in gton, DC: World Bank. 83 Colombia Policy Notes 84 PENSIONS NOTE 4 Colombia’s pension system reform of 1993 remains unfinished. Pension coverage is low, while highly subsidized public pension funds engage in unfair competition with private funds, resulting in regressive income redistribution, fiscal pressures, and underdeveloped annuity markets. Lump- sum benefits at retirement are prevalent, undercutting the main goal of the pension system to provide consumption smoothing. These problems are expected to become even more acute as Colombia faces sharply accelerating population aging. The reform agenda is comprehensive. It should address regressive income redistribution through parametric reforms, which will also ensure financial sustainability of the public pension schemes and allow private pension provision to grow. Revised minimum pension policy would help to in- crease pension coverage. Comprehensive policies to develop the annuities market should result in true old-age income insurance and consumption smoothing. Context And Reform Progress (RAIS), run by private pension fund manage- ment companies Administradoras de Fondos The contributory pension system in Colombia de Pensiones (AFPs). The high level of informa- is characterized by low coverage, costly and lity in the country results in less than 35 percent regressive redistribution, and prevalence of of the labor force contributing to a pension sub-optimal lump-sum benefits at retirement. scheme. Due to stringent eligibility conditions Since 1993, the system has consisted of two the proportion of pension recipients among parallel competing regimes: the public Pay- the elderly is expected to fall from 37 percent As-You-Go (PAYG) Defined Benefit (DB) sche- today to only 17 percent in a couple of deca- me known as Regimen de Prima Media (RPM) des. In 2016, Regimen de Prima Media ran a mostly managed by Colpensiones1, and a fu- deficit of 3.4 percent of GDP; this is estimated lly funded Defined Contribution (DC) scheme at 3.7 percent for 2017.2 High income earners Régimen del Ahorro Individual con Solidaridad are the main beneficiaries of RPM, which offers 1  Pensions for some civil servants, uniformed personnel, and teachers are managed by other administrators. 2  Colpensiones was responsible for the deficit of 1.2 percent of GDP in 2016, with remaining deficit attributable to other RPM administrators, including civil servant regime FOPEP (1.0 percent), Magistrates (0.3 percent), uniformed per- 85 Colombia Policy Notes highly subsidized pensions for those with long schemes in Colombia currently cover only 37 careers in the formal sector. Private sector insti- percent of the elderly population, and this per- tutions are unable to compete for these contri- centage is expected to drop to 17 percent butors and essentially function as savings sche- due to stringent benefit eligibility conditions. mes for the less wealthy, as current regulations Non-contributory programs like Colombia Ma- disincentivize the provision of annuities. yor and BEPs offer additional coverage but their scope is limited by budget constraints. The Faced with a high proportion of elderly people unsatisfactory current situation makes the pen- with no steady income source, Colombia has sion’s system future even more daunting. Ac- introduced two independent non-contributory cording to 2017 UN population prospects data- old age programs. Beneficios Económicos Pe- base, Colombia’s old-age dependency ratio3 riódicos (BEPs) are voluntary pension savings currently stands at 12.6, a level comparable to accounts for people with incomes below mi- that of high-income countries in 1950. It took nimum wage. The accounts are administered those countries seven decades to reach their by Colpensiones and subsidized by the gover- current dependency ratio of 28.8, but Colom- nment at 20 percent. In 2018, the BEPs program bia, like the rest of South America, is expected expenses were projected at COP 104 billion to cover that distance in only 25 years due to (0.01 percent of GDP), in comparison to the the confluence of lengthening life expectan- COP 29,385 billion (3.0 percent of GDP) spen- cy and a sharp drop in fertility rates. Therefore, ding for contributory benefit programs also run examining current pension practices of OECD by Colpensiones. However, BEPs accumula- countries, including retirement ages and relati- tions are small and result in the lump-sum return ve pension benefit generosity, could help Co- of contributions at the time of retirement, ra- lombia plan the next 25 years, even though the ther than in annuitized payments. The second current generosity of OECD pension schemes non-contributory program, called Fondo de may be hard to achieve especially in the ab- Solidaridad Pensional (FSP) and administered sence of strong GDP growth. by Colombia Mayor, a consortium of local go- vernments, covers benefit payments for poor One of the key challenges for Colombia is elderly people. They also provide pension con- completing the unfinished pension reform of tribution payments for disadvantaged youn- 1993, which envisioned a further parametric ger contributors. In 2018, FSP was allocated reform of RPM and a reduction of its size. Since COP1,439 billion (0.1 percent of GDP). 1993, new formal labor market entrants have automatically been enrolled in RAIS, and the Main Challenges expectation of the reform was that the new scheme would continue gaining members at Colombia already struggles to provide retire- the expense of RPM. The reformers were confi- ment income coverage to the current elderly dent that the RAIS scheme would outperform, population, and faces sharply accelerating or at least be able to compete with, RPM. RPM aging in the near future. Contributory pension was expected to be further reformed given its sonnel (0.6 percent), and others (0.3 percent). As most young civil servants are obliged to join Colpensiones, with time Colpensiones deficit is expected to increase, while transitional regimes for older civil servants, like FOPEP, are expected to be phased out. 3  Here the old age dependency ratio is calculated by diving population aged 65+ by population aged between 15 and 64. 86 Note 4 Pensions long-term financial unsustainability. The RAIS pared to the region and the OECD. This benefit scheme was expected to help diversify lon- generosity comes at a cost: government sub- gevity and investment risks, transferring some sidies to RPM were an estimated 3.7 percent of them from the government to private sec- of GDP in 2017 and have precluded fair com- tor institutions. Flexibility of switching between petition between RPM and RAIS. Offering sub- schemes up to the last 10 years before retire- sidized benefits in RPM starves RAIS of sizable ment was introduced to allay fears of the scep- contributions from high-income contributors tics and was not seen to be a big flaw of the which would enable it to offer less expensive design. investment products to all participants. Expen- sive subsidies to the well-off in the RPM sche- RPM benefits remain unsustainably generous, me are also using up resources that could be and highly subsidized for workers with stable made available to the non-contributory pen- careers. RPM retirement ages were raised to sion schemes and other poverty-reducing pro- 57 for women and 62 for men in 2014, but re- grams. main very low compared to OECD countries, as shown in Figure 4.1. The retirement benefit At the same time, low and middle-income wor- amounts to 65 percent of an individual’s avera- kers struggle to achieve minimum contribution ge wage for the minimum 1300-week (25-year) period thresholds, and often fail to choose contribution period, equivalent to an accrual the most advantageous retirement scheme. rate of 2.6 percent per year for those who have In RPM, those who do not accumulate 1300 stable jobs and can achieve such a long ca- weeks (25 years) of contributions receive their reer in the formal labor market. By comparison, money back in one inflation-adjusted lump accrual rates in OECD countries are decidedly sum payment, without accrued interest, which lower, as shown in Table 1. Another way to look leaves people without a predictable income at the issue is to compare net replacement stream in old age. Most individuals in this situa- rates in Colombia with those in the broader tion would benefit from getting their pensions region and OECD, as shown in Figure 4.2; net through RAIS, which has a lower 1150-week replacement rates in Colombia are high com- requirement to access the minimum pension Figure 4.1 Current retirement age in 2016 for a person who entered the labor force at age 20 68 66 64 Years 62 60 58 56 N R X R G A RC K A ZE HU T N G T CR HE AU L S C L DNN K FIN MN EX L P DE E U D L US L A T ITA ISR NO L R a ES AU PR H BE NZ PO IR IS SW SV ES TU LU KO B LV bi SV FR A JP NL C C om Normal age Additional years for men (if different) ol C Source: Pensions at a Glance, OECD, 2017. 87 Colombia Policy Notes Table 4.1 Accrual rates in earnings related schemes in OECD Japan 0.55 Estonia 1 Hungary 1.64 Canada 0.64 Germany 1 Turkey 1.68[w] USA 0.75[w] France 1.06 Austria 1.78 Greece 0.8-1.5 Slovak Republic 1.25 Spain 1.82 [y] Korea 0.87 Belgium 1.33 Netherlands 1.85 Poland 0.91 Italy 1.46 Luxembourg 1.92 [y] Norway 0.94 Iceland 1.47 Portugal 2.3-2 [w] Sweden 0.95 [w] Czech Republic 1.5-1.02 Slovenia 0.96 Finland 1.5-4.5 Colombia 1.5-2.6 [y] Notes [w] – varies with earnings; [y] – varies with years of service. Source: Pensions at a Glance, OECD, 2015. Figure 4.2 Net pension replacement rates for full career average earners in North and South America and OECD 120 100 80 Percent 60 40 20 0 N P R AR I G C N U Y C Z JA L M UY TM 26 HN B D G T C D AN A A LA RY U S M EX SU I R O BR L V A O HL R HT PR O BO BL BH PR BR ES SL PE EC DE VE PA FR BR US EC NI C TT DO C C M U G G Source: Pensions at a Glance databases, 2014 and 2017, OECD. guarantee and, failing that, returns contribu- tially mask the RPM’s financial unsustainability. tions with accrued interest.4 However, the lack To the extent that the low- and middle-income of financial literacy prevents people from ma- earners do make an advantageous choice of king the most beneficial choices. Implicitly, this RAIS and people with higher incomes choose means that high-income RPM beneficiaries are RPM, the system is converging into one where subsidized by lower- and middle-income con- RAIS only pays pensions that are equivalent to tributors who transfer their accumulated ba- the minimum benefit guarantee. lances to RPM and effectively subsidize it with no-interest loans. These account transfers to The fact that the RAIS ends up paying mostly RPM are booked as current income and par- minimum pensions represents significant poli- 4  Active RAIS members contribute 0.5 percent of their income to the Fondo de Garantía de Pensión Mínima (FGPM). The fund is used to guarantee a minimum pension for individuals who reach age and contribution period eligibility requirements, but have insufficient pension savings to purchase an annuity (or phased withdrawal) with that value. 88 Note 4 Pensions Figure 4.3 Minimum benefits relative to average wage in Colombia and OECD, 2014 80 70 60 50 Percent 40 30 20 10 0 HU R N ZE T HL L BR A C V AN K U ISL N FIN HE ITA E L ISR K A NL S D T G L RC M T NOX R P L X L R ES AU PR O PO BE IR NZ AU SW SL DN SV ES KO E LU TU DE US JP FR C C G C C Basic Pension Minimum Pension Social Assistance Source: Pensions at a Glance databases, 2015, OECD. tical risk. Recent regulations facilitate greater even half that level and demonstrates that this access to the Minimum Pension Guarantee policy is fiscally unsustainable in the long run Fund (FGPM). Since transferring longevity risk in the society that is expected to age rapidly. to private sector intermediaries is an essential Since financing such a high minimum pension feature of the private pension system, the pos- becomes expensive, this leads to the prolon- sibility of transferring this risk back to the go- ged minimum contribution period require- vernment through the FGPM may become a ments. Ironically, the desire to protect workers political liability for the RAIS. The value-added from insufficient retirement incomes by setting of the private pension scheme can be ques- a high minimum pension level pushes a high tioned in a context where RAIS contributors re- proportion of contributors away from the sys- ceive a minimum pension simply by achieving tem, leaving them with no retirement income age and contribution period requirements, in- at all. dependent of their contribution amounts and investment returns, while longevity risks are Another challenge, closely related to the un- transferred back to the government through fair competition between the two schemes, is the FGPM. an under-developed annuity market. As it is more advantageous for high-income indivi- The high level of the minimum pension, which duals to retire through the RPM scheme, there is set to equal the minimum wage, is an im- is little demand for annuities in Colombia from portant source of distortion in Colombia’s this income group. Until 2015, insurance com- pension system. Salary structure in Colombia panies and pension fund managers were not is highly concentrated at low wages, and the compensated for minimum pension increases minimum wage stands at around 70 percent that were mandated by the government for of the average wage, a highly distortive level pensions already in payment. Given that few that precludes further labor market formaliza- RAIS accounts can be converted into annui- tion. Furthermore, Constitution directs that mi- ties safely above the minimum pension level, nimum pension should equal minimum wage. private intermediaries have little interest in par- Figure 4.3 shows that in most OECD countries ticipating in the RAIS benefit phase. Further- the minimum pension benefit does not reach more, recent regulatory changes, including 89 Colombia Policy Notes Figure 4.4 Affiliation and contribution densities in comparator countries Men Chile Women Men Mexico Women Men Peru Women Men El Salvador Women 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Not affiliated [0-50) [50-100) Other affiliations Source: Pensions at a Glance: Latin America and the Caribbean, OECD, IDB and The World Bank, 2017. the deslizamiento5 and Resolution 3023, create cial markets and creates dependence on exis- more favorable conditions for the provision of ting economic groups. pensions under the mechanism of phased wi- thdrawal, rather than annuities. Consequently, Even with needed contributory pension refor- the possibility of domestic annuity market de- ms, labor market informality in Colombia is velopment rests solely with disability and survi- likely to persist, resulting in a large coverage vorship annuity provision. gap and low contribution densities. Colombia’s 35 percent coverage rate is not exceptionally In addition, the current regulatory framework low compared to other countries with high in- makes it difficult for intermediaries to run a pro- formality rates in the region, as shown in Figure fitable business. While private pension funds 4.4. Even in Chile, contribution density remains can charge up to 3 percent of income as fees, low, especially for women. Given the fact that this limit includes the cost of insurance of disa- the contributory system serves and is likely to bility and survivorship (IDS). As benefits of IDS continue serving the higher-income popula- are most generous in relative terms compared tion with stable employment for the foreseea- to other countries in the region, net fees recei- ble future, its continued subsidization from the ved by the pension funds may not be enough general budget cannot be condoned. to compensate for their risks. While the IDS ope- rates on a self-insurance principle, it is impossi- ble to identify its market price. Only economic Policy Options groups, normally made up of an AFP, an insu- rance company and an investment company, Given the multiple challenges that face the can remain profitable when offering annuities, Colombian pension system, the reform agen- and treating the business as a package rather da in this area needs to be comprehensive. It than as a collection of separate business units. needs to tackle the issues of harmful compe- This approach damages competition in finan- tition between the two contributory pension 5  The deslizamiento is a parameter set by the government on annual basis, which sets the maximum increase on pensions that must be financed by the insurance company or pension fund management company. 90 Note 4 Pensions schemes, address regressive income redistri- Special pension regimes also merit reform. The bution, help develop the annuities market to retirement age for teachers is currently 52 and provide true old-age income insurance rather 57, for women and men respectively, and the- than lump sum payments, and ensure financial se ages could be equalized with those in the sustainability of pension schemes in the long general system. Armed forces pensions with run. Pension system fragmentation and incom- replacement rate of up to 95 percent of basic plete coverage should also be addressed. salaries plus benefits and no age limit for retire- ment are also very generous. It would be rea- Parametric reforms of the RPM are needed to sonable to set lower age limits for these retirees eliminate subsidies to high-income contribu- compared to general population, but current tors. Such reforms normally entail an increase eligibility conditions that rely only on length of in the retirement age as well as revisions to the service could be strengthened with minimum level of net replacement rates and minimum age requirement. pension. Raising contribution rates is often pro- posed as a more politically acceptable reform, Lowering eligibility requirements for minimum but it carries a risk of pushing more people out pensions, combined with a lower minimum of formal labor markets and pension insuran- pension level, would allow a higher propor- ce scheme and cannot bring the system into tion of the middle class to qualify for annuiti- financial equilibrium on its own. zed benefits. While this reform would require a Constitutional change, its effects would be Capping the income insured through the RPM far reaching, as it would increase coverage of system is also worth considering. PAYG reform the elderly in contributory scheme. It is essen- is usually a politically difficult and slow pro- tial that both elements of reduced eligibility cess, while demographic developments and requirements and reduced benefit are incor- the need to provide old-age insurance for porated into any proposal to ensure financial the middle- and lower-income elderly neces- sustainability. The best way to introduce such sitate quick action. Capping the insured RPM a reform would be to freeze the minimum pen- income at around 2-3 average wages would sion level in nominal or real terms for several make the scheme unattractive to high-inco- years while slowly phasing in moderately lower me individuals, who may decide to remain in eligibility requirements. the RAIS scheme, rather than switch to RPM ten years before retirement, something that is Unbundling regulatory requirements is essen- currently very common. This could help redu- tial for developing a healthy annuity industry. ce the size of the RPM faster and would provi- It would allow each business unit of economic de a welcome boost to financial and annuity groups to run their businesses profitably. The 3 market development. Such actions are likely to percent cap on fees creates an unstable equi- create temporary fiscal strain on RPM finances, librium, as pension fund management business as revenues would decrease without a strong is not profitable and gives the impression of pro- stream of transferred higher-income account tecting consumers. Creating mechanisms for balances from the RAIS scheme. Therefore, revealing market prices for services provided the introduction of an insured income ceiling by intermediaries may help to support chan- should be well-planned, possibly include tran- ges in the regulatory framework. Regulatory sitional arrangements, and be combined with changes should: (i) ensure that the parameters other parametric reforms. for calculating the additional amount (suma 91 Colombia Policy Notes adicional)6 are based on market parameters, ty. This would also reduce the pool of poten- including the technical interest rate; (ii) centra- tial beneficiaries of non-contributory pensions, lize the provision of disability and survivorship resulting in more financially sustainable pro- insurance, as is the case Chile and Peru; and grams. While the current subsidy to contributors (iii) use auction prices as a guide to evaluate who move their accounts to the BEPs program the possibility of unbundling the 3 percent fee is attractive (an additional 20 percent to the cap that pension funds are allowed to char- individual account), few people use it. Default ge contributors.7 To the extent that the cost of options that would move the accounts of indi- disability and survivorship insurance is determi- viduals from the AFPs or RPM to BEPs in cases ned to be significantly above 2 percent in a where minimum pension eligibility conditions competitive auction setting, the 3 percent limit cannot be achieved may dramatically increa- would need to be revised. se the participation in the BEPs program. Al- ternatively, campaigns to provide information The participation of foreign insurance compa- to these individuals by phone or by text could nies would contribute to greater competition also help increase the awareness. in the annuities market, but their participation is not guaranteed under current conditions. While the role of a state insurance company Judicial risks need to be mitigated as these in the provision of non-pension annuities from are potentially a major impediment for inter- BEPs accounts is adequate in the short term, it national participants. Under the current le- would help bring in private sector competitors. gal framework, local court rulings often have Currently, the main deterrent for private sec- unpredictable effects on intermediaries’ capi- tor participation is judicial uncertainty about a tal, it is difficult to price this risk, and as a result, non-pension product in this market: insurers do judicial risk could be a significant deterrent to not want to be found liable for paying top-ups market entry. Improved communication with to minimum pension level. Instead of running clients regarding their rights and products sold, a state insurance company, the government for example through an ombudsman’s office could offer protection to private market parti- dealing only with pension issues, increases the cipants to avoid this. accountability of judges; improvements in jud- ges’ financial education would help mitigate More analytical work is needed, despite much the judicial risk. analysis and diagnosis of Colombian pension system done in recent years. The World Bank Better non-pension instruments for contribu- provided an overall assessment of the funded tors who are ineligible for minimum pensions pension scheme in 2012, and an analysis for need to be developed. Limiting lump sum pa- the implementation of a centralized insurance youts and requiring mandatory conversions of of disability and survivorship (2015). In addition, old age savings into periodic payments would IDB (2015), OECD (2015), Ministerio de Trabajo reduce the risks of falling into old-age pover- (2015) and presentations made by Asofondos, 6  The Suma Adicional is the amount of money that the provider of the IDS gives to the pension fund management company for purchasing an annuity. To ensure that the amount of the Suma Adicional is sufficient for purchasing the expected annuity, it is essential that the parameters are calculated based on market parameters including the tech- nical interest rate, and the mortality tables. Since currently these parameters are not aligned with market conditions, the resulting amount might be insufficient. 7  The maximum AFP charge equal to 3 percent of contributor’s salary includes the cost of disability and survivorship insurance, and asset management fee. 92 Note 4 Pensions Fedesarrollo, and other stakeholders have pro- ther analysis and its own proprietary Pension vided valuable information for this work. More Reform Options Simulation Toolkit (PROST) for analytical work and estimations are needed to this purpose. Finally, a study on the remaining assess the implications of the proposed refor- challenges for the annuities market develop- ms. The World Bank stands ready to offer fur- ment would be useful. Annex 4.1 Matrix of Policy Options Development Policy Options Challenge Short Term Medium Term 1. Reform the pen- • Introduce parametric reforms to • Review minimum pension policies sion system the pubic pillar (Regimen de Prima • Mandate conversion of lump sum pay- Media, RPM): eliminate gender gap ments of old age savings into periodic in retirement ages/increase retire- payments. ment age; reduce pension accrual rate; review the generosity of special pension regimes • Introduce insured income ceiling in RPM • Unbundle regulatory requirements for annuity provision from regulations for other financial services • Centralize auction of the insurance of disability and survivorship REFERENCES IDB and World Bank (2017). Pensions at a Glance: La- Organization for Economic Cooperation and Deve- tin America and the Caribbean. lopment (2015). Pensions at a Glance 2015. Organization for Economic Cooperation and Deve- Organization for Economic Cooperation and Deve- lopment (2014). Pensions at a Glance 2014. lopment (2017). Pensions at a Glance 2017. 93 Colombia Policy Notes 94 SOCIAL PROTECTION SYSTEM NOTE 5 The peace building process underway brings opportunities and challenges for further consolida- ting and increasing the social gains of the last decade. Changing territorial conditions will require a greater, and more pertinent, supply of public services, creating a window of opportunity to build trust in government where service provision was previously weak or absent. Colombia has, over time, adopted a strong set of social protection programs, and sought to strengthen their coordination through various institutional reform efforts. To rise to this challenge in a context of limited space for further expansion of programs, the social protection sector needs to transition from a static, fragmented set of programs to a dynamic and integrated system that ensures that people receive the right support at the right time. Re-imagining public service delivery from the point of view of the users can help generate solutions that create value for users, while improving efficiency of the system. Context And Reform Progress Social policies access to the labor market, and Colombia has achieved significant monetary higher labor incomes were central to redu- and multidimensional poverty reduction over cing poverty and increasing shared prosperity the last decade, but income inequality re- over the past decade and a half. More than mains high and there are large regional dispa- 70 percent of the observed decline in mode- rities. This persistent inequality also reflects low rate poverty between 2002 and 20161 can be social mobility and limited opportunities for the attributed to labor market components, with lower quintiles and other vulnerable groups. Si- more people working (29 percent) and wor- multaneously addressing these persisting gaps kers earning more (43 percent). In rural areas requires a social policy vision that brings toge- poverty reduction due to higher labor incomes ther social and productive inclusion (through is as high as 85 percent.2 Income from transfers access to services and enhanced income ge- accounted for 15 percent of the reduction in neration capacity). moderate poverty and nearly 33 percent of the 1  Moderate poverty declined more than 40 percent over the last 14 years, from almost half of the population in poverty in 2002 to less than one third (28 percent) in 2016. Extreme poverty almost halved, falling from 17.7 percent in 2002 to 8.5 percent in 2016. 2  Of which 60 percent is due to increased labor income and 25 percent to greater participation. 95 Colombia Policy Notes reduction in extreme poverty from 2012 to 2016. Figure 5.1 Expenditure on social protection The contribution of transfers to urban poverty reduction has declined in the last four years. 6 5 The peace building process, as well as the so- Percent of GDP 4 cial implications of neighboring Venezuela’s 3 economic collapse, bring opportunities and challenges for further consolidating and in- 2 creasing social gains. Public policies need to 1 adapt to the need for increases in the supply 0 – and pertinence – of public services in con- 2010 2011 2012 2013 2014 2015 Social Assistance Labor Markets Social Insurance flict-affected areas and in areas with large mi- gration inflows from Venezuela.3 Taking advan- Source: ASPIRE database (June 2017). tage of this window of opportunity to build trust in government where service provision was previously weak or absent will be a key priority delivery mechanisms have been developed to for the incoming administration. more accurately identify target households and deliver benefits more efficiently. Contributory so- Main Challenges cial security schemes offer pensions, health insu- rance, and other benefits to those who pay into Social protection programs expanded over the the system. A range of non-contributory inter- past two decades, as more inclusive social po- ventions, including a near universal health sub- licies were pursued in the context of greater fis- sidy scheme for the poor (fee waivers)4, are de- cal space. Over the past two decades condi- signed to reduce poverty and promote human tional cash transfer (CCT) programs have been capital development for those who are unable consolidated; health insurance coverage and to contribute.5 Public and mandatory private so- pension coverage for the elderly has increa- cial expenditure6 in Colombia was 12 percent of sed; young people in particular have used la- GDP in 2011, significantly lower than the OECD bor market programs; and integrated service average of 22 percent (Figures 5.1, 5.2 and 5.3).7 3  Areas such as the border and large urban centers like Bogota, Medellin, Barranquilla, Cali, Bucaramanga and Santa Marta. Migración Colombia (2018). 4  Colombia has also achieved near universal health insurance coverage (98 percent of the population) and gua- ranteed a single benefit package to all users, eliminating inequity in coverage and poverty-inducing expenses. 5  Among these a few stand out. The conditional cash transfers program, Más Familias en Acción (MFA), launched in 2001 and covering over 2.5 million families, was among the first wave of CCT programs globally and is well regar- ded for its impacts on health, nutrition and education. The youth training support program Jóvenes en Acción (JA) covers more than 350,000 poor beneficiaries providing them with conditional cash transfers to facilitate access to post-secondary training opportunities. The non-contributory pension benefits program Colombia Mayor, with 1.3 million beneficiaries, has significantly expanded pension coverage since it was first implemented in 2008. These programs are complemented by labor market interventions that promote employability (mostly through SENA) and by many smaller inclusion interventions in rural and urban areas. 6  Using the OECD’s Social Expenditure Database (SOCX) definition of social spending. The Colombian government follows a different classification of social expenditure than that used by the OECD SOCX. In Colombia, public social spending is divided into the following categories: “work and social security” (including programs for the elderly, survi- vors, disabled people, families, active labor market programs, unemployment and other social policy areas, especia- lly, social assistance), education, health, water, housing and culture. The World Bank ASPIRE database, whose data is shown in figures 5.1, 5.2 and 5.3 – includes categories under “work and social security.” It is important to mention that spending on social assistance shown in Figure 5.2 has grown significantly but from a very low base. As noted in Policy Note #1 on Fiscal Policy, this spending is mostly well-targeted and still small in size, while spending on pensions is large and regressive in nature. 7  OECD (2016). Among OECD countries only Korea and Mexico spend less as a proportion of GDP. 96 Note 5 Social Protection System Figure 5.2 Expenditure on social assistance 3.0 2.5 Percent of GDP 2.0 1.5 1.0 0.5 0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 CCT UCT Social pension School feeding Public works In kind Fee waivers Other SA/SC Source: ASPIRE database (June 2017). The social protection system remains fragmen- shed effective mechanisms for program exit ted and often lacks the information to identi- or for encouraging harmonization with com- fy gaps and overlaps in demand and supply plementary programs, limiting the potential to for social services. Despite having a compre- support participants’ mobility across programs, hensive social protection system to support or to reach a larger number of potential users the needs of poor and vulnerable, fragmen- over time. tation of programs and information result in potential targeting inefficiencies, weak coor- The social registry – Sisbén – faces significant dination, and limited capacity to guarantee challenges in maintaining up-to-date informa- long-term results. In 2015, there were almost tion used by key social programs to identify 60 active social assistance, social insurance, and select potential beneficiaries. Sisbén (Sis- social care and labor market programs, ma- tema de Identificación de Potenciales Benefi- naged by at least 15 institutions.8 At the local ciarios de programas sociales) is currently used level an unknown number of social programs to target 20 social programs provided by 10 di- are operating, funded by subnational gover- fferent government entities, as well as some lo- nments (departments and municipalities) and cal level social programs.9 Although its current sometimes by the non-profit and private sec- iteration, Sisbén III, is a solid and well-functio- tors. There is no way of identifying duplications ning instrument, the low frequency with which or gaps in social services and benefits at the in- regular updating mechanisms are used implies dividual and household levels. In addition, indi- gradual loss of quality and reliability of informa- vidual programs face implementation challen- tion over time (Box 5.1). As a result, information ges that can reduce their efficiency, prevent on demand for social programs is outdated, effective coordination, and limit their impact. making it hard to target programs effectively, For example, most programs have not establi- leading to further inefficiency.10 8  World Bank, ASPIRE database (2017). 9  CONPES 3877 (2016). 10  In addition, the algorithm used by Sisben III does not adequately capture households’ ability to generate income, leading to possible targeting inaccuracies for those social programs for which income is a key criterion. CONPES 3877, p.18 (2016). 97 Colombia Policy Notes Figure 5.3 Expenditure on labor market programs 0.29 0.30 0.26 0.25 0.24 0.22 0.23 0.21 0.21 0.20 0.20 Percent of GDP 0.20 0.16 0.17 0.15 0.15 0.15 0.13 0.10 0.05 0.01 0.01 0.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Intermediation services ALMPs Passive LM programs Source: ASPIRE database (June 2017). Currently, there are limited incentives for users participants’ ability to apply to programs in a to maintain updated information, and a po- timely manner. Coverage to eligible families is tential burden associated with doing so. A guaranteed for programs like subsidized health user that updates an ID document, household insurance, but productive inclusion programs composition or address, needs to inform each like Mi Negocio, IRACA, and Familias en su program in which he is enrolled separately, tierra, tend to have small, uneven coverage this information is not automatically shared by across departments/municipalities. Even lar- Sisbén programs, suggesting that further steps ge programs like the CCT Más Familias en Ac- would be required to update socioeconomic ción have not been able to accept the large information to determine eligibility. In addition, inflows of eligible beneficiaries in the last two the incentive to complete this step is limited if years due to fiscal constraints. Eligibility and do- there is a perceived risk of losing access to cu- cumentation requirements vary, so poor hou- rrent benefits. While new applications to Sisbén seholds have to comply with many different are open and people can reach local autho- requirements to access a package of services rities to update their information, there are no (age, income level, educational attainment, incentives to do so when household conditions among others). The productive inclusion pro- are improving, because of the perception that gram, Mi Negocio, provides business develop- it will threaten eligibility. The roll-out of Sisbén IV, ment services for the poor, but limits its target and the implementation of its social contract, population to those currently registered in Red as described in the CONPES document 3877, UNIDOS (social intermediation services for the presents an opportunity for specific measures extreme poor) or to victims of conflict (Registro to be taken in coordination with other agen- Único de Víctimas). cies and subnational governments to improve the quality of information while simplifying the While Colombia has provided support to fa- burden on the user. milies in the process of “linking up” to social programs for a long time, access remains cha- Asymmetric information, coverage gaps and llenging. In 2006, Colombia was one of the first conflicting eligibility requirements, represent countries to model the successful Chile Solida- significant barriers to effective access, limiting rio program by creating the Red Juntos (now 98 Note 5 Social Protection System Box 5.1 Theoretical losses of Sisbén’s information quality over time, 1995–2016 Sisbén’s information quality degrades over time as each new version is introduced, genera- ting high costs of inefficiency and administration. Even if each of the three versions of Sisbén has improved information quality, information on individuals’ living standards collected from surveys before the implementation becomes obsolete over the years. Conpes 3877 of De- cember 2016, estimates that as of October 2016, as many as 74 percent of people registered in Sisbén III had outdated information. These losses of information quality represent inefficien- cy of public spending – some non-poor people benefit from anti-poverty programs and some poor people are excluded. Using monetary poverty measures, Conpes 3877 estimated that as many as 65 percent of people were mistakenly identified as poor in 2015 (inclusion errors) and 17 percent were mistakenly excluded (exclusion errors). Multidimensional poverty mea- sures show that the inclusion error was 50 percent and the exclusion error was 29 percent. In addition to these errors, the current process requires costly surveys to be run periodically at national level to collect household data for the system. Quality of the information in Sisbén Sisbén I Sisbén II Sisbén III Higherer quality Information quality WITHOUT exclusion and inclusion errors Losses of information quality quality Lower Information quality WITH exclusion and inclusion errors 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Red UNIDOS), a social intermediation strategy for citizens looking for information, guidance, to help the extreme poor access social pro- and referral to access new or retain existing grams.11 UNIDOS can help overcome informa- benefits or services. Despite these efforts, po- tion gaps and connect the poorest people to tential beneficiaries in many municipalities still available supply, but – by design – it is direc- need to make multiple, possibly lengthy, trips ted only to the extreme poor, which comprise to the program office. They need to get infor- a small fraction of the potential users of social mation from multiple sources, and make use of programs. Other recent attempts to increase their social network to gather the information access for the poor include fostering synergies they need to apply effectively, and separate- between Sisbén and programs at the local le- ly, to each program. vel. Some Sisbén municipal offices with high resources and strong technical capacity serve Program supply is not harmonized, and indivi- as point of registration and as the entry point dual programs face design and implementa- 11  In December 2015, the National Agency for Reduction of Extreme Poverty (Agencia Nacional para la Superación de la Pobreza Extrema, ANSPE) formerly responsible for the implementation of the Red Unidos was merged into Pros- peridad Social to support coordination of social programs. 99 Colombia Policy Notes tion challenges that limit their effectiveness and rrently uses largely manual processes to draw the efficiency of the system. The MFA conditio- information from program-level administrative nal cash transfer plays an effective safety net data, and faces challenges from the quality of role for the poor but, has limited mechanisms for the underlying data. program exit or to establish linkages with com- plementary interventions, effectively limiting its Given the scenario just described, a “typical”14 effectiveness in supporting participants’ mobili- household faces challenges when trying to ty. Jóvenes en Acción, on the other hand, has access the right program/benefit among the demonstrated results on improving access to set of existing social security, social assistan- higher education, reducing dropout rates and ce, and labor-market programs. For illustrative providing better opportunities to disadvanta- purposes we refer to the example of Juan and ged youth in the labor market12 but it also faces Adela (Box 5.2). While this is representative of design challenges (e.g. limitations to track em- an “average” poor household, this example ployability outcomes) and budget space cha- does not capture the diversity of contexts and llenges that limit its coverage and reduce its po- situations of those who interact daily with the tential to serve as a key complement to safety social protection system. Firstly, the social pro- net programs. Similarly, several relatively small tection system is not only designed to reduce productive inclusion programs targeting rural poverty, but also to prevent vulnerable peo- and urban households have limited capacities ple from falling into poverty, promote their so- to exploit synergies with complementary inter- cial mobility, and facilitate the consolidation ventions. It is usually not possible to take advan- of the middle-class. In addition, it also focuses tage of synergies between programs, or shared on especially vulnerable populations such as eligibility requirements, to facilitate transition of indigenous and Afro-Colombian peoples, inter- users across programs in an organized enough nally displaced populations, victims and former way that supports effective delivery of services combatants. The experience of accessing the and achievement of specific household goals. system varies across these groups, and is likely Even when eligibility requirements are shared to present unique challenges (or opportunities). across programs in the same institution, poten- tial users need to go through entirely separate First, Juan and Adela would need to make sure application processes to demonstrate eligibility. that their socioeconomic information is up to Prosperidad Social has recently developed an date. Since their Sisbén information was last integrated beneficiary registry (Llave Maestra) collected in 2009 several things have changed with the aim of supporting selection of poten- for them: their youngest son was born; Adela’s tial beneficiaries by individual programs, coor- mother has moved in with them; and Adela dination and tracking of benefits received.13 Its no longer works as many hours as she used to. potential is promising, but the Llave Maestra cu- More than 20 programs use Sisbén. Juan and 12  Econometria and SEI (2017). 13 The Llave Maestra contains information on over 19 (past and current) programs implemented by the Social Inclu- sion and Reconciliation sector, including currently active ones such as Más Familias en Acción, Jóvenes en Acción, Familias en su Tierra, Mi Negocio, Infraestructura y Hábitat, IRACA, Red de Seguridad Alimentaria, UNIDOS, Unidad de Víctimas. 14  The “typical” poor household profile is based on 2016 GEIH data, using a monetary poverty measure. The profile includes several dimensions considered relevant to characterize the household in terms of their basic human capital endowments, assets and available resources. For each dimension/variable, we choose the most frequent outcome, with only a few exceptions. In the case of urban and rural poverty, for example, most of the poor live in urban areas but poverty rate is higher in rural areas. 100 Note 5 Social Protection System Box 5.2 Family story, for illustrative purpose The Rodriguez family is a family of four, with two children ages 4 and 13. The family lives in a rural area. The head of household, Juan, is a 46-year-old agricultural worker, who has com- pleted basic primary education. His work is seasonal, and Juan goes through stretches of unemployment of variable duration. During those times, he looks for jobs through his network. He has considered taking some training, but has a hard time fulfilling basic requirements and accessing training opportunities. His wife, Adela (37), has completed secondary school, and runs a small food service business from home. The business has been expanding slowly, and is successful, but to expand it further she would need to access credit, and she does not know where to start. Rosa, Adela’s 70-year-old mother who is no longer able to afford living on her own, has recently moved in with them. She is helping with child rearing, but also requires help from Adela for her own basic care. So, how can the existing social protection system support them and their needs? What is it like for them to access the social protection system? What kind of barriers or challenges are they most likely to encounter in the process? Adela’s information needs to reflect their cu- complementary, follow-on programs such as rrent situation if they wish to prove eligibility for Jóvenes en Acción would be automatic or one or more of these programs. supported. Scholarship programs like Ser Pilo Paga, have a completely different enrolment Second, they would need to navigate the sys- window, with different physical and virtual tem’s multiple entry points, access windows, channels to access the benefits. Similarly, Juan and information requirements. They would and Adela would not be able to access Mi Ne- need to identify whether they are eligible for gocio even if its geographic targeting includes the programs they are interested in, verify whe- the municipality where they live, because it is ther the program is available in their area, and only available to those already included in the navigate the different program rules regarding UNIDOS or victim’s registries, of which they are enrollment windows and additional eligibility not part. Rosa, Adela’s mother may not be able requirements. to access the social pension Colombia Mayor even though she is eligible. While the program Even after having successfully accessed the accepts new applicants/registrations, it faces system, they would have to repeat this process a limited budget that does not allow it to in- – or part of it – to access different services or crease the number of actual beneficiaries. benefits over time, depending on their chan- ging needs. Program supply is not harmonized Finally, as their socioeconomic information and no or few mechanisms exist to facilitate changes, they will have to update their infor- access across programs that could be com- mation in each of the programs in which they plementary. For example, if their children were are enrolled in Sisbén. It is their responsibility to successfully complete secondary school to provide all programs and services with their with support from Más Familias en Acción, the- new address, family composition information, re would be no guarantee that enrollment in and other information. 101 Colombia Policy Notes Policy Options instead of the actual needs of the end users. Even when user feedback is requested, it is rare Shift towards a citizen-centered service that it leads to direct change in implementa- delivery system tion or delivery. This is particularly acute in so- cial sectors, where the client-provider power The social protection sector needs to transition relationship is more asymmetrical. from a static, fragmented set of social pro- grams to a dynamic and integrated system Shifting towards a citizen-centered service de- that ensures that people receive the right pro- livery system could positively impact delivery gram (and the right amount) at the right time. performance, final outcomes and user satis- The final objective is to make it possible for the faction. Since the first wave of expansion of Rodriguez family and others like them to move the social protection system in the early 2000s, more easily within the system as needed. The many reforms have been made to the institu- government should focus on designing inno- tional arrangements of the sector, seeking to vative mechanisms and strengthening mana- enhance the coordination of social policies gement tools that can deliver well-sequenced, and programs. People do not experience poli- more effective combinations of programs (or cies,16 they engage with service providers and “integrated packages”) that address the di- come to know and perceive the State’s value fferent challenges faced by individuals and through them. Re-imagining public service de- households, while also simplifying the process livery from the point of view of the users can for the user. help generate solutions that create value for users, and improve efficiency of the system. Delivering services to citizens effectively is cri- Especially in the provision of social programs tical for creating trust and shaping perceptions and services, where those in charge of desig- of the public sector.15 Transforming service deli- ning the service are generally removed from very begins with understanding citizens’ needs the realities of their potential users, understan- and priorities, and many governments face ding who the users are, what they need, how challenges related to citizen satisfaction and they make decisions and what their habits and declining trust. This may be due to various in- expectations are can make the difference. In ternal and external circumstances, but impro- a dynamic social protection system, users are vements in service delivery can play a role in the focus of services and programs (Box 5.3), shaping perceptions and building trust in the and management tools help achieve better public sector. In designing public service de- outcomes, for example by providing them with livery programs, governments tend to map access to and exit from individual programs. processes which reflect their own institutional requirements and assumptions about users, The experience of the Rodriguez family and the processes described above highlight two areas 15  Heintzman and Marson (2005). As summarized by the authors a thorough review by Bouckaert et al. of existing theories regarding the factors that explain variations in citizen confidence and trust in public institutions identified two main strands. The first group of theories seeks to explain declines in confidence primarily based on societal changes in identities and values. The second group of theories focuses instead on the role of governments’ performance, and citizens’ perception of such performance, in shaping trust and confidence. Heintzman and Marson focus on the latter strand, and particularly on the administrative/service delivery level micro-performance of government as an impor- tant approach to improving citizen trust and confidence. 16  OECD Observatory – Public Sector Innovation. https://www.oecd.org/governance/observatory-public-sector-in- novation/blog/page/human-centereddesignandpublicsectorinnovation.htm 102 Note 5 Social Protection System Box 5.3 What is citizen-centered service delivery? Canada - Citizen First studies The government of Canada has a long history of focusing on public management improve- ments. The citizen-centered service research agenda made a significant leap in the late 90s early 2000s with the acknowledgement that a lot of research until then had not been actio- nable. As a result, they launched the “action-research” initiatives, including the now famous Citizen First Surveys, designed to track service delivery from the client (“outside-in”) perspec- tive. The surveys provided new insight into the challenges faced by citizens when accessing services, something that had largely gone unnoticed because of the previous focus on their experience once they had reached the point of service. The Citizen First study highlighted that 16 percent of the time citizens needed to access multiple services at once, often spread across agencies and levels of government, the burden of navigating the system fell entirely on citizen. Three main drivers of citizen satisfaction with access were identified: (i) knowing where to start and how to get service, (ii) easily find out information, (iii) ability to contact staff. This and other findings have driven changes in service design that have led to improve- ments in performance and citizen satisfaction. Citizen First surveys are now carried out every two years. The Common Measurement Tool, a multi-channel instrument with core questions to allow programs to benchmark their results against others, is another important element of this agenda. for the new administration’s reform agenda, of Sisbén IV is managed at the municipal level, which could support the required shift towards its progressive integration with existing social a citizen-centered service delivery system. information systems as well as other adminis- trative data managed by different agencies, First, the quality of demand side information will and the implementation of a “social contract” need to be improved: an integrated social re- with potential users setting clear rules and res- gistry with up-to-date information will be key to ponsibilities to periodically update information maintain the efficiency and effectiveness gains for program eligibility purposes, offer a signifi- in the determination of eligibility made with the cant window of opportunity to shift the status roll-out of Sisbén IV. The approval of CONPES quo and create a more integrated social in- 3877 on Sisbén enables it to maintain updated formation system that serves as the channel for information regarding the evolving needs of dynamic inclusion.18 These planned changes social programs, and this information will allow pose a significant shift in the way data is sha- for estimations of monetary and multidimensio- red between Sisbén and other agencies, as nal household poverty;17 it will align Sisbén IV well as in the processes within Sisbén and will with official poverty measures and targeting thus require strengthening Sisbén’s technical criteria of many existing social programs. Mo- resources and processes. If successfully imple- reover, the changes in the way the information mented, they will help prevent the gradual loss 17  The Sisbén IV questionnaire includes new questions on household monthly expenditures, factors associated with disaster risk, effective access to health services, care of children under 5 in the household, and labor and non-labor income of household members. 18  The social contract seeks to encourage citizens to continuously update their socio-economic information, thus im- proving the allocation of services and benefits. To promote more frequent updates by beneficiaries, Conpes explicitly calls upon social programs to establish clear duration and entry/exit requirements. 103 Colombia Policy Notes of quality of information over time and can re- identify gaps in program coverage and reveal duce the need for survey-sweep efforts to co- program overlaps; used systematically to in- llect updated data, that Sisbén has used since form program-level decisions, they could also it was first introduced in 1995, reducing cost help direct users to the most appropriate pro- over time while increasing quality of the data. grams and services. It will also help track program beneficiaries’ situation over time. Sisbén will be more dyna- A citizen-centered design approach could mic, and better able to direct supply to where maximize the impact of these changes. The it is needed. International experience such as outside-in view of service delivery (Box 5.3) the implementation of Chile’s RSH and Turkey’s starts with a need and an expectation of the ISAS, as well as Brazil’s Cadastro Único among user, not the service itself. A citizen-centered others, can offer valuable lessons learned.19 approach can guide the choice of tools used to (i) identify citizens’ service needs and ex- Second, improve the effectiveness and coor- pectations, (ii) systematically integrate findings dination of social protection programs. A com- to improve accessibility, convenience and effi- bination of programs, or “integrated packa- ciency and (iii) measure and benchmark results ges” should be used to address individual and in client satisfaction. Citizen-centered design household needs over the life cycle. These are makes use of data analytics, design thinking, designed “around” a user need or life-event behavioral insights, and organization deve- and, because of this, tend to be more effec- lopment to re-design social service delivery tive than individual programs.20 For an integra- and improve user experience. Solutions tied ted package to work, programs need to be to front-office functions (physical spaces, cus- able to work together, and must be designed tomer service, citizen feedback) are as impor- consequently. For example, entry/exit criteria tant as those related to integrating back-end may need to be harmonized, or referral pro- functions such as data sharing, interoperability, tocols across programs introduced. Existing shared application processes, and monitoring. management and coordination tools have not Colombia is not new to these ideas21 and natio- been used to their full potential in terms of in- nal and subnational government initiatives are forming decision-making, either at the higher already underway to respond more effectively policy level or at program level; for example, to citizen’s needs (Box 5.4). Focusing on users information management tools like social re- in the design and delivery of social protection gistries (Sisbén) and/or integrated beneficiary programs and services can identify problems registries (the Llave Maestra) could facilita- with the system; develop solutions; and help in- te linkages across programs. They could help crease trust in government. 19  Leite et al (2017). 20  While it is hard to provide quantitative evidence of how providing combinations of programs can be more effec- tive in supporting individual households’ needs, the literature does provide some evidence of the gains for poverty reduction when providing joint interventions compared to separate interventions. Chong et al. (2007) show that hou- seholds in Peru who received two or more public services jointly, e.g., such as water, electricity, sanitation or telephone increased their welfare more than when services were provided separately, especially in urban areas. Maldonado et al (2006), Banerjee et al (2015) and Blattman et al. (2016) show positive synergies with social protection programs and productive interventions, when provided together. 21  CONPES 3785 (2013) “Política Nacional de Eficiencia Administrativa al Servicio del Ciudadano”, sets out a pro- posal for an Efficient Public Management Model for Citizen, aimed at improving the quality of management and the provision of services by the Public Administration. The model includes actions to implement ‘internal and external’ service windows to increase coverage and quality of services. And also, introduces institutional arrangements that promote coordination among public institutions. The proposed model also defines principles from Decree 2482 of 2012 regarding transparency, citizen participation and efficiency. 104 Note 5 Social Protection System Box 5.4 Experiences with citizen-centered service provision for social programs in Colombia • Ferias de Servicios al ciudadano (https://www.dnp.gov.co/programa-nacional-del-servi- cio-al-ciudadano/Paginas/Ferias-Nacionales-de-Servicio-al-Ciudadano.aspx). • Centros Integrados de Servicios – CIS: https://www.dnp.gov.co/programa-nacio- nal-del-servicio-al-ciudadano/Paginas/Centros-Integrados-de-Servicios-–-CIS.aspx • Operación de las oficinas municipales del Sisbén en Cali • Protocolos de Servicio de Atención al ciudadano Distrito de Bogotá http://secretariage- neral.gov.co/transparencia/informacion-interes/publicacion/otras-publicaciones/ma- nual-servicio-la-ciudadan%C3%ADa 105 Colombia Policy Notes Annex 5.1 Matrix of Policy Options Development Policy Options Challenge Short Term Medium Term 1. Improve the • Conduct a new round of Sisbén data • Consolidate a dynamic social registry quality of collection through interoperability of adminis- demand-side • Implement mechanisms (and su- trative data and social contract for information for pporting operational processes) for self-reported data. social protection continuous update of Sisbén data • Improve use of Sisbén data and infor- programs through: (i) user provided (self-repor- mation by social programs for targe- ted) information; and (ii) administrati- ting (beyond score, use socioecono- ve data exchange (interoperability) mic characteristics captured by Sisbén, • Implement social contract with po- as relevant) tential users of social programs/servi- • Strengthen the role of municipalities as ces and introduce citizen-centered the key citizen-government interface principles for interface with users while maintaining policy and guideline setting role of the central government; and consolidate citizen-centered prin- ciples for interface of Sisbén with users 2. Improve the • Review individual program design; • Design packages of services centered effectiveness focus on alignment of incentives, on families’ needs and profile and and coordina- opportunities for harmonization, and supported by referral protocols and tion of social complementarity; Introduce citi- agreements across programs protection pro- zen-centered principles for interface • Implement data exchange from pro- grams with users grams back to Sisbén for data analysis • Strengthen cross-sectorial coordina- and service delivery purposes tion arrangements to facilitate data • Introduce protocols to facilitate exchanges for decision making and automatic referrals to complemen- improved service delivery (e.g. with tary programs or eligibility status (not Sisbén) enrollment) for users of programs with • Strengthen the use of Llave Maestra same eligibility requirements, to avoid to support: (i) referral of potential duplicating processes users to complementary services; • Promote capacity building at the muni- and (ii) monitoring cipal level for integrated delivery of so- cial protection programs and services while maintaining policy and guideline setting role of the central government. 106 Note 5 Social Protection System REFERENCES Banerjee, A., E. Duflo, N. Goldberg, D. Karlan, R. value chain?” International Review of Adminis- Osei, W. Parienté, J. Shapiro, B. Thuysbaert, and trative Sciences Vol 71(4):549–575 C. Udry. (2015). A multifaceted program causes _________. (2009), “From Research to Results: A De- lasting progress for the very poor: Evidence from cade of Results-Based Service Improvements in six countries. Science 348(6236), 126079. Canada,” New Direction Series, The Institute of Blattman, C., E. P. Green, J. Jamison, M. C. Lehmann, Public Administration of Canada, www.ipac.ca and Jeannie Annan. (2016). "The Returns to Mi- Leite, Phillippe; Phillippe Leite, Tina George Karippa- croenterprise Support among the Ultrapoor: A cheril, Changqing Sun, Theresa Jones and Kathy Field Experiment in Postwar Uganda." American Lindert. (2017), “Social Registries for Social Assis- Economic Journal: Applied Economics. 8(2): tance and Beyond: A Guidance Note & Assess- 35–64. ment Tool,” Social Protection and Labor Discus- Blattman, C., N. Fiala, and S. Martinez. (2014). Ge- sion Paper No. 1704, World Bank nerating skilled self-employment in developing Maldonado, J. H., R. Del Pilar Moren-Sánchez, J. countries: Experimental evidence from Uganda. A. Gómez, V. León Jurado (eds.). (2016). Pro- Quaterly Journal of Economics. 129: 697–752]. tección, producción, promoción: exploran- Chong, A., J. Hentschel, and J. Saavedra. (2007). do sinergias entre protección social y fomento “Bundling Of Basic Public Services and House- productivo rural en América Latina (Protection, hold Welfare in Developing Countries: An Em- production, promotion: exploring synergies be- pirical Exploration for the Case of Peru.” Oxford tween social protection and rural productive de- Development Studies. 35 (3): 329–346 velopment in Latin America). Centro de Estudios Conpes 3877 (2016). “Declaración de Importancia sobre Desarrollo Económico (CEDE), Facultad de Estratégica del Sistema de Identificación de Po- Economía, Universidad de los Andes. Ediciones tenciales Beneficiarios (SISBEN IV)”. Uniandes Econometria and SEI. (2017). “Evaluación de Impac- Migración Colombia, January (2018). Radiografía to del programa Jóvenes en Acción”. Bogotá. Migratoria Colombia-Venezuela. Heintzman, Ralph and B. Marson. (2005), “People, OECD, (2016). OECD Reviews of Labour Market and service and trust: is there a public sector service Social Policies: Colombia 2016. 107 Colombia Policy Notes 108 HEALTH NOTE 6 Despite major achievements in insurance coverage and financial protection to its citizens, Co- lombia’s General System of Social Security in Health (Sistema General de Seguridad Social en Salud, SGSSS) faces important challenges related to financial sustainability, quality of care and health outcomes. The growing expenditures that could threaten the financial stability of the system is the most pressing of these challenges. Policy interventions aimed at improving the system’s efficiency and financial design are required. No single intervention would be able to address the complexity and diversity of issues affecting the system’s sustainability: new sources of financing and changes to payment mechanisms need to be introduced, and regulatory and supervisory capacity need to be strengthened. Access and quality-related issues have led to lower than desirable progress in health outcomes. The challenges related to access and quality-related issues arise, to a large extent, from the suboptimal application of results-based models of care, which has hindered the translation of in- surance coverage into better access to services, particularly in the rural and remote areas of the country. As a result, improvements in main health outcomes have been similar to, or lower than, the rest of the region, and significantly lower than the OECD average. The implementation of a system focused on outcomes requires, among other measures, a new strategy to improve the quality, allocation and development of the sector’s human resources, in a way that is compatible with the country’s need to fully release the new integrated model of care (MIAS). A new policy that can support the appropriate functioning of public hospitals is also necessary to the address the challenges of reaching those citizens that live in the more remote areas of the country and whose access to care largely depend on these providers. The fact that health is defined as a fundamental human right in the country’s Constitution re- presents an additional and permanent challenge to the organization of the system and how it responds to the expectations of its key stakeholders. In this sense, Colombia needs to find an adequate and sustainable way to operationalize the concept of the right to health. A Statutory Law was approved in 2015 with such a goal, as it attempts to address some issues derived from 109 Colombia Policy Notes a liberal interpretation of the constitutional right to health by different stakeholders that have contributed to the exponential growth of judicial claims. While the impact of the Statutory Law is difficult to assess, the very tangible issues that affect the Colombian health system have been translated into a general perception of discontent and low confidence in the system that may threaten the progress that has been achieved. In this sense, it is critical that a channel of dialogue with the judicial sector and other stakeholders be established and clear information is provided for these decision-makers to promote collaborative solutions that can help address the differen- ces and tensions that exist between the various actors in the system. Context And Reform Progress reached 92 percent. Colombia now has one of the most comprehensive vaccination pro- The SGSSS is regarded as one of the country’s grams in Latin America. major social achievements of the recent past. Since the approval of Law 100 in 1993, the The overall financing structure of the SGSSS is country has achieved universal health covera- progressive1 and provides a significant level ge: in 2017, 46.7 million Colombians, or roughly of financial protection to its beneficiaries. Out 98 percent of the population, were enrolled in of pocket expenditure is one of the lowest in the SGSSS’s two systems. The contribution-ba- the region: in 2014 (the last year for which data sed system, for those in formal employment is available), it was estimated to be 15.4 per- and the non-poor (approximately 48 percent cent of total health expenditure, up from an of the affiliated population); and the subsi- estimated 43.7 percent in 1993 and only slightly dized system for the poor (52 percent). The- above the observed OECD average.2 A signifi- se advances have demanded considerable cant increase in the tobacco tax rate3 and an political and financial commitments from the increase in the general value added tax (VAT) country since the 1993 health reform. from 16 percent to 19 percent effective were There has been important progress in health Figure 6.1 SGSSS Coverage by type of program outcomes in recent years. Chronic malnutri- 25 100 Percentage of Total Population tion, adolescent pregnancy and vaccination coverage have shown improvements. Chronic 20 80 Millions of People malnutrition decreased from 13.2 percent to 15 60 10.8 percent between 2010 and 2015. Adoles- cent pregnancies returned to their lowest level 10 40 since 1990 (17.4 percent), after reaching 19.5 5 20 percent in 2010. The coverage of the biologi- cal vaccine that prevents diphtheria, pertussis, 0 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 tetanus, hepatitis B and influenza B has rea- ched 91 percent, while coverage of the triple Contributive Subsidized % total population (rhs) viral vaccine (measles, mumps and rubella) Source: Ministry of Health, Financing Division. 1  Amaya-Lara (2016); Guerrero et al (2015); Florez et al, Knaul et al. (2012). 2  Baron (2007). 3  A 200 percent increase by 2019, with 100 percent in 2017 and the remainder in 2018, followed by real annual in- creases of 4 percentage points after that. 110 Note 6 Health approved by Congress in late 2016. It is esti- e.g. the surplus from the Regional Pension Fund mated that this reform will bring an additional (FONPET), general taxes (part of VAT) and ear- COP 500 billion to the health sector and pre- marked taxes (e.g. tobacco and alcohol). The vent 2,300 deaths per year. SGSSS deficit for 2017 was estimated to be COP 1.6 trillion7; the total liabilities reported by the pu- Main Challenges blic providers association (ACESI) are COP 3.38 trillion (for debts older than 1 year), while debt Improve the efficiency and financial is estimated at COP 14 trillion, half of it from pu- design to ensure SGSSS’s financial blic providers. The government is proposing a sustainability change in the distribution of the health resour- ces from the General System of Participations Financial sustainability is the most pressing is- (Sistema General de Participaciones, SGP),8 in- sue facing the SGSSS, and the gains achieved creasing the proportion allocated to the finan- in coverage and financial protection are at risk cing of the subsidized regime from 80 percent unless the issue is prioritized and properly ad- to 90 percent and has also implemented ad- dressed. Total healthcare spending, and parti- ministrative measures to reduce the proportion cularly public expenditure, has been growing of hospitals at high risk of bankruptcy. However, rapidly in recent years. Even though total heal- these measures are not enough to fix the struc- th expenditure, at 7.2 percent of GDP, is signi- tural imbalance of the system and the deficit is ficantly lower than the OECD average of 12.3 projected to widen in the coming years. percent of GDP, and similar to the level obser- ved in the Latin American region (7.1 percent The expansion in coverage to reach poo- of GDP), it grew rapidly after the crisis of the late rer people, and harmonization of the benefits 1990s and early 2000s4: it was 34 percent higher across the subsidized and contributions-ba- in 2014 than in 2004 (Figure 6.2 a).5 Most impor- sed systems has changed the nature of the fi- tantly for the financial sustainability of the sys- nancing of the sector in recent years. In 2010, tem, (i) public expenditure on health as a share Colombia’s SGSSS was still mostly financed by of total health expenditure is higher than the payroll taxes (parafiscales) (70 percent), but by average of Colombia’s main comparators (75 2016 general revenue and payroll taxes were percent for Colombia, 62 percent in the OECD, contributing equally to its financing (Figure 6.3 50 percent in LAC. Figure 6.2 b)6 and is projec- a). This has important implications for overall ted to increase; and (ii) per capita public heal- medium-term fiscal sustainability: in 2017 the th expenditure growth (constant international system presented a deficit for the first time and PPP dollars of 2011), exceeds the average in- government projections indicate continued creases in the two comparator groups (Figure deficit growth in the coming years (see Figu- 6.2 c), as well as per capita income growth (at re 6.3 b). This deficit is covered by government PPP) (Figure 6.2 d).The government has tried budget transfers at least in the short term, as to help alleviate this issue by injecting additio- other options, such as raising contribution rates, nal resources into the pool of health resources, are politically difficult in the current context.9 4  Total health spending dropped from a peak of 9 percent of GDP in 1997 to 5.4 percent in 2004. 5  Comparative data are available for the 1995-2014 period. 6  2014 data. 7  PROESA (2017). 8  The SGP is constituted by the resources that the Nation transfers by legal mandate to the territorial entities (depart- ments, districts and municipalities), for the financing of the services under their charge, including health. 9  An increase in contribution rates would raise the cost of labor and could thus create a disincentive to formalization. 111 Colombia Policy Notes Figure 6.2 Health expenditure a. Total health expenditure as b. Public health expenditure as a share of GDP: 1995-2014 a share of total health expenditure (2014) 180 80 160 70 134.1 60 Index (2004 = 100) 140 50 Percent 120 40 75.1 100 30 62.2 80 50.2 20 60 10 40 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2014 Colombia OECD LAC Colombia OECD LAC c. Public health expenditure per capita: d. Public health expenditure per capita 1995-2014 (PPP, constant international $ of 2011) and GDP per capita: 1995-2014 180 400 160 300 Index (1995 =100) Index (1995 =100) 140 120 200 100 100 80 60 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Colombia OECD LAC Health expenditure per capita (public), PPP (constant 2011 international $) Source: World Bank, World Development Indicators. GDP per cápita, PPP (constant 2011 internacional $) The financial sustainability of the SGSSS also in the last ten years. Colombia’s aging process depends on demographic issues such as the is expected to materialize three times as fast as epidemiological transition and the rapid po- in high-income Europe, which means that there pulation aging. The former shifts the burden of is less time to implement the necessary reforms. disease to more complex and expensive chro- nic diseases: non-communicable diseases, in- Factors related to the labor market also affect cluding mental illnesses, already represent 83 the sustainability of the SGSSS. The slow pace percent of the country’s burden of disease. The of labor formalization impacts the balance of latter can be seen from the changes in the de- active contributors versus the number of bene- pendency ratio, i.e. the proportion of people ficiaries in the subsidized regime, as shown in older than 64 to those of working age (15 to 64 Figure 6.1. years old). This ratio has increased substantially in the past 30 years, from 6.7 percent in 1985 to Exploitation of the health system’s regulatory 10.7 percent in 2016, and at a much faster rate weaknesses also represent a threat to its sus- 112 Note 6 Health Figure 6.3 SGSSS financing projections a. Sources of financing for the SGSSS: 2010-2016 b. Financial balance of the SGSSS: 2013-2021 100 70 60 80 70.3% 68.6% 68.2% 68.7% 50 53.6% 51.4% 40 Trillion COP 60 50.1% Percent 30 48.6% 49.9% 20 40 46.4% 10 20 29.7% 31.4% 31.8% 31.3% 0 -10 0 -20 2010 2011 2011 2013 2014 2015 2016 2013 2014 2015 2016 2017 2018 2019 2020 2021 Payroll taxes General revenue Revenue Expenditure Balance Source: Ministry of Health, Financing Division. tainability. The reimbursement, through judicial Finally, the peace agreement and post-con- claims, of high-cost inputs (mostly medica- flict context also impact the system’s sustai- tions), services and procedures not included nability. New challenges to the system include in the benefit plan (plan obligatorio de salud the need to confront mental and psychosocial POS, until 2016) have escalated in the past ten issues, and to design new organizational and years.10 The rapid growth in judicial claims re- delivery structures to better suit the rural areas sults in part from the perverse incentives that in- where the populations most affected by the surers and providers face to grant services that peace process are located. are paid on a higher reimbursement schedule outside the capitation rate (unidad de pago Quality and access: the need for a por capitación, UPC). Judicial claims have system focused on outcomes grown exponentially in the last decade: from COP 600 billion in 2007 to COP 2.5 trillion in 2016, Health outcome gains have been lackluster i.e. around 10 percent of total expenditure.11 and lag those of comparator countries. Impro- The combination of the high “non-POS” reim- vements in the main health outcome indica- bursement rates arising from litigations with the tors have generally been similar or lower than weak regulation of pharmaceuticals (until 2012 those seen in the region, and are significantly the prices of medicines paid by insurance com- lower than the average for the OECD (Figures panies were de-facto unregulated) has contri- 6.4 a and 6.4 b). This is mainly due to the per- buted to making the price of pharmaceuticals sistence of barriers to access that still affect a another important source of cost pressure. Lack large segment of users, and to the incomplete of accountability, mismanagement or corrup- and insufficient deployment of a results-based, tion compound these problems further. patient-focused model of care. These factors, 10  Ministerio de Salud y Protección Social (2016). 11  Since these services were not included in the benefit plan, coverage was generally denied when requested. This denial produced an administrative barrier, which can be resolved through a third-part authorization or through litiga- tion (the so-called “tutelas”). 113 Colombia Policy Notes combined with slow quality improvements, and the system’s main actors: insurers, provi- have influenced public perception and could ders (IPSs) and the Ministry of Health (MoH). potentially undermine the legitimacy of the system. The results of household surveys show While health sector policies and regulatory that between 2010 and 2016, there was a 10 measures have been largely directed towards percent decline in the number of people see- promoting coverage expansion, the insuran- king institutional care when ill.12 ce model has incentivized a service provision scheme to help with individual and more com- Geographic, financial and administrative ba- plex services and procedures. This model has rriers still impact access to healthcare servi- incentivized rent-seeking behavior by agents, ces. Geographic and financial barriers mostly rather than the objective of providing health- affect people in remote areas, where commu- care. It also boosted the provision of curative nication is difficult and mobilization is expen- care to the detriment of risk management ser- sive. They are unattractive to private insurers vices and prevention, thus retaining few attri- and providers, and therefore not well-suited butes of primary health care (PHC). As a result, to Colombia’s managed competition model. quality-related indicators, such as those rela- Public hospitals play an important role in the ted to hospital readmission rates14 and there is provision of health services in these areas. In little information on the problem in Colombia. this sense, remote and isolated parts of the The objective was to determine the frequen- country require different organizational and cy of 30-day all-cause hospital readmissions supply structures to address the needs of these and associated factors. This was a retrospec- populations more appropriately. This is beco- tive analytical cohort study of 64,969 hospita- ming particularly evident in post-conflict areas, lizations from January 2008 to January 2009 in where the singular needs of local communities 47 Colombian cities. 6,573 hospital readmis- – e.g. those related to mental health issues and sions, prevalence: 10.1% (men 10.9%, women to the health needs of ex-combatants and dis- 9.5%and avoidable hospitalizations15, remain placed families – require a vertically integrated below optimum levels. model of care that is unlikely to be fulfilled by non-public providers.13 Administrative barriers The increasing prevalence of chronic diseases that slow down or prevent the provision of heal- requires a model of care to respond to the cha- th services have persisted since the early days llenges faced by Colombia’s epidemiological of health reform. Processes such as premium transition. Law 1438 of 2011 introduced a new compensation, service authorization, verifica- integrated model of care (modelo integral de tion of rights, or difficulties in filing claims impe- atención en salud, MIAS), based on PHC prin- de people’s ability to change insurer (EPS) or ciples. However, despite its presence in the Na- regime. These barriers are exacerbated by limi- tional Development Plan for 2014-201816, its im- ted communication between the beneficiary plementation has been limited, both in scope 12  Results from Quality of Life surveys (Encuestas de Calidad de Vida) of 2010-2016. 13  This challenge was recognized by the government when it launched the National Rural Health Plan (Plan Nacio- nal de Salud Rural), which aims to strengthen the infrastructure and the quality of the public network in rural areas and improve the suitability and relevance of service provision there. This came about as a result of the Peace Agreement with the FARC. 14  Caballero et al. (2016). 15  Guanais et al. (2012). 16  Departamento Nacional de Planeación (2015). 114 Note 6 Health Figure 6.4 Health outcome indicators a. Life expectancy at birth: 2000-2015 b. Infant, under-5 and maternal mortality rates in 2016* in relation to 2000 (percent) 84 80 80.3 66 68 70 62 80 61 77.1 60 55 54 53 52 50 75.2 50 76 Percent Years 71.3 40 72 74.2 30 71.0 20 68 10 64 0 Infant Under-5 Maternal 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Mortality Mortality Mortality Rate Rate Rate Colombia OECD LAC Colombia OECD LAC Source: World Bank, World Development Indicators. *Infant mortality rate and under-5 mortality rate: 2016 data; maternal mortality rate: 2015 data. and geographical reach. Several elements still users are entitled to all services, except those potentially threaten full implementation of the that are excluded. The Law also introduces a Law, including the lack of adequate data to broader framework for healthcare aimed at provide feedback on the effectiveness of al- improving health outcomes and equity in ac- ternative models of care and that support the cess. Adequate implementation of this Law is introduction of appropriate incentives, as well challenging because of the potential risk of un- as lack of PHC training for general practitio- sustainability derived from its inappropriate in- ners, specialists and other professionals.17 terpretation and application by sector agents and the public.18 The implicit tension between Adequate and sustainable the Statutory Law and the financial sustainabili- implementation of the right to health ty of the system requires that exclusion mecha- nisms are properly deployed. The 2015 Health Statutory Law (Law 1751) “ope- rationalizes” the concept of health as a funda- The Statutory Law was designed to address mental human right, as defined in the country’s some issues derived from a liberal interpreta- Constitution. The Law introduces a new con- tion of the constitutional right to health by di- cept of health care that extends beyond the fferent stakeholders. As already noted, many traditional explicit benefit plan: it dictates that stakeholders have appealed to the judiciary technical and scientific criteria corroborated system to claim access to health services through a participatory process will be used to and inputs (particularly medications). Judicial exclude services and technologies provided claims or tutelas arise under two main scena- and financed by the SGSSS. It makes the be- rios: (i) one in which a health good or service nefit package implicit, rather than explicit, i.e. that should be provided by the health system 17  OECD (2016). 18  Londoño & Molano (2015). 115 Colombia Policy Notes is not offered or is denied, as a result of admi- how to operate within a more transparent and nistrative barriers, mismanagement or financial participatory framework. Finally, rights-related difficulties of providers and/or insurers of insu- issues emerging from the post-conflict context rers;19 and (ii) when the user seeks an input or may present further challenges regarding the service that is not offered by the system. implementation of the Law. The use of judicial claims has skyrocketed sin- Policy Options ce 2000, particularly those related to health issues, making the judiciary system an impor- Improve efficiency and financial design tant player in the health system. Since 2000, to ensure financial sustainability the total number of tutelas increased by 366 percent, from almost 132,000 to approxima- Financial sustainability in the healthcare sector tely 615,000 in 2015. In the same period, the requires a full set of policy measures, as no sin- number of judicial health claims increased by gle intervention would be able to address the 509 percent: from roughly 25,000 to close to complexity and diversity of issues. New sources 151,000. It was estimated that in 2009 alone, ju- of financing and changes to payment mecha- dicial claims cost the Colombian health system nisms need to be introduced, and regulatory US$ 300 million.20 Even though non-POS related and supervisory capacity needs to be streng- claims have significant monetary values, higher thened. numbers of tutelas involve POS-related services and inputs. According to a study conducted Introduce new sources of financing. The heal- by the Ombudsman's Office, approximately 64 thcare system requires an increase in its fi- percent of the health-related judicial actions nancing to remain sustainable. Even though filed in 2015 were to enforce the POS, and most co-payments and other fees are used as per of those were in the subsidized healthcare sys- Law 100, their use is restricted by the Constitu- tem21, indicating higher levels of difficulty expe- tional Court and their expansion is not recom- rienced by the poor in fulfilling their rights. mended because of their potential negative impact on access. Raising payroll contributions It is difficult to assess the likely impact of the would distort the labor market and does not Statutory Law, particularly its effect on the use of seem to be a politically or economically viable judicial mechanisms to access health inputs or alternative, at least in the short run. Introducing services. Although a list of 44 technologies and higher taxes on products with negative heal- services that met the exclusion criteria defined th impacts, such as foods with high fat and/or through a participatory process was prepared salt content or sugary beverages are poten- in 2017, the impact of these regulatory norms tially attractive alternatives, for their revenue on the general trend of tutelas will take some generating capacity, as well as for their po- time to manifest and the government will need sitive health and cost-saving impacts. A new to adopt complementary measures mandated tobacco tax increase is less feasible but not by the Statutory Law, particularly those related impossible. Evidence from the most recent in- to the expansion of technologies and proce- crease in tobacco taxes shows positive results dures. In addition, the public sector must learn and the risks of an increase in contraband do 19  OECD (2016); Rodriguez Orrego (2014). 20  Cubillos-Turriago et al. (2012). 21  Defensoría del Pueblo (2016). 116 Note 6 Health not seem to have materialized. This alleviates ble for health technology evaluations and the fears of implementing a more “aggressive” tax formulation of clinical practice guidelines. On increase that would move the tobacco tax supervision, the National Health Superinten- policy towards the average regional price of dence requires improved capacity, especially cigarettes. at the regional level, where the system is more vulnerable to malpractice. Interventions are Strengthen and expand the regulatory and required to: (i) complete the decentralization supervision capacity of key stakeholders, in of the Superintendence in regional urban cen- areas such as medications, financial manage- ters; (ii) fully deploy the risk-based supervision ment and information analysis. As a response model and include agents that are not traditio- to financial and access issues generated by nally prioritized in the supervision practice (e.g. the high levels of pharmaceutical expendi- lottery companies, labor risk insurers, as these tures, the Statutory Law made the Ministry of agents also manage resources used to finance Health responsible for regulating pharmaceu- the health sector); and (iii) redefine the legal tical prices, through the Medicine Commission scope for health supervision in regions to avoid (CNPMDM). Improvements in price regulation replication of duties. Finally, SISPRO is the infor- measures recently implemented and the cen- mation system where millions of transactions re- tralized price negotiation of medicines, toge- lated to health and social protection take pla- ther with the greater competition brought by ce. These transactions are an important source a biosimilar policy, are generating important of information that could be used to improve savings in the purchase of medicines. The fo- the quality of the services as well as the policy llowing proposed measures would further stren- making process. New approaches such as big gthen the progress achieved: (i) development data, advanced analytics and machine lear- of an integrated pharmaceutical information ning could be used to better analyze health system; (ii) enhancement of price monitoring records. Examples of new measures that could and surveillance capacity; and (iii) improve- be implemented include: (i) electronic medi- ment of technical, logistical and negotiation cal records; (ii) drug utilization review; and (iii) capacity for the centralized purchase and electronic invoices. Experiences and lessons distribution of strategic and/or high-cost me- learned from places like Estonia, Scotland, Fin- dications. Regarding financial management, land, Alberta, Canada and South Korea, could ADRES (Administradora de los Recursos del Sis- be used to help develop and implement spe- tema General de Seguridad Social en Salud) cific developments for the Colombian model. is the new entity responsible for managing the financial resources of the SGSSS to ensure their Design payment and regulatory measures ai- appropriate flow and control. The proposed su- med at refining the relationship between insu- pport for this entity could include: (i) technical rers and providers. The existing reimbursement assistance for the development of the appro- mechanisms used by insurers (EPS) to reimbur- priate regulatory measures that define and se providers (IPS) do not adequately reflect structure the mechanisms for controlling resour- costs or risks and do not provide incentives ces; (ii) cooperation for the development and for improved financial performance and/or implementation of the required information health outcomes. The introduction of case-ba- systems; and (iii) improvements to the techni- sed prospective payment mechanisms, such cal capacity of IETS (Instituto de Evaluación as the Diagnostic Related Groups (DRGs), for de Tecnologías en Salud), the entity responsi- most inpatient procedures would provide in- 117 Colombia Policy Notes centives to efficiency and bring risk-sharing Prioritize the implementation of the MIAS. The principles between EPS and IPS. Payments to MIAS represents the potential for implementing insurers who use the capitation rate and who a model of care based on PHC principles. The use performance- or results-based incentives model should be implemented throughout the to prevent chronic diseases could strengthen country and should focus on strengthening pu- the primary level of care and promote more blic health and health promotion, prevention integrated healthcare. Changes in reimburse- and early detection of health problems, and ment mechanisms could be complemented health education for the public. Given the with regulatory measures to organize the ver- post-conflict context, special emphasis should tical integration of insurers and providers. This be placed on the implementation of mental would create opportunities for efficiency gains health policies and actions within MIAS. without negatively impacting competition; it would also help design effective mechanisms Design and implement a specific policy for to account for liabilities between insurers and public hospitals. Public hospitals are a critical providers. On the other hand, a certification tool to addressing access challenges in ru- mechanism to ensure that EPS comply with ral and remote areas of the country. As they minimal technical standards is required, given tend to operate in more complex contexts, the pivotal role of the insurers in the SGSSS, and they require updated policies that respond to the many instances of complaints and closures such an environment and can contribute to of insurers in recent years. the development of (i) technical standards for management, quality of provision and health Quality and access: towards a system outcomes monitoring; (ii) costing and human focused on outcomes resource assessment based on population needs, especially in rural areas; (iii) adequate Design and implement a human resources planning for infrastructure and equipment (in- strategy for the health system. The quality of cluding alternative financing sources); and (iv) healthcare services provided to any popula- better coordination with insurers for adequate tion is fundamentally dependent on the quality risk management in health. and appropriate allocation of the sector’s hu- man resources, Colombia still lacks a strategic Adequate and sustainable policy for its human resources for health, even implementation of the right to health though a national competence framework (marco nacional de competencias) is being Establish a channel of dialogue with the judi- developed. The sector also lacks the role and cial sector and other stakeholders and provide function of the various professionals and tech- clear information for these decision-makers. nical personnel. Potential areas for policy de- Given the important role that judges play finition include: (i) strengthening the role and through the tutelas in defining the provision of power of primary care physicians; (ii) expan- services and spending, the MoH should establi- ding the roles and responsibilities of nurses and sh a communication channel with the judicial other professionals, such as pharmacists; (iii) sector. The World Bank Group’s SaluDerecho strengthening incentive mechanisms to deploy Initiative (Collaborative Learning Initiative on physicians in rural areas; and (iv) defining a the Right to Health and Universal Coverage), stable financing mechanism to co-finance the succeeded in establishing a safe and neutral residency training of doctors. space for multi-stakeholder dialogue in seve- 118 Note 6 Health ral countries of the region, demonstrating how collaborative solutions can help deal with di- fferences and tensions that exist between the various actors in the system, and how these so- lutions can become a foundation for innova- tive solutions. In addition, judges should keep up-to-date with data and information and re- ceive training on evidence-based medicine.22 22  A capacity development program of this type was implemented with great success, with the support of the Salu- Derecho Initiative, for the Constitutional Court of Costa Rica. 119 Colombia Policy Notes Annex 6.1 Matrix of Policy Options Development Policy Options Challenge Short Term Medium Term 1. Improve efficien- • Design payment and regulatory me- • Introduce new sources of financing cy and financial asures aimed at refining the relations- • Strengthen and expand the regulatory design of the hip between insurers and providers and supervision capacity of key stake- health system to holders, in areas such as medications, ensure financial financial management and informa- sustainability tion analysis 2. Steer the SGSS • Prioritize the implementation of the • Design and implement a human re- towards a sys- MIAS sources strategy for the health system tem focused on • Design and implement a specific poli- outcomes cy for public hospitals 3. Implement the • Establish a channel of dialogue with right to health the judicial sector and other stake- in an adequate holders and provide clear informa- and sustainable tion for these decision-makers way 120 Note 6 Health REFERENCES Amaya-Lara, J. (2016). Catastrophic expenditure Discussion Paper, No. IDB-DP-266). Washington due to out-of-pocket health payments and its DC.: Inter-American Development Bank (IDB). determinants in Colombian households. Interna- http://services.iadb.org/wmsfiles/products/Publi- tional Journal for Equity in Health, 15(1), 1–11. ht- cations/37846490.pdf tps://doi.org/10.1186/s12939-016-0472-z Guerrero, R., S. Prada, A. Pérez, J. Duarte, and A. Barón, G. (2007). Cuentas de salud de Colombia Aguirre. (2015). 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Effectiveness and the Extent of Avoidable Hospi- org/17 July 2012 talizations in Latin America and the Caribbean. 121 Colombia Policy Notes 122 $ FINANCING AND MANAGING NOTE 7 SUBNATIONAL GOVERNMENTS Colombia has made efforts to establish the basis of a fiscally sustainable intergovernmental fra- mework but has yet to advance the institutional capacity of territorial governments to manage expenditure responsibilities and mobilize own-source revenue. Reform priorities to improve the intergovernmental framework include: (i) reviewing the delegation of expenditure responsibilities and only delegating functions to those municipalities with the capacity to carry them out, while increasing their autonomy to manage these services; (ii) enhancing the capacity of departments and municipalities to raise own-source revenues, by updating and modernizing the cadastral and land registries, and improving tax administration; (iii) adopting a single streamlined process to prepare and select processes across funding streams and reduce earmarking of capital transfers; and (iv) revising the transfer formula to strengthen equalization. Context and Reform Progress port on the use of resources affecting service delivery. The current assignment of expenditure Colombia has made important efforts to establi- responsibilities does not adequately consider sh the basis of a fiscally sustainable intergover- the differences in capacity. nmental framework, but has yet to advance the capacity of territorial governments to deliver High vertical and horizontal imbalances conti- quality services. Reforms have sought to dis- nue to be challenging and negatively impact courage excess spending and borrowing; pro- the quality of service delivery. Own-source re- vide for performance monitoring; and adopt venue mobilization is relatively low compared bankruptcy procedures for subnational gover- with the OECD, and raises dependence on nments. Weak management capacity limits the central transfers. There are also persistent diffe- impact of decentralized spending. Subnational rences in fiscal capacity and differences in the governments account for a significant share of cost of service provision that are not adequa- public spending, but improving the quality of tely considered in the distribution of shared re- public spending remains challenging for most venue. Most subnational revenue comes from territorial governments. Most municipalities lack the SGP (Sistema General de Participaciones), the management capacity, systems, and data a general fund for allocating tax revenues, to properly manage, monitor, evaluate, and re- and the SGR (Sistema General de Regalías), 123 Colombia Policy Notes which allocates natural resource royalties that Accountability to citizens is limited, in part be- are earmarked for investment. The SGP system cause the central government makes policy promotes equal distribution of resources but and input decisions for services provided at the does not take account of the varying service local level. Nearly half of subnational spending provision cost or fiscal capacity across munici- is in the education and health sectors, yet de- palities. In 2011, Congress approved a consti- partments and municipalities have very limited tutional reform which distributed royalties more control over the policy design and resource evenly across regions and introduced perfor- allocation in these sectors. For instance, de- mance criteria, with distribution still favoring partments pay teachers and health workers’ producing regions. There are concerns about salaries, but they have no authority to determi- the efficiency of the institutional framework ne salaries or to dismiss workers. These sectors for approval of regional investment projects, are largely financed with earmarked transfers which is carried out by regional SGR manage- and taxes. ment bodies (OCADs) and about the central government’s ability to respond to demand Low subnational tax mobilization and execute regional projects. The execution of SGR resources has consistently been slow Subnational tax mobilization is relatively mo- and there is evidence of persistent variation in dest compared to other countries with similar the quality of project design and investment levels of expenditure decentralization and lo- atomization. cal revenues are concentrated in a few juris- dictions. Subnational taxes represent about a Main Challenges fourth of total tax revenue, of which approxi- mately two-thirds is earmarked for specific Discrepancy between expenditure sector expenditures as these taxes were ‘ce- responsibilities assigned to municipalities ded’ or devolved by the central government.1 and their capacity to manage Municipalities and departments raise 3.5 per- decentralized functions cent of GDP in tax revenues. Colombia's pro- perty tax collection was 2.1 percent of GDP in Poor planning and execution, procurement, in- 2016, which is above Latin American average ternal controls, and human resource manage- (0.8 percent of GDP) and approaching OECD ment undermine expenditure efficiency. The countries (2.6 percent of GDP, with the UK at progress made by the central government in the highest level of 4.0 percent). There are reforming its financial management system several initiatives under way to improve local has not extended to subnational governments tax mobilization, including the incremental tax (SNGs). Cash management is poor and pay- financing pilot for housing in Medellin. ments to service providers are often delayed, impacting service delivery costs. Despite im- Transfers account for over 65 percent of total provements in the legal and regulatory fra- subnational revenues, with the bulk of the re- meworks that govern procurement systems, sources coming from the heavily earmarked SNGs lack adequate capacity to manage the- Sistema General de Participaciones (SGP). se systems, and often resort to legacy or infor- These transfers are governed by a rigid set mal procurement practices. of rules that leaves little space for incentive 1  The so-called ‘rentas cedidas’ were originally national taxes that were already earmarked. 124 Note 7 Financing and Managing Subnational Governments schemes or local discretion. The revenues sha- Low quality and high fragmentation of red with departments are allocated in the fo- investment spending llowing manner: (i) 60 percent is to be spent on education; (ii) 20 percent on health; and (iii) The provision of infrastructure services (tertiary the remaining 20 percent on either education roads, water, sanitation) has been increasin- or health. Departments have discretion as to gly delegated to subnational governments, how to use the transfers within the sector, af- but their capacity to prepare and implement ter salaries have been paid, but surpluses are projects has lagged. Departments and munici- rare. For municipalities, revenue sharing is also palities have received very little assistance for defined, but slightly less strictly: (i) 30 percent is capacity building, while having to respond to to be spent on basic education (infrastructu- changing and inconsistent directives from the re, equipment, or personnel); (ii) 25 percent on central government. health; (iii) 20 percent on water supply (except in municipalities that have already achieved Subnational capital spending is very fragmen- 70 percent coverage), 5 percent on physical ted and often of low quality. There is little co- education, and the remaining 20 percent on rrelation between the level of investment per housing, welfare, debt service, and other func- capita (generally homogenous, except for tions. departments and municipalities that receive more royalties) and the quality of infrastructure. Most departments and municipalities control very few revenues for which they are fully po- A variety of methodologies are used in alloca- litically accountable to residents; they have tion and control of resources for funding infras- little incentives and few means to increase tructure, and the SGR financing mechanism is revenue. The current departmental tax sys- complex. Most municipalities have difficulties tem depends heavily on excise taxes, and complying with its criteria. The SGR requires re- resources are dedicated to collecting low sources to be spent on projects that have been taxes which yield almost no revenue. Most previously evaluated and approved by mana- Colombian municipalities have an outdated gement and a central committee (OCAD). It property tax base and impose very low rates. provides a more rigorous framework for prepa- Local governments have little incentive to do ration and selection of projects, which could otherwise, and so remain almost completely be simplified and used as a standard for the dependent on transfers. More could also be other funding sources. done to turn the current local business tax into a more effective source of revenues, at least in High interregional inequalities and larger cities. The absence of an updated land persistent vertical and horizontal cadaster is an additional problem. The central imbalances Instituto Geográfico Augustín Codazzi – (IGAC) is responsible for cadasters but is slow and ex- Regional inequality in GDP per capita is higher pensive for municipalities.2 in Colombia than in other Latin America and the rest of the world. Resource-rich regions have 2  See also Policy Note #9 on Territorial Development. 125 Colombia Policy Notes grown faster than others and have higher GDP rural. Of 1,102 municipalities in Colombia, 975 per capita, but they still suffer from high levels are in category 6. of poverty and inequality.3 Regional disparities and growth opportunities are also influenced The transfer system currently does not consi- by topography: high mountain ranges isolate der or compensate for differences in fiscal ca- many regions and the infrastructure needed to pacity. While the SGP distributes transfers (3.8 connect them is lacking. The network of roads percent of GDP) more evenly, SGR transfers and railways is low relative to GDP per capita4, (1.5 percent of GDP) to subnational levels vary especially compared to other Latin American substantially. SGP resources use a formula that or OECD countries. Government capacity is a considers the population served and the po- critical determinant of local economic perfor- pulation to be served, as well as administrative mance, and is closely correlated with the ca- efficiency and territorial equity criteria5, but not pacity of municipal governments to provide local fiscal capacity. The SGR formula indirect- services (particularly to the poor) and develop ly considers municipalities’ and departments’ infrastructure. spending needs by taking poverty indicators into account. The aim is not to equalize fiscal Significant vertical and horizontal imbalances capacity but to favor lagging regions; additio- need to be tackled. The central government nal investments go to the areas, mostly remote, still collects over 65 percent of tax revenue. that suffer from poverty and inadequate ac- Bogota, Medellin, Cali, Barranquilla and Car- cess to basic public services. The government tagena account for about two-thirds of taxes is preparing a proposal for the revision of the mobilized at the subnational level. These muni- formula that is intended to remove and revise cipalities collect more revenue and they bene- some of the earmarks within sectors to improve fit from agglomeration effects and economies allocative efficiency and revise the distribution of scale, enabling them to offer more and bet- of unearmarked funds to favor lagging regions. ter services at a lower cost. Large metropolitan areas attract migrants as a result of higher le- The 2011 SGR reform significantly improved vels of public services. Providing similar services distribution, however producing regions still is often costlier in smaller jurisdictions, where receive more resources than the rest. The SGR local governments have a narrower economic reform changed the formula so that revenues base and lower capacity to administer taxes. from the oil and mining sector could be more As such, they face a higher vertical imbalance. evenly distributed across departments. Prior For resource allocation purposes departments to this, half the royalties were concentrated in and municipalities are divided into categories. only four producing departments. The new for- The largest, richest (and most urbanized) are mula has also shifted the division of SGR resour- characterized as special (6 municipalities are ces to departments at the expense of munici- in this category). There are four other catego- palities. Royalties are presently the main source ries (1-4): category 4 departments are those of department finance for public investment. with the lowest population and incomes. The- SGR has been important in sustaining the level re are 6 other categories for municipalities; 6 is of investment by providing a more predicta- the smallest, and usually the poorest and most ble source of funding for subnational projects. 3  See also Policy Note #9 on Territorial Development. 4  Olaberría (2017). 5  Law 715 (2001) and Law 1176 (2007). 126 Note 7 Financing and Managing Subnational Governments Subnational capital spending financed by ro- Carry out a formal review of yalties focuses on four main areas: improving the delegation of expenditure road connectivity, research and development responsibilities and the classification projects, improving delivery of education in of municipalities and only delegating the regions and purifying water.6 One of the functions to municipalities with the objectives of the reform was to reduce frag- capacity to carry them out, while mentation by making departments responsible increasing their autonomy to manage for investments across municipalities. There are such services early indications that the average size of pro- jects has increased after the SGR reform.7 An asymmetric approach implies the delega- tion of responsibilities to municipalities in ac- Policy Options cordance with the capacity to fulfill them. In jurisdictions where capacity is weak or absent, Key reform priorities to improve the intergover- departments or the central government should nmental framework are to: (i) carry out a for- retain service delivery functions. Asymmetric mal review of the assignment of expenditure decentralization could be implemented in two responsibilities and the classification of munici- ways: (i) devolving competencies to the most palities, and to delegate tasks only to munici- capable SNGs; and (ii) simplifying reporting palities able to execute them, while increasing mechanisms of weaker SNGs to alleviate the their autonomy to manage such services; (ii) administrative burden. In this review of delega- enhance departments’ and municipalities’ tion of responsibilities, it may be important to capacity to raise their own revenues, by up- re-think what is decentralized and why. In ad- dating and modernizing cadastral and land dition, mechanisms need to be developed so registries and improving tax administration; that subnational governments have more flexi- (iii) streamline the process of preparation and bility to execute expenditures (within well-defi- selection across funding streams and reduce ned parameters and where capacity exists) to earmarking of capital transfers; and (iv) revise increase autonomy to manage these services the transfer formula to strengthen equalization and generate incentives to improve them. to ensure that governments with different fiscal capacities have equal capacities to provide There is a framework for carrying out asym- public services. Each of these recommenda- metric decentralization, but it has yet to be tions is consistent with the findings of the Comi- implemented. As part of the National Develo- sión del Gasto y la Inversión Pública of Decem- pment Plan9, a program for the delegation of ber 2017.8 different competencies (Programa Nacional de Delegación de Competencias Diferencia- 6  OECD (2014 and 2017). 7  Ministerio de Hacienda y Crédito Publico (2018). 8  Among its recommendations were: Reform the General Royalties System (SGR) to (i) eliminate the rigidities stem- ming from the percentages established in the constitutional norms for specific destinations; (ii) integrate its resources with those of the national central government and those of the territorial entities in a joint system of investment plan- ning, programming and execution of investment spending impacting the regions; (iii) allow the royalties resources to finance territorial debt payments relating to health, pensions and judicial decisions, among other things; (iv) revise the percentages of royalties allocated to producing municipalities, whose low level has eliminated the incentive for local support to mining and oil projects; and (v) establish norms that encourage the financing of significant projects and that prevent the atomization of resources. (Comisión del Gasto y la Inversión Pública, 2017). 9  Departamento Nacional de Planeación (2015b). 127 Colombia Policy Notes das, PNCD) was created to guarantee effi- While the framework was designed to delega- cient service delivery by the state. The PNCD te additional competencies to subnational go- delegates competencies to subnational enti- vernments, it could also be used to allow more ties that comply with criteria related to finan- flexibility in the use of transfers. This could work cial, technical and institutional capacity. The by identifying municipalities above a certain PNCD is managed by a steering committee level of capacity and development environ- of the National Planning Department (Depar- ment (for example, above the 50th or 75th per- tamento Nacional de Planeación, DNP), the centile). These municipalities could then redu- Ministry of Finance and Public Credit (Ministe- ce earmarking for specific sectors, as long as rio de Hacienda y Crédito Público, MHCP) and performance or service delivery in the sector MOI (Ministry of Interior) and of representatives remains above a target level. For example, in from sectoral ministries. This steering committee municipalities meetings these criteria, the 5.2 identifies competencies and functions to be percent of the SGP plus the 60 percent of the delegated.10 There are two groups of criteria: “general purpose” expenditure allocated to general and specific. water and sanitation would not be required to be spent on water and sanitation (and would Specific (sectoral) criteria are defined by the become additional non-earmarked “general DNP and the relevant sectoral ministries. For purpose” expenditure). This would not mean municipalities, general criteria include: strong that there would be no spending on water and capacity; a population greater than 25,000; sanitation; it would simply mean that the muni- a high or intermediate development environ- cipality would be free to allocate the resour- ment; or a low development environment wi- ces, if the service delivery levels were maintai- thin a high-development department. ned. Of importance are the definitions of capacity There could be similar criteria for health and and level of development. Capacity is cons- education, with no requirement for manda- tructed from proxy variables and the ability to tory spending levels if certain service deli- plan and manage finances and investment very targets are met. Education and health using IMF and OECD methodologies.11 Varia- outcomes could be measured, for example, bles are selected based on the availability of by the performance on the “Prueba Saber.” departmental and municipal information. The There could also be a requirement to com- indicator for the level of development is rela- ply with all existing contractual commitments ted to participation in the national economy, (including payroll and pensions). Failure to do urbanization, connectivity, average income so would result in a re-imposition of the man- levels and low crime rates. All these variables datory spending levels. In practice, given that may be good proxies for the administrative many elements of education and health poli- and financial capacity of municipalities to de- cy are determined at the national level, muni- liver services. Nevertheless, it would be impor- cipalities would not have much more spending tant to review the criteria, to see whether they freedom, even if spending allocations were re- adequately capture the varying capacities of laxed. It would also provide incentives for mu- the municipalities and departments involved. nicipalities to improve performance outcomes 10  Departamento Nacional de Planeación (2016). 11  Mizell and Allain-Dupré (2013), Dabla-Norris et al. (2011). 128 Note 7 Financing and Managing Subnational Governments and strengthen capacity. The proposed policy property tax compliance. also builds upon existing institutional arrange- • Introduction of a flat rate for the local busi- ments (especially the PNCD) and the recom- ness and industry tax to reduce distortions. mendations of the Comisión del Gasto y la In- versión Pública. Providing greater flexibility and In addition to the continuing efforts to update autonomy to local governments with higher and modernize the cadastral and land regis- capacity and better outcomes, could also be tries14, the central government could consi- used to reduce the administrative burden on der: (i) an information management platform lower capacity municipalities by reducing the to help local government administer property degree of detail required in financial reporting and other local taxes; and (ii) matching grants by placing more emphasis on reporting the re- to reward tax collection at the local level. sults of service delivery. In the medium term, SNGs need to be able to Enhance the capacity of departments raise own-source revenues and to have more and municipalities to raise own- flexibility in their use, through (i) allowing instru- source revenues, through updating ments such as congestion charges or tolls; and and modernizing the cadastral and (ii) promoting more flexibility in terms of user ta- land registries and improving tax riffs and local fees and optimize income from administration properties (rents, dividends). Increasing own-source revenue mobilization Adopt a single streamlined process of departments and municipalities would help for the preparation and selection of finance services and establish accountabi- investments across funding streams and lity links with citizens. Lower dependence on reducing earmarking of capital transfers transfers would also reduce pressure on the central government. Positive experiences with A systematic approach to capacity building high-capacity governments being responsible for public investment is needed to improve the for updating property cadasters could be re- quality of infrastructure services. Most munici- plicated for a larger group of municipalities. At palities have limited institutional capacity and the same time, the choice of taxes also needs implement only small-scale projects. Proce- to minimize potential distortions. Specific mea- dures to access resources for investment and sures could include:12 financial reporting requirements need to be consolidated and streamlined. The General • Asymmetric decentralization of the cadas- Adjusted Methodology15, currently used une- ter administration.13 venly by municipalities, should be simplified. • Elimination of taxes with low yield but high The appraisal methodology needs to be diffe- administrative costs (i.e., sellos). rentiated according to the size and complexity • Improvement in the design and administra- of projects and, whenever possible, standardi- tion of automobile and gasoline taxes. zed designs (for example, for schools and pri- • Establishment of central rules to encourage mary health care facilities) should be used. 12  The last four items in the list are addressed by the proposed Territorial Tax Code. 13  See also Policy Note #9 on Territorial Development. 14  See also Policy Note #9 on Territorial Development. 15  Departamento Nacional de Planeación (2015a). 129 Colombia Policy Notes The central government should also continue base and the departments’ or municipali- to invest in strengthening the public investment ties’ tax base) and human development. management system at the central and subna- • Conditional transfers to be distributed ac- tional levels. Developing institutional capacity cording to improvements in tax collection for more systematic preparation, appraisal, to encourage own source mobilization. De- selection and implementation of infrastructure partments and municipalities that increase investment projects at the local level needs to local tax collection are to receive additio- be prioritized. Greater links between planning nal resources. and budgeting, and incentives to support ho- • Block grants to compensate departments rizontal cooperation across jurisdictions, are and municipalities to which additional ser- needed to support more strategic investment. vice delivery responsibilities have been de- This will be particularly helpful for strengthening volved, according to the principle that fun- functional urban areas.16 ding should follow function. Revise the transfer formula to strengthen equa- The objective is to have a minimum standard of lization to ensure that governments with diffe- basic services that are provided across territo- rent fiscal capacities have equal abilities to ries by equalizing the capacity of subnational provide public services governments to finance them. Fiscal capacity and development should be measured using The intergovernmental fiscal system needs to objective indicators that are regularly calcula- help offset the disadvantages with variations ted by the central government. In addition to in development and fiscal capacities across the ongoing efforts to update the cadaster, it subnational jurisdictions. Without improving would be necessary to improve the frequency equalization, it will be difficult to address the and quality of data collected on local deve- persistent differences in access and quality of lopment and fiscal capacity. In the medium basic services across municipalities. In addition term, it is critical to continue reforms to ensure to supporting own-source revenue mobiliza- the coherence and complementarity of the tion, it is also important to assist municipalities components of the intergovernmental fiscal to balance higher unit costs of provision with a framework and establish a comprehensive lower revenue base. strategy to guide the sequencing of the de- centralization reforms. To reduce horizontal inequality, the SGP and SGR should be revised to include: • An updated categorization of departments and municipalities to better capture the va- riation in their fiscal and administrative ca- pacity. • Unconditional transfers that are inverse- ly distributed according to fiscal capacity (measured by the difference between the population-weighted average of the tax 16  See also Policy Note #9 on Territorial Development. 130 Note 7 Financing and Managing Subnational Governments Annex 7.1 Matrix of Policy Options Development Policy Options Challenge Short Term Medium Term 1. Enhance the • Introduce an asymmetric assignment of res- • Improve central monitoring efficiency of ponsibilities that delegates more functions to and evaluation system of lo- subnational municipalities with the capacity to fulfill them, cal service delivery outcomes spending and while in the municipalities where capacity is • Increase financial support for focus on results absent departments retain service delivery institutional building at the functions departmental and municipal • Simplify transfers and grants reporting mecha- level nisms for small municipalities to alleviate their • Introduce results-based grants administrative burden and incentivize com- to incentivize improvements in pliance local service delivery • Reduce earmarking in the business and gasoli- • Simplify and streamline the ne taxes and increase the flexibility to execute budgetary system at the cen- expenditures (for subnational governments tral and subnational levels with higher capacity) to increase autonomy • Implement a single integrated the delivery of services financial management infor- mation system for subnational entities (i.e. Guatemala and Mexico). 2. Improve the • Simplify the General Adjusted Methodology • Improve the links between quality of the and differentiate appraisal methodologies planning and budgeting at design and se- according to the size or complexity of projects the central and subnational lection of subna- • Establish a facility to provide technical assis- levels tional investment tance to low-capacity departments and mu- • Create a program to support projects nicipalities in the preparation of medium-size systematic capacity building and large investment projects for public investment mana- • Introduce matching grants/especial incenti- gement at the subnational ves to finance subnational projects that under- level go a more rigorous appraisal and selection • Simplify the system to appro- process for medium-size and large projects ve and monitor the projects • Increase financial incentives for regional coo- financed by the SGR peration across jurisdictions to strengthen in particular functional metropolitan areas • Reduce the earmarking in transfers and impro- ve targeting of resources. 131 Colombia Policy Notes Annex 7.1 Matrix of Policy Options Development Policy Options Challenge Short Term Medium Term 3. Increase own • Reduce the number of earmarked taxes. • Provide additional reve- source revenue • Provide funding and technical assistance to nue-raising powers to the mobilization to enhance the capacity of municipalities to largest departments and reduce transfer raise property taxes, including updating and municipalities (within establish dependency modernizing the cadastral and land registries parameters) and increase • Pass a new departmental and municipal tax • Streamline the portfolio of local accounta- code defining tax bases and establishing ran- taxes levied by departments bility ges of rates and municipalities and a. Allow municipalities to use instruments such promote shared taxation as congestion charges or tolls between the central and b. Promote more flexibility in the administra- subnational governments tion of user tariffs and local fees and optimize • Provide technical assistance income from properties (rents, dividends) to departmental and munici- c. Revise the business tax to reduce distortions pal tax administrations d. Unify excise tax rates and gasoline surchar- • Provide a common informa- ges tion management platform for tax administration/collec- tion 4. Ensure that go- • Establish a regional measure of well-being • Simplify the intergovern- vernments with mental fiscal framework and different fiscal • Review the allocation formulae for SGP and establish a comprehensive capacities have SGR to account for population changes, strategy to guide the sequen- equal ability to disparities in regional well-being, and the gap cing of the decentralization provide basic between resources and mandates to deliver reforms public services. basic public services 132 Note 7 Financing and Managing Subnational Governments REFERENCES Bird, Richard M. (2012). “Fiscal Decentralization in Ajustada (MGA). Bogotá, Colombia: DNP. Colombia: A Work (Still) in Progress.” International Departamento Nacional de Planeación (2015b). Center for Public Policy Working Paper 12 (23). Plan Nacional de Desarrollo, 2014-2018. Bogotá, Boadway, Robin, and Anwar Shah (2009). Fiscal Fe- Colombia: DNP. https://colaboracion.dnp.gov. deralism: Principles and Practice of Multiorder co/CDT/PND/PND%202014-2018%20Tomo%20 Governance. 1 edition. Cambridge; New York: 1%20internet.pdf. Cambridge University Press. Departamento Nacional de Planeación (2016). “Cri- Bonet-Morón, Jaime, and Jhorland Ayala-García terios Generales Programa Nacional de Delega- (2015). “Transferencias intergubernamentales y ción de Competencias Diferenciadas.” disparidades fiscales horizontales en Colombia.” Ministerio de Hacienda y Crédito Público (2018). Documentos de trabajo sobre economía regio- Marco Fiscal de Mediano Plazo 2018. Bogotá. nal 231. Mizell, Lee, and Dorothée Allain-Dupré (2013). Bonet-Morón, Jaime, and Joaquín Urrego (2014). “El “Creating Conditions for Effective Public Invest- Sistema General de Regalías: ¿mejoró, empeo- ment.” OECD Regional Development Working ró o quedó igual?” Documentos de trabajo de Papers 2013/04. http://dx.doi.org/10.1787/5k49j- economía regional 198. 2cjv5mq-en. Comisión del Gasto y la Inversión Pública (2017). “In- OECD (Organisation for Economic Co-Operation and forme de La Comisión Del Gasto y La Inversión Pú- Development) (2014). OECD Territorial Reviews: blica: Presentación,” December. http://www.re- Colombia 2014. Paris: Organisation for Economic pository.fedesarrollo.org.co/handle/11445/3516. Co-operation and Development. http://www. Contraloría General de la República (2017). Infor- oecd-ilibrary.org/content/book/9789264224551- me de la Situación de las del Estado en Finanzas en. 2016: Resultados del Sistema General de Rega- ——— (2017). OECD Economic Surveys: Colombia lías a diciembre de 2016. Bogotá. 2017. Vol. 2017. OECD Economic Surveys. OECD Dabla-Norris, Era, Jim Brumby, Annette Kyobe, Zac Publishing. https://doi.org/10.1787/eco_surveys- Mills, and Chris Papageorgiou (2011). Investing in col-2017-en. Public Investment: An Index of Public Investment Olaberría, Eduardo (2017). “Reigniting Growth throu- Efficiency. Washington DC: IMF. gh Productivity-Enhancing Reforms in Colom- Departamento Nacional de Planeación (2015a). bia.” OECD Economics Department Working Pa- Manual Conceptual de la Metodología General pers 1424. https://doi.org/10.1787/dac4e274-en. 133 Colombia Policy Notes 134 PEACE CONSOLIDATION NOTE 8 After decades of fighting, a peace accord between the Colombian government and the Revo- lutionary Armed Forces of Colombia (FARC-EP, or “FARC”) was signed on November 24, 2016. By March 2017, more than 7,000 FARC guerrillas had moved from their bases of support in 242 munici- palities across 11 regions of the country to 26 rural “zones of concentration”, where they began to disarm under United Nations’ supervision. The FARC completed the disarmament process on June 27, 2017 and turned itself into a political party. However, building a sustainable peace remains a challenge. Moreover, the illegal economy and new forms of paramilitary violence have been growing, jeopardizing the broader peace building efforts across Colombia. Context and Reform Progress were internally displaced. They are among the poorest and most vulnerable citizens, and it is Lasting peace is within reach. For decades, estimated that the internally displaced peo- Colombia has been trapped in a cycle of ple represent half of the extreme poor. The violence that was rooted in inequality, pover- post-conflict era brings challenges, but it also ty, and weak local institutions. The prolonged presents the opportunity to address important armed conflict made things worse. The end issues: uneven territorial development, inequi- to the five-decade old armed conflict, which ty, and extreme poverty. Building confidence affected the lives of three generations, creates among the victims and those excluded, throu- an opportunity for building a sustainable pea- gh effective delivery of social services, could ce that could pave the way for inclusive de- help solidify stability and support their aspira- velopment and progress in reducing poverty. tions for peace and prosperity. Rebuilding the The country is at the beginning of a long and social fabric could help Colombians realize challenging process of societal transformation their potential. and territorial development. The 2016 peace agreement1 represents an Over 8 million people became victims du- opportunity not only to end the armed con- ring the conflict and nearly 7 million of them frontation, but also to address many of the key 1  ¨Peace Agreement¨ (PA) refers to the ¨Final agreement to end the armed conflict and build a stable and lasting peace¨, signed between the government of Colombia and the Revolutionary Armed Forces of Colombia at the Colón Theater in Bogotá, on November 24th, 2016. 135 Colombia Policy Notes drivers behind the political polarization and cant social challenges must also be addres- violence. The adequate and timely imple- sed, including rebuilding communities’ ties, mentation of the peace agreement is widely and social cohesion. seen in Colombia as a test of the commitment to tackling the problems of exclusion, inequi- Political economy issues underpin conflicts ty and regional imbalances, and to reducing around land. Vested interests of diverse groups extreme poverty and promoting shared grow- and stakeholders that seek to secure land, th and prosperity for all Colombians. Newly combined with weak government capacity, elected officials face the legacy of an histo- can result in violence and conflicts. Access to rical peace agreement at the early stages of land has typically been a fundamental reason implementation; critical confidence-building for conflict and violence, because land repre- measures are needed for its successful imple- sents an asset, an important source of income mentation. Meanwhile, other violent actors in for rural populations, and it is also closely linked the country represent a threat for a sustainable to the history and culture of communities. Land peace. access is a critical factor for development: (i) at the beginning of a conflict that forces peo- The main priorities presented in this note reflect ple to leave their homes and properties dis- the mandate, global experience and compa- rupting development; and (ii) upon the return rative advantage of the World Bank. This note to their homes once the conflict ends as they will focus on peace consolidation through: (i) seek to restore their livelihoods. land restitution; (ii) reincorporation of former combatants; (iii) elimination of illicit crops; and Land restitution is an instrument for recovering (iv) reparation of the victims of the conflict. land (including housing and other valuable assets) that were lost during a conflict.2 Co- Main Challenges lombia’s land restitution policy is implemented through a hybrid process conducted by the Land Restitution Land Restitution Unit, which represents the ad- ministrative branch, and by the Land Restitu- Conflict and post-conflict municipalities are tion Courts as part of the judicial branch. Given often characterized by massive displacement, the presence of other armed groups the resti- forced abandonment of property and assets, tution measures are being executed gradually and land dispossession. People that have been and progressively. Previous high-density areas forced to leave their homes and communities affected by the conflict where the improve- are vulnerable as lack of access to their land ments in the security conditions enable inter- leads to economic deprivation. Displacement nally displaced people (IDP) to return are given through armed conflict and violence affects priority. By December 2017, more than 110,000 negatively social cohesion by disrupting home claims have been received by the Land Resti- communities, and by creating tensions when tution Unit. Of these, nearly 42,500 claims have new members join host communities. Robust completed the administrative process; around economic growth is therefore not sufficient to 234,200 hectares have a restitution ruling; and prevent a relapse into violence and the return more than 3,000 productive projects have of instability in post-conflict situations. Signifi- been implemented on restituted land. 2  Brookings Institution and London School of Economics (2012). 136 Note 8 Peace Consolidation Land restitution is contributing to the peace Santa Fe de Ralito process are still part of the building process. The land tenure rights that are ARN3 program and are in the process of being being reestablished enable access to markets reintegrated. Many former combatants are and public services; foster public and priva- expected to continue to take advantage of te investments; strengthen communities; and the government’s (GoC) individual demobili- could help prevent potential new conflicts. The zation policy4; and about 7,000 former FARC restitution policy includes complementary go- combatants that were demobilized collec- vernment measures to support income gene- tively as part of the implementation of the ration activities and productive projects; these Havana peace process will require support have had high rates of success in getting fami- from associative economic activities in areas lies back on track, improving their economic where markets and market access need to be situation and restoring livelihoods. developed. Reincorporation of former combatants Several, partly inconsistent policy frameworks are used, however, in the process of reincor- Reincorporation and normalization of the situa- porating former combatants. The policy-ma- tion of former combatants is as a critical pillar king document CONPES 3554 of December of the post-conflict stabilization and recovery 2008 established the general framework for agenda. They are central to reinforcing secu- Disarmament, Demobilization and Reintegra- rity and safety at the community level, to pro- tion of former combatants (DDR).5 This docu- viding productive options for former comba- ment was based on the normative framework tants, and generally to consolidating peace. of the Colombian Constitution; as well as on Experiences in different countries demonstrate multiple laws and discussions in the Congress that stabilization and the resumption of a nor- the Courts, and the executive on DDR; and on mal life by former combatants can contribute international treaties on human rights and in- to supporting economic growth and to cons- ternational human rights law. tructing a more harmonious social structure; it may also help prevent new tensions. Suppor- • CONPES 3554 determines the scope of ting ex-combatants and individuals formerly each component of the DDR program. engaged in violent activities to transition to ci- • Law 418 of 1997 allows the executive to vilian life, as socially responsible and economi- hold peace negotiations with illegal ar- cally self-sufficient individuals, through socioe- med groups and to consent to benefits for conomic reincorporation activities is a difficult ex-combatants to be reincorporated into undertaking but an essential element of cons- civilian life. tructing sustainable peace. • Laws 548 of 1999, 782 of 2002, and 1106 of 2006, extended this law. Colombia has a long history of implementing • Law 975 of 2005, known as the Justice and strategies and programs to support ex-com- Peace Law, and Law 1424 of 2010 establish batants’ transition to civilian life. Up to 20,000 juridical benefits for ex-combatants. former combatants discharged as part of the • Law 782 frames the procedures and condi- 3  Colombian Agency for the Reincorporation and Normalization (ARN), formerly Colombian Agency for Reintegra- tion (ACR). 4  Including former combatants from FARC, ELN and other groups, demobilizing through the ¨individual process¨. 5  DDR, Disarmament, Demobilization and Reintegration of former combatants. 137 Colombia Policy Notes tions of the demobilization and reintegra- to read or write, 68 percent of children do not tion process.6 go to school, 97 percent do not have access to health services and only 13 percent certify The Peace Accord brings yet another juridi- that they own their property.7 It is clear that in cal framework for the demobilization and re- areas where informal land tenure is pervasive, incorporation of former combatants, creating illicit crops proliferate, which in turn generates a situation where different groups of former fi- multiple types of conflicts among its inhabi- ghters share a single program supporting their tants. Recently, clashes between rival armed reintegration, but are subject to different legis- groups to fill the vacuum of power created by lations with different processes and scope. The- the demobilization of the FARC, have seriously se complex conditions threaten the process of affected the security conditions. reincorporation, as well as any kind of cohesive reconciliation between former fighters of diffe- The persistence of the drugs problem is linked rent groups, who were demobilized at different to poverty, marginalization, and underdeve- times. lopment in coca-producing areas.8 To ad- dress the development-related obstacles, on A key issue related to these legacy challen- January 27th, 2017 the GoC launched a new ges are the persistent discrepancies that affect National Comprehensive Program for the Subs- program beneficiaries. There are significant titution of Crops Used for Illicit Purposes (Pro- legal gaps and discrepancies in the applica- grama Nacional Integral para la Susitución Vo- ble legal framework, including the Justice and luntaria de Cultivos Ilícitos, PNIS) as part of the Peace Law and the Law 1424 of 2010. As a le- Comprehensive Rural Reform (CRR) agenda.9 gacy challenge, there are already differences The PNIS is regulated by the Decreto Ley 896 of in treatment among ARN beneficiaries. Such May 29, 2017, and is being implemented jointly pre-existing weaknesses could easily be mag- by the Directorate for the Substitution of Illegal nified with the surge in additional beneficiaries Crops (Office of the Higher Presidential Adviser resulting from the peace accord negotiated for the Post-Conflict – Presidency of the Repu- with the FARC. blic) and the FARC. Elimination of illicit crops With mounting international and domestic pressure to reduce coca cultivation, in Fe- There has been mixed progress in the imple- bruary 2017 the GoC announced a strategy to mentation of the Colombian government's stra- eliminate 100,000 hectares of coca crops: 50 tegy for both eradication and the substitution of percent through enforced eradication, and 50 illicit crops. The largest presence of illicit crops percent through community-driven voluntary is concentrated in 29 municipalities. According substitution in line with the PNIS scheme.10 Ac- to a Report by UNODC and the Ideas for Peace cording to GoC, 88 percent (44,000 hectares) Foundation (Fundación Ideas para la Paz, FIP), of the enforced eradication goal has already 36 percent of respondents do not know how been achieved, however only 7,800 hectares 6  CONPES 354, p 5. 7  UNODC and FIP (2018). 8  PA (2016). 9  PA (2016). 10  El Heraldo (2017). 138 Note 8 Peace Consolidation have been voluntarily substituted according to and the Comprehensive Community-based UNODC, with 29 collective agreements under and Municipal Plans for the Substitution of Illicit the PNIS framework signed between the GoC Crops and Alternative Agrarian Development and coca-growing communities.11 However, (Planes Integrales Comunitarios y Municipales there are significant tensions between eradi- para la Sustitución de Cultivos Ilícitos y Desa- cation and substitution goals. Coordination rrollo Agrario Alternativo, PISDA). The GoC has between security forces (police and military) clarified how these instruments are going to and the Directorate for the Substitution of Ille- be constructed at a local level. However, the gal Crops is inadequate, and the parallel im- links between the PNIS and the PDET and PISDA plementation of enforced eradication and remain unclear.13 Guidance on the proper se- voluntary substitution quotas undermines the quencing of peacebuilding and development population’s trust in the PNIS. actions in drugs-producing municipalities is ne- cessary. Moreover, the PNIS relies heavily on cash trans- fers, and it is not being implemented within the Reparation for victims framework of the CRR or within a more gene- ral integral multi-year development agenda. Reparation for the victims of the armed conflict The integral development actions and funds is key for reconciliation and peaceful coexis- required for successful implementation of the tence. The GoC has stated its commitments PNIS depend on various government stake- for the reparation of the victims several times, holders. Despite Article 5 of the Decreto Ley but Law 1448 of 2011 on victims´ reparation 89612, which states that inter-institutional coo- was enacted in a very different political and peration is critical to the implementation of the economic context. The legislation contempla- PNIS, there is little clarity on how this should take ted at the time was dealing with a universe place. There is also little clarity on the roles of of victims of less than one million.14 The 2011 key stakeholders, such as the Ministry of Agri- CONPES document 3712 on financing for the culture, the Agency for Territorial Renewal, the implementation and sustainability of Law 1448, National Land Agency and the Rural Develop- estimated that the overall cost of implementa- ment Agency. tion would fall from 1 percent of the country’s GDP (US$ 3.4 billion) in the first year and gra- Lack of clarity on sequencing have also pla- dually decline to 0.75 percent of GDP by 2021. gued the design and implementation of two Nevertheless, there are over 8.5 million registe- key post-conflict development planning ins- red victims (of which 6.65 million are vetted for truments vis-à-vis the PNIS: Development Pro- integral reparation), with only four years left to grams with a Territorial-Based Focus (Programas implement the law and by 2017 only around de Desarrollo con Enfoque Territorial, PDET), 615,00015 victims had received administrative 11  El Tiempo (2017). 12  Participation of national entities on the PNIS. 13  Recent academic studies have argued that the PNIS implementation presents challenging economic considera- tions. Per GoC estimates, the number of PNIS beneficiaries could rise to 132,774 in the coming months. If so, the GoC would need COP 4.7 billion to cover cash transfers for these beneficiaries. This figure, however, does not include the development interventions as part of the CRR. 14  The CONPES 3712 shows 830,000 victimizing acts, of which 618,000 were associated solely with forced displace- ment, 134,000 cases of other victimizing acts and 78,000 that were simultaneously victims of forced displacement and another victimizing fact. 15  Of which only 580,415 are part of the National Victims Registry. 139 Colombia Policy Notes compensations. Furthermore, of the 522 co- estimate the fiscal effort necessary to process llective reparation subjects included in the Na- a larger number of cases; (ii) to adjust its proce- tional Victims Registry16, only a few have been dures to resolve restitution claims in those cases fully compensated. Consequently, the repa- in which field visits cannot be carried out due ration of the approximate 6.65 million eligible to adverse security situations; (iii) to strengthen victims no longer seems technically or fiscally the capacity of the Land Restitution Unit Fund feasible under the terms described in Law 1448 to process more compensation cases; and (iv) and its interpretations by the constitutional to coordinate with the Office of the Attorney court, given that it would require nearly 4.5 per- General to carry out the corresponding cri- cent17 of the GDP over the next 4 years. minal investigations related to ​​ forced displa- cement, dispossession and abandonment of Policy Options lands, and related crimes. Land Restitution Strengthening interinstitutional coordination. Document CONPES 3712 of 2011 created a fi- Process all restitution claims. An important step nancing plan for Law 1448 of 2011, including will be for the Land Restitution Unit to estimate budgetary estimates related to the public po- the number of claims that might not be proces- licy for land restitution. Initially there were no sed before 2021, due to demining and security expenses associated with the policy for entities considerations. This could involve two possible other than the Land Restitution Unit, which re- solutions: (i) to process an extension of the Law ceived an allocation of COP 2.95 trillion. The in Congress, providing all data related to the following year, the National Council of Econo- land restitution claims, an analysis of the securi- mic and Social Policy adjusted the plan, with ty conditions, and the pace of implementation CONPES document 3726 of 2012. These chan- of the restitution claims; or (ii) without modifying ges recognized that restitution measures had the validity period of the Law, to compensate additional expenses related to inter-institutio- those claimants who cannot get restitution for nal coordination. The resources for the Institu- their property, as a result of security conditions, to Geográfico Agustín Codazzi (IGAC) were within the original 10-year span of the Law. The adjusted (COP 323 billion) to allow for an up- latter solution appears to be envisaged by the date of rural cadasters; the INCODER18 recei- statement of the Colombian Constitutional ved COP 374 billion to update land tenure and Court (Sentence T-679 of 2015) that the right to use; SNR received COP 449 billion for updating restitution "cannot remain indefinite in time. In and certifying land tenure and for registering effect, the Colombian State is obliged to crea- measures associated with Law 1448 of 2011; te tools that expedite those processes, despite and the Superior Council of the Judiciary was the factual circumstances that prevent it." allocated COP 102 billion. The allocation of re- sources allowed for management indicators In the case of compensation of claimants wi- for the Land Restitution Unit, which the unit is thout an extension of the law, the recommen- required to report on semi-annually. However, dations to the Land Restitution Unit are: (i) to the resource allocation made to other enti- 16  Of which 300 are ethnic subjects, 222 are non-ethnic, 13 are of national scope and 6 come from the CNRR. 17  For year 2016, 1.31 percent of the GDP was allocated for the implementation of Law 1448. It started at 0.96 per- cent in 2012 and was always above the projections of CONPES 3712. 18  Today, National Land Agency 140 Note 8 Peace Consolidation ties with land restitution responsibilities do not tution and compensation programs (access to come with monitoring requirements, which effective remedies, restoration of housing, land makes it difficult to monitor implementation and property, access to documentation). As and assess the effectiveness of the resource part of the restitution program, the recommen- use. The recommendation is to establish, for dation to the Land Restitution Unit (Unidad de each of the entities involved in the restitution Restitución de Tierra, URT) is to strengthen pro- process (IGAC, SNR and ANT), an action plan ductive projects on restituted land to support with activities, products, baseline, indicators, rural development, with the aim of preventing goals, and budget to facilitate implementa- future conflicts. tion and monitoring of the policy. This will also assist with interinstitutional coordination to en- The reincorporation of former sure results and outcomes. combatants Promoting durable solutions19 by ensuring sus- The consistent and predictable application tainable integration in places of origin (land of demobilization measures to three distinct restitution return); or in a third location with simi- beneficiary groups will be key. The first group lar productive characteristics (compensation). consists of the current beneficiaries from pre- Land return and compensation can constitute vious peace accords like the Santa Fe de Ralito durable solutions if they are accompanied by Agreement between the GoC and the AUC22, legal, civil, political and economic integration. or groups that are pursuing individual demobi- The IASC Framework on Durable Solutions for lization track. This group has been supported Internally Displaced Persons20 identified eight by ARN for the last 12 years. A second group is criteria to measure progress towards durable the large number of persons who demobilized solutions: (i) safety and security; (ii) adequate collectively through the peace agreement standards of living; (iii) access to livelihoods; (iv) between the government of Colombia and restoration of housing, land and property; (v) the FARC. A third group will likely include indi- access to documentation; (vi) access to effec- viduals who continue to leave factions of the tive remedies and justice; (vii) family reunifica- FARC that are not party to the peace agree- tion; and (viii) participation in public affairs. ment (dissidents); it may also include existing These criteria reflect the central role of land guerrilla groups that have not reached a pea- and housing for achieving durable solutions21 ce accord such as the ELN. and the need to address housing, land and property issues in post-conflict settings throu- Standardization of the legal framework is an gh any or all of the following: demining (safety imperative for current and future beneficiaries, and security); provision of access to land and including persons already graduating from the housing with secure tenure (adequate stan- reintegration program. This legal framework dards of living, access to livelihood); and resti- would also be applicable to individuals who 19  “A durable solution is achieved when internally displaced persons (IDPs) no longer have specific assistance and protection needs that are linked to their displacement, and such persons can enjoy their human rights without discrimi- nation resulting from their displacement”, IASC, Framework on Durable Solutions for Internally Displaced Persons, April (2010), p.5. 20  The IASC is the primary mechanism for inter-agency coordination of humanitarian assistance. It comprises key UN and non-UN humanitarian partners and was established in June 1992 in response to United Nations General Assembly Resolution 46/182 on the strengthening of humanitarian assistance. 21  While the IASC Framework focuses on IDPs, the criteria identified can also apply in refugee context. 22  AUC stands for United Self-Defense Forces of Colombia, colloquially known as ¨paramilitaries¨ 141 Colombia Policy Notes have already benefitted from the reintegration forces) and voluntary initiatives (carried out program. This standardization could be achie- by the Presidency) must be linked to new and ved by unifying the judicial framework that existing activities for rural development, par- would apply to all demobilized ex-combatants ticularly those envisioned under the PDET. This and by consolidating the scope of existing fra- should be done in order to ensure the sustai- meworks. Former combatants would be sub- nability of the efforts aimed at eliminating illi- ject to a single transitional justice framework cit crops. These links will be key to maximizing and the immunity guaranteed by that fra- the construction of peace and the develop- mework. The framework will need to facilitate ment potential of the funds (ie, cash transfers) reconciliation and reincorporation efforts, re- t. For example, inter-institutional coordination gardless of the timing of decommissioning or of is urgently needed to address the issue of illicit the group to which former combatants belon- crops in protected areas, in which 32 percent ged. These former combatants are expected of the total area of coca cultivation is locates. to include members of the three groups men- The slow implementation of the PNIS in these tioned above. areas is generating new incentives for the cul- tivation of coca. Dealing with illicit crops The efforts of governments aimed at promoting Strengthened coordination between the Di- the integral development of these zones should rectorate for the Substitution of Illicit Crops be framed within a multi-sectoral, multi-annual and the Ministry of Defense will be important. development agenda guided by efforts that This will involve, in particular, harmonizing the contribute towards achieving Sustainable De- substitution and eradication approaches. velopment Goals and Human Rights. The effec- A comprehensive coordination strategy will tive participation of the affected communities need to: (i) provide security to communities in all phases of planning the development of and pro-substitution leaders where the PNIS their territories contributes significantly to the is being implemented; (ii) secure full territo- sustainability of the interventions and to the rial control in the coca-rich municipalities; (iii) restoration of trust between the civilian popu- exercise territorial control over Natural Parks. lation and the State. As the PNIS advances, experts anticipate that field-based personnel of the Directorate for The formalization of land tenure for former illi- the Substitution of Illicit Crops may face secu- cit crops farmers reduces the risk of re-sowing rity challenges.23 and increases the sustainability of develop- ment interventions in these zones. The upda- Interventions for sustainable integral develop- ting of the cadastral registry can contribute to ment in areas affected by drugs will be possi- significantly increasing municipal tax revenue, ble only if the government institutions work in a and consequently strengthen local administra- coordinated manner24 and if the PNIS becomes tion’s ability to fulfill their obligations as service a central component of the RRI. Forced eradi- providers. cation (implemented by the country's security 23  In contrast to other civil servants implementing tasks related to the Peace Agreement, the Directorate for the Substitution of Illegal Crops field-based staff do not have a security scheme. Some have requested it but the UNDSS cannot grant it as they are not ‘staff members’ (personal de planta) but consultants paid through UNODC funds. 24  Windle, (2016). 142 Note 8 Peace Consolidation The deepening of efforts and alliances to at- aligned with the commitments under the pea- tract private investment and social entrepre- ce agreement. neurship initiatives to areas where substitution projects are being carried out is fundamental. Review the eligibility criteria of individual vic- Inevitably, the public sector needs private in- tims in order to focus on those most affec- vestments to promote the economic deve- ted. The Unified Victim Registry includes a to- lopment of these zones that contributes to tal of 8,625,631 victims as of February 2018. securing economic, social, cultural and envi- 6,589,325 are entitled to reparation. Although ronmental rights. registration is now closed, many victims are sti- ll being included through judicial decisions or Reparation of the victims of the armed "guardianships". It is critical that the executive conflict branch reach consensus with the judiciary and legislative powers on the criteria that must be The government's Medium Term Fiscal Fra- applied for a revised eligibility of victims in the mework 2017, in relation to the reparation of Registry. Criteria should not take into account victims, is primarily conceived around the the "vulnerability" based on needs, which turns compensatory nature of the victim’s policy. the program into a social protection strategy, The MFMP includes the following subtopics: (i) but to focus on the "acts of victimization" that victims' human rights; and (ii) truth, which tries are directly related to the impacts of the ar- to provide content that satisfies the demands med conflict on this population. of those who have been affected by the con- flict. In order to achieve the objectives of the Putting the focus on collective reparations for Victim’s Law, within the current fiscal constra- the delivery of reparation activities. The esti- ints and the implementation challenges de- mated total burden of collective reparations is rived from the high number of registered vic- about 3 percent of the total costs of reparations tims (more than 8 million), it is necessary to: (i) in Colombia. However, collective cases have extend the period of applicability of the Law; a huge impact in terms of reconciliation and (ii) revise their eligibility criteria; and (iii) refocus recognition of acts of victimization, particularly the priorities of reparation for the collective for indigenous peoples and the Afro-descen- subjects. dant population. Although it is recognized that the process of implementing collective repara- Extend Law 1448 by at least ten years in addi- tions requires more intense work than individual tion beyond the current end date limit of the (or "administrative") reparations, their footprint year 2021. Under the law’s current provisions, in terms of contribution to peacebuilding and by 2021 all victims must be repaired before the reconciliation is much more significant. The le- legal framework expires (resulting in the ex- veraging of investments made in recent years piration of legal rights). This leaves only three to develop a methodology for collective repa- years for the implementation of the Law. With rations provides the best short-term value for more than seven million cases of victims that the Colombian government. still need to be resolved, only extending the period of validity by at least ten years would make it possible to provide reparations to the total number of victims. Extending the Law’s period of applicability would also allow it to be 143 Colombia Policy Notes Annex 8.1 Matrix of Policy Options Development Policy Options Challenge Short Term Medium Term 1. Ensure adequa- • Strengthen productive measures in restituted • Process in Congress an exten- te land restitu- land sion of the Law, supporting tion for victims such request with the figures related to the universe of land restitution claims, the analysis of security conditions, and the pace of implementation of the restitution claims • Set up an action plan for each one of the entities invol- ved in the restitution process (IGAC, SNR and ANT) with activities, products, baseline, indicators, goals, and budget. 2. Ensure the effec- • Harmonize the legal framework for demobili- tive reintegration zation and reintegration of former com- batants 3. Eliminate illicit • Harmonize substitution and forceful eradica- • Strengthen coordination crops tion approaches mechanisms between the • Link the PNIS with the PDET and PISDA Directorate for the Substitu- • Promote integral development through a mul- tion of Illegal Crops and the tisectorial and strong community participation Ministry of Defense approach during the various implementation • Formalize land tenure and phases. update the cadastre • Form alliances with the private sector to foster development in these areas. 4. Ensure adequa- • Ensure a sustainable and fiscally-sound imple- • Extend the period of validity te reparation to mentation of the Victims’ Law, focusing on of Victims’ Law by at least 10 the victims of the collective reparations years, and revise the eligibility armed conflict criteria for individual victims to focus on the most affected 144 Note 8 Peace Consolidation REFERENCES Brookings Institution and London School of Econo- unhcr.org/50f94cd49.pdf mics (2012). Transitional Justice and Displace- International Crisis Group (2017). Colombia´s Armed ment: Challenges and Recommendations. Re- Groups Battle for the Spoils of Peace. Report N. search Unit: Project on Internal Displacement. 63. October 19. ICTJ (International Center for Transitional Justice). Moreno Horta, Ivonne (2016). Aspectos de la Política https://ictj.org/sites/default/files/ICTJ%20and%20 de Tierras, en Análisis sobre el Estado de Cosas Brookings-LSE%20Transitional%20Justice%20 Inconstitucional, Comisión de Seguimiento a la and%20Displacement%20Report.pdf Política Pública sobre Desplazamiento Forzado, El Heraldo (2017). “Colombia espera sustituir 100.000 Consultoría para los Derechos Humanos y el Des- hectáreas de cultivos de coca en 2017” https:// plazamiento (CODHES). ISBN: 978-958-8881-08-9. www.elheraldo.co/colombia/colombia-espe- Bogotá, Colombia. ra-sustituir-100000-hectareas-de-cultivos-de-co- Peace Agreement -PA- (2016) ¨Final agreement to ca-en-2017-328515 end the armed conflict and build a stable and El Tiempo (2017). “Erradicación forzada llegó al 88 lasting peace¨, November 24th, 2016. por ciento de la meta del 2017”. http://www. UNODC (2017). Colombia: Monitoreo de Territorios eltiempo.com/justicia/conflicto-y-narcotrafico/ Afectados por Cultivos Ilícitos 2016. 14 July 2017. erradicacion-forzada-llego-al-88-por-ciento-de- UNODC and FIP (2018). "Who are the families living in la-meta-del-2017-149478 coca producing areas”. Bogota IASC (Inter-Agency Standing Committee) (2010). Windle, James (2016). Suppressing Illicit Opium Pro- IASC Framework on Durable Solutions for Interna- duction. Successful Interventions in Asia and the lly Displaced Persons. Washington DC: The Broo- Middle East. New York: I.B. Tauris. kings Institution - University of Bern. http://www. 145 Colombia Policy Notes 146 TERRITORIAL DEVELOPMENT NOTE 9 Growth has been characterized by an unequal territorial development, where deep regional inequalities have persisted across time. The past administration has devoted considerable efforts to the territorial development agenda, however some challenges have persisted. This note has grouped key challenges along four cross-cutting sectoral lines: (i) incomplete information sys- tems for decision making; (ii) poor coordination among the institutions responsible for territorial planning; (iii) fragmented programs and incentives for territorial development; and (iv) limited connectivity infrastructure. Policy recommendations are also structured following the same the- mes, emphasizing on the concept of a portfolio of places, where public investment should be guided by broad distinctions of territories according to function. Recommendations further stress the need to build on the tools, policies and institutions that already exist, focusing on simplifying and streamlining the processes, directing the effective implementation of programs, and provi- ding economic incentives, in lieu of excessive regulation, to achieve better results. Context and Reform Progress in Colombia has failed to include large areas of land and large segments of the population. Strong economic growth in Colombia over Gaps in poverty rates and standards of living the past decade has not been felt equally persist between urban and rural areas, across throughout the country. Colombia boasts La- regions, and even within departments and mu- tin America’s fourth-largest economy and has nicipalities. Regions face disparate challenges, been one of the region’s solid performers in depending on: location and geography; eco- terms of economic growth, but persistent re- nomic specialization; environmental features; gional disparities present a challenge for future and the incidence of social unrest and armed development. Regional inequalities are 42 ti- conflict. mes higher than in Australia and more than 5 times higher than in Canada or the United Sta- Persistent regional gaps pose a barrier for ba- tes, they are also higher than in most neighbo- lanced development. Poverty rates in Colom- ring Latin American countries.1 Development bia vary largely across regions, from as high as 59.3 percent in Chocó and 50.7 percent 1  OECD (2014). 147 Colombia Policy Notes in Cauca to as low as 8 percent in Santander nectivity among regions, and the long history and 7.3 percent in Cundinamarca.2 Extreme of armed conflict that has destroyed physical, poverty in rural areas is over three times as high human, and social capital  especially in rural as in urban areas, and moderate poverty in areas, among others. rural areas is 50 percent higher than in urban areas.3 Significant differences persist in access Aware of these regional inequalities, and the to basic services and land. According to the social, political and economic instability they Gran Encuesta Integrada de Hogares4, the can create, the Government of Colombia percentage of households in which at least (GoC) has undertaken an ambitious territo- one member is illiterate is more than three ti- rial development agenda. With support from mes higher in rural areas than in urban areas; many development partners including the only 21 percent of people living in rural areas World Bank, through the efforts of the Misión has finished middle school. In terms of access del Sistema de Ciudades, the Misión para la to water and sanitation, in urban areas 97 out Transformación del Campo, and more recent- of 100 people have access to drinking water, ly the Misión de Crecimiento Verde, the gover- while in rural areas only 74 out of 100 people nment has undertaken comprehensive reviews have access. Similar patterns exist with respect of current trends and key constraints in urban to sanitation; in urban areas 85.2 percent of and rural areas. These exercises emphasize the households have access to sanitation services, importance of moving beyond the traditional while in rural areas the figure is only 67.9 per- rural-urban classification typically used in plan- cent.5 Regarding land, only 36 percent of rural ning instruments towards one that recognizes households have formal title, and in most ca- the diversity of places, with the final objective ses the area is too small to generate enough of bridging the gaps in living standards across income to keep the household out of pover- the regions, i.e. a territorial development ty. 70 percent of agricultural production units approach. consist of smallholder-operated farms covering less than 5 hectares (these small units occupy These efforts to adopt a territorial approach less than 5 percent of the total area), while 0.4 have led to important advances. In particu- percent of agricultural production units con- lar, the Misión del Sistema de Ciudades has sist of large commercial farms covering more contributed to: (i) territorial development by than 500 hectares (these large units occupy defining a new generation of territorial deve- 40 percent of the total area).6 These regional lopment plans, called “POTs modernos” which imbalances have persisted for many reasons, are expected to have a greater emphasis on including imbalances in public investment for practical measures; be responsive to monito- critical infrastructure, the limited physical pre- ring and evaluation; include disaster risk-ma- sence of the government in many isolated nagement (DRM); and be updated regularly; regions, the extremely uneven topography of (ii) exploiting the potential of urban areas by the country that naturally isolates certain areas proposing the development of a methodology and perpetuates the persistent lack of con- to define regional visions for economic growth 2  Moderate Poverty rates for 2016. World Bank staff calculations on several rounds of GEIH, DANE. 3  World Bank staff calculations on several rounds of GEIH, DANE. 4  Gran Encuesta Integrada de Hogares (2015). 5  PNUD (2015). 6  Censo Nacional Agropecuario (2014). 148 Note 9 Territorial Development Figure 9.1 Gini coefficient of inequality in Latin America and by department in Colombia Colombia Choco Huila Mexico Boyacá Cauca Costa Rica Antoquia Caldas Chile Tolima Bogotá Ecuador Bolívar Valle del Cauca Bolivia Sucre Santander Peru Meta Córdoba Argentina Atlántico Cundinamarca Uruguay La Guajira 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.0 0.1 0.2 0.3 0.4 0,.5 0.6 Gini coefficient Gini coefficient Source: World Development Indicators and DANE, 2015. in around 18 urban agglomerations identified for designing development programs with a through the analysis; and (iii) building the data territorial focus (programas de desarrollo con for analysis, by proposing the creation of an ur- enfoque territorial, PDETs). The Misión de Creci- ban observatory. As a result of the Misión del miento Verde is still ongoing; its focus includes Sistema de Ciudades, several CONPES7 docu- charting a way to strengthen competitiveness, ments were signed and approved, one for the support sustainability and ensure resilient grow- mission itself, another one for POTs modernos, th. Its findings and recommendations are infor- a third for the creation of the multipurpose ca- ming the discussion on territorial development. daster and a fourth for policies to support sus- In parallel to the work of the missions, the GoC tainable green growth. All the policies defined through DNP is working to articulate an overall in these documents are being taken forward Territorial Development Policy (Política General by the National Planning Department (DNP) de Ordenamiento Territorial, PGOT). with different degrees of success. The GoC has made considerable progress The results from the Misión para la Transfor- along the lines of territorial development, but mación del Campo provided key inputs to additional efforts are needed to achieve grea- guide the peace agreements signed in 2016. ter and more equally distributed growth in Co- Key policy and institutional changes that resul- lombia. Recognizing that the challenges of te- ted from the recommendations of this Misión rritorial development cover a broad spectrum included the liquidation of INCODER (Instituto of issues and sectors, the scope of this note is Colombiano de Desarrollo Rural) and the sub- limited to key challenges along four cross-cu- sequent creation of the National Land Agency tting sectoral lines: (i) incomplete information (ANT), the Rural Development Agency (ADR), systems for decision making; (ii) poor coordina- and the National Agency for Renovation of the tion among the institutions responsible for terri- Territory (ART) to support rural development. torial planning; (iii) fragmented programs and Efforts are under way to develop instruments incentives for territorial development; and (iv) 7  The Consejo Nacional de Política Económica y Social (CONPES) is the GoC’s advisor council for social and econo- mic development. The CONPES issues documents to define the GoC’s national policies and to validate development projects to be financed internationally. 149 Colombia Policy Notes limited connectivity infrastructure. Considering tricts the effectiveness of monitoring and eva- the work ahead, the next administration’s ac- luating investments, as there is no up-to-date tions should be guided by the following princi- information to measure progress. ples: less planning and more implementation, less regulation and more economic incentives, An example of the lack of complete, updated stronger coordination among the already exis- information is the current state of the cadaster, ting plans and tools before creating new ones, with coverage being especially incomplete and use of technological advances to solve and inconsistent in rural areas. Today there is existing problems. no cadastral record for 28 percent of the sur- face of the Colombian territory, and where Main Challenges information is available, it is usually outdated.8 Information is not fully systematized, common Territorial development decision-making technical standards for cadastral surveying is not supported by robust information are non-existent, and cartography lacks the systems required scale for planning and prioritization of investments in 59 percent of the Colombian te- Information used by policy makers for plan- rritory.9 In addition, since cadastral data have ning, implementing, and evaluating territorial traditionally been used solely for tax collection development activities is often unreliable, in- purposes10, important information that could complete and outdated, and sometimes di- be useful for enhancing tenure security and im- fficult to access. Information deficiencies are proving land use planning is limited (e.g., ow- common, and the institutional setup to mana- nership, land use). The lack of reliable cadaster ge information is frequently limited. Each agen- information has prevented a more equitable cy usually has its own methodology for data distribution of land and resources, perpetua- gathering and collects information based on ting inequality and poverty, and has slowed its own standards. Some information is self-re- productivity growth in urban and rural areas.11 ported, which results in low-quality data, and Further, lack of complete information on land there are significant inconsistencies among the ownership, characteristics, and uses, has also li- various sources. This information gap has three mited the ability of municipalities to raise funds major consequences for achieving a more ba- through property taxation, which in turn affects lanced territorial development. First, it under- their financial health. mines land-use planning, policy making and implementation of infrastructure investment. The GoC approved a comprehensive and am- Second, it limits government’s ability to mana- bitious property cadaster policy. The general ge resources such as public land and allocate objective is to design and implement a mul- them to the most appropriate uses, in particu- ti-purpose cadaster system that is complete, lar for the much-needed initiatives to promote up-to-date, reliable, consistent with the pro- the productive use of rural land. Thirdly, it res- perty registry, and integrated with other infor- 8  The municipalities without any cadastral are mostly located in the Departments of Chocó, Amazonas, Vaupés, Guainía y Nariño. These regions include 81 percent of the indigenous territories (Resguardos Indígenas), collective property territories, Afro-Descendants, and many of the protected areas of the Country. 9  CONPES 3859 (2016). 10  This explains why around 27 percent of the territory has never been surveyed as many of these plots had little or no expected tax collection. 11  See Policy Note #8 on Peace Consolidation for a detailed analysis of the land administration challenges. 150 Note 9 Territorial Development mation systems.12 Approval of the new cadas- reform accounting and budget systems and ter policy marks an important step towards a to develop an integrated national public in- more equitable territorial development (and vestment platform. The latter aims to enhance the GoC should continue these efforts). Howe- transparency and efficiency in the use of the ver, carrying out a national cadaster is a very investment funds by consolidating, in a com- ambitious task, especially in Colombia, where mon system, mechanisms currently used for there is lack of recent precedent and whe- managing project investments. Efforts to build re institutional reforms will have to be carried a territorial database (Terridata) are well ad- out. As such, the GoC has chosen a step-wise vanced and should be continued. approach, has launched seven pilot programs in different regions, and is developing a rollout The lack of comprehensive information systems plan with financing from both the World Bank covering specific sectors limits the efficacy of and the Inter-American Development Bank. territorial development plans and exposes lo- cal governments to many threats. For example, The set of instruments and skills needed to in the water sector, the lack of a comprehen- collect, manage, and make effective use of sive water resources management system hin- planning information is not met by the skill le- ders the attainment of an adequate level of vel and general capacity of many municipali- water security; this includes: efficient allocation ties. This mismatch poses a barrier for effective of water resources and reliable and affordable assignment of resources for territorial develo- water services. It also includes appropriately pment. Subnational governments (SNGs) are recognizing and mitigating water related risks. required to provide the central government In terms of incorporating DRM information into with a complex set of reports on fiscal and bu- POTs, advances have been made with support dget information, including information about from the World Bank, with 56 municipalities ha- public investment, to receive central gover- ving included DRM in their POT formulation. nment funds, which are channeled mainly Also, the GoC moved from five to 51 POMCAs14 through the SGR (Sistema General de Rega- including DRM considerations. Efforts need to lías). However, low-capacity SNGs are often be continued along these lines given that Co- overwhelmed by the amount of paperwork lombia has been historically affected by both they must handle, and the systems used to low-frequency/high-impact events (such as manage these funds are not mutually compa- earthquakes, volcanic eruption, and an occa- tible as the available data are often fragmen- sional Atlantic hurricane) and high-frequency ted, outdated, inconsistent, and non-transpa- but lower impact events (such as floods and rent.13 Moreover, accountability mechanisms landslides). As highlighted in the 2012 Analysis are weak as the central government lacks of Disaster Risk Management in Colombia,15 ris- reliable information on the progress of invest- ks are on the rise more because of improper ments. To that end, the GoC is leading seve- territorial, sectoral, and private management ral critical initiatives to improve the quality of of resources than because of external factors fiscal data and statistics at the local level, in- such as climate change. cluding most notably the ongoing initiatives to 12  Colombia Multipurpose Cadaster Project (P162594). 13  See also Policy Note #7 on Subnational Governments. 14  POMCAs are watershed management plans prepared according to a nationally approved guideline (2013). 15  World Bank (2012). 151 Colombia Policy Notes Institutions responsible for territorial Newly created institutions for territorial develo- planning are not coordinated pment and peace process consolidation need support to fulfil their mandates effectively. The Despite many agencies having a key role in ANT has the mandate to implement the GOC’s territorial planning, overlapping functions often overarching land policy entitled “Ordena- lead to an uncoordinated vision for territorial miento Social de la Propiedad’.16 Fulfilling this development. The DNP has played a key role in mandate is particularly difficult for a recently guiding policy direction and organizing actions created institution with a weak presence at the for territorial development, in part due to the territorial level (only 5 Territorial Offices with less lack of leadership of other institutions. However, than 10 staff each) and in the initial stages of other entities such as the Ministry of Housing (Mi- setting up internal processes and procedures. nisterio de Vivienda, Cuidad y Territorio), have ANT received between 2016 and 2017 a bac- legal mandates for territorial development but klog of approximately 180,000 unresolved land limited role in policy development and imple- regularization and formalization claims, and mentation. As a result, important policies like additionally, it is also expected to address is- the PGOT take long time to define and appro- sues of land tenure informality that encompass ve. Another example of poor coordination is 60 percent of Colombia’s rural land. ANT is fa- experienced with land administration. Physical cing this task without updated cadastral infor- characteristics of land parcels in the cadaster mation and with the absence of harmonization maps and information systems are under the between the cadaster and registry data. On Geographic Institute Agustin Codazzi (IGAC), the other hand, the ADR’s main goal is to struc- while information on tenure, ownership and ture, co-finance and implement rural integra- transactions in the property registry are under ted projects, prioritized according to their im- the Superintendent of Notaries and Registries pact, and to pursue finance and co-ownership (SNR). Both systems are considered imprecise with local public and private stakeholders. This and not fully linked, which limits the efficiency is also a challenging task due to the lag faced and reliability of property transactions. These by many rural areas. Creating these speciali- institutional shortcomings lead to several pro- zed agencies with clearly defined mandates blems for the management of the land resour- represents progress, but they will be success- ce, such as: (i) potential conflict of interest for ful only if they can coordinate effectively with IGAC to act as policy body and implementa- other institutions and government entities to tion agency; (ii) lack of a consolidated land-re- turn their mandates into actions. lated database that incorporates information from multiple government agencies, resulting Institutions in charge of water resource ma- in fragmentation, increased costs, and diseco- nagement need to strengthen coordination to nomies of scale; and (iii) lack of clarity over the address inefficiencies in the sector and articu- role of SNGs in terms of updating and financing late a common vision for future resource use. of cadastral information. Water is a crucial resource for the economic, social and environmental development of the country. With close to 50,000 cubic meters of surface runoff per person per year, Colom- 16  The implementation of this policy entails the gradual formalization of rural private property, regularization, titling and administration of public land (baldíos), identification and registration of land property of the State, and the admi- nistration of agrarian processes (recuperation of improperly acquired public lands, etc.). 152 Note 9 Territorial Development bia is technically one of the most water-rich instrument, have also faced some issues given countries in the world.17 However, pollution, that there is a disconnect between rural and poor spatial planning, inadequate infrastruc- urban areas and many SNGs in rural areas do ture, and extreme variability in annual rainfall not have the technical capacity to successfu- regularly cause water-related disasters and lly develop these instruments following a strate- mismatches between demand and availabi- gic approach. For the first generation of POTs, lity, limiting the country’s development capa- the challenges are well known: only 3 percent city.18 There is lack of vertical and horizontal of the “first generation” POTs included a territo- coordination issues to manage and conserve rial approach that combined urban and rural the water resource and mitigate water-related areas into land use and investment plans19, and risks. Unclear responsibilities for water resour- POTs for urban areas included detailed spatial ce management and the limited capacity plans as well as tools for managing and finan- among different institutions prevents the effec- cing redevelopment, but comparable levels of tive mainstreaming of POMCAs in the POTs. Fur- detail were often missing for rural areas.20 The ther, a Decree has been issued by the Ministry GoC has approved a new territorial planning of Environment and Sustainable Development policy using the POTs modernos program. The to establish the National Water Council. This program is supporting 115 SNGs during an initial Council should support integration among the phase and is developing a territorial land use various players in the sector, but until now it has methodology with the participation of several not been operational as there is no agreement national and international think tanks. Despite on how and at which level should the Council this progress, important challenges remain, in- operate. cluding: (i) limited funds for additional munici- palities; (ii) difficulties guaranteeing municipal Institutional coordination challenges and low implementation and monitoring of the POTs in technical capacity at the local level limit effec- the first 115 municipalities; (iii) difficulties coordi- tive implementation of planning tools such as nating efforts among DNP, Ministry of Housing, POTs modernos and local development plans regional autonomous corporations (CARs), (PDTs). Despite the existence of a wide varie- and subnational governments; and (iv) uncer- ty of planning tools, the complex institutional tain prospects for self-sustainability, as local set-up and the poor capacity of many SNGs governments have been slow to assume ow- frequently limit the ability of these tools to act nership so as to gradually decrease DNP’s role as enablers for a more integrated territorial de- in the process. velopment. For example, PDTs are designed at the local level at the beginning of each local Coordination challenges between SNGs and electoral mandate and are supposed to be the central government contribute to ineffi- articulated with the National Development ciencies in planning and investment. Depart- Plan. But in practice they are often conside- ments are supposed to play a multifaceted red a formality and remain disconnected from role in regional development and public invest- other instruments, such as the POTs. The POTs, ment; they are expected to be key players for which are a powerful territorial management vertical co-ordination between municipalities 17  IDEAM (2014). 18  See also Policy Note #12 on Green Growth. 19  Territorial Development Policy Loan (DPL) (P158520). 20  Ibid. 153 Colombia Policy Notes and the central government, and to perform Programs and investments for territorial an institutional and technical role to support development remain fragmented municipalities in their investment policy. Howe- ver, departments, especially those with more The structure of the system of transfers might be limited capacity, face difficulties to integrate perpetuating inequalities in the territory. Local and orient sector plans and to guide invest- governments in Colombia have been playing ments across municipalities. This is partly due to an increasing role in public investment and de- their inability to generate own resources. The livery of services following the decentralization Contratos Plan21 have been developed with reforms. Central government transfers, through the goal of fostering cooperation between the the Sistema General de Participaciones (SGP) three levels of government (national, depart- are the principal source of revenues for SNGs mental and municipal) to better co-ordinate and mainly target current expenditure (pro- investment in a cross-sectoral way. The focus viding basic services such as education, wa- has been on revitalizing lagging regions and ter sanitation). Allocation of these funds does on improving road connectivity or service deli- not consider the fiscal capacity of regions to very. However, coordination has been challen- ensure effective distribution, nor does it con- ging, and reaching agreement among multi- sider the specificities of certain territories (ur- ple territorial entities is time-consuming. As a ban-rural). This is problematic because deep result, very few Contratos Plan haven been sig- fiscal disparities23 exist across SNGs in spending ned and none have been fully implemented. needs and management capacities, creating Challenges regarding the Contratos Plan iden- further gaps in the quantity and quality of pu- tified by a DNP assessment carried out in 2014 blic goods and services these can provide.24 include: better targeting for spending, redu- cing the fragmentation of projects, and focu- The royalties system is key for financing regional sing on projects with a more regional impact. investment, but the disconnect between funds There are also deficiencies in the projects’ de- and regional plans, and lack of local capaci- sign, as projects tend to lack sound technical ty, often results in fragmentation of investments. analysis.22 Further, financing the Contratos Plan The central government has used royalties from is still under discussion; a Regional Fund is being extractive industries to promote equitable re- created to address funding issues, but several gional development, yet the effectiveness of administrative and legal steps remain, and it is this strategy has been limited because of low lo- not clear what resources would finance such cal technical capacity of SNGs for conceptua- fund. lizing and implementing projects. Many SNGs, especially in remote communities, are not able to take full advantage of the funds they recei- ve, because they lack the capacity to manage projects and coordinate with other communi- ties to ensure proper execution. Projects funded 21  A Contrato Plan is a formal and signed memorandum of understanding between the different government levels of a department or region that includes an agreed medium-term program of investments for territorial development to be co-financed by the GoC and local governments involved, as well as other actors like the private sector. 22  OECD (2016). 23  Martinez-Vazquez and Searle (2007). Horizontal inequalities refer to the gaps that arise in the differences between expenditure needs and fiscal capacity in the jurisdictions. 24  See also Policy Note #7 on Subnational Governments. 154 Note 9 Territorial Development by royalties are usually small, and they tend Financiera de Desarrollo Territorial (FINDETER) to be geographically isolated: as of October has led important efforts to support the develo- 2015, only 5 percent of projects approved for pment of quality infrastructure at regional level, royalty-funding had a regional dimension.25 The yet challenges remain. FINDETER has facilita- small size and wide dispersion of these projects ted decentralization by providing loans to lo- stems from the fact that local governments do cal governments to finance infrastructure and not prioritize large infrastructure projects, which by providing technical assistance. FINDETER tend to have higher social returns. As a result, has developed capacity to act as a speciali- the SGR is not achieving its objectives; even zed financial intermediary, but it still faces the though revenues from royalty payments increa- following constraints when seeking to finance sed by 42 percent between 2009 and 2012 (1.4 territorial development activities: (i) FINDETER percent of GDP in 2012), this has not brought works mostly with urban municipalities that about a reduction in rates of poverty or inequa- have solid financial standing, but tends to lea- lity in lagging regions (Figure 9.1).26 ve behind rural municipalities that do not, per- petuating problems of unequal development; The weak revenue collection capacity of many (ii) FINDETER lends mostly to municipalities and SNGs poses a threat to the sustainability of local not so often to regional entities, constraining investments. Almost 3 out of 4 municipalities (72 the incentives for small municipalities to work percent) currently receive more than one-half together; (iii) FINDETER’s main sources of fun- of their resources through transfers and one out ding are bilateral and multilateral banks, which of 10 municipalities (10 percent) receives more frequently require lengthy and complex disbur- than 75 percent of total resources through the sement procedures; and (iv) FINDETER’s menu Sistema General de Participaciones (SGP).27 of financial products remains narrow for the The heavy reliance on fiscal transfers means vast necessities of the different entities. that many municipalities have low capacity for revenue-raising; on average municipalities Weaknesses in connectivity exist within collect only 34.6 percent of their estimated re- cities, within regions, and between cities venue potential.28 Poor revenue collection can and regions be attributed to the lack of regional fiscal and land information, the absence of institutional Intra-city connectivity is weak in some areas, coordination within government to execute limiting urban mobility. For territorial develo- funds, and weak public procurement policies. pment to be balanced, places must be con- In this context, both the World Bank and the nected, so that people can reach jobs easily OECD have consistently highlighted the impor- and firms can have access to markets. This is tance of establishing incentives and providing true also within a single city. Good accessibility support to enhance tax collection at SNG le- in cities is regarded as a catalyst for higher pro- vel, as well as improving the performance of ductivity, greater access to economic oppor- municipal property tax collection by updating tunities, and social inclusion. As such, Colom- cadastral and land values.29 bia has taken important steps over the past 25  DNP (2016). 26  Bonet and Galvis (2016). 27  Terridata (2016). 28  Ibid. 29  World Bank (2014). 155 Colombia Policy Notes two decades to improve urban accessibility Colombia´s logistics performance. Despite and gradually replace traditional public tran- the great effort made in the last years to im- sit systems with more modern, safe and clean prove the main road network through the PPP ones that offer a higher level of service throu- 4G program, with the construction of four-lane gh the implementation of the National Urban highways increasing from 2,628 km in 2006 to Transport Program NUTP. The implementation 10,155 km in 2016, the intercity connectivity is of the NUTP has been successful in improving some regions is still unsatisfactory. Colombia’s accessibility in cities like Bogotá (Transmilenio infrastructure gap by transport mode has the BRT System). But the implementation of integra- largest deficiency in road infrastructure, where ted transport systems (SITP) has been difficult in Colombia ranks 120 out of 138 in 2016 and 2017 Bogotá and other, medium-sized cities. Issues World Economic Forum (WEF) infrastructure in- include: (i) faulty conceptual designs and de- dex (Figure 9.2). mand estimates (especially for the increase of private vehicles (cars and motorcycles) that The limited road infrastructure, partly due to might have overestimated infrastructure and the country’s mountainous terrain, has isola- operational investments, and thus impacted ted many rural areas and affected agricultural financial equilibrium of private sector partici- productivity. Low road density is most preva- pation (concessions arrangements); (ii) opera- lent around hard-to-access rural areas, which tional designs and service plans that are not have been among the most affected by the offering clear improvements for users (longer armed conflict. Towns with a high incidence travel times, increased transfers, decreased of armed conflict have an average of three comfort), and as a result are fostering informa- times fewer tertiary roads than other towns.30 lity and illegal transport as an alternative for Low accessibility levels limit peoples’ access users; (iii) dire financial situation, due to poor to economic opportunities and public services structuring of bus operator concession con- like education, housing, and welfare, yet it also tracts and overloading of tariffs with capex affects agricultural productivity. For example, costs, that further impact and restrict service Casanare, the nation’s largest rice producing plans; (iv) weak institutional capacity at the area, has potential to produce biofuels from local level, and difficultly attracting technical corn and palm oil. However, it takes 18 hours to expertise to manage these systems; and (v) reach Bogotá and 50 hours to access a main unclear incentives that always favor additional port.31 As such, lack of connectivity reduces infrastructure over operation and good opera- opportunities to attract private investment in tion and maintenance. sectors such as agribusiness, and in priority re- gions such as Orinoquia. Many studies have Colombia’s limited road network has hampe- documented how remoteness and lack of red connectivity across major urban areas. connectivity to markets undermines profitabi- Colombia has embarked on a set of compre- lity and discourages agricultural production. hensive reforms expected to mobilize more Recent work done in the remote Altillanura private sector resources and skills for public region shows that competitiveness in interna- transport projects with the objective of increa- tional markets for many cereals and oilseeds sing the national road network and improving is undermined by high transport and logistics 30  OECD (2016). 31  World Bank (2009). 156 Note 9 Territorial Development Figure 9.2 Road infrastructure in Colombia a. Transport infrastructure quality b. Quality of roads OECD 5.33 Ecuador 5.1 (24) Chile 4.66 (44) OECD 5.026 Uruguay 4.52 (47) Chile 5 (30) Mexico 4.26 (57) Mexico 4.3 (58) Ecuador 3.99 (71) Uruguay 3.2 (98) Brazil 3.98 (72) Argentina 3.1 (103) Argentina 3.66 (85) Peru 3 (110) Colombia 3.67 (84) Brazil 3 (111) Peru 3.57 (89) Venezuela 2.8 (119) Venezuela 2.57 (121) Colombia 2.8 (120) 0 1 2 3 4 5 6 0 1 2 3 4 5 6 Source: World Economic Forum 2016-2017. costs that inflate the prices of key inputs like and equity. In 2016, the CONPES 3857 establi- fertilizers. shed policy guidelines for the management of tertiary roads based on five elements: (i) pre- Poor financing and limited local capacity have paring and updating tertiary network invento- slowed progress in road development. In terms ries to standardize and systematize supply and of road financing, the road network, particu- demand information; (ii) introducing a practi- larly those assets under public sector manage- cal methodology for municipalities to prioriti- ment, has been subject to inflexible and vola- ze road sections based on spatial, social, and tile budget allocations, which has impeded a economic criteria; (iii) developing technical, long-term maintenance strategy. The situation economic and environmentally sustainable is particularly acute at the SNG level, due to solutions for the construction of tertiary roads the lack of technical, institutional and financial that allows updates to current regulations; (iv) capabilities. Moreover, the Infrastructure Law, creating co-financing criteria that include ele- enacted at the end of 2013, is meant to tackle ments such as the development environment, some of the most pressing transport infrastruc- the length of the road network, and certain su- ture bottlenecks that have historically led to pport bonds that encourage the optimization cost-overruns and delays in transport projects. of investments; and (v) implementing good It calls for the creation of two important agen- practices for creating efficient procurement cies in the transport sector: The Transport Regu- processes by national and territorial entities latory Commission and the Transport Planning that are also competitive and transparent. Unit, however both entities have not been yet These recommendations have not yet been institutionalized. implemented. Several plans and programs linked to the peace agreements have been Recommendations for the management of ter- launched to improve tertiary roads in muni- tiary roads have not been implemented. The cipalities affected by the armed conflict. But last administrations highlighted the importan- these efforts only target 11.6 percent of all ru- ce of creating a management policy of the ral roads under municipalities’ control (100,748 tertiary roads as one of the main strategies to km), and they have not adhered to CONPES support rural development, peace building 3857 guidelines. 157 Colombia Policy Notes Policy Options It is essential to evaluate how the private sec- tor can be mobilized and which key functions Develop and operationalize a system should be maintained by the public sector to support robust decision-making in (monitoring, dispute resolution, quality control territorial development and standards). Continue the land administration reform from Continue and strengthen Terridata’s efforts to the previous administration and move forward collect and standardize local and regional with the national property cadaster policy. data for policy monitoring and evaluation. Te- The multi-purpose cadaster policy32 is part of rridata is a DNP initiative that seeks to be the the ongoing land administration reform and main repository of data at the municipal, de- defines the specific objectives for the adop- partmental and regional levels. This instrument tion of the multi-purpose cadaster that will: (i) aims to improve information arrangements and adequately characterize the physical condi- move towards better tracking results by collec- tions of the territory under a systematized and ting standardized and comparable indicators. standard methodology; (ii) guarantee the full In order to ensure that this system is sustaina- alignment between physical and legal pro- ble and that municipalities and citizens can perty information; (iii) document and record use and feed into the system, development of market-related land values to support property new mechanisms will be needed such as te- taxation and enable functional land markets; chnical capacity at the local level. Long-term and (iv) incorporate provisions to ensure tech- sustainability of this initiative could use coordi- nical, financial and institutional sustainability in nating mechanisms to involve the private sec- the long term. While the policy is already deve- tor, universities, and research centers. This ro- loped, the next administration’s efforts should bust information system on local and regional focus on approval and implementation.33 Due trends can be used to monitor and evaluate to the complexity of this endeavor, it will requi- programs, guide future investment decisions re strong institutional coordination and political and increase accountability of resources, in- support. This moment represents an opportu- cluding funds channeled through SGR. Further, nity to review the complex institutional arran- continuing current efforts to build analytical gements for land administration and consider models that allow examination and evaluation reforms to streamline the institutions. Public of policies at the regional level (e.g. the regio- awareness campaigns can help citizens un- nal computational general equilibrium model derstand that property registration is important -CGE at regional scale being developed by and needs to be kept current. Additionally, the the Direccion de Estudios Economicos of DNP) GoC should continue outsourcing cadaster will be key to better assess and inform territorial surveys and other systematic work to the pri- development policies. vate sector. Systematic formalization and regis- tration across the country will require a massive For the water sector, integrate information sys- mobilization of people and resources, which tems and improve capacity to collect and or- cannot be done by the public sector alone. ganize data on regional and local trends. Good 32  CONPES Document 3859 (2016). 33  DPF Territorial Development Policy Loan (P158520). 158 Note 9 Territorial Development Figure 9.3 Map of Colombia by type of territories (quadrants) of agricultural activity Metrppolitan and urban High-High Low-High Low-Low High-Low Source: RIMISP (2018). Note: In the legend the first word represents labor productivity and the second one density of labor. information systems like SIRH34 and SIASAR35 al- to encounter illegal use of water and uncon- ready exist, yet these need to be integrated to trolled contamination of the resources. It also improve decision-making. The institutions res- allows for a better understanding of the status ponsible for these information systems (IDEAM and gaps, to set priorities and to developing of the Ministry of Environment and Sustainable investment policies for a more equitable terri- Development and The Ministry of Housing, City torial development. and Territory) must strengthen their capacity to collect and analyze data, and produce in- To identify opportunities for closing territorial formation that guides decision-making. Better gaps and improving sectoral competitiveness, information would also increase the capacity review the agricultural sector based on territo- 34  Sistema de Información de Recursos Hídricos – IDEAM. 35  Sistema de Información de Agua y Saneamiento Rural – Ministry of Housing, Cities and Territory under the fra- mework of the National Water and Sanitation investment System (Sistema de Inversiones en Agua Potable y Sanea- miento Básico - SINAS) 159 Colombia Policy Notes rial analysis. The agricultural sector in Colom- rational model at the national and territorial bia has been deeply affected by lack of pro- levels, considering ethnic territories; (ii) deve- ductivity. Yet, recent studies like the ongoing loping standardized procedures for systema- methodology developed by RIMISP36 can help tic land tenure formalization “Ordenamiento assess the sector through a territorial lens. This Social de la Propiedad”, devising community methodology evaluates the interrelation of two participation strategies and campaigns; (iii) variables: capacity of production based on la- ensuring land tenure formalization services bor productivity and density of labor to reach incorporate environmental considerations such production. The interrelation of the two to avoid deforestation or any other natural variables offers key information on the agricul- ecosystem transformation (in line with the cu- tural activity of a territory and helps develop rrent Colombian legal framework Decreto Ley a typology of territories according to charac- 902/2017); (iv) strengthening the ICT infrastruc- teristics of agricultural activity (see Figure 9.3). ture to support land tenure formalization servi- This type of information can then be used to ces in compliance with policies and standards design policies that can contribute to closing of quality and interoperability with cadaster territorial gaps and improving the performan- and registry data; and (v) digitalization of pa- ce of the agricultural sector. per records of historical agrarian and land tit- ling processes. Strengthen coordination among institutions in charge of territorial For the water sector, the operationalization of development and streamline territorial the National Water Council (Decree 585, April planning instruments 4, 2017, Ministry of Environment and Sustaina- ble Development) is key. This is an efficient The institutional setup that guides the territo- and effective way to improve horizontal and rial development agenda needs to be clear- vertical coordination in the water sector and ly defined and articulated. The GoC should develop a shared vision on the value of wa- give an institution the directive to guide and ter for society, the environment and the eco- coordinate entities and plans for territorial de- nomy. The council should also be supported velopment, which will ensure the successful by a strong inter-ministerial secretariat to pre- definition and implementation of the Territorial pare the agenda and to make available the and Land Use Planning General Policy (PGOT). information needed to support discussions on Further, the roles of key institutions for territorial water management. For the council to be re- planning need to be clearly articulated and levant it needs the participation and support acknowledged by all relevant entities to avoid of key ministries. For example, in Mexico, a fe- duplication of function and ensure more inte- deral level agency – the National Water Com- grated investment programs and projects. mission – was created with a strong mandate to lead and coordinated water resource ma- To strengthen ANT’s capacity at national and nagement. Any use of national water resource subnational level to provide land tenure ser- (both abstraction and discharge) requires a vices throughout the country in an effective permit from CONAGUA.37 manner. This includes: (i) designing ANT’s ope- 36  RIMISP (2018). 37  CONAGUA, OECD and IMTA (2010). 160 Note 9 Territorial Development To strengthen the POTs modernos, provide eco- facilitate monitoring and capacity building. nomic incentives and continue with technical Contratos Plan also need to be better articu- capacity to improve performance of SNGs. As lated with PDTs. Further, establishing monito- part of the current efforts with the POTs Moder- ring mechanisms to evaluate and learn from nos, DNP should seek ways of gradually de- regional cooperation experiences as they are creasing its role by building local capacity and implemented will be essential for the long-term providing incentives for local governments to success of these efforts. assume ownership of territorial development activities. Further, stronger alignment between Develop a portfolio of programs, PDTs and POTs could significantly help impro- incentives, and investments adapted to ve the investment prioritization and allocation the differential needs of territories and of resources. Incentives for better integration based on practical considerations of plans and coordination among entities are used in several countries. For example, France Implementing the Territorial and Land Use Plan- and Italy have put in place specific financial ning General Policy (PGOT) must be a priority incentives, such as higher central government for the next administration, emphasizing the transfers, to promote cooperation.38 concept of a portfolio of places where public investment will be driven by practical consi- Use of Contratos Plan as a tool for departments derations. This means differentiated policies to have a stronger role in promoting coopera- along broad distinctions of territories accor- tion for investment projects with a regional fo- ding to function. The final classification is not cus. The Contratos Plan can be used as a tool set in stone and it could draw from the classi- to reach agreement for medium-term invest- fication put forward by the Misión del Sistema ments at regional level, to promote coopera- de Ciudades, the Misión para la Transforma- tion, and find effective funding mechanisms. ción del Campo, and current work done under This is a key instrument to develop powerful the POTs Modernos Program. The key issue is to positive incentives for the evolution of subna- consider differentiated instruments to tackle di- tional level entities’ performance, such as to fferent challenges. For example: promote departmental and municipal coope- ration and strengthen the capacities to deve- In rural areas, efforts should focus on identif- lop long-term development strategies. Incenti- ying competitive/comparative advantages in ves could be set for contract enforcement. For the various classifications of rural territories so example, allocating part of the funding based that the ADR can design tailored programs. Co- on good performance (performance reserve, lombia needs clear mechanisms for assessing on the model of Italy or the European Union); and prioritizing agricultural and agribusiness and part of the funding could be dedicated investments, and these need to be applied to projects with a regional impact.39 To do so, systematically. The apuestas agro-productivas the timing of these contracts, which for the mo- y de competitividad regional,40 need to be ment varies greatly, should be standardized to clearly identified, and any prioritization should 38  OECD (2016). 39  OECD (2016). 40  The apuestas agro-productivas y de competitividad regional refer to the internal proposals based on the definition of their productive potential; these entail a series of activities fundamental for the development of the territory. Based on the above, their main needs and shortcomings are identified in order to achieve success in international markets and thus establish actions for their solution. Among the main actions are infrastructure, business management, science 161 Colombia Policy Notes consider: agricultural potential and levels of proved economic linkages could encourage productive efficiency across regions (micro-re- specialization and increased trade with diver- gions), and prioritization of investments based sified urban agglomerations and external mar- on cost/benefit analysis, impacts on poverty kets. Better inter-municipal coordination can reduction, etc. “Crop feasibility” maps by ru- be achieved by government incentives and ral planning units (URPAs) represent an impor- this improved coordination can help achieve tant first step toward incorporating productive economies of scale and manage spatial exter- potential criteria to guide planning processes. nalities (e.g. landfills, regional water treatment It is essential to do more work to understand plants, interconnecting roads). Such aggrega- productive efficiencies and links between tion could also spark Public-Private Partnerships agriculture and agribusiness investments with (PPP) interest for service expansion and profes- growth and poverty outcomes. This will mean sional infrastructure management.42 focusing not only on primary production, but considering also the opportunities for accele- In large metropolitan areas and urban agglo- rating growth and generating jobs all along merations, institutions to foster inter-jurisdic- the value chain, including through advances tional coordination are needed, along with in transport and logistics, agro-processing, and supporting programs of competencias diferen- distribution.41 ciadas, so that better equipped municipalities and large cities can take on more responsibi- In areas around small cities, connectivity is lity. Efficiency and productivity here is strongly critical to improve the potential for trade with linked to ability to coordinate land use and midsized and large cities and for reducing strategic and structural investment planning economic isolation. Policies need to focus on across boundaries. Logistics platforms need to closing the gaps in living standards by prioriti- be developed for more-efficient movement zing investments to provide basic, reliable and of goods and regional investments. Policies to affordable services, showing presence of the strengthen institutions for metropolitan gover- state through social programs, and developing nance are key to supporting better provision of infrastructure and communications to facilitate services. As new responsibilities are decentra- trade out. The government also needs to provi- lized to cities, the role of the national gover- de technical assistance to local governments nment will be to provide the right incentives and a more-explicit incentive framework to to ensure inter-jurisdictional coordination and improve the efficiency of transfers and to as- help build and strengthen local governments’ semble “building blocks” for increased local capacities to serve. revenue efforts. Performance-based grants should be used In areas around medium-sized cities, the fo- as tool to complement the current process of cus must be on improving investment in infras- asymmetric decentralization. This involves a se- tructure to support the rise of local economies, ries of incentives to help build basic technical such as manufacturing and agribusiness. Im- strengths at the municipal level and improve and technology and institutionality. Among its main potentialities have been the production of fruits and vegetables, forest plantations, oil palm crops, cocoa, rubber, meat and dairy, aquaculture and fishing among others. 41  See also Policy Note #12 on Green Growth for detail on the conditions to scale up adoption of sustainable prac- tices in agricultural production processes. 42  See also Policy Note #11 on Financial Sector. 162 Note 9 Territorial Development the use of resources. This system will help train As more urban municipalities build their ca- staff on revenue generation, financial mana- pacities for local revenue generation, use LVC gement, investment planning, and implemen- and PPPs for infrastructure financing. Despite tation. It could also provide the right incentives being available for decades, instruments such to create and update information required to: as LVC and PPPs are still underutilized in Colom- strengthen planning systems; coordinate mul- bia. Understanding the key constraints to their tiple planning instruments; coordinate across regular use is important to charting a way that sectors and jurisdictions; and improve quality can help address their deficiencies and unlock of life. A system of differentiated incentives can their potential. An assessment of lessons lear- respond to the varying needs and capacities ned from urban renovation agencies can also of municipalities with different challenges, in- shed light on: (i) how PPPs can be better used cluding urban/rural differences. Differentiated for urban regeneration; (ii) what issues need incentives can help build local technical ex- to be addressed; and (iii) what an operational pertise and systems that respond to the needs model for the future would look like.43 of a wide range of municipalities. Invest in connectivity infrastructure FINDETER needs to fortify its effort to help achie- ve more balanced territorial development by For greater intra-city mobility and connectivi- lending to a wider variety of SNGs. It is currently ty, the GoC should play a more active role in playing the role of a broker among commer- supporting the development of urban transport cial banks to mobilize funding for municipali- through the National Urban Transport Program ties, and it is doing it well. However, if the GoC (NUTP). This includes fostering greater flexibi- is consistent with its policies of reaching a more lity for the implementation of urban transport equitable land use development, FINDETER infrastructure, supporting greater efficiency should have a window dedicated to munici- in the allocation of resources and a definition palities that are on more precarious financial of incentives for the cities to achieve better footing, that could be supported with techni- quality of service. Further, international expe- cal assistance and financial backing to upgra- rience suggests that an important role of the de infrastructure and services. FINDETER should GoC in urban transport is to foster a metropoli- also develop a set of products to lend and tan approach to urban mobility that is able to provide more grants to support the portfolio address the limitations of urban jurisdictional is- of places. This includes providing more lending sues. Brazil’s recent 2012 National Mobility Law to departamentos and associations of muni- and India’s Urban Transport Policy provide pos- cipalities and backed up by Contratos Plan. sible examples of succinct policy frameworks The GoC could also consider incorporating of this kind.  the Regional Fund to FINDETER as part of the effort to promote regional investments. Further, Improve investment planning, project structu- moving from an input-based financing model ring and project management capacities at to a results-based model can help simplify its the SNG level to ensure that projects generate operation. impact at the regional level. There is a need to articulate the long-term planning of the natio- 43  See also Policy Note #10 on Private Financing of Public Infrastructure, which reviews the lessons learned from PPPs in Colombia. 163 Colombia Policy Notes nal road network, with the long-term planning ject to inflexible fiscal constraints, the govern- of the regional and local networks. The Minis- ment could consider structuring a program to try of Transport has taken important strides in introduce performance based contracts for helping departments with their planning and rehabilitation and maintenance of the natio- project structuring capacities with the deploy- nal road network under public domain. This ment of the Plan Vial Departamental program. strategy could also be assessed for the secon- Similarly, the government could leverage this dary (and even tertiary) network. program to support municipalities in the de- finition of competencies and instruments to Implement the recommendations of CONPES manage the tertiary road network (collection 385744 for the management of tertiary roads. of statistics, compilation of road inventory, gui- Following the Peace Agreement, the gover- delines to manage the network, identification nment initiated the implementation of an in- of funding sources, etc.), and in promoting vestment in the areas most affected by the ar- investments that make sense from a regional med conflict. From this exercise, which covers perspective. The Transport Planning Unit should around 12 percent of the tertiary road network also become the coordinating body for multi- and where innovative sources of funding have modal transport and the integral planning of been identified, it is recommended to follow the sector at the subnational level to articula- up on the goals and challenges in order to te the long-term planning of the road network identify lessons learned and make a national at all levels. The goal is to prioritize structure tertiary roads program more sustainable. and implement projects at the subnational le- vel that have regional or national impact, as opposed to fragmented and atomized public investments. Define a resource framework for the stable fi- nancing of the road sector under public mana- gement, and continue with private sector par- ticipation through toll road concessions in high traffic corridors. Hence, developing a sound and stable resource framework that identifies the sources of funding for the transport sector, including excise taxes, user charges, municipal finance, makes sense for sustainability reasons, and from the perspective of internalizing trans- port sector externalities. Furthermore, to lessen the maintenance backlog, and build long- term maintenance strategies that are not sub- 44  Recommendations include: (i) preparing and updating tertiary network inventories to standardize and syste- matize supply and demand information; (ii) introducing a practical methodology for municipalities to prioritize road sections based on spatial, social, and economic criteria; (iii) developing technical, economic and environmenta- lly sustainable solutions for the construction of tertiary roads that allows updates to current regulations; (iv) creating co-financing criteria that include elements such as the development environment, the length of the road network, and certain support bonds that encourage the optimization of investments; and (v) implementing good practices for creating efficient procurement processes by national and territorial entities that are also competitive and transparent. 164 Note 9 Territorial Development Annex 9.1 Matrix of Policy Options Development Policy Options Challenge Short Term Medium Term 1. Develop and • Continue the land administration • Review the policies in the agricultural operationalize reform from the previous adminis- sector based on territorial analysis to a system to tration and move forward with the identify opportunities for closing territorial support robust national property cadaster policy. gaps and improving sectoral competiti- decision-ma- • Continue and strengthen Terrida- veness. king in territorial ta’s efforts to collect and standar- development dize local and regional data for policy monitoring and evaluation. • For the water sector, integrate information systems and improve capacity to collect and organize data on regional and local trends. 2. Strengthen coor- • Clearly define the institutional setup • Strengthen ANT’s capacity at national dination among that guides the territorial develop- and subnational level to provide land institutions in ment agenda. tenure services throughout the country in charge of territo- • For the water sector, operationalize an effective manner. rial development the National Water Council. • Provide economic incentives to streng- and streamline then the POT modernos, and continue territorial plan- with technical capacity to improve ning instruments performance of SNGs. • Use of Contratos Plan as a tool for departments to have a stronger role in promoting cooperation for investment projects with a regional focus. 3. Develop a • Implementing the Territorial and • Use performance-based grants as a tool portfolio of Land Use Planning General Policy to complement the current process of programs, (PGOT) must be a priority for the asymmetric decentralization incentives, and next administration, emphasizing • As more urban municipalities build their investments the concept of a portfolio of places capacities for local revenue generation, adapted to where public investment will be use LVC and PPPs for infrastructure finan- the differential driven by practical considerations cing needs of territo- • Strengthen FINDETER’ s efforts to achieve ries and based more balanced territorial development on practical by lending to a wider variety of SNGs. considerations 165 Colombia Policy Notes Annex 9.1 Matrix of Policy Options Development Policy Options Challenge Short Term Medium Term 4. Invest in connec- • Give national government a more acti- tivity infrastructu- ve role in supporting the development re of urban transport through the National Urban Transport Program (NUTP) • Define a resource framework for the stable financing of the road sector under public management, and continue with private sector participation through toll road concessions in high traffic corridors • Improve investment planning and pro- ject management capacities at the SNG level to ensure that projects generate impacts at the regional level • Implement the recommendations of CONPES for the management of tertiary roads 166 Note 9 Territorial Development REFERENCES Bonet and Galvis. (2016). Sistemas de transferencias OECD (2016). Making the Most of Public Investment subnacionales: lecciones para una reforma en in Colombia. Paris: OECD Publishing. Colombia. Bogota: Banco de la República. PNUD (2015). Objetivos de Desarrollo del Milenio: In- CONAGUA (Comisión Nacional del Agua), OECD forme 2015. Nuevas Ediciones S.A. (Organisation for Economic Co-Operation and RIMISP (Centro Latinoamericano para el Desarrollo Development) e IMTA (Instituto Mexicano de Rural). (2018). Nota de lineamientos estratégicos Tecnología del Agua). 2010. Financing Water Re- para la agricultura en Colombia. Bogotá. sources Management in Mexico. México. http:// World Bank (2009). World Development Report 2009: www.conagua.gob.mx/CONAGUA07/Conteni- Reshaping Economic Geography. Washington do/Documentos/OECD.pdf DC. DNP (2016). Desempeño fiscal de los departamen- World Bank (2012). Analysis of Disaster Risk Manage- tos y municipios 2016. Colombia: DNP. ment in Colombia: A Contribution to the Creation IDEAM (2014). Estudio Nacional del Agua. of Public Policies. Colombia: World Bank, GFDRR. Martinez-Vazquez, J. and B. Searle. (2007). Fiscal World Bank (2014). Policy Notes. equalization – challenges in the design of inter- World Bank (2014). Towards Sustainable Pea- governmental transfers. Springer US. ce, Poverty Eradication, and Shared Prospe- Ministerio de Ambiente, Vivienda y Desarrollo Terri- rity: Colombia Policy Notes. Washington DC. torial (2010). Política Nacional para la Gestión http://documents.worldbank.org/curated/ Integral del Recurso Hídrico. en/112491468028508507/pdf/ACS109000REVIS- OECD (2014). OECD Territorial Reviews: Colombia 0tes0text0120220140qr.pdf 2014, OECD Publishing, Paris, http://dx.doi.or- g/10.1787/9789264224551-en. 167 Colombia Policy Notes 168 PRIVATE FINANCING OF NOTE 10 PUBLIC INFRASTRUCTURE Colombia has been very successful in structuring and launching one of the largest toll road pro- grams in EMEs, accounting for around 7 percent of GDP. Challenges ahead are twofold. The first is replicating similar programs in other infrastructure sectors that are critical for economic growth, particularly after the Peace Agreements. The second challenge is to continue the process of mobilizing private sector investment at the lowest possible cost from domestic and international sources. Available liquidity from domestic banks is limited, so mobilizing other sources of financing, such as domestic capital from long-term institutional investors, or foreign capital from internatio- nal banks and institutional investors, will be essential. Context and Reform Progress and quality of service; and is priced compe- titively. This strategy needs to define sectors Infrastructure plays a critical role as an engine and projects which would be more effectively of sustainable development. It fosters econo- financed by the private sector; it also needs to mic growth, enhances competitiveness and identify policies in specific economic sectors job creation, and facilitates the transition to and in the financial sector to help drive this higher income levels. Colombia’s ambition to strategy. The 4G toll road program currently continue growing under a more sustainable under implementation could provide valua- and socially-inclusive model, particularly after ble lessons that are relevant for other sectors in the Peace Agreements, requires an articula- this context. The infrastructure program should ted effort to reduce the infrastructure gap by continue with the fiscal prudence standards 2037, currently estimated at US$339 billion; in- that have been followed so far, in terms of pro- vestment needs for this are 3-4 percent of GDP per accounting and provisioning of contingent per year.1 liabilities. Colombia needs to develop a strategy to en- The Public Private Partnership sure that financing the infrastructure gap: is framework: Key challenges and lessons fiscally sustainable; ensures efficient delivery learned from the 4G Program 1  Estimate from the G20 Investment Hub including energy, transport, water and telecoms investments necessary to sustain projected growth rates. 169 Colombia Policy Notes Lessons learned from the 4G process and cu- framework that is more bankable and repre- rrent challenges in the program’s implementa- sentative of international best practices vis-à- tion provide important guidelines for the next vis the first drafts that were issued to the market generation of infrastructure projects in Co- for review and consultation. The next challen- lombia. The 4G program was the most ambi- ge for ANI should be to redouble its efforts in tious infrastructure program to be executed in contract administration and regulation, lea- Latin America in the past few decades, and ving early-stage work, structuring and advisory will eventually alter the social and economic to FDN as set out below. landscape of the country. Below are some key lessons from the program that help delineate The role of Financiera Nacional de Desarrollo the challenges faced by Colombia in infras- (FDN): To complement ANI’s role above, FDN tructure finance with important insights for the has matured into the primary structuring agent next phase of the 4G Program and for new for infrastructure projects at a national scale sectors and projects under consideration. in Colombia. It is also the structuring agent for projects in sub-national jurisdictions as well as Establishing Leadership Institutions in emerging PPP sectors such as mass transit, hospitals, educational facilities, etc. As a case A critical challenge is to consolidate inde- in point, FDN is leading the structuring of nine pendent, decision-making entities who have projects with total projects costs of over US$8 clear roles in project structuring and contract billion, including the first line of the Bogota Me- administration. With most 4G projects already tro for an estimated US$4.6 billion in investment. awarded it is important to ensure that there is FDN should continue to strengthen its role as a leading government agency in charge of the key structuring agent for national scale monitoring contract administration and en- infrastructure, complementing their resources forcement. The roles of Agencia Nacional de with more staff, expertise and technical assis- Infraestructura (ANI) and Financiera de Desa- tance funds from third parties. rrollo Nacional (FDN) in the 4G Program and in other infrastructure projects point to a division FDN should also continue to strengthen its por- of labor between the two entities that would tfolio of innovative financial products that can need to be reinforced. increase bankability and allow more projects to reach financial closing, including in the The role of Agencia Nacional de Infraestructu- capital markets. FDN was present in virtually ra (ANI): The Government of Colombia (GoC) all financial closings either as a senior lender, created the ANI as a decentralized and a fi- subordinated lender and/or partial risk gua- nancially and technically independent sta- rantor in the 4G program. The success of the te agency responsible for implementing the financial closings in the 4G is in large part a national infrastructure program. ANI built a result of the flexibility and innovation of FDN’s strong management team, which was drawn products team. This is particularly true for the from the private sector and given the neces- two benchmark capital markets issuances for sary empowerment and political capital. ANI the Pacifico 3 and Costera transactions, where also painstakingly vetted the program with the the sponsors and their advisors partnered with local and international stakeholder commu- FDN to create the necessary bankability profile nity, including dozens of public hearings and to attract offshore investors through 144a/Reg question-and-answer sessions. The result is a S issuances. Building upon this success, FDN 170 Note 10 Private Financing of Public Infrastructure should strengthen its role as upstream structu- important to attract the interest of domestic ring agent as well as downstream financial so- and international sponsors and financiers. lutions provider. Sectors with higher chances of success of PPPs, Leadership in Other Sectors: As the GoC looks are those where a pipeline of projects can be to expand private sector operations in other developed by adopting similar contracts and sectors such as energy and water, the process financial structures. This brings economies of will be distinct from the 4G, but some lessons scale to the public sector and to private sector will be valid nonetheless. As the administrator sponsors and financiers; it is also expected to of the 4G, ANI has a role to play with regards to reduce their transaction costs. Moreover, pro- lessons learned and best practices in contract grams that include a series of projects with simi- administration and management. The energy lar transaction structures, and that are well pro- and renewables and water sectors are decen- moted, are much better positioned to attract tralized and supported by established munici- the attention of international sponsors. Enga- pal and regional entities that will take the lead ging in one of these programs is more attrac- in implementing investment programs, so ANI’s tive for companies who do not have a phy- role will be minimal. sical presence in the local market and need to open new offices and allocate substantial FDN on the other hand has the structuring and resources to a new country. It would also make financial expertise to support initiatives in diver- an attractive investment proposition for long- se sectors and should provide valuable structu- term investors like pension funds and insurance ring advice and innovative structural products, companies. Long-term investors, in Colombia some of this work is already underway. FDN will and internationally, benefit from certainty on need more resources and staff to manage this the pipeline of potential investments, and from expanding mandate, but the structuring and fi- a certain degree of standardization of assets. nancial capacities of FDN (developed through the 4G) should prove invaluable as Colombia In Colombia the sectors with the strongest po- seeks to expand its private investment in infras- tential for mobilizing private sector financing tructure across sectors, across geographies are renewable energy, social infrastructure and at the national and sub-national levels. and transport. The GoC has recognized the importance of environmental sustainability Planning for “sector programs” of and has embraced a Green Growth Strategy bankable projects for promoting sustainable economic develo- pment and competitiveness. Natural disasters A key driver in bankability and efficiency of and climate change are expected to impose infrastructure finance is being able to develop significant economic and social costs in the a critical mass of similar projects. Developing coming years; it is therefore important to re- a pipeline of bankable and fiscally sustainable duce vulnerabilities to the impacts of climate projects with fair risk allocation among stake- change, as these are increasingly affecting holders is a key element for attracting long- the poor. Given Colombia’s target for green- term institutional investors and foreign capital. house gas emissions (GHG) reductions, the de- The scale of the 4G program in terms of overall ployment of clean energy projects (renewa- volume and the number of projects was very ble energy and energy efficiency) will play a 171 Colombia Policy Notes central role in achieving this target.2 However, countries that contemplate this option. Howe- there are several measures that need to be ver, there are still several aspects of the project considered to attract private investment and preparation process that could be improved. scale up the clean energy market. One key measure to attract private investment to the With some exceptions, speed has often taken sector is having proper Power Purchase Agree- precedence over quality in project prepara- ment (PPA) regulations in line with best interna- tion with several unintended negative conse- tional practices. Concerning healthcare ser- quences. Some projects have been rushed vices, most of the people (including the most through early development stages to meet vulnerable sector) rely on the network of public politically-determined deadlines. This has re- hospitals, which are concentrated in the nor- sulted in tendered projects that are either th of the city, with an important deficit in the poorly structured or contain unresolved issues, south and west. Moreover, most of these hos- such as land expropriations or an inaccurate pitals do not comply with earthquake regula- risk assessment. This weakens the vetting pro- tion standards. The GoC is leading an initiative cess on project fundamentals and could lead to improve Bogota Public Health System with to unintended consequences including: early a pipeline of 5 new public hospitals, for which cancellations, disputes, renegotiations and new ways of financing will be need and whe- even terminated projects. All these factors can re capital markets can play an important role. question the credibility of strategic PPP pro- The education sector also has the potential to grams or increase the cost to the government. reap large benefits over time, and the ability to absorb the large up-front costs associated Quality of project preparation requires strong with structuring an ambitious program such as in-house capacity in PPP units and in line mi- the 4G. In the context of the National Educa- nistries; it also requires experience from public tion Infrastructure Plan (Plan Nacional de In- and private infrastructure markets. This needs fraestructura Educativa), there is a pipeline of to be complemented by investing in well-qua- 1,500 school projects, 14 percent of which will lified advisors to produce solid commercial, te- be structured as PPPs that will need additional chnical, legal and environmental, and social funding sources from the private sector. inputs. It is also imperative that government advisory teams have reasonable implementa- Ensuring projects are well-prepared tion timelines so that the technical inputs can before tender be appropriately evaluated, designed, assi- milated, discussed (including with the private Colombia has made a significant improve- sector) and completed. ment in several elements of its PPP framework since the approval of its PPP law in 2012. It has Many regional governments have laid the obtained a high score in the “Procuring Infras- groundwork for concession and PPP programs. tructure PPPs 2018” report published by the Legal and regulatory frameworks have been World Bank.3 It ranks 5th out of 135 countries designed to channel more private invest- in the preparation of PPPs indicator and 1st in ment into the transport sector. This groundwork the unsolicited proposals indicator between means that governments are faced with the 2  See also Policy Note #12 Green Growth where these climate change targets are covered in detail. 3  World Bank (2018). 172 Note 10 Private Financing of Public Infrastructure longer-term task of producing pipelines of and equity participants. This structure reached bankable projects year-after-year to address an interesting balance between providing the mediocre performance of the infrastructu- guaranteed revenue streams to the financiers, re sector and the daunting gap in investment. while incentivizing concessionaires to operate Progress on these fronts hinges on institutio- and maintain quality through a system of ca- nal capacity and the ability of PPP authori- pped performance deductions assessed by ties to perform better at: prioritizing, planning, independent third-party auditors, over the life appraising, vetting and, ultimately, structuring of the concession. projects that are attractive to private sector investors. Early termination is one of the most critical bankability elements that affect the overall The concession agreement appetite for the PPP program, especially from capital market participants. If the goal is to Structural gaps in the concession agreement optimize appetite from private sector financial of the 4G Program explain the high demand markets, early termination payments should for FDN risk enhancement. FDN has been very cover the senior debt (including interest rate effective in bridging these gaps with its diffe- hedge close-out costs) in all circumstances, rent liquidity facilities. However, if these struc- and the payment should be made within 12- tural gaps in the concession could be reme- 18 months. If the government’s intention is to died, FDN could be even more effective in its cover the debt, it should be clear to financiers. catalytic role in providing liquidity. It could also If the aim is to attract strategic and institutio- provide credit enhancement products that nal equity investors, it is important to recognize could bring even more participation from local all investments that are undertaken, including and international capital markets where the make-whole provisions and contractor de-mo- cost of funding is least expensive. bilization when appropriate. A bankable concession or a PPP program that Rationalize the bidding process is suitable for private sector investment needs to take the specific risk appetites of different Pressure to move quickly and to “democratize” financiers into consideration. Globally, gover- the bidding process by inviting an audience nments are de-risking the revenue streams in that is too broad, can have unintended conse- road and public transportation PPPs by using quences. Selected bidders may be unqualified availability payments, minimum revenue gua- or may be unable to comply with the technical rantees and other bankable solutions. Gover- and economic criteria needed for large-sca- nments seeking to introduce unmitigated tra- le infrastructure projects. In the case of the 4G ffic and revenue risk will find fewer debt and program, the “lottery” system was used to li- equity participants, including capital markets mit the bid list to ten (10) prequalified groups, investors that have no appetite for these ris- which meant that many participants were not ks. As a reference for other sectors, an impor- able to submit bids after long and expensive tant high-level bankability features of the 4G due diligence work. This is sub-optimal from an was that the concession divided the revenue individual project perspective, but also detri- stream into two currencies: US dollars and Co- mental to securing sustained long-term interest lombian pesos. ANI-backed flows encouraged in national infrastructure programs, especially the participation of onshore and offshore debt from international bidders. 173 Colombia Policy Notes Optimizing the number of projects and their se- infrastructure operators. In this context, com- quencing is key for governments that are often petition is the most effective way to optimize under severe pressure to produce large num- value for money for the government and to bers of projects in a short space of time. In the ensure constituents that the most efficient eco- case of the 4G, ANI overwhelmed the market nomic proposal has been selected for a PPP with too many projects at once. This can crea- project. Competition is required at all levels of te chaos or, at best, reduce the efficiency of project financiers: sponsors, lenders and capi- the project finance market, affecting financial tal markets participants. Some key lessons can advisors, commercial and investment banks be drawn from the recent 4G program on how and bond and insurance product providers. to be more effective in creating competitive markets. Timing, project quality and project coordina- tion have a strong impact on the programs, The benefits of standardization and international bidders tend to shy away from early stage bids according to a “wait and ANI has been successful in standardizing con- see” strategy. This reduces competition and cession contracts for 4G projects, even if this can often leave local bidders with more pro- has contributed to slower implementation. As jects than they can sustainably finance and noted above, the openness of the consultation execute. Financing can also be very expensive process for the Concession Agreement mana- unless there is an ample amount of competiti- ged to create a rigorous debate among de- ve local and international financing available velopers, investors, legal advisors, investment to finance the PPP on a currency-matched ba- banks, commercial banks and multilaterals. sis. The first wave of 4G was dominated by Co- ANI engaged early with this “pool of experti- lombian firms, which in some cases were the se”, and these same players have become pi- only bidders to present final offers; and as there lot participants in the 4G itself. The contract were too many projects seeking financing from format could have been simpler, but the result too few financiers, the cost of financing ended of this process was a standard concession do- up being very high. The banks did not get com- cument that was far more bankable than ear- petitive until capital markets financing by the lier versions. Mario Huertas Group reached financial closing and introduced stronger competition. Having a single concession document that can be used for all projects has cut down on Optimize competition due diligence expense and has incentivized bidders to present offers to multiple projects. Colombia is a clear example of the benefits of International participants operate on the pre- competition for lowering the cost of financing mise of “relative opportunity” and they tend to PPP programs. The main challenges to private focus their efforts where there is the greatest financing of infrastructure in Colombia inclu- likelihood of potential projects and the most de: the dominance of a few large economic efficient use of staffing and due diligence re- and financial conglomerates; the lack of a do- sources to present multiple business oppor- mestic track-record in project finance for PPPs; tunities. Although international bidders’ and the lack of experienced and well capitalized commercial banks’ appetite did not materiali- infrastructure operators; the existence of small ze until later in the 4G process (second wave), construction companies that take the role of several developers presented multiple offers 174 Note 10 Private Financing of Public Infrastructure and international financiers funded several 4G Create competition: attracting new undertakings. players to the infrastructure finance market Main Challenges Fostering complementarity as well as competi- Challenges for a reliable PPP financial tion between banks and long-term investors is ecosystem critical as the banking sector faces more obs- tacles to providing long term finance. In recent The scale of the 4G Toll Road Program has ab- decades, the project finance market in Co- sorbed a large share of domestic banks’ liqui- lombia has been dominated by domestic and dity. Mobilizing other sources of financing, such (to a minor extent) international commercial as domestic capital from long-term institutional banks and DFIs that have provided long-da- investors, or foreign capital from international ted, limited-recourse financing. However, len- banks and institutional investors, is essential. ding markets are changing. As commercial Each source of financing presents its own cha- lending terms and conditions have become llenges which the government needs to ad- more conservative (including drastically re- dress. duced tenors) as a result of expensive capital requirements under Basel III and Basel IV, it is Balanced risk allocation to crowd-in necessary to consider domestic and internatio- capital markets investors nal capital markets as complementary sources for project debt financing. Commercial banks A challenge for the GoC is to adopt a more de- do not want (or cannot afford) to hold long- mand-driven approach to bankability that res- term project exposure on their balance sheets, ponds to the risk appetite of debt capital mar- however yield-seeking institutional investors kets. The 4G was an important first step toward are willing to support the sector if risk allocation introducing capital market investors to the Co- can be structured to meet creditworthiness cri- lombian infrastructure sector. In recent years, teria and rating agency thresholds. governments have structured concessions ac- cording to their own risk preferences – often The concentrated structure of financial conglo- with limited feedback from the private sector. merates is a major drawback to developing This has left sponsors and lenders to deal with competitive infrastructure finance markets, risk allocation that has proven to be challen- even if institutional investors were to become ging and expensive. Institutional investors are more active. Additionally, pressures are star- highly risk-averse; and long-term, low-risk, sta- ting to build in the availability of long-term ble returns are a pre-requisite for commitment. local currency financing for infrastructure in When governments allocate high levels of risk Colombia, given the size of the 4G Toll Road to the private sector under concessions, inclu- Program. This can result in a higher cost of fi- ding foreign exchange, demand, construction nancing for new projects. In this context, be- and early termination risks, interest from institu- ing able to attract foreign, long-term investors tional sources rarely materializes. Therefore, an is critical; however, most international investors expanded concept of bankability is required cannot take on local currency risk. An added and a balanced risk allocation needs to be at- difficulty is the fact that most remaining pro- tained. jects, including in the 4G Program, have local currency revenue streams. 175 Colombia Policy Notes The challenge is to create competition for do- tion of private sector governance and mana- mestic long-term institutional investors from gement practices. FDN developed its products both domestic and international markets. The in a very timely manner based on the needs current investor market structure, dominated of the market. Additionally, FDN has had the by a highly concentrated pension fund sector, breadth to manage dozens of potential and restricts competition and liquidity in the securi- actual clients, each asking for tailored finan- ties market. There are also potential conflicts of cing and risk enhancement, helping projects interest that could impact the objectivity of the to reach financial closing. In particular, the ca- asset managers responsible for pension and pital markets issuances led by Goldman Sachs investment money within the large conglo- have been groundbreaking transactions. FDN merates. This situation is even more critical in has also been instrumental in the success of the case of conglomerates that have a strong the two key capital markets instruments used presence in the construction business. Some in Colombia: project bonds and infrastructure pension funds have high-level officials in their debt funds. investment committees who have a manage- ment role in the banks, as well in the construc- Financial sector regulations supporting tion business belonging to the same holding financial innovations company. Besides the obvious conflicts of in- terest, this situation leads to a sub-optimal allo- On the supply side, Colombia had limited pro- cation of resources, as all financiers in a project ducts available in capital markets to provide fi- show the same investment preferences even nancing for infrastructure before the implemen- though they are supposed to have different risk tation of the 4G Program. As the program was profiles. There is space to make improvements implemented, two innovative and successful through changes to be introduced by Super- products were developed: project bonds, and financiera as part of implementing the new infrastructure debt funds for greenfield pro- conglomerates law. jects. Two types on project bonds have been issued: inflation-linked and denominated in lo- Role of FDN to address market failures cal currency; and denominated in US dollars. and support financing innovations All project bonds were registered off-shore un- der the 144 A/RegS issuance regimes, including The GoC created FDN as a development bank those denominated in CoP. Two challenges re- responsible for supporting market based so- main for project bonds: registering and issuing lutions for Colombian infrastructure programs. bonds in the local market, and broadening the As with ANI, the GoC appointed a leadership use of bonds so it becomes a more common with international capital markets experience. instrument in both greenfield and brownfield FDN’s objective was to structure tailored finan- projects. As it relates to infrastructure debt cing and risk mitigation products to support pro- funds, this has been an innovative approach grams such as the 4G. Overall, FDN has been to increasing the exposure of domestic institu- very successful in achieving its objectives. Part tional investors to projects with an important of the success is the result of an unusual sha- construction phase. Three features of infras- reholding structure for a development bank, tructure debt funds should be underscored. which includes non-government shareholders The first one, is that they are ideal vehicles to (two multilaterals: IFC and CAF; and a private complement bank financing in longer maturi- bank: Sumitomo). This has led to the incorpora- ties, as they have the same flexibility as a bank 176 Note 10 Private Financing of Public Infrastructure loan. The second is that investors can outsour- compete for the same instruments as the pri- ce the infrastructure finance expertise to the vate pension funds. funds’ manager (General Partner - GP), which effectively makes them operate as a bank on The governance and investment frameworks behalf of institutional investors. Third is the very for public and private pension funds could be strict governance arrangements developed in substantially improved to promote competi- Colombia for infrastructure debt funds. These tion and innovation. Defined benefit pension ensure that the interests of the fund manager funds could gain from greater rates of return and the investors are aligned. Key governance by increasing the maturity and risk profile of in- features include: a minimum of 10 percent GP vestments so that they are matched with their co-investment in each project invested by the liabilities. This could be done for example by funds; a 20 percent cap in the debt tranche of expanding the types of private capital funds any project; long-term tenors to 20 years; and where they can invest. In the case of FONPET, no-disbursement in the fund until the projects the public pension fund, the Colombian ca- require the financing, among others. pital markets would also benefit from adding a sizable new long-term investor with around On the demand side, investment regulations US$15 billion of assets under management. have been adjusted with positive results but Carry out an assessment of the pension funds challenges remain. The SFC has been flexible governance and management framewor- in creating a specific investment bucket that ks following best practices in similar types of allows pension funds to invest in infrastructure funds (e.g. Canada, USA) would allow greater through debt funds, if the exposure is to the 4G flexibility in investment policies, while aligning program. with best practices on prudent investment stra- tegies that match the funds’ liabilities and re- However, there are several regulatory barriers quired returns. It would also be good to assess that need to be addressed before this can ha- remuneration arrangements for outsourced ppen. The first one is the formula of minimum asset managers of public pension funds, inclu- profitability, which encourages conservative ding performance measures and risk manage- and herd investment behavior. The second is ment frameworks. that all costs of developing innovative invest- ment strategies are borne by the administra- Policy Options tor, which discourages innovation. Third is the disparity between the public regime and that Colombia has made remarkable progress in in- of the private AFPs; this constitutes an obstacle frastructure finance, though challenges remain to the development of Colombian domestic to consolidate its position as an investment des- capital markets on three accounts: (i) they li- tination for long term capital. As described in mit product innovation in the market; (ii) they this note, the effort by leading institutions in the restrict liquidity; and (iii) they are not supportive public sector (ANI, FDN, the Ministry of Finan- of competitive price formation.4 Public pen- ce, the SFC) on multiple fronts has managed to sion funds could become an important player place Colombia in the international scene as a in the market provided their investment rules model to replicate. There is still room for impro- incentivized them to invest long term and to vement to become more sustainable and to 4  See also Policy Note #4 on Pensions. 177 Colombia Policy Notes benefit other sectors beyond the 4G, particu- used. This could provide focus for public and larly in light of recent corruption scandals. Five private sectors alike. policy recommendations are prioritized in this section, drawing on the challenges explained Third, provide ANI with more resources to en- in this note. hance the institutional capacity required to manage and administer projects. The ANI has First, the new government needs to move quic- made a tremendous effort in structuring the 4G kly to support and strengthen the momentum program, which has taken most of its resources. for private infrastructure finance, consolidating Equally important functions include monitoring its technical nature beyond the political cycle. PPP contracts implementation; ensuring the The recent corruption scandals, including Ode- parties that are involved comply with their obli- brecht, and the slow pace of project develop- gations and that there is legal certainty over ment have created some skepticism of the 4G their interpretation. The credibility of the 4G program, despite reaching financial closing for program is at stake if there is not sufficient insti- several important projects. The new govern- tutional capacity from ANI on contract monito- ment needs to reassure investors of the stability ring and enforcement. of the infrastructure finance approach despite the political cycle. An important move, would Fourth, expand the role of FDN as the struc- be to reinforce the technical quality of the pro- turing agent and the local bank capable of ject preparation and implementation and its having a unique catalytic role in infrastructu- long-term and programmatic approach, con- re finance. National development banks are sidering the shortcomings and lessons learned most powerful when they cover inadequacies from the 4G as described in this document. in private sector financing rather than pro- viding sub-market funding and/or covering Second, the GoC should provide clarity about structural gaps in the concession and/or legal when to use PPPs and when to use traditional framework. If granting authorities can achieve procurement and other public sector structu- a bankable risk allocation in the concession, res. Within PPPs there are several very different FDN should increase its focus on providing mar- models depending on how risk is allocated ket-based funding and credit enhancement between the public and the private sector products with a special emphasis on attracting (e.g. availability payment versus tariff-based international capital markets participants whe- models). In recent years, several different re the cost of financing is lowest. types of business models have been used to procure public services without a clear direc- Fifth, support the different domestic and inter- tion, except for the 4G program. This has crea- national channels that would bring competi- ted uncertainty and an unnecessary waste of tion to infrastructure finance with special em- resources. PPPs are a proven model of procu- phasis on institutional investors. Colombia is at ring public infrastructure but they are appro- the forefront of EMEs in channeling institutional priate in all circumstances. PPPs are not sui- investors into infrastructure. Its great advanta- table for some projects as a result of size (too ge is the existence of a sizable private pension small or too large) of the project, or becau- fund industry, but this is also its main weakness se of the nature of the risks. The GoC needs given its concentration and poor enabling to develop systematic criteria and policies environment for developing competition. The to indicate when different models are to be GoC should prioritize policies and regulations 178 Note 10 Private Financing of Public Infrastructure that would allow improved governance and such as the quality of its people, investment a greater number of players in the institutio- philosophy, risk management practices, and nal investor space. This includes a change in performance track record. Second, introdu- governance and investment regulations for cing the ability to assign investment managers FONPET, as mentioned above; a change in a specialized mandate rather than the current governance and investment rules for domestic approach of using multi-asset class manda- AFPs; and an improved enabling environment tes. Last but not least, it is also recommended, for foreign institutional investors. The latter is at least for an initial period, that any publicly very much linked to the recommendations on traded asset classes in which FONPET invests stability of the infrastructure framework and should be managed passively (e.g. using index the institutional capacity recommendations funds or exchange traded funds (ETFs)), rather explained above. As regards FONPET, some than being actively managed, as this will requi- suggested changes to the current investment re less time and attention on the part of the manager selection process would be: first, to board of FONPET than active management, select the investment manager on the basis of allowing the board to focus more on asset allo- multiple criteria rather than simply lowest cost, cation decisions, which account for most of including a broader range of relevant factors the return and risk arising from the portfolio. Annex 10.1 Matrix of Policy Options Development Policy Options Challenge Short Term Medium Term 1. Develop PPP • Develop systematic criteria and policies • Design programmatic sectorial programs for about when to use PPPs and when to use program of bankable projects: sectors traditional procurement and other public coordination between line minis- sector structures tries, MoF, DNP and subnational • Select sectors with strongest potential for entities private sector financing, and continue • Enhance PPP framework for eligi- support for reforms in clean energy sector ble/selected sectors: risk matrix, • Reinforce the technical quality of the contract standardization, expro- project preparation and implementation priations, bidding process • Support ANI with more resources to en- • Expand the role of FDN as the hance institutional capacity to manage structuring agent of infrastructure and administer projects projects 2. Mobilize private • Expand the role of FDN as the local bank • Design financial sector regulations sector financing capable of having a unique catalytic role supporting financial innovations in infrastructure finance from the supply (local offering/ • Review governance of public and private registration regimes) and demand pension funds (under conglomerates law) side (investment regulations) • Review investment framework on public pension funds (e.g. Fonpet): selection of the investment manager based on mul- tiple criteria, introduction of the ability to assign investment managers a specialized mandate, and passive management of publicly traded asset classes 179 Colombia Policy Notes 180 FINANCIAL SECTOR NOTE 11 Colombia’s financial system has withstood the economic slowdown in recent years, but key cha- llenges remain. Efficient and inclusive financial systems are critical to support productive invest- ments and sustain economic growth. In order to increase the breadth and depth of the Co- lombian financial sector and correct inefficiencies in the allocation of capital important policy reforms are necessary. Reforms should focus on strengthening the financial regulatory architec- ture; ensuring adequate levels of financial supervision of conglomerates; and reducing concen- tration. Moreover, despite notable progress in some segments of domestic capital markets, more needs to be done to increase their size and liquidity, and to encourage product development. Access to finance needs to be expanded by developing financial instruments tailored to un- and under-served segments of society, such as micro, small and medium enterprises (MSMEs); women and rural populations; and people on lower incomes. Improved access to finance will also help the sector catch up with the fast-evolving technological developments. Context and Reform Progress factors such as the boom in international tra- de (1986-2007; the commodity super-cycle as Colombia has a well-developed financial sys- of 2004; and increasing access to international tem with a variety of intermediaries but it is capital markets at affordable conditions since dominated by complex financial conglomera- the mid-2000s. Credit institutions (mostly banks) tes. Financial system assets rose from about 60 account for nearly 40 percent of total financial percent of GDP in 2000 to 166 percent of GDP system assets, with assets over 64 percent of in 2016. Several factors contributed to a rapid GDP (Figure 11.1). Over a half of total financial growth of financial sector assets, including mar- system assets is held by non-banks, out of which ket liberalization reforms1; favorable external fiduciaries (trust companies)2 and pension fund administrators (AFPs) control 30 and 16 percent 1  These reforms were introduced in the early 1990s to help integrate Colombia into the global economy and expand private sector development 2  Fiduciary companies act as trustees and managers under fiduciary contracts engaged in a variety of financial, commercial and other activities, including funds management (fiduciary contract for administration and payments), managers of collateral (guarantee fiduciary contracts), construction projects (real-estate fiduciary contracts) and investments. As is customary under a fiduciary scheme, the settlor conveys certain assets to the trustee (the fiduciary company) which manages the assets pursuant to the instructions provided by the settlor. 181 Colombia Policy Notes Figure 11.1 Financial sector structure remains strong with ROE and ROA at 13.8 and (assets to GDP, 2016) 2.2 percent respectively. Alike, overall net-inte- rest reached 59.2 percent and non-net interest Other Financial margins reached 43.9 percent. NPLs increased Institutions 3% from 2.9 percent in 2015 to 4.2 in 2017. Howe- Fiduciaries ver, NPL provisions remained well above 100 50% percent. Liquidity buffers appear adequate, Banks although indicators have deteriorated in re- 64% cent years. Nonetheless, credit institutions had a liquidity coverage ratio (LCR) above the re- Pension Funds Others Administrators gulatory minimum. (infrastructure (AFPs) 26% financing) 4% Special Official Securities Institutions (IOEs) Colombia’s banking sector is characterized by Intermediaries Insurance 2% Corporations) 7% elevated levels of concentration in a few ban- 7% king groups and conglomeration around three Source: Own calculations with data from SFC. dominant economic entities.3 Banking services are expensive; there are monthly charges on entry-level savings accounts and basic ATM respectively (Figure 11.2). The top eight con- operations (even at a bank's own ATM). Eleva- glomerates hold about 80 percent of total fi- ted levels of concentration within the banking nancial sector assets. The top three banks hold sector (where a single financial group owns about 50 percent of the sector's assets, and this four large banks), the conglomeration in most is higher than in Brazil, Chile or Mexico. segments (insurance, brokerage, finance com- panies) and the duopoly of the AFPs (where Financial intermediation in Colombia has in- one financial group controls 50 percent of as- creased in recent years and stands at similar sets and the other 37 percent) ultimately ham- levels to regional peers. Credit to the private pers competition and financial intermediation sector increased to around 47 percent of GDP (Figure 11.3). It also increases financial costs in 2016 (mirroring 49 percent for the LAC region) and creates adverse effects on banking sys- from 33 percent in 2006. Commercial and con- tem efficiency and the overall developmental sumer loans represent more than 90 percent impact of credit. of the total credit portfolio (27 percent and 13 percent of GDP, respectively). Micro and small Central Bank stress tests show that while the fi- and medium enterprises (SME) credit is small. nancial system seems to be resilient, the real economy faces risks from potential financial The financial system appears to be sound, well sector distress. The Financial Stability Report capitalized and is among the most profitable (FSR) assessed Colombia’s impact of a hypo- in the region. As of December 2017, capital thetical severe adverse scenario, involving adequacy (18.6 percent) and tier-1 capital a major reduction in investment, a decline in (12.4 percent) were well above the regula- consumer confidence and foreign demand, tory minimum of 9 percent. Bank profitability and an increase in the risk perception from 3  The three largest financial conglomerates control nearly two-thirds of total banks’ assets, 87 percent of private pension funds (which represent over a quarter of Colombia’s GDP) and over 60 percent of the country’s total financial assets. 182 Note 11 Financial Sector Figure 11.2 Financial sector structure 2016 100 90 80 Percent of GDP 70 60 50 40 30 20 10 0 Argentina Brazil Chile Colombia Mexico Peru Regional Median Private Sector Credit as % of GDP Insurance Assets as % of GDP Pension Funds Assets % of GDP Market Cap % of GDP Outstanding Private Debt Issuance % of GDP Source: World Bank, Finstats Database 2018. Figure 11.3 Boone indicator* in banking Main Challenges sector for Colombia Inadequate oversight architecture 0.00 and challenges for supervision of -0,05 conglomerates -0.10 Colombia’s financial oversight architecture -0.15 has not adapted to recent changes in the fi- nancial sector structure. The Ministry of Finance -0.20 and Public Credit (MHCP) is the consolidated -0.25 financial sector regulator through its Unidad de 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Regulación Financiera (URF). FOGAFIN4 and the Superintendencia Financiera de Colombia Note: *A measure of degree of competition based on profit-efficiency in the banking market. It is calculated as the elasticity of profits to (SFC) are under MHCP’s control. Changes to marginal costs. An increase in the Boone indicator implies a deteriora- tion of the competitive conduct of financial intermediaries. the structure of the Colombian financial sec- tor, such as the increased internationalization of financial conglomerates, have exposed the international investors in a two-year horizon - need to enhance regulatory and supervisory from late 2016 to end 2018. This scenario is mo- standards. tivated by vulnerabilities identified in the FSR for the financial system in the current macro- The SFC has a broad mandate and a very cen- economic context, concluding that the total tralized governance structure, despite various cumulative losses that credit institutions would restructuring efforts undertaken since 2014. The suffer in the adverse scenario amount to 20.4 SFC suffers from a host of methodological, ope- percent of the total capital of the system as of rational and legal issues, it currently has nume- December 2016., rous responsibilities in: prudential supervision, 4  The deposit insurance fund and resolution agency. 183 Colombia Policy Notes consumer protection and market conduct and cross-border expansion (mainly in Central areas, including supervision of participants not America) represent major challenges. Aside covered by similar institutions worldwide. It is a from cyclical factors, Colombian banks’ credit fragmented and complex organization that profile face two structural features when asses- makes supervision difficult and less effective. sing risks: (i) the prevalence of a few large, of- This broad authority and excessive workload ten systemically important, banks. These banks present challenges for the SFC stretching its tend to be associated with related corporate management and resources, and creating parties with complex group structures inclu- potential oversight gaps and bottlenecks. Its ding mixed-activity conglomerates; and (ii) the mandate for prudential supervision may so- wave of foreign acquisitions in Central Ameri- metimes be at odds with the role of promoting ca5, which may further strain Colombian banks’ market development, or with enforcing con- capital levels. Their capital levels already have sumer protection. SFC’s staff lack adequate relatively low ratios compared to those of peer legal protection as they are covered for civil banking systems. Following the global finan- charges to some extent, but not for criminal cial crisis, Colombian financial and economic charges; institutional decision-making proces- groups took advantage of European banks se- ses are excessively complex and centralized; lling their stakes in Central American subsidia- and IT systems are outdated. SFC's structure ries. A strong Colombian peso and easy finan- also presents challenges to the oversight of cing post-crisis also supported its international self-regulatory organizations by splitting the banking expansion strategy. Additional cha- responsibility for oversight between a range of llenges of working in some of these countries independent departments without a centrali- include: elevated levels of dollarization, weak zed coordination and with limited experience. external and fiscal positions, slow GDP growth, and high political and social tensions. At present the responsibilities for recovery and resolution mechanisms are unclear. FOGAFIN’s Critical actions now include implementing the capacity to safeguard the public sector from recently approved Law on Conglomerates; is- bank failures - beyond the limits of its relatively suing complementary regulations; and imple- small deposit insurance fund - needs to impro- menting key Basel III reforms in the banking ve, and it has not adopted the innovations sector. The SFC lacks the supervisory power to applied internationally following the 2008 cri- assess and enforce requisite capital levels for sis. It is therefore not in the position to address conglomerates considering group-wide risks, the too-big-to-fail problem, or the fiscal costs as well as risks from corporate balance sheets of eventual bailouts in the case of systemic cri- and overseas exposures. Its supervisory autho- ses. Furthermore, the resolution mechanisms of rity over conglomerate members is too narrow, non-bank financial intermediaries remain un- and this prevents consolidated financial repor- clear, as they fall outside of FOGAFIN’s regula- ting and risk management practices. It also tory purview. leaves SFC with no legal authority to oversee unregulated bank holding companies: capital The prudential supervision complexities stem- requirements and exposure limits only cover su- ming from the increase in conglomeration pervised entities. 5  Colombian banking conglomerates invested US$12 billion in purchasing the most systemically important banks in Central America, with assets of US$80 billion, representing about 25% of the three groups’ assets in Colombia, major cross-border exposure with complex control and organizational models (in part in Panama). 184 Note 11 Financial Sector The legal and regulatory framework for con- lumes in shares were approximately US$ 14.2 bi- solidated supervision faces challenges. The- llion in 2016 (5 percent of GDP, compared to 11 re is no regulation that incorporates SFC’s and 31 percent of GDP for Mexico and Brazil, consolidated supervision activities and no risk respectively). The listings of a formerly fully sta- management requirements. SFC has limited te-owned company (Ecopetrol) and four large legal powers as they only cover supervised financial groups account for nearly 50 percent entities and their subsidiaries, excluding un- of the total market capitalization. Ecopetrol’s regulated bank holding companies. The sco- privatization provided a boost to the retail mar- pe of consolidated prudential requirements ket, but the buy-and-hold culture of investors is incomplete and uneven, as some requi- and the subsequent upheaval in the oil market rements do not cover domestic subsidiaries at the end of the commodity cycle stunted fur- while others exclude foreign subsidiaries. Mo- ther development. reover, effective management of cross-bor- der flows and liquidity needs is affected by The underdevelopment of the non-govern- the complex ownership and offshore structu- ment debt market causes low levels of liquidi- re of the conglomerates. ty. The growing demand for investable assets from domestic pension funds adds to the pri- Uneven capital markets development cing pressure. Underdevelopment can be exp- lained by elevated levels of bank dominance, Despite progress, development of capital mar- risk aversion among institutional investors, con- kets is uneven. The government securities mar- centration of the investor base dominated by ket is relatively large and liquid, and the private two large pension funds, and regulations resul- sector is underdeveloped. Colombia has the ting in high issuance costs and long time-to-is- third largest local currency government bond suance. Innovations should be considered in- market in LAC after Brazil and Mexico. Gover- cluding the development of alternative assets nment bond markets amount to nearly 30 per- through structuring of SME and microenterprise cent of GDP (compared to 118 and 53 percent securitization as well as assets of infrastructure in Brazil and Mexico, respectively). Most gover- projects and credit cards. These could have nment debt is denominated in local currency; partial guarantees from public or private fi- maturity of outstanding debt is mostly medium nancial entities, to improve the credit rating of and long-term. Issued tenors extend to 15- year such instruments. bonds, although liquidity is scarce at the longer end of the yield curve. In contrast, non-gover- The predominance of financial conglomera- nment debt is small (6 percent of GDP, compa- tes in the financial system also affects capital red to 19 percent in Mexico, and 36 percent in markets development. This happens by con- Brazil). trolling distribution channels and investment committees, and through ownership of other Equity market capitalization increased subs- key players like private pension funds, finance tantially over the last several years, but re- companies, brokerage houses, and insurance mains highly concentrated in a small number companies. This affects investment fund diver- of issuers. As of December 2016, there were 80 sification and reduces the interest to bring new listed companies across a range of sectors with players (including bond and commercial pa- a total market capitalization of approximately per issuers) into the market. US$103 billion (36 percent of GDP). Traded vo- 185 Colombia Policy Notes The pension fund industry suffers from struc- platforms and other trading venues based on tural imbalances, which prevent competition increasingly complex technological systems and development within the domestic capital and trading applications. With these innovati- market. Each class of investors is highly con- ve technologies comes a need to regulate the centrated. Fiduciaries that manage invest- emerging industry to ensure investor protec- ment funds are largest in size and concentra- tion, market and data transparency and ope- tion with assets of nearly 30 percent of GDP as rational security. of December 2016; this is followed by pension fund management companies (AFPs) with 24 Limited access to finance and financial percent of GDP. Demand for pension funds is inclusion an essential factor shaping the supply of ca- pital market instruments, but the sector is very Colombia’s banking penetration has grown, concentrated. Their portfolio is also relatively but actual customer usage remains low. 2017 conservative and subject to minimum return Findex data shows that 45.8 percent of Colom- regulations linked to the industry average. This bia’s population has an account at a formal encourages extreme risk-aversion, herd beha- financial institution, compared to 39 percent in vior and near-perfect collusion between the 2014. According to the 2016 National Financial two dominant funds. This structure has become Inclusion Report, as of June 2016, 77.3 percent a major impediment to future development of of adults in Colombia had at least one financial Colombian capital markets.6 product and 100 percent of municipalities had financial coverage through a banking corres- The Pacific Alliance has potential to develop pondent and/or office. Despite these advan- an integrated regional capital market. Results ces in access and coverage, new challenges for the Mercado Integrado Latinoamericano in terms of financial inclusion remain, particu- (MILA) are still modest. The number and value larly in the use of financial products. Many pay- of transactions made through the MILA, since ments between people are still made in cash, its creation in 2011 are small, particularly for which results in travel, security and storage Colombia.7 Challenges include further harmo- costs. nization of regulations and taxation regimes on portfolio investments, high heterogeneity of The uptake and usage of digital payment pro- investment guidelines and limited buckets to ducts is particularly low and costs are high. invest abroad. According to the 2017 Demand Survey of Ban- ca de las Oportunidades, 95 percent of hou- The rapid development of new financial te- seholds pay for utility bills with cash. Moreover, chnologies (FinTech) to access alternative 85 percent of adults with access to financial funding, including crowdfunding and peer-to- services use cash for their daily transactions.8 peer lending platforms has attracted a growing This led the government to prioritize the use of number of investors to the securities markets. electronic means of payment in the National This opens new ways of distributing products in Development Plan 2015-2018 (NDP). The NDP capital markets. It also has given rise to new also set the goal of reducing the cash/M2 ratio 6  See also Policy Note #10 on Private Financing of Public Infrastructure. 7  Colombia invested $5.5MM in Chilean assets and US$0.4 MM in Peruvian assets as of 2016. 8  Findex 2017 data shows that 14.2 percent paid a utility bill using an account and 3 percent paid using a mobile device. Over 50 percent paid utility bills with cash only. 186 Note 11 Financial Sector up to 8.5 percent for 2018 (compared to 13.3 the formal system, and low understanding of percent in December 2014). Colombia’s large financial services limit the usage of financial informal economy is a key structural constraint services and undermine financial inclusion, to expanding online transaction. Many Colom- particularly in the rural areas. bians have difficulties using financial products in the informal economy because of consu- SMEs continue to face barriers to finance. Ac- mers’ lack of knowledge concerning financial cording to the 2017 World Bank Enterprise Sur- products available, the benefits of using tho- vey, approximately 25 percent of SMEs said se products, and the institutions that provide access to finance is still a major constraint, in- them. The low usage of digital payment pro- cluding high loan-to-value ratios on collatera- ducts and the high priority for the government lized loans at 165 percent of the loan amount. reflects an urgent need to develop innovative An important area of policy focus has been on channels to increase financial coverage in re- business formalization but the rate of informali- mote rural areas, while developing instruments ty among SMEs remains high.9 that cater to lower-end income segments and address issues generated by informality. Disparities in access to finance among specific segments, such as rural populations and wo- Policy advances aimed at improving financial men are significant. Prolonged internal conflict inclusion have been made but challenges re- and the ensuing barriers associated with physi- main. In addition to enacting national financial cal expansion have contributed to this dispari- inclusion and education strategies, other refor- ty among rural populations. The microfinance ms have also enabled branchless banking. Po- sector has targeted programs for women, but licy reforms have eased regulations and taxa- micro credits are a small percentage of the tion of low-balance accounts; created a new overall lending portfolio of formal institutions. regulatory and supervisory environment for 41 percent of the rural population reported ha- microcredit; and encouraged the opening of ving a bank account at a financial institution in bank accounts for many low-income families 2017, but less than 15 percent borrowed from (Familias en Acción). The government has in- a financial institution in the past 12 months (Fi- centivized the presence of banking correspon- gure 11.4). dents in municipalities with no banking presen- ce, and it has also strengthened the financial The legal and regulatory framework for recent- infrastructure by creating a transparent system ly secured transactions seeks to address the to facilitate lending. It has encouraged savings mismatch between the collateral required by via formal financial institutions and lowered financial institutions (real estate) and the assets the cost of money transfers through the use (movables) that SMEs typically must pledge to of non-bank deposit institutions Sociedades lenders. With over 1,675,000 registrations since Especializadas en Depósitos y Pagos Electróni- its launch in 2014, the national registry of mo- cos (SEDPEs). However, the popularity of cash vable assets has been successful in offering payments as a result of the informal sector, the transparency and facilitating the constitution financial transaction tax Gravamen a Movi- of rights over movable assets used as collate- mientos Financieros (GMF 4x1000), high fees in ral. However, SMEs only make up 2 percent of 9  Banco de la Republica (2016). Estimated that only 10 percent of micro-establishments in Colombia have access to financial products, July 2016. 187 Colombia Policy Notes Figure 11.4 Gender and rural disparity in access to finance 60 49 50 42 41 Percent of 15+ 40 34 30 26 24 22 20 16 17 18 13 15 10 10 7 5 0 Has an account Borrowed from Used credit card Used a mobile Made digital at financial financial in the past phone or the internet paymemts in the institution institutions 12 months to access an account past 12 months Male Female Rural Source: Findex 2017. registrations to date, indicating the need to Supervisory Colleges and agreeing on formal deepen the impact of the reform. Low levels of Memoranda of Understanding (MOUs) with SME registrations can be explained by risk aver- regulatory agencies and central banks from sion by financial institutions to lend against mo- Central American countries. Moreover, poten- vables, the continued use of consumer loans tial adoption of a “twin peak” model could for business purposes, as well as an over-relian- be positive in terms of encouraging the de- ce on government provided guarantees for velopment of Colombia’s capital market and lending to SMEs. promote financial innovations. This would also address conflict of interest concerns in terms Policy Options of enforcing prudential supervision and market development. Other countries have dealt with Strengthen the financial regulatory and the inherent difficulties of central banks and supervisory architecture, particularly for regulatory/supervisory agencies by granting conglomerates full autonomy to the bank supervisor/regulator (Peru), defining roles more clearly for monetary Reforms to ensure greater institutional streng- and stability policies (United Kingdom), or esta- th and operational advancement of the SFC blishing (separate financial) consumer protec- could include: i) improving organizational effi- tion agencies (USA). ciency, reducing internal fragmentation and excessive centralization of decision-making Strengthening the independence and legal powers; ii) upgrading SFC’s IT systems and un- protection of the superintendent and other se- dertaking a thorough review of its supervisory nior SFC officials is essential for making risk-ba- and internal risk assessment methodologies; iii) sed supervision viable. The head of the SFC is consider transforming the SFC’s Advisory Com- currently appointed by the government and mittee into a collegial Supervisory Board with is prone to political interference. A fixed-term independent external directors; and iv) fos- appointment staggered between adminis- tering greater coordination of regulatory and trations would help ensure its independence. supervisory activities by enhancing the work of Moreover, the Financial Sector Coordination 188 Note 11 Financial Sector Committee could be transformed into a Finan- eliminating “silos” and introducing qualitative cial Stability Committee10, to foster a more ho- risk assessments, with more emphasis on: cor- listic, systemic and forward-looking approach porate governance, transparency, disclosure to current and developing systemic risks. The of information, liquidity, related parties, large central bank could play a stronger role as the exposures, and counterparty risks. Capital re- secretariat of the revamped committee, and quirements for financial conglomerates should could also play a formal role as Colombia’s also be defined, and the impact of the diffe- macro-prudential authority. rent proposals should be assessed, especially in the context of financial conglomerates with It is recommended that the authorities continue mixed activities. Rules pertaining to limits in ex- strengthening FOGAFIN’s bank recovery and posure to related parties, conflicts of interest, resolution powers in a coordinated effort with and risk concentration should also be clarified URF and the SFC. FOGAFIN’s law needs to be and enforced. revised to develop its bank resolution powers and incorporate Financial Stability Board (FSB) SFC’s capabilities to identify, monitor and res- recommendations and new international pond to cross-border risks need to be streng- practices. New legislation should address the thened. A comprehensive legal and regulatory recovery and resolvability of systemically im- framework is required to bind together the exis- portant institutions and financial conglomera- ting set of legal and regulatory rules relating to tes; it should seek simplification of the existing SFC’s consolidated supervisory activities, inclu- corporate control structures, and address the ding: reporting requirements on consolidated hidden risks in their cross-border investments financial statements; access to information; and the holding structures established in Pana- consolidated exposure limits, consolidated ma. The review also needs to assess the true capital and risk management requirements. risks of financial conglomerates and establish To address inadequate supervisory reach un- whether they have the required capital nee- der the new conglomerates law, monitoring ded to support the risks they face and the risks of intra-group flows between regulated and they pose to the public purse. unregulated entities needs to be enhanced. This process should involve the SFC and the Su- To improve the effectiveness of the conglo- perintendencia de Industria y Comercio, the merates law recently enacted, issuance of se- anti-trust regulator. The EU has extensive ex- condary legislation (decrees) and regulations perience in the supervision of EU cross-border is essential. It is necessary to define ‘groups’, banking groups11 and could serve as guidance financial conglomerates and holding compa- for Colombia. Peru has also made important nies under Art. 6 of the Financial Conglomera- advances on this regard. Improving coordina- tes Law. SFC’s “integrated risk management tion in supervisory efforts is extremely helpful, system” should be formalized, with a view to however the country also needs to develop a 10  The existing Committee with membership of the four key agencies (MHCP as the chairs running the Secretariat, comprised of the central bank, MHCP, SFC and FOGAFIN) was established by Decree 1954 of October 7, 2014 as a coordination forum. 11  EU competent authorities have developed a framework of cooperation that is legally binding for all supervisory authorities in the European Economic Area (EEA) and with the adoption of a legislative package, a Directive and a Regulation to strengthen the regulation of the banking sector. Both legal acts together form the legal framework governing banking activities, the supervisory framework and the prudential rules for credit institutions and investment firms. The Directive also addresses colleges of supervisors. 189 Colombia Policy Notes comprehensive set of tools to identify systemic, Additional policy and regulatory efforts are country, operational (cyber risks), and inte- necessary to strengthen and diversify the long- rest rate risks on the banking book. This could term institutional investor base. Reforms are include monitoring and mapping of foreign necessary on several fronts as the current in- exchange and liquidity exposures of financial vestor market structure is dominated by a hi- conglomerates. ghly-concentrated pension fund sector that limits competition and liquidity in the securities To minimize risks from the presence of Co- market. Potential reforms could: (i) enable Fon- lombian banks in Central America, their ca- do Nacional de Pensiones de las Entidades Te- pital buffers need to be strengthened; a ma- rritoriales (FONPET) to become a more relevant cro-prudential filter might be considered; and player in long-term investments as a defined a regional body for stability could established benefit pension fund12; (ii) review AFPs owners- to take charge of financial stability. Common hip and governance arrangements in the con- regulatory and supervisory standards need to text of implementing the Conglomerates’ Law, be established. Domestic and regional ma- eventually seeking divestitures; (iii) increase the cro-prudential surveillance needs to be more duration of the pension funds’ fixed income efficiently coordinated, this could be achie- portfolio; (iv) deepen the disability and survi- ved by working with confidentiality aspects vorship annuity market13; (v) mature the role of related to information-sharing among gover- the insurance sector as a more dynamic and nment agencies. This improved coordination longer-term investor; (vi) develop investment would also create a forum for addressing: the products in alternative assets via the use of rising concerns over the deteriorating quality of non-traditional securitizations with possible par- loans issued by Colombian banks; higher FX ex- tial guarantees by third-party institutions; and posures; weak prudential standards; and Anti (vii) support the design and implementation of Money Laundering/Combating the Financing foreign exchange (FX) hedging instruments for of Terrorism (AML/CFT) frameworks. infrastructure projects, such as an FX liquidity facility, with a view to expanding its investor Deepen capital markets with a focus on base to foreign investors.14 long-term finance At the same time, government bond markets Structural impediments to the development of need to be more efficient. Despite a relatively local capital markets should be analyzed in well-developed and efficient government depth. Authorities could consider setting up a bond market, liquidity tends to be concentra- “Blue Ribbon” Commission, of domestic and ted in a few points of the yield curve. Actions to international experts, to help develop the Co- improve liquidity along the whole curve need lombian capital market, identifying top-down to be identified. For this, issuance procedures priorities, defining obstacles and offering a lon- of all relevant maturities need to be analyzed, ger-term view, including how to address an- developing a securities lending facility for mar- ti-trust issues. ket makers. 12  In order to promote FONPET, it would be important to attract international managers that participate in the mar- ket together with local fund managers. This would allow the reduction of the concentration and increase efficiency. 13  See also Policy Note #4 on Pension Reform for additional discussion on the annuities market, which will be key to promote the deepening of the capital markets. 14  See also Policy Note #10 on Private Financing of Public Infrastructure. 190 Note 11 Financial Sector Authorities should continue to help develop the rance coverage between cooperatives and Pacific Alliance and MILA initiatives and take banks. Creditworthiness of the rural population advantage of the newly created investment could be assessed by introducing a general space. Promoting MILA is likely to increase do- value-limit exemption for balance and tran- mestic competition and bring new players to saction volume for wholesale e-accounts to compete in the local market (a larger pool of incentivize use of electronic payments.15 Deve- players and financing). Further development loping a land title insurance product and fina- of the Pacific Alliance Regional Mutual Fund lizing the issuance of decrees and regulations Passport will promote long-term mutual funds supporting the movable collateral reform will and cross-regional business models; it will also further expand access to, and use of, financial encourage the Pacific Alliance to grow as a services among the rural population. domestic investment space for pension funds with harmonized investment rules. So far pro- Colombia would benefit from encouraging the gress has been slow and disappointing and growth of a well-regulated and supervised Fin- many issues remain unresolved, including com- Tech sector. Global trends in technological in- plex listing and taxation rules. novation in the financial services sector have shown great potential for advancing financial Expand financial inclusion and access inclusion.16 The most successful cross-country to finance examples include regulatory sandboxes whe- re FinTech companies can operate, evaluate Continued support is needed to help develop their business models and offer their products financial instruments that address the needs of in monitored environments. This will also facili- people in lower income segments. Active pro- tate a smooth transition towards an adequa- motion of SEDPEs could have a significant im- te regulation and supervision, for start-ups and pact on meeting the financial needs of Colom- oversight bodies. Usage metrics, and an ena- bia’s un- and under-served. SEDPEs will need to bling legal and regulatory framework conduci- be able to access switching platforms (current- ve to growth of the FinTech sector need to be ly controlled by banks) and mobile communi- developed. Particularly, regulations for crowd- cation channels, on non-discriminatory terms. funding will be required to create a new viable In addition, they must not be subjected to an source of funding for SMEs in the financial and overly onerous regulatory, supervisory, and re- capital markets. Close collaboration between porting regime. public and private sector participants should be encouraged to help strengthen the overall Further progress is required to expand the pre- business environment and the rapidly evolving sence and reach of financial services in rural ICT infrastructure. areas. Continued improvements in financial education should be at the forefront of this To support access to finance, the impact of agenda. It will be equally important to trans- the secured transaction reform could be dee- form non-regulated institutions into prudentially pened. Special attention should be paid to regulated ones and to equalize deposit insu- designing credit products for the SME market, 15  As a result, SEDPEs would be able to compete with a full range of transactional services, leveling the playing field between SEDPEs and banks. It would increase competition for a wider range of services. Increased competition is likely to have a positive impact for consumers and fuel innovation and ultimately rural financial inclusion. 16  Experiences from UK, China, Singapore, and Mexico could prove useful in this respect. 191 Colombia Policy Notes especially those using movable property as co- to be well researched to find ways to create a llateral. The reform has introduced a relatively second loss guarantee fund. This would crea- young regulatory framework and enforcement te a secure environment for financial institu- system, the effectiveness of which still needs to tions to test this framework, by offering mova- be fully tested in terms of: ability to establish a bles-based loans to SMES. This fund would act comprehensive system for rights and obliga- as a standby guarantee to cover potential risks tions between lenders and borrowers; preser- related to the new enforcement process, and vation of those rights against third parties; and to cover any discrepancy in the value of colla- a timely and effective enforcement process in teral between the time of loan origination and the case of default. Government funds need liquidation. Annex 11.1 Matrix of Policy Options Development Policy Options Challenge Short Term Medium Term 1. Strengthen • Rethink the structure of SFC and • Strengthen FOGAFIN’s bank recovery financial sector strengthen the independence of and resolution powers in a coordinated regulatory and the superintendent effort with URF and the SFC supervisory ar- • Strengthen the legal and regulatory chitecture framework to identify, monitor, and respond to cross-border risks and improve consolidated supervision • Finalize secondary regulation to improve the effectiveness of the conglomerates law, including regulations on the definition of ‘groups’, and holding companies; capital requirements for financial conglomerates; and exposure limits to related parties 2. Deepen Capital • Set up a “Blue Ribbon” Commission, • Develop policy and regulatory changes Markets of domestic and international ex- to support a more diversified institutional perts, to develop a strategy for the investor base for long-term financing deepening of Colombian capital and improve liquidity of government markets, identifying top-down priori- bond market yield curve; and develop ties, defining obstacles and offering alternative asset instruments through a longer-term view securitizations • Promote MILA initiatives to increase domestic competition and bring new players to compete in the local market 3. Expand financial • Encourage the growth of a well-re- • Promote the sustainability of financial inclusion gulated and supervised FinTech sector operations in rural areas, with sector financial education at the forefront of this agenda • Deepen the impact of the secured tran- saction reform and evaluate options to create a second loss guarantee fund 192 Note 11 Financial Sector REFERENCES Banca de las Oportunidades (2016). Reporte Na- clusion and the Fintech Revolution. World Bank: cional de Inclusión Financiera.   https://ban- Washington, DC. https://datacatalog.world- cadelasoportunidades.gov.co/sites/default/ bank.org/dataset/global-financial-inclusion-glo- files/2017-07/RIF%202016-%20final.pdf bal-findex-database Banca de las Oportunidades (2018). “Estudio de DNP (2014). Plan Nacional de Desarrollo “Todos por Demanda de Inclusión Financiera”. https://ban- un Nuevo País”; 2014-2018. https://www.dnp. cadelasoportunidades.gov.co/sites/default/ gov.co/Plan-Nacional-de-Desarrollo/paginas/ files/2018-08/Presentaci%C3%B3n%20Estudio%20 que-es-el-plan-nacional-de-desarrollo.aspx de%20demanda_FINAL%20%28002%29_0.pdf World Bank (2018). Finstats Database. Demirgüç-Kunt, Asli, Leora Klapper, Dorothe Singer, World Bank (2017). Enterprise Surveys Database. Saniya Ansar, and Jake Hess (2018). The Global http://www.enterprisesurveys.org/data/explo- Findex Database 2017: Measuring Financial In- reeconomies/2017/colombia#finance--size 193 Colombia Policy Notes 194 GREEN GROWTH NOTE 12 Green growth is key to Colombia’s efforts to sustain poverty reduction and shared prosperity. The country has abundant natural resources, including unique biodiversity, forests, productive land, solar and wind potential, and fossil energy and minerals. Moreover, it is building a strong interna- tional image in international environmental cooperation and as a green growth champion. But the country is facing important challenges. First, the country needs to reverse the mounting pres- sures on its ecosystems, driven by land use change and pollution, while promoting institutions and policies to boost the productivity of natural assets, like forests and land. Second, it needs to scale up efforts to attract investments in energy efficiency, resilient infrastructure, renewables, and to achieve universal energy access. Third, it needs to cope with the perverse effects of fast growth, particularly in urban areas, and rethink its strategy for managing waste. Policy options can build on a strong track record of reforms. In order to achieve climate smart, sustainable and productive rural landscapes, the country should improve the incorporation of ecological considerations in land planning; put in place the vision and the institutional set up for a comprehensive national forest policy; strengthen institutions and capacities; enable the adoption of sustainable practices in agriculture and bio economy sectors; and address inefficient behaviors by clarifying land tenure, improving fiscal instruments, and enhancing incentives for forest management. In order to promote a new energy model, capable of exploiting the power of renewables, harness the potential for energy efficiency and maximize service delivery, the country needs to establish a clear energy policy and regulations; promote an adapted procure- ment framework for attracting new economic actors; expand the suite of financing options for investors; design and implement a rural electrification strategy. Finally, to mitigate the disecono- mies of agglomeration and fast growth, the country should deepen the work on air quality norms; expand solid waste and city cleaning services regulation and investments; promote a circular economy paradigm and improve regulation of wastewater. 195 Colombia Policy Notes Context and Reform Progress country has become a green growth cham- pion in recent years. Green growth has emer- Colombia’s prospects for sustained long-term ged as a model of growth that seeks to pro- economic growth cannot be separated from its tect the country’s natural capital base, reduce abundant natural capital, yet the country’s na- externalities associated with the costs of envi- tural assets, particularly renewables, are under ronmental degradation, contribute to compe- pressure. Empirical evidence shows that positi- titiveness, and prevent the impacts of natural ve changes in a country’s total wealth, i.e. in- disasters and climate change. Colombia has clusive of natural and human capital, are good taken concrete steps in the direction of this predictors of long term growth.1 Colombia is growth model. It adhered to the OECD Green endowed with a diverse geography, a variety Growth Declaration in 2012 and it has also of landscapes and ecosystems, and considera- committed to the Sustainable Development ble renewable and non-renewable resources. Goals (SDGs). Through the Bonn challenge, the Hosting close to 10 percent of the planet’s bio- country pledged to restore one million hecta- diversity, Colombia ranks second among coun- res of degraded land and has made an ambi- tries with the greatest biodiversity in the world.2 tious commitment to reach zero net deforesta- It ranks seventh in the world in terms of area co- tion in the Amazon by 2020 under the Tropical vered by tropical forests3; natural forests cover Forest Alliance. In addition, it increased the more than half the country's mainland area. It amount of protected areas, notably with the possesses rich mineral and hydrocarbon reser- recent extension of the Serranía de Chiribique- ves, and abundant water resources. In mone- te National Park. The Peace Agreement with tary terms, natural capital has represented on the FARC targets environmental sustainability, average 15 percent of the country’s total weal- stating that post-conflict development should th between 1995 and 2014, close to the regio- guarantee socio-environmental sustainability nal average and well above OECD countries and should not expand the agricultural frontier. (Figure 12.1). This wealth of resources offers uni- Latest in this series of efforts, in February 2018, que opportunities for economic growth based the Government of Colombia (GoC) comple- on nature-based and bio-economy sectors. ted its Green Growth Mission, which had been However, the renewable portion of Colombia’s launched a year earlier, setting the basis for a natural capital has diminished over time. Figure long-term national green growth policy. 12.2 shows that comparator countries have by and large expanded the value of their agricul- Colombia has given a great impetus to the tural land capital. Some countries have expan- climate change agenda at a global, national ded their forest land capital (Chile, Costa Rica); and local level. Following the approval of the others have depleted their forest land capital Paris Agreement in July 2017, it committed to (Argentina, Ecuador). Colombia has reduced reducing greenhouse gas (GHG) emissions by both types of renewable assets. 20 percent by 2030 (and up to 30 percent, con- ditional on receiving international support) in Committed to reconciling growth and the sus- its Nationally Determined Contributions (NDC). tainable management of its natural capital, the The NDC contains sector-specific targets to 2030, accompanied by priority investment lines 1  Hamilton (2005). 2  Convention on biological diversity (n.d.). 3  FAO (2015). 196 Note 12 Green Growth Figure 12.1 Composition of wealth per Figure 12.2 Renewable natural capital evolution: capita (average for the period 1995-2014) forest vs. agricultural land wealth average annual growth: 1995-2014 (selected peers) 100 700 1.5 600 CHL 80 1.0 2014 USD thousands 63.9 61.4 CRI 500 60 72.3 Forest (%) 0.5 Percent 400 40 PER BRA 12.8 12.5 1.7 300 2.6 4.7 0.8 0.0 20 -2 0 2 4 6 8 10 200 COL All regional 22.2 23.5 25.7 MEX -0.5 peers ARG 0 -1.5 -2.0 -0.5 100 VEN ECU -20 0 -1.0 COL LAC OCDE Land: cropland and pasture(%) Produced Natural no-ren Natural ren Human Net foreign assets Total wealth (right axis) Note: Forest includes timber and non-timber forest products. Note: Forest includes timber and non-timber forest products. Source: Authors based on data from Lange et al. (2018). Source: Authors based on data from Lange et al. (2018). to achieve these goals and estimates of the services; and new air quality standards appro- investments required for their achievement. ved in 2017. As low-hanging fruits are taken Moreover, the country now has a national up, the agenda is becoming more and more carbon tax and is putting in place a mecha- ambitious and the country still faces challen- nism for carbon neutrality which will allow firms ges to sustaining implementation efforts, stren- to avoid the payment of the tax by investing gthening institutions, and achieving efficiency. in carbon reduction projects throughout the Colombia can generate sustainable growth country. Other milestones include: the creation based on the comparative advantage of its of the National Climate Change System and, natural capital and the efficient use of resour- in particular, the Inter-Sectoral Commission on ces. It also needs to reverse and minimize de- Climate Change; the formulation of Integrated gradation of the environment, build resilience Climate Change Plans by the Ministries of Agri- to extreme weather events, and reduce was- culture, Mines and Energy, Transport, Housing, te. This policy note focuses on three sets of re- Trade, Environment, Finance and Health; and levant challenges where the Bank has a solid the formulation of 22 Comprehensive Territorial knowledge base. Climate Change Plans. Main Challenges This policy note argues that a continuation of recent efforts and further steps towards green Reversing the mounting pressures growth are both necessary and feasible, and on Colombia’s ecosystems, and will be ever more relevant to the country’s maximizing the productivity of its natural near- and long-term future. Colombia is alre- capital ady ahead of the curve on commitments to green growth and has achieved important Forests and key ecosystems are being lost policy shifts, such as the carbon tax approved rapidly. Despite important efforts to address in 2016; a new law on payment for ecosystem deforestation and although the rate of forest 197 Colombia Policy Notes loss in Colombia was significantly reduced be- frequent and severe with climate change, tween 2000 and 20154, it remains high and has causing floods (and landslides) and droughts, recently increased, with 178,597 hectares of fo- as well as negative socio-economic impacts rest having been lost just in 20165, a 44 percent that affect the poor more severely with loss of increase compared with 2015. Key ecosys- lives and assets and displacements. In 2010-11, tems, such as paramos and wetlands, are also La Niña caused floods and landslides that ge- being severely degraded, and almost half of nerated losses estimated at 2 percent of GDP the 85 ecosystems identified in Colombia are of 2010 and affected over 3 million people.8 In in critical or endangered state.6 The expansion 2017, the landslide in Mocoa caused at least of agriculture and livestock farming is the main 333 deaths and affected over 22,000 people. driver of deforestation; however, an important Deforestation also delays progress on achie- underlying driver is illegal land grabbing fueled ving Colombia’s international climate change by expectations of eventual titling. This is parti- commitments. For example, 43 percent of the cularly the case in forest frontiers and remote country’s GHG emissions reductions are ex- areas where land tenure is uncertain and whe- pected to be achieved via reductions in de- re there is little state control or institutional pre- forestation.9 sence. Current forestry and ecosystem trends contradict the GoC’s own targets, hence the The potential to develop a strong forestry sec- need to strengthen land use policies and their tor remains untapped. Colombia is well suited enforcement. for forest-related activities: half the country is covered by forests; and a further 13.6 million Deforestation and ecosystem degradation im- hectares of land could host forest plantations.10 pose economic costs, undermine the potential However, forestry development is incipient, the for growth, increase vulnerability to extreme mandate to formulate an encompassing vision weather events, and hinder the capacity to for the sector does not have a clear institutio- achieve international commitments. Soil ero- nality, less than 3 percent of land suitable for sion7, the loss of important ecosystem servi- forest plantations is used as such, and Colom- ces such as water provision and hydrological bia is a net importer of timber products. Re- regulation, and the loss of biodiversity – a key cent estimates indicate that if Colombia were asset for nature-based economic sectors such to increase its commercial forest plantations as tourism, pharmaceuticals, cosmetics and by 464,000 hectares11, it could become a net agribusiness –are direct consequences of de- exporter. Gross production value of the fores- forestation and ecosystem degradation. This try sector could be as high as US$ 4 billion and degradation increases vulnerability to extreme could create 35,000 permanent jobs in forest weather events, expected to become more plantations and related industries.12 But the 4  Average annual rate of forest loss fell from 0.52 percent for the period 2000-2005 and 0.47 percent for 2005-2010, to 0.25 percent for the period 2010-2016. IDEAM (2017b). 5  IDEAM (2017a). 6  WWF (2017). 7  90 percent of deforested area presents some degree of soil erosion, and overall 60 percent of soils suited for agri- culture present some degree of erosion. IDEAM (2015). 8  CEPAL-BID (2012). 9  MADS (2017). 10  7.3 million ha have high suitability., 6.3 ha have medium suitability, and 11.3 have low suitability according to UPRA (2014). 11  World Bank (2017). 12  Ibid. 198 Note 12 Green Growth sector faces several barriers, including varying used for low productivity extensive cattle ran- interpretations of norms and permits required, ching14, contributes to soil degradation and is which generate confusion in the private sec- a key reason behind increasing deforestation tor and a long process for permit issuance, re- and greenhouse gas emissions. More efficient sulting in high transaction costs and affecting livestock production could be achieved in par profitability. There is also a lack of silvicultural with reduced emissions, particularly conside- knowledge, especially with regards to native ring that the livestock sector is one of the lar- species, that need to be overcome. These are, gest contributions to emissions in the country. to a considerable extent, the result of a missing Efforts have been made in the generation of institutional anchor that deals with technical, fi- knowledge and development of practices for nancial, legal and administrative aspects of fo- silvopastoral production, which have demons- restry. Furthermore, given that 53.4 percent of trated positive impacts on productivity, biodi- forests lie in ethnic territories, empowering the versity conservation, and carbon sequestra- governance of indigenous and Afro-Colom- tion. The main challenge remains to scale-up bian communities and promoting community these models. Productivity is also affected by forest management could slow down land use insecurity of land tenure, hindering investment, change and generate a sustainable supply of and by climate shocks: the agricultural sector timber and non-timber forest products. is extremely vulnerable to El Niño and La Niña events, making it urgent to adopt measures to Agricultural land is characterized by low pro- adapt to climate change. ductivity, under-investment, unclear tenure, and extreme vulnerability to climate change. Intensified crop production in selected areas Productivity and innovation in the agricultural carries high risks, particularly from water de- sector are low, despite abundant land for agri- mand and agrochemicals use. Commercial cultural production. Agricultural policy in recent crops have expanded in recent years and decades has been heavily based on subsidies, require large amounts of water and fertilizer.15 market price support, and price stabilization Colombia’s abundant water resources are mechanisms; while investments to enhance unevenly distributed across the territory, and productivity and competitiveness, such as re- competition for water is increasing. Only 33.3 search and development, knowledge transfer, percent of farmers use irrigation16, but the agri- and improved infrastructure have received less cultural sector accounted for 46.6 percent of attention.13 Crop productivity and agricultural water demand in 2015, mainly due to irrigation competitiveness is hampered by insufficient in large-scale production. Low water usage access to agricultural extension services, ineffi- fees, despite the recent increase in water use cient sanitary/phytosanitary services, and poor tariffs from COP 0.81/m3 to COP 11.5/m3, and connectivity in some regions. Current land use low collection rates by local environmental au- patterns, whereby 80 percent of arable land is thorities (Corporaciones Autónomas Regiona- 13  OECD (2017). 14  The Mainstreaming Sustainable Cattle Ranching Project supported by the World Bank has shown evidence that number of heads per hectare could increase from 0.5-0.6, currently, to 1.5-2.5 heads per hectare; milk productivity could rise 15-25 percent. 15  The average annual rate of cultivated area expansion between 2011 and 2016 was 2 percent for coffee; 8.8 percent for oil palm; 3.1 percent for sugar cane; and 2 percent for potatoes. FAO (2017). 16  DANE (2015). 199 Colombia Policy Notes les, CARs) are ineffective in discouraging the the adoption of better practices. For example, inefficient use of water. 17 18 Colombia is one of the approval of Law 1658 in 2013 prohibited the largest consumers of nitrogen fertilizer and the use of mercury in all economic activities, pesticides in the world.19 Such monoculture sys- starting in 2018. Authorities are also trying to tems, without crop rotation, can reduce ove- formalize the workforce and restore degraded rall biological diversity, disrupt the ecological sites, but coordination of these interventions is balance of predator-prey species, affect po- insufficient. llinators, and increase pest risks. Farmers try to overcome these negative effects by applying Incomplete efforts to invest in non- even more non-specific pesticides. Further- conventional renewables and achieve more, locking into unsustainable agricultural universal energy practices could reduce economic opportuni- ties in global value chains where demand for The energy sector faces challenges in ter- environmentally friendly and socially responsi- ms of climate resilience and sustainability, ble commodities offer attractive price margins which can be best addressed by developing and is expected to grow significantly. non-conventional renewable energy (NCRE)22 and energy efficiency. Although the country Water, forests, and soils are affected by wides- has strong energy security, the heavy reliance pread illegal mining operations. Widespread on hydropower makes the energy sector vul- informal gold mining, mainly in Antioquia and nerable to weather events. Key priorities are to Choco, threatens these natural resources. As diversify energy sources, complete electrifica- much as 95 percent of the 4,134 gold mining tion, and provide electricity service to about operations in the 2011 mining census had no 1.8 million Colombians. Expanding access is environmental permit.20 Most illegal mining instrumental to supporting growth and deve- takes place in the most bio-diverse areas, of- lopment in poorer regions and in post-conflict ten in indigenous and Afro-Colombian territo- areas. The development of NCRE sources has ries and protected areas. Environmental im- huge potential in Colombia23: it will help diver- pacts are severe: the use of mercury and other sify the energy mix, strengthen efficiency in the toxic substances causes severe environmental electricity sector, and provide off-grid service and health damages. Colombia is the world’s in remote areas. Demand-side management largest mercury polluter per capita.21 An addi- and energy efficiency (EE), for which there tional problem with gold mining is that it is often is a very large potential given that millions of related to criminal activity. This is a complex dollars are lost every year to inefficiencies, are issue and involves many government bodies, also important climate change strategies, and who are trying to enforce the law and promote are included in measures identified to redu- 17  Transforma (2018). 18  By law, revenues from water tariffs should be directed to projects related with the conservation of water resources. 19  With an average 172 kg of fertilizer per hectare of cropland in 2014, the country uses more fertilizer than Peru (48 kg), Mexico (53 kg), Ecuador (78 kg) and Chile (142 kg); and with and 20.8 kg of pesticides per hectare of cropland in 2014 it ranks 4th in terms of pesticides application worldwide. 20  Guiza and Aristizabal (2013). 21  Veiga, M. M. (2014). 22  In this document, we refer to non-conventional renewable energy as electricity or heat derived from solar, wind, ocean, small scale hydropower, biomass or geothermal resources. 23  Wind is assessed to be able to contribute 1,174 MW and up to 3,331 MW if the full potential located in La Guajira region is developed. An additional 574 MW could be provided by distributed solar generation, cogeneration using biomass and geothermal, taking the share of the ‘NCRE block’ to 10-16 percent of the energy mix. 200 Note 12 Green Growth ce GHG emissions from the energy sector by mand-side resources.24 There is an articulated 20.6 percent. Actions to promote NCRE and EE legal framework for EE and small-scale NCRE would be important factors as part of an ambi- that establishes tax, customs, market and ac- tious strategy to transition away from fossil fuel counting incentives and regulates delivery of dependency. electricity surplus to the grid, but EE regulation is also incomplete. The small size of investments An incomplete regulatory framework limits and developers’ inadequate performance re- penetration of NCRE and energy efficiency cord further constrain the market for small-sca- strategies. With Law 1715 of 2012, Colombia le NCRE and EE projects. The current market is established the legal framework for NCRE, but therefore limited to financially viable projects its regulation has been delayed. Despite abun- developed by large companies with strong dant potential, the share of NCRE in the energy balance sheets. mix remains very small in both absolute terms, and when compared to other countries in Latin A fragmented institutional framework, planning America that have developed markets based issues and insufficient financial resources are on auctions for renewable energy. NCRE deve- delaying progress to universal access. Provi- lopment in Colombia is embedded in key na- ding electricity to remote areas involves many tional policies and supported by a robust legal stakeholders that results in a complex gover- framework, but there are no clear targets for nance framework and poses coordination is- development capacity. National plans mainly sues. Inadequate planning and lack of familia- provide potential scenarios, and regulations to rity with business models for developing off-grid accommodate the risks of large-scale NCRE in- electrification also impede progress. Invest- vestments have not been completed. Existing ment needs far exceed the financial resources regulations and procurement mechanisms ba- provided to finance electrification. In spite of sed on auctions create a bias in favor of the this, a recent achievement of the government existing energy mix: thermal and hydropower is the award by the Mining-Energy Planning Unit generation receive a reliability payment, and of the electricity transmission lines project that variable renewable energy (VRE) cannot com- will connect wind generation in the Guajira to pete on an equal footing. Off-take risks remain the National Interconnected System. The esti- overly high, as there are no long-term con- mated investment for the nearly 370 kilometers tracts (power purchase agreements, PPAs) for of transmission lines will reach US$ 175 million. NCRE and the off-taker segment is fragmen- ted, with an array of incumbent utilities, mostly Pollution and the side effects of fast vertically integrated and often with low credi- growth tworthiness. Financing for large NCRE projects is therefore limited. The transmission infrastruc- Worsening environmental quality may be li- ture is insufficient for connecting load centers miting Colombian cities’ potential to sustain with locations where NCRE can be developed, inclusive economic growth. Cities provide and the grid code and rules for scheduling and economic opportunities but these can in turn dispatching VRE restrict NCRE integration. Also, be hampered by diseconomies caused by the grid code and regulations are also not congestion and pollution. Over 70 percent of designed to facilitate the integration of de- Colombians live in urban areas. The major ci- 24  Surplus from small-scale projects including self-generated electricity delivered to the grid. 201 Colombia Policy Notes ties of Bogota, Cali, Medellin and Barranquilla do not meet air quality standards. Even though are home to 30 percent of the population and the low-hanging fruits for reducing air pollution a high proportion of the country’s jobs. Urban have been taken, additional gains are urgent activities have contributed to more than 50 and will require a careful consideration of be- percent of the GDP growth rate in the last four nefits and costs of potential measures. decades25, but the benefits of urban agglome- rations as engines for economic growth are li- Substandard water quality, inadequate waste mited by increasing levels of pollution, environ- collection, and lack of green space also affect mental risk, inadequate waste management, environmental quality of cities. All large cities noise levels and an overall sense of insecurity. and over 70 percent of medium-sized cities re- The environmental quality of Colombian cities port having waterways with substandard wa- is considered “low” or “very low”.26 ter quality.32 Waste collection services are high in urban areas (98 percent) and much waste Air pollution imposes a high toll on society des- that is collected is adequately disposed (94 pite important progress in reducing it. Progress percent). However, populations in the Atlan- has been made in addressing air pollution, for tic and Pacific regions, in informal settlements example air quality norms have been set in line and small towns, and in rural areas are less with good global practice.27 28 Several mea- well served.33 Cities’ spatial pattern of growth sures have helped to reduce air pollution, for also increases vulnerability to extreme weather example through greening fuels: the Sulphur events; more than 20 percent of the popula- content of diesel fuel has been reduced by 98 tion in seven cities live in areas of high environ- percent29; mass public transportation has also mental risk. Only Medellin and five medium-si- been improved and emissions from stationary zed cities provide more green areas than the sources have been reduced. However, air po- World Health Organization standards (>9 m2 llution imposes significant costs to society. In per person), and no city provides enough pu- 2015, over 8,000 deaths were related to low air blic space to meet Colombian standards (>15 quality30 and fifty-one per cent of Colombians m2 per person).34 believe that air pollution is major environmen- tal problem in Colombia.31. Health costs attri- Low reuse and recycling and limited landfi- butable to air pollution are estimated at COP ll capacity could be used as an opportunity. 12 billion or 1.5 percent of 2015 GDP. Cities like Despite progress in collection and disposal of Medellin, Soacha and Cucuta have annual solid waste, waste management has followed particulate matter (PM10) concentrations that an inefficient lineal model, with low reuse and 25  Urban activities include commerce, restaurants, hotels, manufacture, financing, and other services to support, among others. The calculations of GDP contribution based on World Bank calculations using a moving average of the component of the economy’s growth rate contributed by purely urban activities. World Bank (2012). 26  Based on 37 reporting cities (29 with a population of 100,000-500,000 and 8 with population greater than 500,000). MADS (2015). 27  MADS (2017a). 28  In line with World Health Organization standards and good practices of cities such as Mexico City and Santiago de Chile. 29  DNP (2017). 30  DNP (2016). 31  DNP (2017a). 32  All 7 large cities and 15 of the 24 medium sized cities that report data have poor water quality. MADS (2015). 33  In the Caribean Region and Pacific collection coverage is, respectively, 74.8 and 54.6 percent. National rural areas have only 27.3 percent waste collection service coverage. DANE (2017). 34  MADS (2015). 202 Note 12 Green Growth recycling rates that - if improved - could result of resources, and reuse and recycling activi- in significant savings, social opportunities and ties. Incentives, standards and regulations for environment benefits. Only 15 percent of solid managing recovered materials do not match waste is recovered and reused35, compared to up with waste thresholds for the private sector an average of 46 percent in OECD countries. (e.g. reuse of construction material).38 Strate- Most recycling depends on informal recycling, gic plans, actions, and resources to implement and only a small percentage of municipalities the National Policy on Integrated Solid Waste incorporate some form of formal recycling in Management (CONPES 3874) are inadequa- their waste management activities. Most solid te; and the waste recovery tariff structure and waste ends its life cycle in landfills. Projections methodology39 is less effective than it could of solid waste generation indicate that Colom- be as it does not incorporate infrastructure bia will not have adequate capacity to dispo- and treatment costs. There also needs to be se waste by 2030. More land will be needed for more emphasis on data collection and ove- landfills, the siting of which faces community rall monitoring of material cycles. Because of opposition and increasing transport costs. Pur- these challenges, estimates suggest that the suing a circular economy, in which resources economy’s most productive sectors could be are kept in use for as long as possible, maxi- missing the opportunity to reduce waste by 40 mum value from them is extracted whilst in use, percent and recover materials for reuse, rema- and at the end of each service life products nufacturing, recycling or repair.40 and materials are recovered and regenera- ted. This is expected to reduce the long-term Policy Options costs related to the need for landfills, provide net materials savings and could mitigate price Achieving climate-smart, sustainable volatility and supply risks.36 It is also expected and productive landscapes to encourage innovation and improve income for semi-skilled laborers, including workers in Strengthen the incorporation of ecological and the informal sector where poor working condi- environmental concerns in land use planning tions, inadequate social services and child la- efforts at all levels of government. A growing bor is common. It would also contribute to the number of planning instruments and processes reduction of GHG emissions from waste, esti- are being put in place by different government mated at 14.3 metric tons of CO2 equivalent.37 agencies. Enhanced coordination between different land use and development planning Inadequate coordination of incentives and instruments is needed to ensure consistency regulations poses challenges for efficient use between the underlying territorial develop- 35  Recent estimates indicate that the economy did not reuse or take advantage of 21.3 million tons of agro-pro- cessed biomaterials, 17.4 million tons of cement/concrete, 916 thousand tons cellulose biomaterials, 1.3 million tons of metals, 1.6 million tons of polymers, and 1.8 thousand tons of textiles in 2015. Tecnalia (2017). 36  An analysis for the European Union estimates that between US$340 and US$630 billion per year in net material sa- vings could be accompanied by a shift in the cost curve of raw materials reducing demand drive volatility associated with the supply of scarce materials during times of high demand. Ellen Macarthur Foundation (2016). 37  Ideam (2017a). 38  The Tecnalia (2017) material and life cycle study estimates that the maximum reincorporation potential of mate- rials (vs current recycling/upcycling rates) in six key sectors is 44 percent for biomaterials, 48 percent for cement and concrete, 20 percent for polymers, 10 percent for cellulose biomaterials, 26 percent for metals, and 95 percent for textiles. 39  CRA (2015). 40  Tecnalia (2017). 203 Colombia Policy Notes ment and environmental strategies, improve tion of a high-level entity, to develop, support the integrity of ecosystems, increase resilience and promote sustainable forest management. to climate change, and provide clarity for the Effective enforcement of current regulations private sector on how agricultural and other and the application of penalties for non-com- economic activities can be developed.41 Spe- pliance by CARs remain essential aspects of cific steps in this direction would touch on the managing forest assets, but the laying out of responsibilities and policies not only of various a comprehensive vision and regulation for ministries, but of national, regional and mu- the sector, including to incentivize sustaina- nicipal authorities. A first step is for MADS to ble use, are also key. Important progress has strengthen a unified information system about been made with the recent formulation of ecosystems, land suitability, risks from weather the Comprehensive Strategy for Deforestation events and land use, with common standards Control and Forest Management.43 This needs for the national territory and with detailed in- to evolve into a national forest policy to provi- formation at different jurisdictional and water- de a clear vision about the role of the forestry shed level. Much of that information is already sector for economic development. An agen- available in the Colombian Environment Infor- cy that would act as the National Forest Servi- mation System (Sistema de Información Am- ce, which was mandated by Law 37/1989 but biental Colombiano, SIAC) and efforts to ge- was never created, and which is transversal to nerate, periodically update and analyze the the key line ministries (e.g. MADS and MADR) information should be strengthened. The SIAC needs to be implemented. Its mission would needs to transition from an information system be to lead and develop a strong, sustainable to a decision support system designed as a forestry sector (including commercial planta- tool for decision makers. In addition, it is neces- tions), and to act as a focal point for policy sary to build capacities in local governments planning that will guide forest conservation. It and CARs to be proficient users of the informa- would ensure closer coordination between au- tion. A second step is to overcome the munici- thorities in charge of the registration of com- pal boundaries of local territorial plans and to mercial timber plantations, harvest permits, facilitate and promote coordinated planning and the mobilization of supervision (between between jurisdictions. For example, the imple- the Instituto Colombiano Agropecuario, ICA, mentation of the General Territorial Planning CARs and the National Police) to avoid varying Policy (Política General de Ordenamiento Te- interpretations of norms and permits. It would rritorial, PGOT) could promote coordinated need to remove barriers to financing and pro- planning between jurisdictions, mainstreaming mote research and knowledge diffusion. It also land use suitability and disaster risk manage- needs to create legal instruments, such as the ment elements in a way that overcomes the forest law that ensures and defines rights of use municipal boundaries of local territorial plans.42 of forest resources; and develop guidelines for the management of these resources, espe- Finalize the national forest policy and establish cially in collective territories recognizing local the National Forest Service, including the crea- knowledge and practices. This would also be 41  These instruments include Territorial Zoning Plans (POTs), Watershed Management Plans (POMCAS), development plans such as Rural Development Programs under a Territorial Approach (PDET), Social Land Plans led by the National Land Agency (ANT), and land planning activities undertaken by the Rural Agricultural Planning Unit (UPRA). 42  See also Policy Note #9 on Territorial Development. 43  MADS (2017b). 204 Note 12 Green Growth a first key step to promoting Community Forest dissemination, and ICA, and expanding their Enterprises such as the ones generating rural operational capacities to provide technical income to ejidos and communities in Mexico, assistance and capacities to control sanitary where the National Forest Commission (CONA- and phytosanitary conditions is a priority. For FOR) leads conservation and development of the forestry sector, the development and dis- sustainable forest policies and plans. semination of silvicultural practices, including technology for nurseries, treatment for forest Enable conditions to develop the bio economy plantations and natural regeneration, and sector and scale up adoption of sustainable phytosanitary monitoring is needed to improve practices in agricultural production and agri- productivity. business through research and knowledge dis- semination and certifications. Several private Improve and implement economic incentives sector initiatives are attempting to align pro- to promote climate-smart agricultural prac- duction and environmental sustainability, while tices, forests and key ecosystem restoration fostering productivity and competitiveness.44 and conservation, water use efficiency, and Given the country’s rich biodiversity endow- GHG emission reductions. First, tariffs and fees ments, it is important to develop mechanis- need to be adequately designed to incentivi- ms to strengthen research, development and ze behavior change while improving revenue innovation in bio economy sectors (such as collection. For example, having a comple- pharmaceuticals, cosmetics and food tech). te and updated cadaster with real informa- This could be achieved by strengthening the tion of property values can improve the role capacity of Colciencias, in its role of facilita- of property taxes in incentivizing productive ting knowledge transfer, by purchasing bio land use and reduce incentives to accumu- products through public sector procurement, late land for purely speculative reasons. In and through public awareness campaigns. In- addition, it would help with tax collection and vestments are needed in the agricultural sec- increase revenues for CARs. Tariffs for water tor (crops and livestock) to develop and adopt use need to be increased and the flat natu- new science and technology with green po- re of the tariff for the agricultural sector needs tential, such as agroforestry systems, precision to be reformed to incentivize efficient use of agriculture, integrated pest management sys- water and to improve revenue collection from tems, soil management, and post-harvest loss CARs.45 Updating systems for measuring water and food waste reduction. The government usage is essential to move away from the pri- should facilitate setting up incentives to su- cing system based on concessions. This should pport the adoption of good practices by small be accompanied by a more effective moni- and large agricultural producers, and support toring by the General Comptroller of CARs to market-based mechanisms such as traceabi- ensure revenue collection and adequate mo- lity schemes and certifications that allow pro- nitoring of water usage. Second, economic ducers to access high-value and differentiated incentives to recognize the positive externa- markets. Strengthening institutions like Agro- lities of climate-smart agriculture, and forest savia, in charge of research and knowledge and key ecosystems restoration and conser- 44  For example, the Mainstreaming Sustainable Cattle Ranching Project implemented by FEDEGAN (Colombian Ca- ttle Ranchers Association); the Sustainable Palm Oil Landscapes Project, implemented by Fedepalma; and the AMTEC a rice program, implemented by FEDEARROZ (Colombia’s rice federation). 45  Transforma (2018). 205 Colombia Policy Notes vation need to be regulated and adjusted. A Emphasize capacity building of environmental set of regulatory instruments should be issued authorities and identify opportunities available for the Payment for Ecosystem Services Law, through the emerging green fiscal regime. En- issued in 2017. These instruments need to de- vironmental authorities – MADS, CARs, National fine actions or land use decisions that will be Parks and other entities from the Sistema Na- subject to payment, as well as the level of this cional Ambiental (SINA) – need to have ade- payment. Opportunity costs of land use and quate levels of human capacity and financial the value of ecosystem services provided (e.g. resources for policy formulation and regulation, biodiversity conservation, carbon storage, hy- monitoring and evaluation, and compliance. drology benefits) should be considered when This also applies to research institutes and en- determining payment levels. Targeting should tities in charge of dissemination of good prac- also be based on the level of threat and/or tices and technological packages. Revenues the importance of ecosystem services provi- from the carbon tax open an opportunity to ded. A monitoring, reporting and verification finance the strengthening of these institutions. system (MRV) will be needed to establish a ba- The Colombia Peace Fund (Fondo Colombia seline and verify compliance with sustainable en Paz) will allow investments in peace buil- practices46, expanding the existing forest mo- ding and environmental sustainability, com- nitoring systems managed by the Institute for plementary objectives that can be achieved Hydrology, Meteorology and Environmental through programs and activities that explicitly Studies (Instituto de Hidrología, Meteorología target both objectives. y Estudios Ambientales, IDEAM). With regards to the Certificado de Incentivo Forestal (CIF), Renewing the energy development technical prioritization criteria need to be in- model troduced based on environmental benefits of projects to ensure additionality, and costs Establishing a clear policy, a regulatory fra- related to procedures and wait times should mework and a competitive and transparent be kept to a minimum to incentivize small- and procurement framework for NCRE and EE. medium-sized producers’ participation in CIF NCRE-based technologies are well established benefits. At the same time, a tax exemption and financially attractive at the global level, on capital gains from agroforestry and forestry and there is strong interest from Colombia’s investments could put Colombia on par with private sector. The penetration of NCRE in the countries like Uruguay, which has attracted energy mix (capacity volumes by technology) substantial foreign direct investments due to should be well defined and should focus on its favorable tax structure for forest planta- energy needs, existing and planned genera- tions. Finally, to promote carbon markets it is tion investments, and reliability requirements. key to operationalize the National Emissions Regulation needs to be adjusted, and long- Reduction Registry and create a robust system term financing and credit risks need to be fu- that enables certification and trade of emis- lly addressed. New regulatory measures could sions reductions, which would allow to reduce include: (i) a specific price- or quota-based in- emissions in an efficient way and avoid double centive to lower the risks of NCRE development counting. (e.g. auctioning of long-term contracts); (ii) re- gulations that facilitate access and connec- 46  Ibid. 206 Note 12 Green Growth tion to the grid; and (iii) an adjusted grid code this level of planning. Grid extension remains that supports optimal dispatching of supply- critical in densely populated areas, but mi- and demand-side energy. Long-term PPAs, ni-grids and off-grid schemes using renewable properly designed and procured via auction, energy, especially solar, provide better options are critical for developing a market for NCRE in more remote areas. An efficient combina- projects. A Central Offtake Agency (COA) tion of public and private involvement with role is needed to centralize the procurement strong institutional, business and contracting function and conduct public auctions with models will help accelerate the use of NCRE, standard and bankable PPAs.47 Regulations for selecting the best combination of public and small-scale NCRE and EE projects need to be private involvement and ensuring sustainable well designed. Measures could include stan- service provision overtime. Thus, the national dard offers, demand management, capacity rural electrification strategy shall entail: (i) de- and energy auctions, and white certificates. finition of service configuration and technical options based on a clear understanding of the Expand the suite of private financing options locations involved and the socio-economic and investment vehicles for NCRE.48 Meeting circumstances of targeted communities; (ii) financial needs for large projects will require identification of the most suitable institutional updated private financing options, new sour- and business models to accelerate the use of ces (e.g. equity sponsors), local and interna- renewable energy technologies where suita- tional commercial banks, capital markets with ble; (iii) allocation of responsibilities across GoC institutional investor participation, and inter- agencies and between the public and the pri- mediary investment vehicles including infras- vate sector; and (iv) definition of financing me- tructure funds. The nascent status of the clean chanisms. energy market and the untested regulatory environment require risk mitigation and credit Transitioning towards a green growth enhancement to make large-scale projects planning approach in Colombian cities, bankable and to mobilize long-term competi- industries and a circular economy tive private financing. Aggregating small-sca- le NCRE and EE projects via a specific vehicle Implement targeted actions in the transport can help overcome limitations associated and industrial sectors to meet air quality norms. with small investments and could attract more Air quality authorities, especially the central au- commercial financing if also backed by ade- thority currently under MADS, need enhanced quate credit enhancement. capacity to comply with the updated air quali- ty standards through coordination and support Design and implement a rural electrification to multiple local air pollution control authorities strategy to achieve universal access. Tech- and more effective compliance and enforce- nical options need to be efficient and based ment. Improving information on air pollution on the energy needs of non-served areas and sources is part of effective air pollution mana- geospatial mapping, which could help with gement: for example, by implementing the 47  Candidate institutions for this role include MINMINAS, UPME, the Energy Regulatory Commission (CREG) or the Electricity Market Operator and Administrator (XM) (or another agency, such as the National Compensation Cham- ber, Central Off-Take Risk Chamber, or DERIVEX). The COA would act as a “custodian” of long-term PPAs and manage credit, liquidity and operational risks. 48  See also Policy Note #10 on Private Financing of Public Infrastructure. 207 Colombia Policy Notes pollutants release and transfer registry in line Promote circular economy concepts by upda- with the Kyev Protocol and OECD standards. In ting and aligning existing regulations on ma- the transport and industrial sectors and in sma- terials and waste. To transition towards greater ll-scale, often informal, activities, targeted ac- material efficiency and waste reduction, the tions such as scrapping old vehicles is urgent. GoC can develop business schemes that inci- It is also important to improve vehicle emis- te innovation, introduce target indicators, and sions inspections and to replace older models. promote consumer awareness. First, it could Compensation should be provided to vulne- promote minimum performance or material re- rable families whose resources are invested in quirement standards in key economic sectors these vehicles. A program for electric mobility with high potential for sustainable materials should be formulated, starting from the public management. For example, this could be done transport system. When selecting public trans- by facilitating green building certification for portation options, the costs of air pollution of new housing, hotels, office buildings, retail spa- different alternatives should be included as a ce and hospital constructions (e.g. IFC EDGE decision factor. Fine-tuning tax and tariff incen- – Excellence in Design for Greater Efficiencies) tives will ensure that transaction costs do not wherein construction material reuse is promo- conflict with existing tariff exemptions for clean ted. It could also promote technical guidelines technologies (e.g. clean technology vehicles). for eco design and eco labels. Second, the Finally, coal should be included among the circular economy approach could update the fossil fuels taxed by the carbon tax. National Policy for Solid Waste Integrated Ma- nagement52 to include functional economic Address important gaps in city cleanliness and instruments and reinforce the governance of health, through expansion of service regulation material cycles. It should set recycling targets and a national investment program. Today, for municipal and packaged waste, and pla- the major driver of investment in solid waste ce maximum caps for landfill use. Best practi- services49 has been the tariff system50 which ce examples include relatively high landfill and provides a ceiling price charged by service incineration taxes, pay-as-you-throw schemes, providers. The tariff system needs expansion to waste shipment regulations, and local landfill adapt to gaps in waste collection and disposal bans of various waste streams (e.g. on organic services in rapidly urbanizing areas and infor- waste). Third, the adoption of a regulatory fra- mal settlements. Specialized services, such as mework for non-hazardous industrial materials construction waste collection, should be inclu- is needed to clarify rules on by-products and ded in the tariff system. The regulation of city secondary materials markets that allow for the cleaning services should also be strengthened. establishment of symbiotic exchanges (e.g. as The accompanying infrastructure investment in eco-industrial parks). Fourth, reducing food needs in this sector are estimated to exceed loss and waste has a great potential to redu- COP 3,361 billion (US$ 1.1 billion) over the next ce GHG emissions in the larger agriculture and 10 years, one-third of which can be covered food systems. The GoC should analyze ways to by the tariff regime, and financing sources for reduce this type of waste and design a natio- the remainder still need to be identified.51 nal policy to address this issue. 49  Including 85 percent of financing. 50  Based on data from 2013. DNP, World Bank (2014). 51  Ibid. 52  CONPES 3874. 208 Note 12 Green Growth Regulate wastewater discharges from non-do- jection of water into aquifers under special cir- mestic sources into soil and water. Non-domes- cumstances, i.e. when salinity of the aquifer is tic waste water is commonly discharged from higher than the water discharge. In addition, the oil and mining industry. As part of the tran- regulations should include the conditions re- sition to a circular economy, the GoC should quired for granting permits for non-domestic establish the requirements for discharging water discharges into soil. These actions would non-domestic water into soil and water bodies not only reduce pollution but would incentivize that include partial water treatment and rein- re-use. Annex 12.1 Matrix of Policy Options Development Policy Options Challenge Short Term Medium Term 1. Achieving • Finalize the national forest poli- • Strengthen the incorporation of ecolo- climate-smart, cy, establish the National Forest gical and environmental concerns in sustainable Service, including the creation land use planning efforts at all levels of and productive of a high-level entity to develop, government (**) landscapes support and promote sustainable • Enable conditions to develop bio eco- forest management (***) nomy sectors and to scale up adoption • Improve and implement econo- of sustainable practices in agricultural mic incentives to promote clima- production and agribusiness through te-smart agricultural practices, research and knowledge dissemination forest ecosystem restoration and and certifications (**) conservation, water use efficiency, and GHG emission reductions (***) • Emphasize capacity-building of en- vironmental authorities and invest in programs that explicitly target environmental sustainability with revenues from the carbon tax (***) 2. Renew the ener- • Establish clear policy, a regulatory • Expand the suite of private financing op- gy development framework and a competitive tions and investment vehicles for NCRE model and transparent procurement (*) framework for Non-Conventional • Design and implement a rural electrifica- Renewable Energy (NCRE) and tion strategy to achieve universal access Energy Efficiency (**) (**) 3. Transition • Implement targeted actions in the • Promote circular economy by updating towards a green transport and industrial sectors to and aligning regulations on materials growth planning meet air quality norms and improve and waste (*) approach in air quality information systems (***) • Address important gaps in city cleanli- cities and pro- • Regulate wastewater discharges ness and health, through expansion of mote a circular from non-domestic sources into soil service regulation and a national invest- economy and water (**) ment program (**) *Note: stars indicate a suggested level of priority based on two possible criteria: (i) extent to which the policy is urgent to avoid risk of lock-in and irreversibility, and (ii) capacity of the policy to provide local (i.e. national as opposed to global) and immediate benefits. (***) = very high priority; (**) = high priority; = (*) priority. 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